Cullinan v. Walker

delivered the opinion of the Court.

A tax of $156,212.66 was laid upon Cullinan, under the Act of September 8, 1916, c. 463, Title I, §§ 1 and 2, 39 Stat. 756 , 757, for additional gain or income of that year, assessed at $1,571,760. He paid the tax, under protest; and brought, in the federal court for southern Texas, this action against the local collector of internal revenue to recover the amount. The question was whether certain securities received by Cullman. in that year should be deemed gain or income. The case was tried by the court without a jury, upon agreed facts; and judgment was entered for defendant. Cullinan contends that securities issued to him, which the collector treated as gain or income, were, in legal effect, like a stock dividend; and that, under Eisner v. Macomber, 252 U. S. 189 , he was not taxable thereon. The Government insists that the securities so distributed were gains or income within the rule laid down in United States v. Phellis, 257 U. S. 156 , and Rockefeller v. United States, 257 U. S. 176 . This issue, presented on the facts hereinafter stated, is the only matter for decision. The case is here on writ of error under § 238 pf the Judicial Code, because of the constitutional question involved. Towne v. Eisner, 245 U. S. 418 .

Farmers Petroleum Company was, in 1915, a Texas corporation, with a capital stock of $100,000. Cullinan

Farmers Petroleum Company had been dissolved solely for the purpose of effecting a reorganization. The reorganization was undertaken, partly, in order to separate the pipe lines from the producing properties, which counsel advised was necessary; and, partly, in order to procure credit required for the developing business. The two new Texas corporations had at the time of the distribution of the stock of the Delaware corporation no assets other than those received from the trustees in liquidation. These assets were at the time of distribution of the same value as they were when held by the trustees in liquidation. Cullinan received 26.64 per cent, of each class of security. The stock and bonds distributed were then all worth par. The aggregate value of the securities received by him was $1,598,400. The amount which he

Cullinan insists that his gain so ascertained was merely an incident of a reorganization. This was equally true in the Phellis and the Rockefeller Cases. It is sought to differentiate those cases on the ground, that there the distributed stock of the new corporation was technically a dividend paid out of surplus; and that here the segregation is not of that character. But the gain, which when segregated becomes legally income subject to the tax, may be segregated by a dividend in liquidation, as well as by the ordinary dividend. If the trustees in liquidation had sold all the assets for $6,000,000 in cash, and had distributed all of that, no one would question that the late stockholders of Farmers Petroleum Company would, in the aggregate, have received a gain of $5,900,000, taxable as income. The result would obviously have been the same, if the trustees had taken in payment, and distributed, bonds of the value of $6,000,000, in some new corporations. And the result must, also, be the same where that taken in payment is $3,000,000 of such bonds and $3,000,000 in stock of a third corporation. All the material elements which differentiate the Phellis and Rockefeller Cases from Eisner v. Macomber are present also here. The corporation, whose stock the trustees distributed, was a holding company. In this respect, it differed from Farmers Petroleum Company, which was a producing and pipe line company. It differed from the latter, also, because it was organized under the laws of another State. It is true that, at the time this Delaware corporation’s stock was distributed, it held the stock of the new oil producing company and likewise the stock of the new pipe line company. But the Delaware corporation was a holding company. It was free, at any time, to sell the whole, or any

Affirmed.