R. A. Patout & Co. v. Commissioner

R. A. PATOUT & CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

MR. AND MRS. R. A. PATOUT, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

R. A. Patout & Co. v. Commissioner

Docket Nos. 602, 601.

United States Board of Tax Appeals

10 B.T.A. 1357; 1928 BTA LEXIS 3893;

March 14, 1928, Promulgated

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1. The evidence fails to establish that the petitioner, R. A. Patout & Co., is entitled to deduct from gross income for the year 1918 certain alleged bad debts.

2. The amount of $23,552.75, constituting earnings and profits accumulated since March 1, 1913, distributed in 1919 to Mr. and Mrs. R. A. Patout in liquidation of R. A. Patout & Co., is subject to tax under section 201(c) of the 1918 Act, at both normal and surtax rates. See Hellmich v. Hellman,276 U.S. 233">276 U.S. 233.

Victor G. Gillingham, Esq., for the petitioners.

J. Harry Byrne, Esq., for the respondent.

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LOVE

These proceedings were duly consolidated for disposition. The proceeding brought by R. A. Patout & Co. is for the redetermination of income and profits tax in the amount of $2,081.75 for the year 1918. It is alleged that in determining the deficiency the Commissioner erred in disallowing as a deduction the amount of $2,219.35 on account of bad debts charged off within the taxable year. Other errors were alleged but were abandoned at the hearing.

The proceeding brought by Mr. and Mrs. R. A. Patout is for the redetermination of deficiencies in income taxes for the year 1919.

The notice of deficiency mailed to Mr. R. A. Patout discloses a deficiency of $76.41 for the year 1919. The notice of deficiency for the year 1919 in respect of Mrs. R. A. Patout is not before us. It is alleged that, in determining the deficiencies in respect of Mr. and Mrs. R. A. Patout, the Commissioner erred in holding that the gain realized on their distributive interests in the liquidating dividend of R. A. Patout & Co. is subject both to the normal and surtax rates for the year 1919.

FINDINGS OF FACT.

R. A. Patout & Co., a corporation, began business in February, 1912. Thereafter, until March 31, 1919, it owned and conducted a retail dry goods store at Navasota, Tex.

During the year 1918 there were on the books of the corporation uncollected accounts amounting to $2,219.35. These accounts were charged off as of December 31, 1918, and deducted from gross income. Upon audit of the corporation's return for that year the Commissioner disallowed the deduction.

On March 31, 1919, R. A. Patout & Co. was dissolved, the business thereafter being conducted by a partnership. The members of the partnership were the stockholders of the corporation, and each partner owned, after the dissolution of the corporation, the same proportionate interest in the partnership as he had previously owned in the corporation. No change was made in the location, nature, or method of conducting the business. On the books, however, the capital stock account was transferred to the partners' accounts.

At the time of dissolution of the corporation there was no distribution of cash representing either the assets of the corporation or the accrued profits thereof. Whatever profits had been accrued and retained in the business of the corporation in the form of various assets up to the date of dissolution, were retained and used in the partnership business.

Mr. and Mrs. R. A. Patout, for the year 1919, filed their returns on the basis of the community laws of the State of Texas. Upon audit of the returns, the Commissioner determined that for the year 1919 the amount of $23,552.75 was realized as taxable gain upon the dissolution of R. A. Patout & Co., and he further determined that the amount so realized as taxable gain was subject to both normal and surtax rates.

The amount of $23,552.75 determined by the Commissioner to represent taxable gain, subject to both normal and surtax rates, by reason of the dissolution of the corporation, was computed in the following manner:

160 shares stock in R. A. Patout & Co. held by taxpayer at $236.3047		$37,808.75
Cost of the 160 shares:
Market value of 100 shares held by taxpayer at March 1, 1913, at $106.56 per share	$10,656.00
50 shares purchased Feb. 27, 1914, from P. T. Thomas at $52 per share	2,600.00
10 shares from Gibson and Lott at $100	1,000.00
		14,256.00
Taxable gain		23,552.75

On March 1, 1913, the corporation's outstanding capital stock was $21,000, divided into 210 shares, par value of $100 each. Its surplus on that date was $1,378.42, the book value of the stock being $106.56 per share.

On March 31, 1919, there were 210 shares of capital stock outstanding, each of the par value of $100, or of the aggregate par value of $21,000. The surplus on that date was $36,956.06, against which an unpaid income tax of $8,332.06 was properly chargeable. The book value of the stock was on March 31, 1919, $236.30 per share.

OPINION.

LOVE: It is contended on behalf of R. A. Patout & Co., that the Commissioner erred in disallowing as a deduction the amount of $2,219.35 on account of bad debts charged off in the year 1918. The evidence adduced fails to show that the debts in question were, in fact, worthless. Consequently, the Commissioner's determination in respect thereto is approved.

On behalf of Mr. and Mrs. R. A. Patout, it is contended that the amount of $23,552.75, determined by the Commissioner to constitute taxable gain from the liquidating dividend of R. A. Patout & Co., is not subject to the normal tax for the year 1919.

No question was raised as to the correctness of the Commissioner's determination as to the amount of taxable gain except insofar as it was affected by the alleged bad debts of the corporation, the deduction of which in 1918 was disallowed. We have hereinabove approved the Commissioner's disallowance of the deduction and, consequently, it follows that the amount of gain from the liquidation of the corporation as determined must be approved.

The evidence shows that the amount of $23,552.75 upon which the Commissioner proposes to assert both the normal and the surtax rates constituted earnings and profits of the corporation accumulated since March 1, 1913, and which on March 31, 1919, was distributed in liquidation of the corporation in the manner set forth in the findings of fact.

The Supreme Court of the United States in the case of , held that amounts distributed in 1919 in liquidation of a corporation out of earnings and profits accumulated since February 28, 1913, are payments in exchange for its stock and subject to both normal and surtax under section 201(c), Act of 1918. Accordingly, the Commissioner's action in regard to the amount here in question is sustained.

Reviewed by the Board.

In the proceeding of R. A. Patout & Co., judgment will be entered for the respondent. In the proceeding of Mr. and Mrs. R. A. Patout, the deficiency as to Mr. R. A. Patout for the year 1919 is $76.41, and the deficiency as to Mrs. R. A. Patout will be redetermined on 15 days' notice, under Rule 50.