WhitakeR, Judge,
delivered the opinion of the court:
Plaintiff is a public utility company. In the computation of its surtax net income it seeks to deduct dividends paid by it on some of its stock, which it alleges is preferred stock as defined in section 26 of the Internal Revenue Code. The Commissioner of Internal Revenue disallowed the deduction and plaintiff, having paid the tax computed without it, sues to recover it.
The question presented is whether or not the stock is in fact preferred stock as defined in that section.
Section 15 (as added by sec. 201 of the Revenue Act of 1940, 54 Stat. 516, and amended by sec. 105 (b) of the Revenue Act of 1942, 56 Stat. 798) levies a tax on a corporation’s surtax net income, and section 26 provides that a public utility company is entitled to a credit against its surtax net income of “the amount of dividends paid during the taxable year on its preferred stock.” Preferred stock is defined in section 26 (h) (2) (B) as follows:
The term “preferred stock” means stock issued prior to October 1, 1942, which during the whole of the taxable year * * * was stock the dividends in respect of which were cumulative, limited to the same amount, and payable in preference to the payment of dividends on other stock. * * *
The stock in question was not issued prior to October 1,1942, but section 26 (h) (2) (B) further provides:
* * * Stock issued on or after October 1,1942, shall be deemed for the purposes of this paragraph to have been issued prior to October 1,1942, if it was issued (including issuance either by the same or another corporation in a transaction which is a reorganization, as defined in section 112 (g) (1), or a transaction to which section 112 (b) (10), or so much of section 112 (d) or (e) as relates to section 112 (b) (10), is applicable, or which is a transaction subject to Supplement (R) to refund or replace bonds or debentures issued prior to October 1, 1942, or to refund or replace other preferred stock (including stock which is preferred stock by reason of this sentence), but only to the extent that the par or stated value of the new stock does not exceed the par, stated, or face value of the bonds or debentures issued prior to October 1, 1942, or the other preferred stock, which such new stock is issued to refund or replace. * * *
[300]*300No contention is made that the transaction under which the alleged preferred stock in question was issued does not come within the quoted provision of section 26 (h) (2) (B). The only issue, as stated above, is whether or not the stock plaintiff did issue is preferred stock. However, it might be well to briefly state the circumstances surrounding the issuance of this alleged preferred stock.
On and prior to December 22,1942, and until June 11,1943, the latter date being the date of the issuance of the so-called preferred stock, plaintiff was a subsidiary of United Gas Improvement Company. Prior to December 22, 1942, the Securities and Exchange Commission issued an order requiring United Gas Improvement Company to divest itself of its holdings in the common stock of plaintiff, among other securities. On December 22, 1942, United Gas Improvement Company filed with the Securities and Exchange Commission a plan for doing so. That plan was approved by the Securities and Exchange Commission on March 18,1943, and it was carried out, effective June 11, 1943.
Prior to the inception of the plan, from December 22,1942, to June 11, 1943, plaintiff had an authorized capital of 15,000,000 shares of common stock without par value, of which 10,529,230 shares were outstanding. These outstanding shares had a book value of $137,816,005. Plaintiff retired these 10,529,230 shares, and issued in lieu thereof 2,369,076 shares of the so-called preferred stock, and 8,160,154 shares of new no par common stock. The preferred stock and new common stock had the same book value as the 10,529,230 shares of the old no par common stock.
On June 11,1943, United Gas Improvement Company was the holder of 10,244,262 shares of the old no par common stock of plaintiff. Under the plan it received therefor 2,304,-958.95 shares of plaintiff’s so-called preferred stock and 7,939,303.05 shares of the new no par common stock of plaintiff.
At the same time, the United Gas Improvement Company authorized the distribution of 2,295,438 shares of plaintiff’s so-called preferred stock, and $30,605,840 in cash, in exchange for 765,146 shares of its outstanding $5.00 dividend preferred stock, which had a book value of $75,139,726. The value of [301]*301plaintiff’s so-called preferred stock issued to the holders of the preferred stock of the United Gas Improvement Company was $30,014,751.12, so that the total of the value of this stock and the cash distributed to the holders of the preferred stock of the United Gas Improvement Company was $60,650,591.12, which was less than the value of the outstanding preferred stock of the United Gas Improvement Company for which it was exchanged.
It will thus be seen, as is conceded, that the transaction comes within the terms of section 26 (h) (2) (B) of the Internal Eevenue Code, provided the so-called preferred stock issued by plaintiff was in fact preferred stock as defined in that section.
We repeat the statutory definition of “preferred stock,” for the sake of convenience:
The term “preferred stock” means stock issued prior to October 1, 1942, which during the whole of the taxable year * * * was stock the dividends in respect of which were cumulative, limited to the same amount, and payable in preference to the payment of dividends on other stock. * * *
Defendant concedes the dividends on this stock were cumulative, that they were limited to $1.00 per share, and that they were payable in preference to dividends payable on other stock. It, however, says the stock has not the further characteristic which was added by section 29.26-5 (a) of Treasury Eegulations 111, as amended by T. D. 5384,1944 Cum. Bull. 148. The second paragraph of this section reads:
For the purposes of section 26 (h) preferred stock means stock which was issued prior to October 1,1942, except as provided in subsection (c) of this section for taxable years beginning after December 31, 1943, and which during the whole of the taxable year * * * was stock nonparticipating as to earnings or profits either ewrrently or in liquidation, the dividends in respect of which were cumulative and payable in preference to the payment of dividends on other stock. In addition, the preferred stock must be such that the rate of return is fixed and cannot be changed by a vote of the board of directors or by some similar method. * * * [Italics ours.]
[302]*302The prerequisite added by the regulation is that the stock should not have the right to participate in earnings or profits “either currently or in liquidation.” It is not disputed that this stock did not participate in the earnings currently, but on liquidation they did participate equally with the common stock in the assets of the company, which, of course, would include any undistributed earnings.
The statute does not contain this limitation. It requires only that dividends on the stock be cumulative and limited to the same amount, and payable in preference to payment of dividends on other stock.
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WhitakeR, Judge,
delivered the opinion of the court:
Plaintiff is a public utility company. In the computation of its surtax net income it seeks to deduct dividends paid by it on some of its stock, which it alleges is preferred stock as defined in section 26 of the Internal Revenue Code. The Commissioner of Internal Revenue disallowed the deduction and plaintiff, having paid the tax computed without it, sues to recover it.
The question presented is whether or not the stock is in fact preferred stock as defined in that section.
Section 15 (as added by sec. 201 of the Revenue Act of 1940, 54 Stat. 516, and amended by sec. 105 (b) of the Revenue Act of 1942, 56 Stat. 798) levies a tax on a corporation’s surtax net income, and section 26 provides that a public utility company is entitled to a credit against its surtax net income of “the amount of dividends paid during the taxable year on its preferred stock.” Preferred stock is defined in section 26 (h) (2) (B) as follows:
The term “preferred stock” means stock issued prior to October 1, 1942, which during the whole of the taxable year * * * was stock the dividends in respect of which were cumulative, limited to the same amount, and payable in preference to the payment of dividends on other stock. * * *
The stock in question was not issued prior to October 1,1942, but section 26 (h) (2) (B) further provides:
* * * Stock issued on or after October 1,1942, shall be deemed for the purposes of this paragraph to have been issued prior to October 1,1942, if it was issued (including issuance either by the same or another corporation in a transaction which is a reorganization, as defined in section 112 (g) (1), or a transaction to which section 112 (b) (10), or so much of section 112 (d) or (e) as relates to section 112 (b) (10), is applicable, or which is a transaction subject to Supplement (R) to refund or replace bonds or debentures issued prior to October 1, 1942, or to refund or replace other preferred stock (including stock which is preferred stock by reason of this sentence), but only to the extent that the par or stated value of the new stock does not exceed the par, stated, or face value of the bonds or debentures issued prior to October 1, 1942, or the other preferred stock, which such new stock is issued to refund or replace. * * *
[300]*300No contention is made that the transaction under which the alleged preferred stock in question was issued does not come within the quoted provision of section 26 (h) (2) (B). The only issue, as stated above, is whether or not the stock plaintiff did issue is preferred stock. However, it might be well to briefly state the circumstances surrounding the issuance of this alleged preferred stock.
On and prior to December 22,1942, and until June 11,1943, the latter date being the date of the issuance of the so-called preferred stock, plaintiff was a subsidiary of United Gas Improvement Company. Prior to December 22, 1942, the Securities and Exchange Commission issued an order requiring United Gas Improvement Company to divest itself of its holdings in the common stock of plaintiff, among other securities. On December 22, 1942, United Gas Improvement Company filed with the Securities and Exchange Commission a plan for doing so. That plan was approved by the Securities and Exchange Commission on March 18,1943, and it was carried out, effective June 11, 1943.
Prior to the inception of the plan, from December 22,1942, to June 11, 1943, plaintiff had an authorized capital of 15,000,000 shares of common stock without par value, of which 10,529,230 shares were outstanding. These outstanding shares had a book value of $137,816,005. Plaintiff retired these 10,529,230 shares, and issued in lieu thereof 2,369,076 shares of the so-called preferred stock, and 8,160,154 shares of new no par common stock. The preferred stock and new common stock had the same book value as the 10,529,230 shares of the old no par common stock.
On June 11,1943, United Gas Improvement Company was the holder of 10,244,262 shares of the old no par common stock of plaintiff. Under the plan it received therefor 2,304,-958.95 shares of plaintiff’s so-called preferred stock and 7,939,303.05 shares of the new no par common stock of plaintiff.
At the same time, the United Gas Improvement Company authorized the distribution of 2,295,438 shares of plaintiff’s so-called preferred stock, and $30,605,840 in cash, in exchange for 765,146 shares of its outstanding $5.00 dividend preferred stock, which had a book value of $75,139,726. The value of [301]*301plaintiff’s so-called preferred stock issued to the holders of the preferred stock of the United Gas Improvement Company was $30,014,751.12, so that the total of the value of this stock and the cash distributed to the holders of the preferred stock of the United Gas Improvement Company was $60,650,591.12, which was less than the value of the outstanding preferred stock of the United Gas Improvement Company for which it was exchanged.
It will thus be seen, as is conceded, that the transaction comes within the terms of section 26 (h) (2) (B) of the Internal Eevenue Code, provided the so-called preferred stock issued by plaintiff was in fact preferred stock as defined in that section.
We repeat the statutory definition of “preferred stock,” for the sake of convenience:
The term “preferred stock” means stock issued prior to October 1, 1942, which during the whole of the taxable year * * * was stock the dividends in respect of which were cumulative, limited to the same amount, and payable in preference to the payment of dividends on other stock. * * *
Defendant concedes the dividends on this stock were cumulative, that they were limited to $1.00 per share, and that they were payable in preference to dividends payable on other stock. It, however, says the stock has not the further characteristic which was added by section 29.26-5 (a) of Treasury Eegulations 111, as amended by T. D. 5384,1944 Cum. Bull. 148. The second paragraph of this section reads:
For the purposes of section 26 (h) preferred stock means stock which was issued prior to October 1,1942, except as provided in subsection (c) of this section for taxable years beginning after December 31, 1943, and which during the whole of the taxable year * * * was stock nonparticipating as to earnings or profits either ewrrently or in liquidation, the dividends in respect of which were cumulative and payable in preference to the payment of dividends on other stock. In addition, the preferred stock must be such that the rate of return is fixed and cannot be changed by a vote of the board of directors or by some similar method. * * * [Italics ours.]
[302]*302The prerequisite added by the regulation is that the stock should not have the right to participate in earnings or profits “either currently or in liquidation.” It is not disputed that this stock did not participate in the earnings currently, but on liquidation they did participate equally with the common stock in the assets of the company, which, of course, would include any undistributed earnings.
The statute does not contain this limitation. It requires only that dividends on the stock be cumulative and limited to the same amount, and payable in preference to payment of dividends on other stock. It says nothing about the right of this stock to participate with the common stock in the assets of the company on liquidation. The statute was concerned with dividends paid while the company was in operation; it was not concerned with the distribution of the assets of the corporation on liquidation.
Treasury regulations have the force and effect of law where they are reasonably designed to carry out the intent of Congress, but they cannot add a condition on a right which Congress did not impose, unless the addition was necessary in order to make effective the conditions imposed by Congress. Helvering v. Credit Alliance Co., 316 U. S. 107, 113; Helvering v. Reynolds, 313 U. S. 428; Campbell v. Galeno Chemical Co., 281 U. S. 599, 610; Eastman Kodak Co. v. United States, 99 C. Cls. 569.
In the Credit Alliance Company case, supra, at p. 113, the court said:
In view of what we have said as to the plain meaning of subsection (f), we think that no complexity or confusion is discoverable and that the regulation not only was contradictory of the plain terms of the subsection but attempted to add a supplementary legislative provision, which could only have been enacted by Congress. We hold, therefore, that the court below was right in refusing to give effect to the regulation.
In Campbell v. Galeno Chemical Co., supra, at p. 610, the court said:
The limits of the power to issue regulations are well settled. International Ry. Co. v. Davidson, 257 U. S. 506, 514. They may not extend a statute or modify its provisions. * * *
[303]*303The condition imposed by the regulations in this case was in addition to the conditions imposed by statute and was not necessary in order to make effective any one of the statutory conditions, and is, therefore, invalid.
The fact that plaintiff called this stock “preference common stock” makes no difference; the name given it makes no difference. The test is: Has it those qualities which the statute says it must have in order to be preferred stock. We think it does, and, therefore, that plaintiff is entitled to a credit against its surtax net income of the amount of dividends paid on it.
Plaintiff is entitled to judgment for the amount by which its taxes were overpaid by reason of the disallowance of the credit which it claimed of the amount of these dividends against its surtax net income.
The entry of judgment will be suspended until the incoming of a stipulation between the parties showing the amount due plaintiff computed in accordance with this opinion, or, in the absence of a stipulation, until the incoming of a report of a commissioner showing the amount due. It is so ordered.
MaddeN, Judge; LittletoN, Judge; and Jones, Chief Judge, concur.
FINDINGS OF FACT
The court having considered the evidence, the stipulation of facts entered into between the parties, and the briefs and argument of counsel, makes findings of fact as follows:
1. The plaintiff is a corporation organized and existing under the laws of the Commonwealth of Pennsylvania and having its principal office in the City of Philadelphia, Pennsylvania.
2. On or about May 12, 1948, the plaintiff filed its United States Corporation Income Tax Return, on Treasury Department Form 1120, for the calendar year 1941 with the Collector of Internal Revenue at Philadelphia, Pennsylvania. The aforesaid return set forth income tax due for the year 1947 of $9,389,697.83, which amount was paid to the afore[304]*304said Collector of Internal Revenue on or about the dates and in the amounts as follows:
March 15, 1948_$2,315,000. 00
June 11,1948_ 2,319, 848. 92
September 13,1948_ 2,347,424.46
December 14, 1948_ 2,347,424.45
3. On or about August 9, 1949, following an examination and audit of the plaintiff’s aforesaid return by representatives of the Commissioner of Internal Revenue, the plaintiff paid to the aforesaid Collector of Internal Revenue a deficiency assessment of income tax for the year 1947 of $24,693.46, plus interest thereon of $1,975.48.
4. During the entire year 1942 and at all times subsequent thereto the plaintiff was, has been and is engaged in the sale of electrical energy, gas and steam under rates approved by the Public Utility Commission of the Commonwealth of Pennsylvania.
5. On and prior to December 22, 1942, and from that date until June 11, 1943, the plaintiff’s authorized capital included 15,000,000 shares of common stock without nominal or par value, of which 10,529,230 shares, having an aggregate stated book value of $137,816,005, were outstanding.
6. On and prior to December 22,1942, and from that date until June 11, 1943, the United Gas Improvement Company (hereinafter called “UGI”), a registered holding company under section 2 of the Public Utility Holding Company Act of 1935, owned 10,244,262 shares of the 10,529,230 shares outstanding of the plaintiff’s common stock.
7. On and prior to December 22,1942, and from that date until June 11, 1943, UGI had issued and had outstanding 765,146 shares-of $5 Dividend Preferred Stock, no par value. The said 765,146 shares of $5 Dividend Preferred Stock were issued in several series prior to October 1, 1942, beginning with the year 1929. The dividends payable thereon were payable in preference to the payment of dividends on the common stock of UGI, were cumulative, limited to $5 per share, and the stock was redeemable at any time at $110 per share, plus accrued and unpaid dividends.
[305]*3058. Pursuant to Section 11 (e) of the Public Utility Holding Company Act of 1935, the Securities and Exchange Commission required UGI to divest itself of certain securities and other assets, among which were its holdings in the common stock of plaintiff and Public Service Corporation of New Jersey. On December 22,1942, UGI filed with the Securities and Exchange Commission an application for approval of a plan (hereinafter called the “Plan”) in compliance with the requirement of the Public Utility Holding Company Act for its divestment of certain securities and other assets.
9. On March 18,1943, the Securities and Exchange Commission issued its Order approving the Plan.
10. Under date of May 29,1943, the Deputy Commissioner of Internal Revenue issued a letter ruling to UGI expressing the opinion, inter alia, that in accordance with the provisions of Section 371 (a) and (e) of the Internal Revenue Code, as amended, the gain if any to the holders of UGI’s outstanding $5 Dividend Preferred Stock upon surrender of such stock in exchange for stock of the plaintiff and cash would be limited to the amount of cash received and the loss, if any, to the recipient would not be recognized.
11. Pursuant to resolutions adopted at a special meeting of the stockholders of plaintiff on May 19,1943, plaintiff, on the basis of and in accordance with the terms and provisions of the Plan, converted its authorized no par common stock into $1.00 dividend preference common stock (hereinafter called the preference stock) and new common stock, to be effective as of June 11,1943. In accordance with the terms and provisions of the Plan, plaintiff exchanged the 10,529,230 shares outstanding no par common stock having a book value of $137,816,005 for 2,369,076 shares of preference stock and 8,160,154 shares of new no par common stock, both having an aggregate book value of $137,816,005. On June 11, 1943, UGI, as the holder of 10,244,262 shares of the old no par common stock of plaintiff, received in exchange therefor 2,304,-958.95 shares of the preference stock and 7,939,303.05 shares of the new no par common stock of plaintiff. By letter dated July 7, 1943, UGI advised its stockholders of the consummation of the Plan and the ruling of the Commissioner with respect thereto.
[306]*30612. At a meeting of the Board of Directors of UGI on June 11, 1913, such Board declared the Plan effective as of that date and authorized the redemption of the 765,146 shares of outstanding shares of $5 Dividend Preferred Stock of UGI and in payment thereof distributed to such stockholders 2,295,438 shares of plaintiff’s preference stock and $30,605,840 in cash, in accordance with the terms and provisions of the Plan. The actual redemption was not actually consummated on June 11,1943, but over a period of time, during which the stockholders presented their $5 Dividend Preferred Stock to the registrar, the Guaranty Trust Company of New York, for the redemption.
13. The value of the outstanding 765,146 shares of the $5 Preferred Stock on the books of UGI prior to the aforesaid redemption was $75,139,726. The book value allocated by UGI to the 2,295,438 shares of plaintiff’s preference stock distributed in partial payment on the aforesaid redemption was $30,044,751.12.
14. Of the 2,369,076 shares of plaintiff’s preference stock issued as aforesaid on June 11,1943, 802,990 shares remained outstanding on January 1, 1947, and during the entire year 1947.
15. During the year 1947 the plaintiff paid dividends of $802,990, at the rate of $1 per share, on the 802,990 shares of its preference stock outstanding, none of which dividend payments included any amount with respect to accumulated unpaid dividends for any year prior to 1947.
16. In its income tax return for the calendar year 1947, the plaintiff did not claim credit under Sections 15 (a) and 26 (h) of the Internal Revenue Code, as amended, on account of dividends paid in 1947 on the aforesaid preference stock, and no such credit has since been allowed to the plaintiff in the determination of its 1947 income tax liability.
17. On or about November 2,1949, the plaintiff filed with the Collector of Internal Revenue at Philadelphia, Pennsylvania, a claim for refund of income taxes paid by the plaintiff for the calendar year 1947 in the sum of $108,924.29.
18. In its said claim for refund, the plaintiff set forth the facts and circumstances respecting the Plan and its consummation, and averred that it is entitled to a credit for the year [307]*3071947 under Sections 15 (a) and 26 (h) of tbe Internal Revenue Code in tbe sum of $778,030.66 in respect of tbe dividends paid by tbe plaintiff in that year on its preference stock. The grounds for recovery set forth in the said claim for refund were as follows:
(a) Section 15 (a) of the Internal Revenue Code provides in material part that in the case of a public utility the term “corporation surtax net income” means net income minus, inter alia, the credit for dividends paid on its preferred stock provided in section 26 (h);
(b) Section 26 (h) (1) of the Internal Revenue Code provides in material part that the credit allowable in the case of a public utility in respect of dividends paid on its preferred stock is the amount of dividends paid in the taxable year on such preferred stock;
(c) Of the total number of 2,369,076 shares of preference stock originally issued by the plaintiff on June 11, 1943, 96.8916995% was issued to replace 765,146 shares of UGI $5 Dividend Preferred Stock within the meaning of section 26 (h) (2) of the Internal Revenue Code and the applicable portions of section 29.26-5 of Treasury Regulations 111;
(d) All of such UGI $5 Dividend Preferred Stock had been issued prior to October 1', 1942, and was stock the dividends in respect of which were cumulative, limited to the same amount, and payable in preference to the dividends on the UGI common stock;
(e) The preference stock of the plaintiff was issued in a transaction subject to Supplement R of the Internal Revenue Code;
(/) The stated value of the preference stock of the plaintiff issued to replace the UGI $5 Dividend Preferred Stock did not exceed the stated value of such UGI $5 Dividend Preferred Stock;
(g) The claim further asserted that 96.8916995% of the preference stock initially issued by the plaintiff on June 11, 1943, was preferred stock within the meaning of that term as defined in section 26 (h) (2) of the Internal Revenue Code; that the plaintiff is entitled to a credit of $778,030.66, or 96.8916995% of the total dividends paid in the year 1947 on its preference stock; and that the plaintiff is entitled to a refund of income tax for the year 1947 in the sum of $108,924.29.
19. Under date of March 14, 1950, the Commissioner of Internal Revenue mailed to the plaintiff a report of exami[308]*308nation of the plaintiff’s said, claim for refund, recommending that the claim be rejected for the reason that since the preference stock of the plaintiff shares in the earnings and profits of the corporation in the event of liquidation, it does not qualify as a preferred stock within the meaning of Section 29.65-5 of Treasury Eegulation 111.
20. By letter dated May 25,1950, the Commissioner of Internal Revenue gave notice to the plaintiff by registered mail of disallowance in full of the plaintiff’s said claim for refund.
21. The Commissioner of Internal Revenue has at all times refused and still refuses to allow the plaintiff’s aforesaid claim for refund and to refund the amount claimed therein or any lesser amount.
CONCLUSION OE LAW
Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes that as a matter of law plaintiff is entitled to recover.
On a stipulation by the parties showing the amount due under the court’s decision, judgment was entered April 6, 1954, for the plaintiff for $110,899.77, with interest according to law.