Budget Homes, Inc. v. State Tax Commission , 120 Utah 425 ( 1951 )

HENEIOD, Justice.

This case is here on certiorari, Sec. 80-13-47, U. S. C. A. 1948, to review a decision of the State Tax Commission adjudging that petitioner corporation is obliged to pay a capital gains income tax for the year 1948 on sales of property made individually by its stockholders after dissolution steps were taken. We reverse the decision for insufficiency of evidence, with costs to petitioner.

The uncontroverted facts adduced at the hearing, at which a lone witness testified, are as follows: Petitioner, Budget Homes, Inc., was chartered March 4, 1947, and enjoyed, among other broad powers, the power to construct and sell homes. Two men and their wives owned the stock. Construction was financed by mortgaging each parcel upon which a home was built, to an insurance company. The stockholders by resolution dated October 31, 1947, approved a plan of dissolution.

Petitioner concedes that one of the primary reasons for the dissolution was to save taxes otherwise payable if sale of the property were made by the corporation. The homes were completed or substantially completed at the time of the resolution, which enjoined the company to “discontinue business, be liquidated and wind up its affairs”; to distribute and convey a specific parcel to the stockholders immediately; and to distribute the remaining parcels “from time to time as the stockholders may decide and determine”.

Pursuant to the plan, the shareholders endorsed and delivered their stock to the company. On November 18, 1947, before any property was actually distributed to the stockholders in exchange for the stock, one of them agreed in writing to sell a parcel to third party purchasers, deliverable later. Thereafter, on January 31, 1948, the parcel was distributed to the shareholders by corporate deed, subject to, but not by way of assumption of the mortgage, and the shareholders, as individual grantors, thereafter conveyed to the purchasers by deed. As an adjunct of the transfer, an agreement was signed by the petitioner, the insurance company, the shareholders and the purchasers, releasing petitioner’s obligation on the mortgage and substituting the purchasers as mortgagors. During the next 14 months all parcels were disposed of in like manner, leaving $900 in the company, which amount had been set aside in the liquidation process to pay for equipment.

The company, as such, never advertised or negotiated for the sale of any property, executed no documents of transfer, received nothing from sales except release of the mortgage debt, and reported no proceeds from sales on its tax returns. On the other hand, the shareholders acquired and transferred title to the parcels, received the proceeds from sales, reported the same on individual income tax returns and paid an individual income tax thereon. The Commission assessed a deficiency capital gains tax against the company, and upon hearing held the transactions to be corporate rather than shareholders’ sales, on the theory that the dissolution was a sham procedure, and that looking through form to substance the transactions were really those of the corporation, from which decision this review is taken.

In resolving such cases to establish or eliminate taxa-bility, each must rest on its own facts. We are of the opinion that applied to the facts in this case, the authorities demand reversal of the Commission’s decision. The excellent and comprehensive briefs of counsel for both sides exhaust the authorities, and although a few are difficult to reconcile, we are impelled to show deference to the Cumberland case,¹ the most recent and compelling decision of our highest court. There a power company, fearing competition with cheaper available power, actively negotiated for sale of its stock to a cooperative before considering the advisability of dissolution. The cooperative refused to bargain, but countered with an offer to buy the physical properties of the company, which offer was in turn rejected because of the capital gains burden that would result in a corporate sale. To save such burden, the shareholders deliberately acquired the properties in partial liquidation and sold them to the cooperative. The court held such procedure legal and genuine, pointing out that motive in such case is immaterial in determining taxability.

The contention of the Commission that release of the company’s mortgage liability was a consideration received and therefore pointed to a corporate sale, has no merit under the authorities as being decisive in a genuine liquidation. Neither is the contention that, being both directors and stockholders, the moving parties to the dissolution and sales of necessity must have acted solely as fiduciaries for the corporation, so as to make a conveyance to shareholders and a reconveyance by them to others impossible. Lapse of time- between initiation of dissolution proceedings and final liquidation 14 months later does not, viewed in the light of the factual situation in this case, reflect any disorderly or unlawful proceedings in our opinion. The fact that one of the shareholders agreed to sell before he had obtained title, adverted to by counsel for the Comission as evidence of a corporate sale, is not determinative, since such action is entirely legal and of rather common occurrence.

Accordingly to its order, the Commission apparently felt that petitioner’s stockholders harbored an ulterior motive in dissolving the company, but feelings must succumb to fact, and fact must not yield to conjecture. The record reflects no improper motive. It may reflect the employment of a legally sanctioned ingenuity conceived in order to effectuate a tax saving — but such employment is a prerogative reserved unto the already overburdened taxpayer since the Isharn case.² Taking advantage of a legitimate course of conduct to effect tax savings may result in collection of fewer taxes by the tax collector, but it nevertheless has judicial sanction. Great caution, therefore, should be exercised lest an honest taxpayer be required to indulge in the expensive necessity of absolving himself from suspicion. Administrative procedure is here to stay, but so is the presumption that taxpayers generally pay a full and honest tax, and a lawful plan designed to save tax burdens, if genuine, must not be interpreted administratively to be a stratagem for evasion. Constitutionally guaranteed proprietary rights must be preserved not only against judicial error, but also against administrative fiat — in cases even like this, where, we are satisfied, the Commission arrived at its conclusion honestly and after careful review, albeit in error.

We have refrained from commenting on but few of the authorities cited, since most of them are collected in Amos L. Beaty & Co. v. Commissioner, 1950, 14 T. C. 52, where distinctidns between those cases and this are readily discernible.

WADE, McDONOUGH and CROCKETT, JJ„ concur.

1 U. S. v. Cumberland P. S. C., 1950, 338 U. S. 451, 70 S. C. 280, 94 L. Ed. 251.

2 U. S. v. Isham, 1873, 17 Wall. 496, 21 L. Ed. 728.