UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
May 31, 1938
LADNER, FORMER COLLECTOR OF INTERNAL REVENUE,
Appeal from the District Court of the United States for the Eastern District of Pennsylvania; Oliver B. Dickinson, Judge.
Before BUFFINGTON, THOMPSON, and BIGGS, Circuit Judges.
THOMPSON, Circuit Judge.
This is an appeal from a judgment of the District Court for the Eastern District of Pennsylvania. The Pennroad Company, hereinafter referred to as the appellee, brought an action at law to recover $181,798.66 with interest representing transfer stamp taxes alleged to have been illegally assessed and collected by the Collector of Internal Revenue, appellant herein. The District Court entered judgment for the appellee. The following is a summary of the material facts found by the District Court and necessary to a determination of the controversy:
The appellee was incorporated April 24, 1929, with an authorized capital stock of 10,000,000 shares of common stock of no par value. On the day of incorporation the appellee's Board of Directors resolved to issue 5,800,000 shares to be placed under a voting trust with three named trustees for a ten year period and to offer to the registered stockholders of the Pennsylvania Railroad Company at $15.00 per share voting trust certificates representing the common stock. The Pennsylvania Railroad stockholders who desired to exercise their option were instructed to return their warrants together with $15.00 per share to the appellee, whereupon certificates would be sent to the trustees. On May 22, 1929, the three trustees executed a voting trust agreement to which the appellee was a party. The trustees agreed to issue voting trust certificates to the subscribers for the Pennroad stock upon receipt of certificates of stock from the appellee. On the day of incorporation certificates for 67 shares of common stock were issued to the three original incorporators who paid therefor $15.00 per share. Original issue stamps were affixed and cancelled. On May 22, 1929 the original incorporators assigned their certificates for 67 shares of common stock to the voting trustees and a new certificate representing these shares was issued in their names to the voting trustees. Transfer stamps were affixed and cancelled. Thereafter the appellee received warrants from the Pennsylvania Railroad stockholders for 5,799,993 shares of Pennroad Corporation common stock together with $15.00 for each share; issued 46 certificates representing those shares to the voting trustees and directed the voting trustees to issue voting trust certificates to the former holders of the warrants. Practically the same procedure was followed in the case of two additional issues, making a total of 9,090,000 shares issued. The appellant assessed documentary stamp taxes in the sum of $181,798.66 and collected this sum under protest. The appellee brought suit for the recovery of those taxes and recovered judgment. This appeal is from that judgment.
It will be noted that the subscribers sent checks for the stock to the appellee; the appellee issued stock to the trustees, who then issued trust certificates to the subscribers. The question is whether this transaction is subject to documentary tax. A voting trust is ordinarily created by stock being issued to stockholders who in turn deposit it with the trustees. Such a transaction automatically incurs the stamp tax. The fact that the stock in this case was delivered directly to the trustees does not, in our opinion, obviate the obligation to pay the stamp tax. A transfer of the right to receive stock is taxable within the meaning of the Revenue Act of 1926, Title, 8, § 800, Schedule A-3, 26 U.S.C.A. § 902 and note, and Articles 31 and 34 of Treasury Regulations 71, the pertinent portions of which are set out in the margin.*fn1
In Founders General Corp. v. Hoey, 300 U.S. 268, 275, 57 S. Ct. 457, 460, 81 L. Ed. 639, the Supreme Court said: " * * * The legal title to the shares was received by the nominee from the newly formed corporation; but the authorization rendering his holding lawful was received from the taxpayer. The legality of the issuance of the stock in the names of the nominees rests on the fact that the taxpayers authorized such issuance and granted their nominees the right to receive the stocks entered in their names. The grant of that authority is a transfer of 'the right to receive' within the meaning of the act; and we are not to look beyond the act for further criteria of taxability."
We think the taxing act should be broadly construed and that the uncontradicted facts establish the appellant's contention that the right to receive the shares of stock was transferred from the subscribers to the trustees.
The judgment of the District Court is reversed.
BUFFINGTON, Circuit Judge, dissents.