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COMMISSIONER OF INTERNAL REVENUEvs. MANNINGL-28398 | Aug 6, 197 | !"#$#$%& '%( R"v$") |C*s#(%!"#$#$%&"(+ C%$ss$%&"( %' I"(&*R"v"&u"R"s%&/"s+ 0%& M*&&$&g, ..M4%&*/, E.E. S$%&s 5 CTA

u$4 Su*(+Facts: Reese, the majority stockholder of Mantrasco,executed a trust agreement between him, Mantrasco,Ross, Selph, carrascoso & Janda law firm and theminority stockholders, Manning, McDonald andSimmons Said agreement was entered into because ofReese!s desire that Mantrasco and Mantrasoc!s "subsidiaries, Mantrasco #uam and $ort Motors, tocontinue under the management of Manning, McDonaldand Simmons upon his %Reese death 'hen Reesedied, Mantrasco paid Reese!s estate the (alue of hisshares 'hen said purchase price has been fully paid,the "),*++ shares, which were declared as di(idends,

were proportionately distributed to Manning, McDonaldand Simmons ecause of this, the -R issuedassessments on Manning, McDonald and Simmons fordeficiency income tax for ./01 Manning et al, opposedthis assessment but the -R still found them liableManning et al appealed to the 234, which absol(edthem from any liabilityHeld: 3he manifest intention of the parties to the trustagreement was, in sum and substance, to treat the"),*++ shares of Reese as absolutely outstandingshares of Reese5s estate until they were fully paid Suchbeing the true nature of the "),*++ shares, theirdeclaration as treasury stock di(idend in ./01 was a

complete nullity and plainly (iolati(e of public policy 4stock di(idend, being one payable in capital stock,cannot be declared out of outstanding corporate stock,but only from retained earnings

4 stock di(idend always in(ol(es a transfer of surplus 6orprofit7 to capital stock 4 stock di(idend is a con(ersionof surplus or undi(ided profits into capital stock, which isdistributed to stockholders in lieu of a cash di(idend

F*4#s+ ./0" 8 Mantrasco had an authori9ed

capital stock of $"0M di(ided into"0,+++ common shares "),*++ of theseshares are owned by Julius Reese whilethe rest, at .++ each, are owned byManning, McDonald & Simmons

:ebruary "/, ./01 8 a trust agreementwas executed between Reese,Mantrasco, Ross, Selph, carrascoso &Janda law firm, Manning, McDonald andSimmons Said agreement was enteredinto because of Reese!s desire thatMantrasco and Mantrasoc!s "

subsidiaries, Mantrasco #uam and $ortMotors, to continue under themanagement of Manning, McDonaldand Simmons upon his %Reese death

;ctober ./, ./0) 8 Reese died

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4pril .), ./>0 8 2ommissioner of-nternal Re(enue issued notices ofassessment for deficiency income taxesto Manning, McDonald & Simmons forthe year ./01

Manning, McDonald & Simmonsopposed said assessments -R stillheld them liable for these assessments

Manning, McDonald & Simmonsappealed to the 234

CTA@ *;s%v"/ M*&&$&g, M4%&*/ 5S$%&s '(% *& $*;$$# on theground that #"$( ("s"4#$v" 1>3$"("s# $& M*(*s4% ("*$&"/ #"s*" ;"'%(" *&/ *'#"( #" /"4*(*#$%&%' s#%4 /$v$/"&/s *&/ %& #"&u;"( %' s*("s "/ ; "*4 %'#" 4*&g"/

Issu"s+

. ';= the shares are treasury shares%NO

" ';= Manning, McDonald & Simmonsshould pay for deficiency income taxes%?ES

R*#$%+. T("*su( s*("s *(" s#%4s $ssu"/

*&/ 'u *$/ '%( *&/ ("-*4@u$("/ ;#" 4%(%(*#$%& "$#"( ; u(4*s",/%&*#$%&, '%('"$#u(" %( %#"( "*&s3reasury shares are therefore $ssu"/

s*("s, ;u# ;"$&g $& #" #("*su( #"/% &%# *v" #" s#*#us %' %u#s#*&/$&gs*("s 2onseAuently, *#%ug *#("*su( s*(", &%# *v$&g ;""&("#$("/ ; #" 4%(%(*#$%& ("-*4@u$($&g $#, * ;" ("-$ssu"/ %( s%/*g*$&, such s*(", *s %&g *s $# $s"/ ; #" 4%(%(*#$%& *s * #("*su(s*(", *(#$4$*#"s &"$#"( $&/$v$/"&/s, because di(idends cannotbe declared by the corporation to itself,

&%( $& #" ""#$&gs %' #"4%(%(*#$%& *s v%#$&g s#%4, forotherwise eAual distribution of (otingpowers among stockholders will beeffecti(ely lost and the directors will beable to perpetuate their control of thecorporation, though it still represents apaid8for interest in the property of thecorporation -n this case, su4 "ss"$*

'"*#u("s %' * #("*su( s*(" *("

*4$&g $& #" '%("( s*("s %'R""s"

3he *&$'"s# $"$%& %' #"*(#$"s #% #" #(us# *g("""wasin sum and substance, #% #("*# #"2,7BB s*("s %' R""s" *s*;s%u#" %u#s#*&/$&g s*("s %'R""s"

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Such package de(ice, ob(iously notdesigned to carry out the usual stockdi(idend purpose of corporateexpansion rein(estment butexclusi(ely for expanding the capitalbase of Manning, McDonald &Simmons in Mantrasco, cannot beallowed to deflect their

responsibilities toward our incometax laws

A #"s" *%us *(" su;"4# #%$&4%" #*: *s ;"$&g * '%) %' 4*s;"&"'$#s #% M*&&$&g, M4%&*/ 5S$%&s

Commissioners assessment is

erroneous 2ommissioner should not ha(e

assessed the income tax on the total

acAuisition cost of the allegedtreasury stock di(idends in . lumpsum

3he record shows that the earningsof Mantrasco o(er a period of yearswere used to gradually wipe out theholdings of Reese

2onseAuently, those earnings shouldbe taxed for each of thecorresponding years when paymentswere made to Reese!s estate on

account of his "),*++ shares

$s%s$#$v"+ 234 judgment set aside 2aseremanded to the 234 for further proceedingsfor the recomputation of the income taxliabilities of Manning, McDonald & Simmons