DocketNumber： Docket No. 17513
Citation Numbers： 1949 U.S. Tax Ct. LEXIS 65, 13 T.C. 547
Judges： Disney
Filed Date： 10/11/1949
Status： Precedential
Modified Date： 11/14/2024
1949 U.S. Tax Ct. LEXIS 65">*65
Petitioner, in accordance with the desire of two of its stockholders, each holding one-third of its stock, to eliminate the holder of the other one-third, and pursuant to agreement, transferred to him certain of its assets, and various other matters between the stockholders were settled. The one-third of the stock was surrendered and canceled, though a few days later a dividend thereof, in equal amounts was declared to the two remaining stockholders.
13 T.C. 547">*547 This proceeding involves a deficiency of $ 1,543.94 in income tax and a deficiency of $ 2,327.52 in excess profits tax asserted against the petitioner for the year 1943. The only question to be determined is whether the petitioner sustained a loss from the distribution in kind of certain of its assets to one of its three stockholders in exchange for one-third of its outstanding common stock held by that stockholder.
FINDINGS OF FACT.
Lucius Pitkin, Inc., the petitioner, was incorporated in 1916 under the laws of the State of New York, with principal office at 47 Fulton Street, New York City. Its income and declared value excess profits tax, and excess profits tax returns for the period here involved were filed with the collector of internal revenue for the second district of New York.
In petitioner's income and declared value excess profits tax return there was deducted a claimed loss1949 U.S. Tax Ct. LEXIS 65">*67 of $ 8,737.42, which was computed as follows:
| Leasehold | |||
| improvements, | Patents and | ||
| 45 | life insurance | Total | |
| Fulton St., | |||
| New York | |||
| Acquired | 1941 | Various | |
| "Sales Price" | $ 5,000.00 | $ 5,000.00 | |
| Basis | $ 5,395.00 | 10,413.04 | 15,808.04 |
| Depreciation | 1,911.70 | 158.92 | 2,070.62 |
| Loss | 3,483.30 | 5,254.12 | 8,737.42 |
Petitioner's common stock consisted of 1,000 shares without nominal or par value; its preferred stock consisted of 500 shares without nominal 13 T.C. 547">*548 or par value, with preference as to dividends and assets, cumulative as to dividends, and it was nonvoting.
On April 27, 1929, and prior thereto, Erskine B. Mayo owned 60 per cent and Thomas A. Wright owned 40 per cent of the capital stock of petitioner. Under date of April 27, 1929, Mayo, Wright, and one Sam Tour entered into an agreement under the terms of which Mayo and Wright each agreed to sell enough of their shares of common stock of petitioner to reduce each of their holdings to a one-third interest in the corporation, and Tour agreed to purchase such shares, admitting him to a one-third interest. Tour agreed to pay $ 4,995 for the 333 shares of common stock that he was to acquire. The agreement1949 U.S. Tax Ct. LEXIS 65">*68 also provided that the three, Mayo, Wright, and Tour, were to receive equal amounts in salaries, that they were also to turn over to petitioner all contracts that they then had or were thereafter to obtain covering consulting or other professional service, and, further, with certain exceptions (not material here), they were to turn over to petitioner all patents that they should thereafter acquire in their names. The agreement further provided that petitioner would take out or assume life insurance policies on each of the three stockholders in the amount of $ 15,000, and provided, in case of a stockholder's death, two optional plans to be exercised by his executor. One of the options was that the petitioner would pay the total amount of the insurance, i. e., $ 15,000, to the decedent's estate for the common shares representing his one-third interest in petitioner. The other option was that if the executor should desire to retain the common stock with the view to the eventual entry of a son into the business, $ 1,000 of the proceeds of the insurance policies was to be paid to the widow, if living, or, if not, to the estate of said decedent, and that the balance of the $ 15,000 was1949 U.S. Tax Ct. LEXIS 65">*69 to be set aside by petitioner to be disbursed as the directors desired, with one restriction, that it could not be used to increase salaries, except with the unanimous consent of all the common stockholders. The agreement provided that in case one of the signers of this agreement wanted to retire the two remaining stockholders would purchase his one-third interest at a price to be mutually agreed upon, but in no event to be less than $ 15 per share of common stock; further, that no share of common stock of petitioner then or thereafter held by any of the above mentioned three was to be sold or transferred to others than the parties signing the agreement except with the consent of all the common stockholders.
Pursuant to the terms of the agreement of April 27, 1929, Tour acquired 333 shares of petitioner's common stock, previously owned by Mayo and Wright, so that each of the three parties to the transaction thereafter owned 333 shares. There remained one share of common stock in the treasury of the petitioner.
13 T.C. 547">*549 Tour became vice president of petitioner and organized, managed, and was head of the metallurgical department. This department was built up to the point where petitioner1949 U.S. Tax Ct. LEXIS 65">*70 could no longer accommodate it in the quarters where the company maintained its laboratories. To meet this need, two floors of the building next to the building occupied by the petitioner were leased. Petitioner equipped these leased quarters for this purpose and the entire metallurgical department was moved into that space.
Because of differences in business policies, management friction arose between Tour, on the one hand, and Mayo and Wright, on the other.
Under date of June 26, 1943, petitioner, Mayo, Wright, and Tour entered into an agreement whereby petitioner would give certain equipment and material of the value of $ 5,000 for the 333 shares of common stock owned by Tour, and Tour agreed to surrender the stock for the equipment and material on or before June 30, 1943. The agreement also provided that petitioner would retire from the metallurgical and engineering fields, but could reenter those fields if it chose to do so; that Tour was to take over the staff of the metallurgical and engineering departments, as well as the contracts and clients that were willing to be so taken over; and that Tour could enter the assay, chemical, spectographic, and sampling fields if he chose1949 U.S. Tax Ct. LEXIS 65">*71 to do so. Petitioner was to pay accounts payable of all natures in connection with the metallurgical and engineering departments up to and including June 30, 1943. The agreement also contained certain specific provisions relating to the transfer of the property that was to be transferred to Tour, and the relinquishment of the premises to the respective parties interested. Tour was to take over the lease of the property located at 45 Fulton Street, as of July 1, 1943. Other provisions in regard to carrying of fire, public liability, workmen's compensation, and war damage insurance was also included in the agreement. Provisions were also made for the separation of electrical lines, telephone lines, and interoffice communications for the petitioner and the new enterprise to be established by Tour. Detailed provisions were made for the separation of certain parts of the business between petitioner and Tour. Petitioner agreed to continue certain royalty contracts with a third party and pay Sam Tour 25 per cent of the royalties received, and Sam Tour was to pay petitioner 25 per cent of profits from future exploitation of certain patents taken over by him. The petitioner agreed 1949 U.S. Tax Ct. LEXIS 65">*72 to assign to E. I. Valyi an agreement regarding "the soro process." Petitioner was also to pay off a loan of $ 816.29 on "the life insurance policy" on Tour and turn "these policies" back to Tour. Petitioner was to pay Tour the amount due him on two notes, as well as all current salary to June 30, 13 T.C. 547">*550 1943. No business was to be solicited, transacted, or conducted by Tour under the name of "Pitkin or Lucius Pitkin, Inc.," or upon the premises of 47 Fulton Street, New York, and no business was to be solicited, transacted, or conducted by petitioner from the premises of 45 Fulton Street, New York.
Minutes of a special meeting of the board of directors of petitioner, held June 26, 1943, indicate the corporation's acceptance of the above described agreement.
At a special meeting of the board of directors of petitioner, held July 1, 1943, the resignation of Tour as vice president and director of the corporation was accepted as of June 30, 1943.
The 333 shares of common stock owned by Tour were surrendered to the petitioner and canceled by the petitioner on June 30, 1943.
At a special meeting of the board of directors of petitioner, held on July 1, 1943, a stock dividend of 334 shares1949 U.S. Tax Ct. LEXIS 65">*73 of the common stock of the petitioner was declared payable on the same date to the present holders of the common stock in proportion to the amounts held by each stockholder. These shares represented one share of the stock held in the treasury of the company and 333 shares issued in the place of the 333 shares previously owned by Tour and canceled by the petitioner. The shares so issued as a stock dividend were divided equally between Mayo and Wright, with the result that each became the owner of 50 per cent of the common stock of petitioner.
When Tour left the petitioner he arranged his own corporation for the purpose of engaging in his own business. Mayo was president of the petitioner up to June 30, 1934, when he became chairman of the board of directors and treasurer. In addition to his duties as president, he had been head of the sampling department of petitioner.
The leasehold improvements turned over to Tour were the improvements to the quarters of the building adjoining that of petitioner and occupied by the metallurgical department.
The balance sheet of June 30, 1943, shows as an asset "Cash Surrender Value Life Insurance" in the amount of $ 16,341.95, less "loans" $ 4,042.38, 1949 U.S. Tax Ct. LEXIS 65">*74 or net value of $ 12,299.47. The balance sheet also shows capital and surplus as follows:
| Capital and surplus: | |||
| Capital: | |||
| 500 shares preferred stock -- No par value | $ 5,000.00 | ||
| 1,000 shares common stock -- No par value | |||
| Surplus: | |||
| Capital surplus | $ 15,498.12 | ||
| Earned surplus -- June 30, 1943 | 40,044.59 | ||
| 55,542.71 | |||
| $ 60,542.71 | |||
13 T.C. 547">*551 The redemption value of the preferred stock of the petitioner was $ 55 per share. The dividend arrears of petitioner's preferred stock on June 3, 1943, were $ 18,083.33.
Wright died May 25, 1945, and respondent, in fixing the estate tax, valued Wright's common stock in petitioner at $ 15.57 per share.
The balance sheet of petitioner, May 31, 1945, shows as an asset "Cash Surrender Value Life Insurance" in the amount of $ 4,011.05. The balance sheet also shows capital and surplus as follows:
| Capital and surplus: | ||||
| 1,000 shares common | $ 25,000.00 | |||
| 500 shares preferred | ||||
| Capital surplus | $ 9,148.12 | |||
| Earned surplus | $ 25,982.65 | |||
| Profit for 5 months | 3,816.18 | |||
| Less dividends paid | 875.00 | |||
| 28,923.83 | ||||
| 38,071.95 | ||||
| $ 63,071.95 |
OPINION.
The question to be1949 U.S. Tax Ct. LEXIS 65">*75 determined is whether the petitioner sustained a loss from the distribution in kind of certain of its assets to one of its three stockholders in exchange for one-third of its outstanding common stock held by that stockholder. Petitioner's primary argument is based on the application of section 29.22 (a)-15 of Regulations 111. 1949 U.S. Tax Ct. LEXIS 65">*76 The respondent argues primarily that there was a distribution in kind in partial liquidation under
The object plainly was to eliminate Tour and his stock from the organization, leaving it as it was originally, as is indicated by the seemingly unnecessary care in1949 U.S. Tax Ct. LEXIS 65">*79 both canceling the stock and declaring a 13 T.C. 547">*553 dividend thereof to the two remaining stockholders. The cancellation of the stock complies with the definition of partial liquidation in
Nor was this an operation which could as well have been accomplished by the dealing1949 U.S. Tax Ct. LEXIS 65">*80 in stock of another corporation. Clearly, the purchase of other corporate stock would not have eliminated Tour's interest in the petitioner; neither would it have eliminated the friction that gave rise to the transaction. We are convinced that the petitioner herein did not deal in its stock in the same way as it would have in the stock of another corporation.
See
In the instant case the facts are stipulated and, of course, we must decide the case upon these facts. From the stipulated facts it seems entirely clear that when on January 23, 1939, petitioner acquired from one of its stockholders, J. V. Calvert, 12 1/2 shares of its authorized and issued capital1949 U.S. Tax Ct. LEXIS 65">*81 stock by paying over to him a ratable portion of the corporation's net assets, which represented approximately one-sixth of the then net worth of petitioner, it was not acquiring the shares as it would acquire the shares of another corporation for a subsequent resale at a profit. It was acquiring these shares because Calvert desired to sever his relations with petitioner and the remaining stockholders desired that this be done.
See also
We distinguish the cases cited by petitioner. To substantiate its position as to the applicability of section 29.22 (a)-15, petitioner cites
1. Sec. 29.22 (a)-15. Acquisition or Disposition by a Corporation of Its Own Capital Stock. -- Whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances. The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss, whether the subscription or issue price be in excess of, or less than, the par or stated value of such stock.
But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. So also if the corporation receives its own stock as consideration upon the sale of property by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property. Any gain derived from such transactions is subject to tax, and any loss sustained is allowable as a deduction where permitted by the provisions of the Internal Revenue Code.↩
2. Sec. 29.22 (a)-20. * * * No gain or loss is realized by a corporation from the mere distribution of its assets in kind in partial or complete liquidation, however they may have appreciated or depreciated in value since their acquisition.↩