Weber Flour Mills Co. v. Commissioner

THE WEBER FLOUR MILLS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Weber Flour Mills Co. v. Commissioner

Docket No. 60102.

United States Board of Tax Appeals

32 B.T.A. 181; 1935 BTA LEXIS 987;

February 28, 1935, Promulgated

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">*987 The petitioner, a corporation, was organized to take over the assets and business of a former corporation, the charter of which had been forfeited for failure to pay the state corporation license fees. Held, that petitioner, in computing its taxable net income, may not deduct net losses sustained by the old corporation nor net losses sustained by the business during the interval between the date of forfeiture and the date the petitioner was organized. Flanters Cotton Oil Co. v. Hopkins,286 U.S. 332">286 U.S. 332, and McLaughlin v. Purity Investment Co., 75 Fed.(2d) 30.

Perry W. Shrader, Esq., for the petitioner.

James K. Polk, Jr., Esq., for the respondent.

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JURNER

">*181 This proceeding involves a deficiency in income tax in the amount of $6,467.92 for the fiscal year ended May 31, 1929.

The petitioner alleges that the respondent erroneously disallowed the deduction of a net loss suffered by it during the two-year period next preceding the taxable year.

The parties have stipulated the facts as follows:

The Weber Flour Mills Company, a corporation, was organized under the laws of the State of Kansas on">*988 August 7, 1924, having an authorized capital stock of 10,000 shares of $100 par value, there being issued 8,400 shares. A true and correct copy of the charter issued by the Secretary of State of the State of Kansas, August 7, 1924, is submitted herewith, market Ex. "A" and made a part hereof.

The Weber Flour Mills Company, which was granted a charter as aforesaid on August 7, 1924, was in the hands of a receiver from August 19, 1926, until December 19, 1927, when the receivership was voluntarily dissolved. During the period of the receivership, the corporation failed to pay to the State of Kansas the required license fee, and under date of December 13, 1926, its charter was declared forfeited at a meeting of the Charter Board under the provisions of Section 17-706 of the Revised Statutes of Kansas for 1923. It ">*182 was not known at that time to the officers and directors of the corporation that its charter had been forfeited, and there was no change in the operation, personnel, books or any other part of the business during this period. It was discovered subsequent to the period within which the former charter could be revived in accordance with law, that all notices">*989 of license fees due and all other notices pertaining to the forfeiture of the charter had been mailed to one Leo Weber, Wilson, Kansas, former Secretary of The Weber Flour Mills Company prior to the receivership, and said Weber had failed to notify the then officers of the company of the receipt of said communications or the threatened forfeiture of the charter.

It was discovered as the result of a telephone call to the President in 1928 that the charter of The Weber Flour Mills Company, granted on August 7, 1924, had been declared forfeited by the Charter Board of the State of Kansas on December 13, 1926, and they immediately applied to the Secretary of State for a new charter. A true and correct copy of the charter issued by the Secretary of the State of Kansas May 18, 1928, is submitted herewith.

The stock of The Weber Flour Mills Company, organized May 18, 1928, was issued share for share to the former stockholders of The Weber Flour Mills Company organized August 7, 1924.

The issuance of the new charter made no change in the manner or form of the business conducted by the former company, during the interim when no charter existed, in the personnel of acting officers">*990 and directors or in the books and records. There was no act or deed performed other than obtaining the new charter from the Secretary of State, which in anywise changed the capital structure, business or personnel of the former Weber Flour Mills Company organized on August 7, 1924.

In rendering its return for the fiscal year ended May 31, 1929, the petitioner (organized May 18, 1928) deducted from its income for said fiscal year ended May 31, 1929, net losses sustained as the result of business operations for the years 1927 and 1928. The respondent has refused to allow the said losses of the business to be carried forward and deducted from the income for the fiscal year ended May 31, 1929, on the basis that The Weber Flour Mills Company was organized May 18, 1928, and was not the same taxable entity as The Weber Flour Mills Company organized August 7, 1924, nor the same entity existing during the interim from the date of the forfeiture of the charter by the Kansas State Charter Board on December 13, 1926.

The petitioner contends that it is entitled to carry forward as statutory net losses the losses sustained in the business during the preceding two years. If the Board decides">*991 that petitioner is entitled to carry forward the operating losses sustained by the business during the years 1927 and 1928, it is stipulated and agreed that the said operating losses create amounts of statutory net loss as provided in Section 117 of the Revenue Act of 1928, in excess of the taxable income of petitioner for the fiscal year ended May 31, 1929, so that there is no tax liability for the fiscal year ended May 31, 1929, but if the said operating losses of the business for the years 1927 and 1928 do not constitute deductible net losses to petitioner for the fiscal year ended May 31, 1929, the Board may find the deficiency to be in the amount proposed by the respondent.

The charter of the Weber Flour Mills Co. granted August 7, 1924, shows a capital stock of $1,000,000, divided into 10,000 shares of $100 each, and the value of the corporate assets on that date as $1,000,000.

">*183 The charter of the Weber Flour Mills Co. granted May 18, 1928, shows the capital stock divided into 8,400 shares without nominal or par value, but with a stated value of $50 per share and the value of the corporate assets on that date as $420,000.

OPINION.

TURNER: The only question">*992 for determination is whether the Weber Flour Mills Co., which was incorporated August 7, 1924, has had a continuous existence as a definite and distinct taxable entity and is the "taxpayer" we now have before us as the petitioner in this proceeding. If so, the respondent concedes that the petitioner sustained a net loss in the operation of its business, which is deductible under the provisions of section 117(b) ^{1935 BTA LEXIS 987">*993 The respondent, in his determination, has attributed full force and effect to every event and happening which could in any way affect the existence of the Weber Flour Mills Co. as originally incorporated, and contends that by reason of the forfeiture of its charter in the manner prescribed by the Kansas statute, the predecessor corporation passed completely out of existence; that during the interval from the date of forfeiture, on December 13, 1926, to the date the petitioner received its charter, on May 18, 1928, the business, even though operated in the manner of a corporation, could have been nothing more than a trust or an association, and under the decision of the United States Supreme Court in , a net loss sustained by an association is not to be recognized, under section 117(b), supra, as the net loss of a successor corporation, even though such successor corporation acquires the business and assets of the association without any change whatever. The respondent also cited ">*994 , and , since affirmed by the United States Supreme Court in .}

The petitioner has pointed out the distinctions between the facts in this case and the facts involved in , and , and claims that, since there was no change in the business carried on by the ">*184 predecessor corporation when taken over by the petitioner and the stockholders' powers and the applicable state statutes remained the same, and inasmuch as the loss of its charter by the predecessor corporation was inadvertent and not by reason of any intention on the part of the corporation or its stockholders to make a change in the corporate organization or business, the net losses sustained in the years 1927 and 1928 should be treated as the net losses of the petitioner.

A corporation is a fictitious entity, dependent for existence upon the laws of the state of its origin, and we must examine the Kansas statutes to determine whether the Weber">*995 Flour Mills Co. that sustained the net loss is the Weber Flour Mills Co. now claiming the right to deduct such net loss in computing its net income. Forfeiture of a corporate charter is provided for in section 706, chapter 17, Revised Statutes of Kansas, 1923, which reads in part as follows:

The failure of any domestic corporation to file the annual statement and to pay the annual fee herein provided for within ninety days of the time for filing and paying the same shall, in addition to other penalties, work the forfeiture of the charter of such corporation organized under the laws of this state and the charter board may at any time thereafter declare the charter of such corporation forfeited.

The Supreme Court of Kansas has construed the provision quoted in , and . In the earlier case the charter board had declared a forfeiture of the charter of the Four-S Razor Co. for failure to make the required report and pay the specified fees. It was insisted on behalf of the corporation that this failure on its part did not "Ipso Facto work a forfeiture of">*996 its charter rights", but that these omissions were merely grounds for forfeiture and that the existence of such grounds did not terminate corporate life. The court said:

It is competent for the Legislature which provided for the creation of corporations to also provide that particular omissions or acts should operate to end their existence, and to make these provisions self-executing * * *. The plaintiff organized under the general laws of the state, and it accepted the privileges granted upon the conditions prescribed by the Legislature, one of which was that its existence might be terminated by the omissions mentioned. It owes its existence to the state, and the sovereign power that created it may prescribe the circumstances which will operate as a forfeiture of the granted rights. * * *

The language of the act clearly evinces the legislative intention to be that a forfeiture may be declared and enforced without resort to the courts. The act prescribes that certain omissions and defaults shall work a forfeiture, and for these the state charter board may declare the forfeiture. That board is thereby given authority to determine the existence of the grounds, and, if found">*997 to exist, to terminate the life of the corporation by a declaration of forfeiture.

">*185 Later, in , the court was equally positive, and with reference to the question as to whether or not it was essential that a corporation receive notice of its delinquencies, it was said:

Plaintiff needed no more notice than the statute afforded. It is not necessary to cite authorities to support the doctrine that every one is presumed to know the law and to take notice of the provisions of a general act. Plaintiff was charged with notice of the statute quoted in relation to forfeiture of corporate charters, and was bound to know that if the fees were not paid and the annual report made within 90 days after the time for filing the same * * * the state charter board was authorized to declare the forfeiture at any time after that date.

Referring to its decision in , the court made the following statement:

And it was further declared that the failure to make annual statements and pay a prescribed fee shall operate as a forfeiture of its charter, and when the declaration">*998 is made as the statute provides, the existence of the corporation is ended.

The stipulated facts show that the petitioner's predecessor did fail to make a report and pay the annual fees and that forfeiture of its charter was declared by the charter board on December 13, 1926. Under the laws of Kansas, as construed by the Supreme Court of Kansas, the existence of that corporation came to an end on the happenings of these events.

The petitioner stresses every strongly, however, the fact that it is a corporation formed under the same statutes as its predecessor with the same business, the same powers, and the same stockholders, and urges that it should be regarded as a continuation of such predecessor corporation, entitled to be termed the "taxpayer" within the meaning of section 117(b), supra.

Such a conclusion might readily be reached if, under the Kansas statutes, a revival of the predecessor corporation had been possible at the time the petitioner was organized and the predecessor corporation had been revived. See ">*999 . In section 224, chapter 17, Revised Statutes of Kansas, 1923, provision was made for reinstatement of a charter inadvertently lost in the manner set forth in this case, but it was further provided that the application for such reinstatement must be made within six months of the forfeiture and cancellation. According to the stipulation, no such application was made within the period provided by the statute and there was no revival of the old corporation.

Clearly under the Kansas statutes the petitioner's precedessor corporation passed out of existence on December 13, 1926, and since the time within which it might have been revived had expired prior to the organization of the petitioner, it cannot be said that the petitioner and the predecessor corporation are the same "taxpayer" ">*186 within the meaning of section 117(b), supra.From December 13, 1926, to May 18, 1928, the business had no corporate existence, and, with reference to the deduction by the petitioner of a net loss sustained during that period, the decision of the Supreme Court in ">*1000 , is controlling. Cf. (C.C.A., 9th Cir.). (C.C.A., 3rd. Cir.).

Judgment will be entered for the respondent.

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Footnotes

• 1. SEC. 117(b). Net loss as a deduction.↩ - If, for any taxable year, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year (hereinafter in this section called "second year"), and if such net loss is in excess of such net income (computed without such deduction), the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year (hereinafter in this section called "third year"); the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary.