some length to the legislative history in connection with section 725,3 and concludes that lack of "actual ownership" by Rider of at least one share of petitioner's stock precludes it from classification as a personal service corporation since its income was "ascribed primarily" to his and Van Hummell's activities. It is true, as respondent points out, that the courts and the Board of Tax Appeals consistently held under the earlier acts that actual ownership of stock as well as active participation in the conduct of the business of the corporation was necessary in order for a corporation to qualify as a personal service corporation. A few of the cases applying such rule are shown in the margin. The language of the earlier acts—“activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation"-compelled that conclusion. Cf. Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46. It may also be assumed for present purposes that there is slight difference between the language of the earlier acts and the first sentence of the present one, that the Congress was aware of the interpretation which had been placed upon the earlier acts, and that it assumed the same interpretation would be placed upon the new one. This, in our judgment, however, does not aid the respondent nor support his present contention that the stock owned by Rider's wife is not to be considered as owned by Rider for the purpose of determining whether Van Hummell and Rider owned the required per centum of petitioner's stock. On the contrary it indicates that the Congress deliberately intended that the rule which had been applied, e. g., in such cases as the Boyd Tax Service Corporation, supra, should not be applied under the new act. In that case Boyd owned one share of the corporation's stock and his wife owned the other 29. It was pointed out that since "the relationship of husband and wife gives neither any legal control over property that belongs exclusively to the other" the claim for classification as a personal holding company could not be allowed under a showing that the income was ascribed primarily to the activities of the husband. Under the present act, however, classification as a personal service corporation would be allowed. * * * It is thus apparent, and inferentially respondent concedes as much, that if Rider owned at least one share of petitioner's stock and the facts were in other respects the same as those now before us the claimed classification would be allowed. Before considering in more detail the legislative history relied upon by respondent it may not be H. R. 2894, 76th Cong., 3d sess.; S. R. 2114, 76th Cong., 3d sess.; Conference Report, H. R. 3002, 76th Cong., 3d sess. • Boyd Tax Service Corporation, 1 B. T. A. 346, Hanley-Ried & Co., 2 B. T. A. 315; Filler, Wilson & McClelland, 20 B. T. A. 410, and cases therein cited; Bowring & Co. v. United States (Ct. of Cls.), 50 Fed. (2d) 472; Meinrath Brokerage Co. v. Commissioner, 35 Fed. (2d) 614; certiorari denied, 281 U. S. 738, affirming 12 B. T. A. 113. inappropriate to examine some of his rulings and interpretations under somewhat similar language contained in other acts. Section 503, I. R. C., provides that, for the purpose of determining whether a corporation is a personal holding company, stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust is to be considered as owned proportionately by its shareholders, partners or beneficiaries, and an individual is to be considered as owning the stock owned, directly or indirectly, by or for his family. Under section 19.503 (a)-6 of Regulations 103, in example 1, A is held to be the constructive owner of the stock of P corporation because his wife A W owns all of the stock of M corporation which owns all the stock of O corporation, which owns all of the stock of P corporation. See also example 1 in article 333 (a)-5, dealing with foreign personal holding companies. Section 24 (b) (2), I. R. C., denies deduction for losses resulting from sales or exchanges of property between an individual and a corporation, more than 50 per centum in value of the stock of which is owned, directly or indirectly, by or for such individual. Under subdivision (B) an individual is to be considered as owning the stock owned directly or indirectly by his family. In section 19.24-5 (c) of Regulations 103 it is stated that "an individual need not own any stock of a corporation, either directly or indirectly, in order to be considered as constructively owning the stock of such corporation which is owned, directly or indirectly, by or for any member of his family." A similar provision was contained in article 24-5 (c) of Regulations 101, promulgated under the Revenue Act of 1938. The regulations under section 725, supra (Secs. 30. 725-1 and 2, Regulations 109), follow the language of the statute quite closely and provide, inter alia: Shareholders regularly engaged in the active conduct of the affairs of the corporation and to whom the income of the corporation is primarily to be ascribed must own at all times during the taxable year at least 70 percent in value of each class of stock of the corporation. If stock is owned by the spouse or minor child of an individual, or owned by the guardian or trustee of such spouse or child, such stock is treated as being owned by such individual. This appears to be a correct interpretation of the statute. Returning to the legislative history, respondent attempts to spell out of the portion of the report of the Committee on Ways and Means (H. R. 2894) set out in the margin a requirement that at least one share of stock be owned by Rider. This seems to be premised upon the fact 5 A personal-service corporation is defined as a corporation whose income is to be ascribed primarily to the activities of shareholders who are regularly engaged in the active conduct of the affairs of the corporation and are the owners at all times during the taxable year of at least 80 percent in value of all the stock of the corporation and in which capital is not a material income-producing factor. For this purpose an individual is con that the report states "shareholders, who are regularly engaged in the active conduct of the affairs of the corporation may be counted," his argument being that the Congress did not mean to imply that the classification should be given when the services are rendered by individuals "who are considered as owning shares owned by their spouses.' We can not so interpret the language used by the Committee, especially since the bill being reported by it contained the positive statement that "For the purposes of this subsection an individual shall be considered as owning * the stock owned * by his spouse Moreover the construction which had been placed by the department upon similar language in the other acts was presumably known and it is not unreasonable to suppose that the Congress intended it should be given the same interpretation. Cf. Helvering v. William Flaccus Oak Leather Co., 313 U. S. 247; White v. Winchester Country Club, 315 U. S. 32; Helvering v. City Bank Farmer's Trust Co., 296 U. S. 85; United States v. American Trucking Assns., Inc., 310 U. S. 534; Fides v. Commissioner, 137 Fed. (2d) 731. But see Helvering v. Hallock et al., Trustees, 309 U. S. 106 and Helvering v. Clifford, 309 U. S. 331. However that may be the language seems to be so positive and unambiguous as to give us no alternative but to apply it precisely as written. Other excerpts from committee reports, cited and quoted by the respondent upon brief, have been examined; but we are not convinced the Congress ever intended that the act should be given a construction, the effect of which would be to hold that a husband and wife may be the owners of the shares of stock of a corporation and yet not be its shareholders. Cf. Barbour v. Thomas, 86 Fed. (2d) 510; Metropolitan Holding Co. v. Snyder, 79 Fed. (2d) 263. Moreover such a construction, if carried into Titles I, II, and III of the Revenue Act of 1937 as consistency would seem to dictate, would cause administrative difficulty and confusion and materially affect their efficacy in "closing loopholes"-the purpose for which they were enacted. We think that Rider, for present purposes, should be considered a shareholder of petitioner corporation. Inasmuch as the other conditions imposed by the statute appear to exist, it is held that petitioner is entitled to classification as a personal service corporation. It follows that the deficiency must be set aside. Decision will be entered for the petitioner. sidered as owning at any time the stock owned at such time by his spouse or minor child. Thus all the shareholders, who are regularly engaged in the active conduct of the affairs of the corporation may be counted in determining whether such a corporation may be classified as a personal-service corporation, instead of merely the principal shareholders. Moreover, to determine whether such shareholders own at least 80 percent in value of the stock of the corporation, the stock owned by their spouses or minor children may be included. • • [Report of Committee on Ways and Means of the Second Revenue Bill of 1940, Sixty-Sixth Congress, Third Session, page 11, Report No. 2894.] 625278-45- -8 M. W. ELLIS, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MINA W. ELLIS, PETITIONER, V. COMMISSIONER OF INTERNAL Docket Nos. 111595, 111596. Promulgated January 24, 1944. Held, that certain "conditional rights certificates" were not Leland W. Scott, Esq., for the petitioners. The respondent determined deficiencies in income tax for the year 1940 in the sum of $4,307.61 against M. W. Ellis and $4,478.39 against Mina W. Ellis. An issue involving the deduction of $1,817.24 by petitioner M. W. Ellis for ordinary and necessary business expense has been stipulated by the parties and will be settled under Rule 50. The sole issue now in controversy is whether a corporate distribution received by each of the petitioners in 1940 constituted the receipt of ordinary income, taxable in its entirety, or whether it constituted the receipt by each petitioner of a capital gain. FINDINGS OF FACT. The facts were stipulated and as so stipulated are adopted as findings of fact. In so far as material to the issue presented, the facts are as follows: The petitioners are residents of Charles City, Iowa, and filed their Federal income tax returns for the year 1940 with the collector of internal revenue for the district of Iowa. Oliver Farm Equipment Co., hereinafter called the company, is a corporation organized under the laws of Delaware on February 13, 1929. On January 14, 1931, the total authorized shares of stock were 3,050,000, divided into three classes: 300,000 shares of prior preferred stock, 750,000 of convertible participating stock, and 2,000,000 of common stock. The convertible participating stock was a preferred stock, the holders of which were entitled to cumulative quarterly dividends at the rate of $3 per annum before any dividend could be declared on common stock. On January 15, 1931, the certificate of incorporation was amended so that the total authorized shares of the company were 1,550,000, all without par value, divided into 300,000 shares of prior preferred and 1,250,000 shares of common stock. Pursuant to this amendment, each share of the company's convertible participating stock issued and outstanding was converted into one share of new common stock and each share of old common stock was converted into one-fourth share of new common stock, Certificates representing the new stock were issued and the old stock surrendered. On January 15, 1931, unpaid dividends of $1.622 per share had accumulated on the convertible participating stock. On January 14, 1931, a resolution was passed by the board of directors providing as follows: RESOLVED, that this Corporation shall recognize the right of the holders of the Convertible Participating Stock as indicated in the said certified list, to receive from this Corporation the sum of $1.621⁄2 a share, being an amount equivalent to the unpaid dividend accumulated on the said stock to January 15, 1931, if any dividend is declared and set aside on the Common Stock of this Corporation. RESOLVED, that the recognition of the said right shall in no way obligate this Board at any time to declare or set aside a dividend on the Common Stock of this Corporation, and that the right of the said holders of the Convertible Participating Stock (and the right of any assignee of any such holder) to receive such amount shall not constitute a debt of or claim against this Corporation unless and until a dividend is declared upon its Common Stock. Pursuant to this resolution, certificates evidencing this right, hereinafter called conditional rights certificates, were issued to the holders of record of the convertible participating stock. These conditional rights certificates were in the following form: No. 5408 Representing Conditional Shares OLIVER FARM EQUIPMENT COMPANY THIS CERTIFIES that accrued upon shares of the Convertible Participating Stock of the Company to and including January 15, 1931 (the date of the filing and recording of the Certificate of Amendment to the Certificate of Incorporation of the Company whereby each share of the said Convertible Participating Stock was reclassified into one share of the Common Stock of the Company), being the sum of One Dollar Sixty-two and one-half Cents ($1.621⁄2) on each of the said shares. This Certificate does not represent a debt of or claim against the Company, unless and until it shall declare and set aside a dividend upon its Common Stock, and the Board of Directors of the Company is not and shall not be under any obligation at any time to declare any dividend upon such Common Stock. This certificate and all the conditional rights and interest of the holder hereof hereunder may be transferred of record upon surrender hereof, duly indorsed for transfer, to the Transfer Agent hereinafter named, at its principal office in the Borough of Manhattan, in The City of New York, State of New York. If and when any payment shall be made hereunder, only the then record owner |