Blumenthal v. Commissioner , 12 B.T.A. 1205 ( 1928 )

S. J. BLUMENTHAL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Blumenthal v. Commissioner

Docket No. 17082.

United States Board of Tax Appeals

12 B.T.A. 1205; 1928 BTA LEXIS 3379;

July 9, 1928, Promulgated

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1. GAIN OR LOSS. - Capital investment and value of assets distributed at liquidation and dissolution determined.

2. LIQUIDATING DIVIDEND. - Where a dividend distributing the entire earned surplus is declared a day prior to dissolution and being in pursuance of a plan of voluntary dissolution theretofore agreed upon, held, the distribution is subject to both normal and surtax as a liquidating dividend.

Richard S. Goldman, Esq., for the petitioner.

J. Arthur Adams, Esq., for the respondent.

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MILLIKEN

This proceeding results from the determination by respondent of a deficiency in income tax for the calendar year 1920, in the sum of $1,793.33. Petitioner avers that the respondent erred in his failure to allow as a deduction from gross income the sum of $13,270.13, representing the amount of loss sustained by petitioner in the year 1920 by reason of the sale or disposition of 250 shares of capital stock of the Panama Lamp & Commercial Co.

At the hearing of this proceeding, counsel for the respondent amended his answer and alleged, (1) that a dividend of $16,542.15 paid the petitioner August 31, 1920, was a liquidating dividend subject to both normal and surtax and not an ordinary dividend subject to surtax only, and (2) that the petitioner had failed to include in gross income for the year 1920 an ordinary dividend paid to him by the Panama Lamp & Commercial Co. in the sum of $1,750.

FINDINGS OF FACT.

Petitioner is an individual residing at San Francisco, Calif. Continuously from January 1, 1920, to September 1, 1920, the Panama Lamp & Commercial Co. was a corporation duly organized and existing under and by virtue of the laws of the State of California, with a capital stock of $50,000, divided into 500 shares of the par value of $100 each and with its principal office and place of business in San Francisco. Said corporation was during the year 1920 and up to the time of its dissolution (as hereinafter set forth), and for a number of years prior thereto, engaged in the business of selling at wholesale electrical supplies and representing eastern manufacturers thereof.

From January 1, 1920, to September 1, 1920, the capital stock of the Panama Lamp & Commercial Co. was owned as follows:

Sello J. Blumenthal (petitioner herein) 250 shares of the par value of $25,000.

Joseph Thieben, 250 shares of the par value of $25,000.

On July 23, 1920, the stockholders of the Panama Lamp & Commercial Co. held a special meeting for the purpose of considering and acting upon the matter of the voluntary dissolution of the corporation and the minutes of said meeting were as follows:

The roll of stockholders was then called and the following stock was represented in person:

	Shares
Joseph Thieben	249
Sello J. Blumenthal	249
Total	498

The president then announced that 498 shares of the capital stock of the corporation out of a total of 500 shares of outstanding, subscribed and issued capital stock were represented at the meeting by the owners of said shares of stock in person.

The president then announced that the purpose of this special meeting of the stockholders was to consider and determine upon the matter of the voluntary dissolution of the company.

Upon motion, duly made, seconded and carried, it was unanimously

RESOLVED: That this company immediately take the necessary steps required by law for the purpose of the voluntary dissolution of the company and that upon such dissolution, the assets of the company be distributed to the stockholders in proportion to their respective holdings of the stock of the company, and it was further

RESOLVED: That the directors and officers of this corporation are hereby authorized, empowered and directed to make, execute and file the necessary application and documents in connection with said voluntary dissolution of this corporation.

On the same date, the directors of said corporation also held a special meeting at which the following resolution was passed:

The president stated that at a special meeting of the stockholders held immediately preceding this meeting, it was unanimously resolved by a vote of 498 shares of the stock of the company out of a total of 500 shares subscribed, issued and outstanding, that this corporation be voluntarily dissolved in accordance with law.

Upon motion, duly made, seconded and carried, it was unanimously

RESOLVED: That the Board of Directors and the President and Secretary be and they are hereby authorized, empowered and directed to make, execute and file the necessary application and any and all documents in connection therewith in order to effectuate said voluntary dissolution of the company, and it was further

RESOLVED: That the President and Secretary be and they are hereby authorized, empowered and directed to obtain the consent of any and all creditors of the corporation to the cancellation of the indebtedness due by the corporation to any such creditors and for the assumption of such indebtedness by Joseph Thieben and Sello J. Blumenthal individually and as copartners doing business under the name and style of Panama Lamp & Commercial Company, such action being necessary in order to comply with the law of the state in connection with the voluntary dissolution of this corporation.

A special meeting of the board of directors of the corporation was held at 5 p.m. on August 31, 1920, and the following resolution was passed:

RESOLVED: That the entire available surplus of this company as of August 31, 1920, be paid as a dividend to the stockholders of the company in proportion to their holdings as the same appear on the books thereof as of this date, and be it further

RESOLVED: That said dividend be paid immediately.

On September 1, 1920, after 30 days' notice having been given by publication, the Superior Court for the City and County of San Francisco entered its judgment dissolving the corporation and ordering all of the assets of the corporation to be divided and distributed among its stockholders in proportion to their respective interests and stockholdings therein and the board of directors was authorized and empowered to execute the orders and decree of the court.

On October 1, 1919, the petitioner purchased 250 shares of the capital stock of the Panama Lamp & Commercial Co. and paid therefor the sum of $35,947.27. On March 30, 1920, the board of directors ordered a dividend of 7 per cent to be paid from the earnings of 1919. This dividend was paid, of which petitioner received $1,750.

At the close of business on August 31, 1920, the day before the entry of judgment of dissolution, the corporation had an earned surplus of $33,084.31. Persuant to the meeting had on August 31, 1920, the entire surplus was paid to the stockholders and petitioner's share thereof was $16,542.15. After the payment of the above dividend, the assets of the corporation amounted to $171,319.90 and the liabilities, exclusive of capital stock, amounted to $121,319.90.

On September 1, 1920, the directors met in their capacity as trustees and by appropriate resolution distributed all of the assets of the corporation to its stockholders in proportion to their holdings subject to the liabilities of the corporation. Petitioner's shares of stock were delivered to and canceled on the books of the corporation. On the same day, Thieben and petitioner formed a partnership, and by appropriate bills of sale the assets of the corporation were conveyed to the partnership which continued the business.

The value of the assets of the corporation, transferred on September 1, 1920, was $50,000, of which petitioner received $25,000.

Subsequent to dissolution, it developed that the corporation was indebted for Federal income and profits tax in the amount of $4,646.08, which was paid by the partnership and of which petitioner paid $2,323.04.

OPINION.

MILLIKEN: We have found as a fact the value of the assets distributed to the petitioner at the date of final dissolution and his capital investment in the corporation. Petitioner is also entitled to an allowance in determining the gain or loss resulting from the liquidation of the amount of Federal income and profits tax paid by him for the corporation and which liability he assumed at the date of its dissolution. See . There is no dispute between the parties that petitioner received on March 30, 1920, a cash dividend in the amount of $1,750, which should be included in his gross income subject to surtax.

This leaves for consideration and decision the question of the character of the dividend received by petitioner on August 31, 1920. Petitioner contends that it was an ordinary dividend subject to surtax only and respondent contends that it was a liquidating dividend subject to both normal and surtax. Petitioner included in his tax return for 1920, and paid tax upon the dividend as an ordinary dividend.

Petitioner relies upon our decision in the case of , as authority for the proposition that the dividend received on the above-referred to date was an ordinary dividend.

There can be no question since the decision of the United States Supreme Court in , that if the dividend be a liquidating dividend, it is subject to both normal and surtax.

The facts in this proceeding and those obtaining in the case of , are distinguishable. In this case, action was taken by the board of directors on July 23, 1920, which authorized the board of directors and officers to execute and file the necessary application in furtherance of the voluntary dissolution and the declaration of the dividend in question on August 31, 1920, at 5 p.m., was merely a step in furtherance of the plan of voluntary dissolution, which was legally effected on the following day. Petitioner was the owner of one-half of the outstanding shares of capital stock of the corporation that was to be voluntarily dissolved. During the interim from July 23, 1920, to August 31, 1920, proper legal steps were being taken to effect the voluntary dissolution and an application was on file with the proper court praying for a decree of voluntary dissolution, and notice of dissolution was being published in the newspapers at the time the dividend in question was declared. In , the corporate action and application to the secretary of state was done and filed subsequent to the date of the declaration of the dividend there in question. Also see .

We are of the opinion that the dividend of August 31, 1920, was in pursuance of and a part of the plan of dissolution and as such was a liquidating dividend.

Judgment will be entered under Rule 50.