Warden v. Commissioner , 23 B.T.A. 24 ( 1931 )

FRANK G. WARDEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

SEVERS HOTEL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

W. B. NATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Warden v. Commissioner

Docket Nos. 32596, 36756, 38993.

United States Board of Tax Appeals

23 B.T.A. 24; 1931 BTA LEXIS 1937;

May 4, 1931, Promulgated

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Where a corporation sells a part of its assets and the amount received therefor is paid directly to two stockholders owning all the stock except a single qualifying share, the transaction is a sale by the corporation and the profit realized, if any, is an element of its gross income.

James B. Malone, Esq., for the petitioners.

Elden McFarland, Esq., for the respondent.

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LANSDON

In the proceeding at Docket No. 32596, the respondent assets a deficiency in income tax for the year 1924, and that part of the year 1925 ending June 10, in the total amount of $8,928.25, against the Severs Hotel Company, which the petitioner claims was erroneously determined as tax liability resulting from profit realized from the sale of capital assets. In the two proceedings at Docket No. 36576 and No. 38993, the respondent asserts liability under section 280 of the Revenue Act of 1926 against petitioner Frank G. Warden and W. B. Nation for the entire deficiency asserted at Docket No. 32596. The several proceedings were heard together and are consolidated for decision.

FINDINGS OF FACT.

The Severs Hotel Company, hereinafter cometimes called the corporation, was organized in 1916 under the laws of Oklahoma and was dissolved on May 31, 1926, by proper action of the stockholders and the District Court of Muskogee County, Oklahoma. It was engaged in the operation of a hotel at Muskogee, Okla., and, prior to the sale subsequently herein set out, it was the owner of the furniture, equipment and good will of the hotel business which it conducted under its own corporate name. It was also the owner of a lease on the building in which it carried on its operations. In the taxable year and period here involved its entire issued capital stock, except a single qualifying share outstanding in the name of H. H. Ogden, was owned by Frank G. Warden and W. B. Nation in proportions of two-thirds and one-third. Warden was president and Nation was secretary of the corporation.

Shortly prior to June 10, 1925, one J. B. Harris proposed to buy all the assets and good will of the petitioner corporation upon terms and conditions as follows:

Clinton, Iowa, June 1, 1925.

Mr. F. G. Warden:

I hereby make you the following proposition for the purchase of the Seavers Hotel Operating Company. All its assets and good will I will pay you eighty-five thousand ($85,000.00) Dollars for same. Fifteen thousand dollars cash, balance payable as follows: two-thousand dollars per month and interest. Interest to be 6% per annum. For the first eight months or whatever portion of the eight months remains at time I take possession. The two-thousand payments to run only until February 1, 1926, then said payments are to be One-thousand dollars per month with interest at 6% until balance is paid. All deferred payments are to be secured by chattle mortgage on the furniture and equipment. It is understood that you are to pay all taxes up to the date I take possession and you are to pay all bills and claims whatsoever up until date I take possession. I agree to pay you for all store room inventions also agree to pay all unearned premiums on insurance policies.

Possession is to be given on or before June 15, 1925, or as soon as inventions and bills payable are checked up and books audited.

The above is providing I make satisfactory lease on the Seavers Hotel Building.

Furniture in Mr. Warden's private rooms, except carpets, are to be reserved.

(Signed) J. B. HARRIS.

Accepted.

(Signed) F. G. WARDEN.

Mr. Lisle agrees to take $3,500.00 commission on sale $2,500.00 cash on completion of sale and $1,000.00 in eight months.

(Signed) H. E. LISLE & SON,

JAMES H. LISLE.

The transaction initiated as above set out was accomplished prior to June 10, 1925. On that date the purchaser entered into possession and enjoyment of the property. Transfer of the tangible elements thereof to such purchaser was evidenced by a bill of sale executed on behalf of the corporation by its vice president, H. H. Ogden and its secretary, W. B. Nation, and duly executed by a notary public. The evidence discloses no value for the good will included in the assets purchased by Harris. The depreciated cost of the furniture, equipment, and leasehold at date of sale as determined by the respondent was $23,736.65.

The purchase money for the property in question in the amount of $85,000 was paid directly to the stockholders, Warden and Nation, in proportion to their stockholdings, and was never taken into the books of the corporation or included by it in its gross income in any return made to the respondent. Upon audit of the income-tax return filed by the corporation for 1925, the respondent added to gross income the amount of $61,263.35 as profit realized from the sale of capital assets, made other minor adjustments and determined the deficiency for 1925 now in controversy.

The income-tax return of the Severs Hotel Company for the year 1924 and the period from January 1, 1925, to June 10, 1925, were filed on February 11, 1925, and November 5, 1925, respectively. The deficiency notice relating to tax liabilities thereunder was mailed on or about October 4, 1927, and the appeal therefrom was filed with the Board of Tax Appeals on November 30, 1927. The corporation was dissolved on May 26, 1926. The petition in the proceeding at Docket No. 32596, was verified by Frank G. Warden as president of the corporation.

OPINION.

LANSDON: At the hearing of the proceeding at Docket No. 32596, the respondent moved to dismiss alleging that the petition was not filed by any person authorized by the laws of Oklahoma to act for a dissolved corporation. Section 5361, Compiled Statutes of Oklahoma, annotated (1921), provides:

Unless other persons are appointed by the court, the directors or managers of the affairs of such corporation at the time of its dissolution are trustees of the creditors and stockholders or members of the corporation dissolved, and have full power to settle the affairs of the corporation, and to collect and pay debts and divide among the stockholders the property which remains after the payment of debts and necessary expenses; and for such purposes may maintain or defend actions in their own names by the style of the trustees of such corporation dissolved, naming it; and no action whereto any such corporation is a party shall abate by reason of such dissolution.

Warden was the president and executive head of the Severs Hotel Company at the date of its dissolution. So far as the record shows he was the only person qualified under the law, in the absence of an appointment by a court, to act as trustee for the stockholders and creditors of the corporation. Even if he was only one of several trustees, under our rules his verification of the appeal from the determination of the Commissioner is sufficient. The motion to dismiss is denied.

The Severs Hotel Company, the petitioner at Docket No. 32596, contends that the transaction transferring good will, leasehold and tangible assets to a purchaser just prior to June 10, 1925, was a private deal between its two stockholders, Warden and Nation, and the purchaser; that no part of the purchase money was received by it or taken into its books of account in any way; and that it realized no income therefrom. The record does not disclose how its stockholders, as individuals, became owners of assets which all parties agree were the property of the petitioner down to the date of the sale. The proposal to purchase, duly accepted by the president of the corporation, and the bill of sale evidencing transfer of title to the purchaser, each specifies the Severs Hotel Company as the owner of the property in question.

It is well established that a corporation and its stockholders are separate entities. Any profit realized from the sale belonged in law to the corporation and could be passed on to its stockholders only as a distribution of assets. That the proceeds of the sale were not taken into the accounts of the corporation and were paid directly to the stockholders in proportion to their stockholdings, in no way supports the contention of the petitioner. ; . in contemplation of law Warden and Nation, president and secretary of the corporation, acted as its agents and received the money in its behalf. The petitioner was a close corporation. Retention by the stockholders of the proceeds of the sale of capital assets received by them as agents can be regarded only as a distribution of corporate funds. Profit from the sale, if any, was income to the corporation. American; . Cf. .

There is no controversy over the facts. At the date of the sale the depreciated cost of the assets as determined by the respondent was $23,736.65. The sale price was $85,000. The profit, therefore, none of which was returned as income in the taxable year, was $61,263.35.

In further support of its allegation of error the petitioner contends that the property sold included valuable assets and considerations, not recited in the sales agreement, viz., the understanding that Warden would use his influence to secure the renewal of the lease to the purchaser and that neither Warden nor Nation would thereafter engage in the hotel business in Muskogee in competition with the purchaser. These considerations, the petitioner argues, were not the property of the Severs Hotel Company or at its disposition, and, therefore, must have passed from the individuals, Warden and Nation, directly to the purchaser. The evidence in support of these contentions is far from convincing.

The record is clear that the petitioner was the only vendor in the transaction. If the considerations now under discussion were acquired by the purchaser for cash, the payment was made to the corporation or to agents acting in its behalf, and so are material here only to the extent that their cost to the corporation may be an element of the basis for ascertaining gain or loss therefrom. No evidence to establish such cost is in the record.

The respondent has asserted a deficiency against the Severs Hotel Company for 1924 in the amount of $11.78, which is included in the total of $8,928.25 set out above. Petitioner adduced no evidence in respect of this deficiency and we therefore regard it as abandoned. The determination of the respondent is approved as to the tax liability of the Severs Hotel Company for the taxable year and period.

Frank G. Warden and W. B. Nation, the petitioners at Docket Nos. 36576 and 38992, were the sole stockholders of the Severs Hotel Company except for one share issued in the name of H. H. Ogden, vice president, apparently only for the purpose of qualifying him to act as director and vice president. At the date of the sale here involved, Warden owned two-thirds and Nation one-third of the outstanding capital stock of the Severs Hotel Company and each shared in the sale price of the assets in proportion to his stockholding. The record also discloses that at the date of the sale here in controversy the corporation had other assets of very substantial value. Presumably such property was distributed in kind or cash to the stockholders on or before dissolution which was effective at May 26, 1926. It is clear, therefore, that each of the petitioners Warden and Nation is a transferee without consideration of assets of the Severs Hotel Company and is liable for all unpaid Federal income taxes due and unpaid at the date of its dissolution. .

Decision will be entered for the respondent.