Memorandum Findings of Fact and Opinion
Respondent has determined a deficiency in petitioner's income tax for the calendar year 1944 in the amount of $8,917.90. In the deficiency notice adjustments were made to 1944 income as follows:
| Taxable Year Ended December 31, 1944 |
| Adjustments to Net Income |
| Net income as disclosed by original |
| return | | $142,490.88 |
| Unallowable deductions and addi- |
| tional income: |
| (a) Capital stock tax | $ 2,500.00 |
| (b) Contributions | 1,400.67 | 3,900.67 |
| Total | | $146,391.55 |
| Nontaxable income and additional |
| deductions: |
| (c) Net operating loss |
| deduction | $84,665.13 |
| (d) Amortization of |
| emergency fa- |
| cilities | 7,372.55 | 92,037.68 |
| Net income as revised | | $ 54,353.87 |
The adjustment in controversy relates to the following 1945 adjustment which directly affects the net operating loss deduction in 1944 of $84,665.13:
"(a) This item represents the amount which you received from two of your directors in this year pursuant to the provisions contained in Section 16 (b) of the Securities and Exchange Act of 1934, as amended by Public Law 621, 74th Congress, approved May 27, 1936, on account of their transactions in your capital stock. It is held that this item constitutes taxable income and inasmuch as you failed to include it in your gross income in preparing your return, it is now included in your gross income for this year."
By appropriate assignment of error petitioner contests this adjustment and also takes the position that if the contested amount is income the proper year to include it is 1944, not 1945. The other adjustments are not contested by petitioner.
Originally respondent's determination that this additional income should have been reported in 1945, raised a second issue involving a net operating loss. However, respondent now takes the position that this income was realized in 1944, and has amended his answer to include this position. Any change in computation will be given effect under Rule 50.
Findings of Fact
All the facts have been stipulated and are found accordingly.
The petitioner is a corporation organized under the laws of the State of New York with its principal office at 55 West 13th Street, New York City. The returns for the periods here involved were filed with the Collector of Internal Revenue for the Second District of New York.
The petitioner kept its books of account and filed its tax returns for the years 1944 and 1945 on the calendar year basis and on the accrual method of accounting.
During the years 1943, 1944, and 1945, Joseph H. Ward and James E. Dougan were stockholders and members of the board of directors of the petitioner.
On various dates from November 8, 1943 to December 11, 1944, inclusive, varying amounts of the petitioner's common stock were either purchased and sold or sold and purchased by Ward and Dougan within periods of less than six months. With respect to these stock transactions, Ward and Dougan realized profits in the respective amounts of $4,556.45 and $2,004.81. The stock transactions detailing the amounts and dates of sales and purchases and the amounts of the profits realized by Ward and Dougan are as follows:
| Joseph H. Ward |
| Sold | Bought |
| Date | Shares | Amount | Date | Shares | Amount | Profit |
| 1-10-44 | 100 | $ 574.43 | 11- 8-43 | 100 | $ 409.00 | $ 165.43 |
| 1- 5-44 | 100 | 462.94 | 11- 9-43 | 100 | 409.00 | 53.94 |
| 1- 3-44 | 100 | 462.94 | 11-12-43 | 100 | 409.00 | 53.94 |
| 1- 5-44 | 100 | 450.94 | 12-43 | 100 | 409.00 | 41.94 |
| 1- 3-44 | 100 | 437.94 | 12-43 | 100 | 409.00 | 28.94 |
| 12-31-43 | 100 | 437.94 | 12-43 | 100 | 409.00 | 28.94 |
| 11-15-43 | 100 | 412.94 | 12-43 | 100 | 409.00 | 3.94 |
| 700 | $ 3,240.07 | | 700 | $2,863.00 | $ 377.07 |
| 11-30-44 | 200 | $ 3,410.21 | 8- 2-44 | 100 | $ 787.27 |
| | | 8- 2-44 | 100 | 799.50 |
| 200 | $ 3,410.21 | | 200 | $1,586.77 | $1,823.44 |
| 11-29-44 | 300 | $ 5,008.44 | 8- 2-44 | 100 | $ 799.50 |
| | | 8-18-44 | 200 | 1,853.00 |
| 300 | $ 5,008.44 | | 300 | $2,652.50 | $2,355.94 |
| Total | 1,200 | $11,658.72 | | 1,200 | $7,102.27 | $4,556.45 |
| James Dougan |
| 12-11-44 | 200 | $ 3,832.81 | 8-44 | 200 | $1,828.00 | $2,004.81 |
| Grand Total | 1,400 | $15,491.53 | | 1,400 | $8,930.27 | $6,561.26 |
As of December 31, 1944, the petitioner accrued on its books the amounts of $4,556.45 and $2,004.81 representing accounts receivable due from Ward and Dougan by reason of their liabilities arising under section 16 (b) of the Securities Exchange Act of 1934 in connection with their stock transactions as described above, and credited the total amount of $6,561.26 to capital surplus.
During March 1945, the petitioner and the Securities Exchange Commission exchanged letters relative to the contents of a proxy statement. On March 5, 1945, the Securities Exchange Commission wrote to the petitioner a letter which reads in part as follows:
"This is with reference to the preliminary copy of proxy material received March 1, 1945 in connection with the annual meeting of stockholders scheduled to be held April 2, 1945.
* * *
"It is noted from the ownership reports filed by Messrs. Joseph H. Ward and James E. Dougan pursuant to Section 16 (a) of the Securities Exchange Act of 1934, that on various dates during the period from November 4, 1943 to December 11, 1944, inclusive, varying amounts of the issuer's common shares were purchased and sold or sold and purchased within periods of less than six months. If such purchases and sales were made by these individuals at the prevailing market prices for the shares on the dates of the transactions, it appears that profits were realized which under the provisions of Section 16 (b) of the Act inure to and are recoverable by the issuer. In such event the appropriate facts, including the amounts recoverable by the issuer should be stated in the proxy statement pursuant to the requirements of Item 5 (I) (4) of Schedule 14A. If, however, it is deemed that such profits are not recoverable by the issuer, please submit as supplemental information an opinion of counsel on this point, together with a statement of the aggregate selling or purchase price of the shares in each transaction. In this connection, your attention is directed to the decision of the Circuit Court of Appeals, 2nd Circuit, in Smolowe v. Delendo, 136 Fed. (2nd), 231 which indicates the method of computing such profits."
In a letter to the Securities Exchange Commission under date of March 13, 1945, the petitioner replied as follows:
"We refer to your letter dated March 5, 1945, addressed to the attention of the undersigned, in connection with preliminary copy of proxy material filed on behalf of this company, in connection with the Annual Meeting scheduled to be held April 2, 1945.
"We also refer to conference had by the undersigned with Mr. Knute Anderson and Mr. Davidson at the Commission's office on March 10, 1945, wherein we discussed the contents of the first paragraph appearing on page 2 of your letter, and advised you that Messrs. Joseph H. Ward and James E. Dougan have inadvertently purchased and sold shares of stock of the company within a six-months' period in the mistaken impression that the first-in-first-out rule would be applicable.
"Prior to the mailing of the solicitation material, both directors will have returned to the company the profits in accordance with the schedule delivered to the Commission through Mr. Anderson on March 10, 1945."
On March 13, 1945, the petitioner received payments in the respective amounts of $4,556.45 and $2,004.81, pursuant to section 16 (b) of the Securities Exchange Act of 1934 from Ward and Dougan in discharge of their liabilities arising thereunder in connection with their stock transactions, and credited these amounts to its accounts.
Opinion
BLACK, Judge: Petitioner received $6,561.26 from two of its directors pursuant to section 16 (b) of the Securities Exchange Act of 1934 because of the directors purchasing and selling petitioner's stock within periods of less than six months. The applicable statute is printed in the margin. 1 The only question raised here is whether the sum received constitutes taxable income.
The identical question was decided recently. We held such sums paid pursuant to section 16 (b) of the Securities Exchange Act of 1934 taxable under section 22 (a), I.R.C., General Americaninvestors Company, Inc., 19 T.C. 581, promulgated December 30, 1952. The instant case is determined by the above precendent, and we see no point in reiterating in detail the previous discussion.
In the original pleadings, respondent determined that petitioner realized this income in 1945, and because of a net operating loss deduction the year 1944 which is before the Court was affected thereby. Petitioner took the position that if the contested item was income it was realized in 1944, not 1945. Respondent subsequently changed his position. Ad of December 31, 1944, petitioner accrued on its books the amount of $6,561.26 which is in controversy here. This money represented illegal profits of directors from transactions taking place between November 8, 1943 and December 11, 1944. The actual payment of $6,561.26 was received on March 13, 1945. Since petitioner's taxes were determined under the accrual method, income was realized in 1944 when it accrued, not in 1945 when the cash was received. Though apparently this issue is not in controversy, the pleadings are not free of ambiguity.
Decision will be entered under Rule 50.