Columbia River Orchards, Inc. v. Commissioner ( 1950 )

Columbia River Orchards, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. E. D. Gensinger, Petitioner, v. Commissioner of Internal Revenue, Respondent

Columbia River Orchards, Inc. v. Commissioner

Docket Nos. 20501, 20502

United States Tax Court

15 T.C. 253; 1950 U.S. Tax Ct. LEXIS 91;

September 22, 1950, Promulgated

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An order dismissing the proceeding in Docket No. 20501 for lack of jurisdiction will be entered.

Decision will be entered for the petitioner in Docket No. 20502.

1. A petition filed in the name of a dissolved corporation by a former liquidating trustee and sole stockholder, without authority to act for the corporation under state law, is not the petition of the corporation and the proceeding instituted thereby is dismissed for lack of jurisdiction.

2. The Commissioner's determination and notice of income tax deficiency for a fractional part of taxpayer corporation's correct taxable period held ineffective, there being no deficiency for the period covered by the deficiency notice and the Tax Court having no jurisdiction over the part of the year not covered by the deficiency notice.

A. R. Kehoe, Esq., R. B. Hooper, Esq., and H. B. Jones, Esq., for the petitioners.

John H. Pigg, Esq., for the respondent.

LeMire, Judge.

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LeMIRE

These proceedings, consolidated for hearing, involve deficiencies in taxes and penalties for 1943 as follows:

Petitioner	Kind of tax	Deficiency
Columbia River Orchards, Inc	Income	$ 2,816.67
	Declared value
	excess profits	12,545.01
E. D. Gensinger, Transferee of Columbia River
Orchards, Inc	Excess profits	73,177.67
Total

	5 per cent	25 per cent
Petitioner	negligence	delinquency
	penalty	penalty
Columbia River Orchards, Inc	$ 140.83
	627.25
E. D. Gensinger, Transferee of Columbia River
Orchards, Inc	3,658.88	$ 18,294.42
Total		111,260.73

The deficiencies in tax arise from respondent's determination that the amount of $ 129,544.55 should be included in the income of Columbia River Orchards, Inc., for the taxable year 1943 on the ground that that amount represents the proceeds from sales of fruit grown and sold by the corporation in that year. Respondent has also asserted a 25 per cent delinquency penalty on account of the failure of the corporation to file an excess profits tax return for that year and a 5 per cent negligence penalty. The proceeding against petitioner, E. D. Gensinger, arises from respondent's determination that he is liable as transferee of the assets of Columbia River Orchards, Inc., for the deficiencies in taxes and penalties involved in the corporation proceeding.

FINDINGS OF FACT.

E. D. Gensinger, hereinafter referred to as the petitioner, and his wife, Okel E. Gensinger, are individuals residing at all times here material in Wenatchee, Washington. On April 1, 1930, among other properties owned and operated in connection with his occupation as a fruit farmer, petitioner owned a tract of approximately 300 acres of undeveloped orchard land in Douglas County, Washington. For the purpose of developing and operating an orchard on this tract of land petitioner formed Columbia River Orchards, Inc., a Washington corporation, hereinafter called the corporation, with its principal office at Wenatchee. Petitioner transferred the 300-acre tract of land to the corporation in exchange for an undisclosed number of shares of its stock. Petitioner formed the corporation with the intention of attracting outside capital for the development of the orchard and to limit his own liability. However, only about $ 5,300 worth of stock was ever sold to outsiders and substantially all of the corporation's stock was owned by petitioner and his wife. The corporation also failed to afford petitioner the limited liability he wanted since he had to endorse all corporate obligations.

The corporation earned no profits from 1930 to 1942, during the period of the development of the orchard. A small profit was earned in 1942. Anticipating larger profits after 1942, petitioner bought up the outstanding stock in preparation for liquidation of the corporation. By the end of 1942 petitioner held all the corporation's stock in his name except for two qualifying shares held in his wife's name.

On January 1, 1943, a resolution providing for dissolution of the corporation was drafted. It provided a plan for the liquidation of the corporation out of court under Washington law ^{*95 were paid on or before July 15, 1943, although the corporation's bank account was maintained until August 3, 1943, for all outstanding checks to be cleared. The final income tax return for the corporation was made for the period January 1 to July 7, 1943, on the cash basis. On July 17, 1943, the stockholders adopted the following resolution:}

Be it resolved that all of the voting power of the shareholders of Columbia River Orchards, Inc., a corporation, consider it to be to the best interests of the Shareholders thereof and its creditors that the corporation be dissolved, such dissolution to be as of July 17, 1943.

It is hereby declared that Columbia River Orchards, Inc., be dissolved and wound up out of court, and that E. D. Gensinger, president and shareholder of the corporation, is hereby appointed Trustee to conduct the winding up of the affairs of the Columbia River Orchards, Inc.

Be it further resolved that E. D. Gensinger and Okel E. Gensinger, being all of the directors of Columbia River Orchards, Inc., shall cause to be made duplicate copies of this Resolution and shall sign and acknowledge the same and cause one of such copies to be filed in the office of the Secretary of State of the State of Washington, and the other copy filed in the office of the Auditor of Chelan County, where the company has its registered office.

Copies of the resolution were filed for record in the office of the Secretary of State of Washington on July 19, 1943, and in the office of the auditor of Chelon County, Washington, where the corporation had its registered office, on July 20, 1943.

Immediately after his appointment as liquidating trustee on July 17, 1943, petitioner took possession of the fruit crop produced during the year and thereafter dealt with it in his own name and for his own account as his personal property. He also took possession of the books and records and other assets of the corporation as liquidating trustee and thereafter dealt with them in that capacity. On August 3, 1943, petitioner closed the corporation's bank account and transferred the balance to a newly opened joint account under the name of "E. D. or Okel E. Gensigner DBA Columbia River Orchards." On October 11, 1943, petitioner executed a trustee's deed conveying all remaining fixed assets of the corporation from himself as trustee to himself as an individual. The deed was filed for record on November 18, 1943. The assets which petitioner received as sole beneficial stockholder in liquidation had an aggregate fair market value at least equal to the amount of the transferee's liability involved in this proceeding, plus interest. A certificate of final dissolution of the corporation was filed for record in the office of the Secretary of State of Washington on May 24, 1944, formally terminating the corporation's existence.

At all times subsequent to March 1, 1939, the petitioner and the corporation had identical member's marketing contracts with Ninth Street Skookum Growers, Inc., hereinafter called Skookum, a cooperative marketing association located in Wenatchee. Skookum received all fruit produced by its member farmers, cleaned, graded, and packed it, and sold it for the account of its members in carload lots, f. o. b., Wenatchee, Washington, subject to inspection by the buyer at destination. The fruit handled by Skookum was placed by it in weekly pools where the fruit lost its identity with the grower who delivered it. The growers who contributed fruit to each pool were not paid until the pool was closed on Skookum's books, after the last carload lot in the pool was sold.

Prior to July 1, 1943, petitioner had discussed his plans to dissolve the corporation with Earl Barnhill, the manager of Skookum, and on that date notified Barnhill that the corporation was being liquidated and that the fruit crop for the year would be delivered to Skookum under petitioner's individual contract for his individual account rather than under the corporation's contract for its account. Barnhill agreed to handle the crop in that manner. Petitioner's individual account had been carried on Skookum's books under his individual name, and the corporation's account had been carried under the name of "Columbia River Orchards." The accounts were continued in that manner for the purposes of identifying fruit from petitioner's large orchard and his smaller orchard, although the employees of Skookum were informed and understood that both accounts were for petitioner's individual benefit. Advances were thereafter made against the accounts together rather than separately as they had been before. The same designations for the account have continued to be used, and checks from Skookum in payment for fruit have continued to be designated as payable to Columbia River Orchards.

One of petitioner's reasons for selecting July as the time for dissolution of the corporation was that this time fell after the cherry crop was delivered and before the apricot crop came in. The cherry crop was all delivered to Skookum prior to July 2, 1943. The first apricots were delivered on July 7, 1943, and were included in pool 100 by Skookum. Additional deliveries of apricots were made on July 11 and July 18 and were included in pools 200 and 300, respectively. Skookum prepared the fruit for sale and shipped it mostly to markets in the middle west. In accordance with Skookum's usual sales practices, the carload lots of fruit were sold f. o. b., Wenatchee, but shipped subject to the buyer's inspection at destination. The buyers were required to pay the drafts accompanying the bills of lading before they could take possession of the shipments. The first drafts in payment for shipments from pools 100, 200, and 300 were received by Skookum via air mail in Wenatchee on July 22 and 23. Since the difference between the time the drafts were taken up and the time they were received in Wenatchee was the air mail time between the shipment destinations and Wenatchee, the first sales were made on or after July 18. Distributions of receipts to the fruit growers from individual pools were not made until all shipments from each pool were sold and the pools closed because of the possibility that later sales might have resulted in losses. Pool 100 was closed on August 6, pool 200 on August 11, and pool 300 on August 19. Distributions were made for apricots from the Columbia River Orchards account as follows:

Pool No.	Date	Amount
100	Aug. 6	$ 36,071.05
200	Aug. 3	20,000.00
200	Aug. 11	63,300.87
300	Aug. 19	1,018.10
Total		120,390.02

All checks for distributions from apricot sales were issued to Regional Agricultural Credit Corporation, which financed the operations of both the corporation and the petitioner individually, and to "Columbia River Orchards." No checks were issued in either the name of the corporation or the name of the petitioner. Checks issued for distributions from proceeds from cherry sales were issued in like manner in the aggregate amount of $ 6,530.39 on various dates between July 22 and July 31, 1943.

Prior to 1943, the corporation's books and records were kept and its tax returns were filed on the cash basis for calendar years. In its income and declared value excess profits tax return for the period January 1 to July 7, 1943, filed on October 16, 1943, with the collector of internal revenue for the district of Washington, the corporation's gross income was stated to be $ 5,529.96, but a net operating loss of $ 5,349.04 was reported and no tax liability was shown. An information schedule with respect to dissolution of the corporation which was filed with the return contained the statement that all assets and liabilities of the corporation were received by its sole stockholder, the petitioner, on dissolution as of July 7, 1943. No part of either the amount of $ 120,390.02, representing proceeds of apricot sales, or the amount of $ 6,530.39, representing proceeds of cherry sales, was included in the gross income of the corporation as reported in its income and declared value excess profits tax return for its taxable year 1943. On the advice of C. W. Franklin, a certified public accountant who prepared tax returns for the corporation and the petitioner, no excess profits tax return was filed for the corporation for its taxable year 1943.

In his individual income tax return for the taxable year ended June 30, 1944, filed with the collector of internal revenue for the district of Washington, the petitioner reported a long term capital gain of $ 46,414.05 as a result of the corporation's dissolution, on the theory that petitioner received in complete liquidation of the corporation assets having a fair market value at the time of distribution of $ 155,221.85 in exchange for his stock in the corporation, acquired at a total cost of $ 62,393.75. Included in the fair market value of the assets received by petitioner in liquidation of the corporation was the value of the then unsold 1943 crops of apricots and cherries.

Respondent mailed a statutory notice of deficiency to the corporation in care of the petitioner on June 29, 1948, notifying it that:

* * * determination of your income tax liability for the taxable year January 1, 1943, to July 17, 1943, discloses a deficiency of $ 2,816.67 and $ 140.83 in penalty, and that the determination of your declared value excess profits tax liability for the year mentioned discloses a deficiency of $ 12,545.01 and $ 627.25 in penalty, and that the determination of your excess profits tax liability for the year mentioned discloses a deficiency of $ 73,177.67 and $ 21,953.30 in penalties, as shown in the statement attached.

The deficiencies in taxes were accounted for in respondent's explanation of adjustments by the statement that:

(a) It is held that sales of fruit for a total of $ 129,544.55 which were made by the corporation prior to the date of dissolution should be included in sales of the corporation Income reported is, therefore, increased by this amount.

The penalties asserted were a 25 per cent delinquency penalty for failure to file an excess profits tax return and a 5 per cent penalty for negligence.

As a result of the dissolution of the corporation and the distribution of all its assets to the petitioner in complete liquidation, the corporation was left without assets and without liabilities. Petitioner is the initial transferee of all the property of the corporation. Respondent mailed a notice of transferee liability to petitioner on June 29, 1948, asserting liability for the full amount of the deficiencies and penalties determined against the corporation. The petitioner filed a petition in the name of the corporation and a petition in his own name on September 27, 1948.

In respondent's original deficiency notices and in his answer to the taxpayer's petitions he determined that the corporation's taxable year 1943 was the period January 1 to July 17, 1943. By amendment to his answer respondent alleged that the taxable period was January 1 to October 11, 1943. Finally, after the hearing, respondent moved for and was granted leave by further amendment to his answer to allege that the proper taxable period was the full calendar year 1943, on account of his determination that the corporation was not finally dissolved until May 24, 1944.

OPINION.

The first matter to be disposed of is respondent's motion filed at the hearing to dismiss the proceeding in Columbia River Orchards, Inc., Docket No. 20501, for lack of jurisdiction on the ground that the corporation was finally and completely dissolved on May 24, 1944, with the result that neither the former corporation nor the former liquidating trustee is authorized or empowered to maintain and prosecute this proceeding. The petition was filed in the name of the corporation by the petitioner as former liquidating trustee and sole beneficial stockholder. The facts are that the corporation was completely and finally dissolved for all purposes on May 24, 1944; that respondent mailed a deficiency notice to the corporation in care of petitioner on June 29, 1948; and that the petitioner filed a petition in the name of the corporation on September 27, 1948. Under the laws of the State of Washington, the corporation's existence was terminated on May 24, 1944, when the trustee's certificate of final dissolution was filed with the Secretary of State. Remington's Revised Statutes of Washington, § 3803-59. There is no provision in Washington law for continuance of the corporation after that date for any purpose, and the petitioner has no lawful authority to act for the corporation. Cf. , and . It follows that the petition filed by him is not the petition of the taxpayer in Docket No. 20501, and the proceeding in that docket is therefore dismissed for lack of jurisdiction. ; .There is a recently expressed disagreement with the authorities holding that the right of a dissolved corporation to invoke the jurisdiction of this Court depends upon the law of the state of incorporation rather than upon Federal law. See . However, in view of our disposition of the transferee proceeding, no reexamination of our long established rule, which we follow here, is warranted.

There is a further jurisdictional question as to whether we have jurisdiction over any period other than the period January 1 to July 17, 1943. Respondent's deficiency notice and notice of transferee liability stated that the determination of tax liability "for the taxable year January 1, 1943 to July 17, 1943" disclosed the deficiencies here involved. In the explanation of adjustments attached to the notice, respondent stated that: "It is held that sales of fruit * * * which were made by the corporation prior to the date of dissolution should be included in sales of the corporation." By successive amendments to his answer to the petition respondent alleged, first, that the corporation's taxable year 1943 was January 1 to October 11, 1943, instead of the period January 1 to July 17, 1943, as originally stated in the deficiency notice, and, second, and that it was the entire calendar year 1943.

Respondent admits that he has no authority to alter the correct taxable period of a taxpayer and that this Court has no jurisdiction where the deficiency notice does not cover a proper taxable period. He argues, however, that his deficiency notice was intended to cover the entire taxable period and that he is entitled to correct his erroneous theory as to what constituted the corporation's correct taxable period by amending his answer to conform to the facts adduced at the hearing. Petitioner argues that this Court has no jurisdiction over any period other than the period January 1 to July 17, 1943, covered by the deficiency notice and that since the income involved was realized after July 17, there is no deficiency notice covering it and there is no deficiency for the period covered by the notice.

There is no question that respondent has authority to adopt the annual accounting period of the taxpayer or any fractional part of a year during which it was in existence as a taxpayer as the taxable year, but as we said in , even though the return filed for the corporation in the year it went into dissolution may have covered an incorrect period there is no warrant in law for the respondent's action in computing a deficiency for an incorrect fractional part of the year which does not cover the entire period the corporation was in existence as a taxpayer. Had liquidation of the corporation been completed by July 17, 1943, the respondent's determination and notice would have been proper, but the evidence shows that it had only begun. Cf. , appeal dismissed, ; . If there is any deficiency for 1943, it must be determined for the entire taxable year. Respondent gave notice of no such determination to the taxpayer here. Since the record clearly shows that the sale of the corporation's assets, the gain from which respondent is attempting to tax to the corporation, took place after the period covered by respondent's deficiency notice, we conclude that there is no deficiency notice for the period during which the income involved was realized and that there is no deficiency for the period over which we have jurisdiction. ;; ; .

Respondent's attempt to correct his deficiency notice by amendment to his answer must fail. It is well settled that jurisdiction cannot be conferred upon this Court by the parties where it does not exist by statute. Since we do not have jurisdiction over any period beyond July 17, 1943, the last date included in the deficiency notice, it follows that respondent cannot create jurisdiction for the Court by his pleadings.

In view of the foregoing, we hold that respondent erred in asserting transferee liability against the petitioner for any deficiency in taxes of the corporation.

An order dismissing the proceeding in Docket No. 20501 for lack of jurisdiction will be entered.

Decision will be entered for the petitioner in Docket No. 20502.

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Footnotes

• 1. Remington's Revised Statutes of Washington, §§ 3803-48-49.↩