DocketNumber: Docket Nos. 2714-65, 2715-65
Citation Numbers: 1967 U.S. Tax Ct. LEXIS 68, 48 T.C. 586
Judges: Baum
Filed Date: 7/21/1967
Status: Precedential
Modified Date: 1/13/2023
1. T. corp. adopted a plan to sell its business assets and liquidate within a year. It attempted to bring itself within
2.
*586 The Commissioner determined a deficiency in income tax of Bird Management, Inc., for 1961 in the amount of $ 71,262.46. He also determined that A. U. Bird Trust, as transferee of the assets of Bird Management, Inc., is liable for the deficiency plus interest as provided by law. The parties have stipulated that A. U. Bird Trust is a transferee within the meaning of
The only issues raised by the Commissioner's determination presently in controversy are (1) whether the deduction for a $ 12,750 addition to the taxpayer's bad debt reserve in 1961 was properly disallowed, the taxpayer having sold all of its accounts receivable and other assets in a bulk sale in 1961 pursuant to a plan of complete liquidation; and (2) whether the final $ 63,905.01 *70 balance in its bad debt reserve, after adjustment for the foregoing disallowance, must be restored to income upon the aforesaid bulk sale.
A further question raised in a claim for refund is whether the corporation's $ 248,201.23 loss on the bulk sale of its assets during the *587 course of its liquidation was nonrecognizable under
FINDINGS OF FACT
The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Bird Management, Inc., sometimes hereinafter referred to as petitioner, was a corporation organized under the laws of the Commonwealth of Massachusetts. It was formerly incorporated under the name of La Touraine Coffee Co., and was legally dissolved on May 15, 1963, by the Massachusetts Supreme Judicial Court. The A. U. Bird Trust, Sidney M. Bird, trustee, was *71 the sole stockholder of petitioner, and is a transferee within the meaning of
Petitioner had been in the coffee business. In addition, it had a subsidiary corporation named Kennedy & Co., Inc. ("Kennedy"), which was engaged in selling butter and eggs through chain stores in Massachusetts and Rhode Island. Petitioner also had a subsidiary in the form of a Massachusetts real estate trust known as Bayside Realty Trust, and Kennedy had a wholly owned Massachusetts real estate trust known as Meridian Realty Trust.
During 1960 petitioner's management decided to sell its business. After various negotiations in the spring of 1961 a proposed contract was prepared for the sale of certain of its assets and business to a purchaser known as Maritime Corp. ("Maritime").
At a meeting on June 26, 1961, petitioner's board of directors approved the proposed contract with Maritime, and at the same time adopted a plan of liquidation. The board of directors unanimously voted:
That the business and affairs of this corporation be wound up as promptly as is possible without sacrificing *72 the value of its property and that this corporation be liquidated and dissolved as soon thereafter as is conveniently possible but in any event within twelve months from the date hereof.
Further Voted: That the President or the Treasurer, or either of them singly, be and hereby is authorized to liquidate and sell such of the property and assets of the corporation upon such terms and for such consideration as the officer acting in the matter shall determine to be in the best interests of the corporation, and that after payment or adequate provision for the payment of all obligations of this corporation the remaining assets shall be distributed to stockholders at such time or times as either of said officers shall determine, consistent with the *588 Articles of Organization, as amended, and in any event within twelve months from the date hereof; and upon final distribution of all of such assets all of the certificates of capital stock of the corporation shall be surrendered for cancellation and the corporation shall thereupon be dissolved.
The proposed contract with Maritime was executed on June 30, 1961. Petitioner, then still known as La Touraine Coffee Co., was referred to therein as *73 the Seller. The contract provided in part as follows:
1. Subject to the terms and conditions hereinafter set forth, MARITIME agrees to purchase, accept, and pay for through a wholly owned subsidiary corporation to be organized by MARITIME under the laws of the Commonwealth of Massachusetts (hereinafter referred to as the "Company") and the SELLER agrees to sell, assign, and convey to the Company certain of the assets owned by it at the close of business on June 30, 1961 (hereinafter sometimes referred to as the "Assets"). MARITIME further agrees to cause the Company to accept and assume all disclosed liabilities of the SELLER outstanding at the close of business on June 30, 1961 except as otherwise provided herein. For purposes of this Agreement the term "Assets" shall include all of the assets of the SELLER including specifically all the capital stock of the SELLER'S wholly owned subsidiary, Kennedy & Co., Inc., a Massachusetts corporation * * * and all the capital shares of Kennedy's wholly owned subsidiary, Meredian Realty Trust, a Massachusetts real estate trust * * * other than the following:
A. All of the real estate owned by the SELLER on June 30, 1961.
D. Cash, which in the opinion of the independent public accountants for the SELLER is equal to all taxes incurred by the SELLER and its subsidiaries (other than Bayside Realty Trust) arising out of operations for the six-month period ended June 30, 1961, and any funds withheld from employees for taxes or other purposes.
The closing of the transaction was fixed at August 16, 1961. The purchase price was $ 1,950,000. The sale in fact took place, and petitioner realized a loss on that sale in the amount of $ 248,201.23.
The contract of sale did not allocate any portion of the $ 1,950,000 purchase price to any of the specific assets or properties sold, including the accounts receivable. It was a rounded, negotiated price.
Among the various provisions of the contract was one in which petitioner in effect gave a limited guarantee in respect of the accounts receivable by agreeing to repurchase on July 1, 1962, such of, or such part of, any accounts receivable sold which might then remain unpaid, but such obligation was to be limited to that portion *75 of the unpaid accounts in excess of $ 72,582.65.
On January 1, 1961, petitioner's books and records reflected a reserve for bad debts in the amount of $ 72,582.65. During the period from January 1 to June 30, 1961, there was credited to this reserve $ 17,537.18, consisting of recoveries of $ 4,787.18 and additions claimed on the 1961 income tax return in the amount of $ 12,750. During the *589 same 6-month period $ 13,464.82 was written off and charged against the reserve account, thereby leaving a balance as of June 30, 1961, in the reserve for bad debts of $ 76,655.01. Upon the sale of its assets petitioner had no remaining accounts receivable, and its 1961 return discloses that it had no notes or accounts receivable outstanding at the end of that year.
The consolidated income tax return of petitioner and the three subsidiaries, Kennedy & Co., Inc., Bayside Realty Trust, and Meridian Realty Trust, for the taxable year 1961, was filed with the district director of internal revenue, Boston, Mass., on May 25, 1962. The return disclosed that petitioner's affiliation with Kennedy & Co. and Meridian Realty Trust had terminated on June 30, 1961 (as the result of the sale to Maritime), and *76 that the affiliation with Bayside Realty Trust had terminated on November 16, 1961, so that the consolidated return reflected the operations of those subsidiaries only until the above dates. The return stated that petitioner was "in liquidation," and there was attached thereto a statement supplying the information required by
BIRD MANAGEMENT, INC.
Information Required -- Reg. 1.337-6
1. Copy of Minutes Attached [Minutes of board of directors meeting of June 26, 1961, at which directors voted to liquidate and distribute petitioner's assets within 12 months.]
2. Assets Sold -- All of the corporation's assets excepting --
a. Real Estate and
b. Stock of Bayside Realty Trust were sold to one buyer on June 30, 1961 for an (sic) total price of $ 1,950,000. The purchaser was Maritime Corporation, Boston, Mass.
The (sic) was no gain on the sale. The loss, $ 248,201.23, is entered at Schedule M, Line 19, Sundry Debits to Surplus.
3. Distributions in liquidation totaled $ 2,039,907.61 to December 31, *77 1961. Liquidation will be complete before June 26, 1961.
4. Retained assets are not yet determinable.
Petitioner did not deduct the $ 248,201.23 loss on the sale of its assets to Maritime on its return for the taxable year 1961. The loss was, however, charged to surplus as a "sundry debit" with the following explanation:
Non-deductible Loss (Sec. 337, IRC) resulting from the | |
bulk sale of all assets (excepting real estate and a | |
100% interest in a Mass. real estate trust) | $ 248,201.23 |
On September 17, 1962, petitioner filed a "final return" for the taxable period January 1 to June 15, 1962, with the district director of *590 internal revenue, Boston, Mass. Petitioner again submitted a statement setting forth the information required by the regulations under
The return also stated that petitioner was "completely liquidated," and had no assets, liabilities, capital stock, or earned surplus on June 15, 1962. As of this date, all of the preferred stock in petitioner had been redeemed *78 and all of its common stock was owned by the A. U. Bird Trust. Sidney M. Bird, who was also president of petitioner during these years, was the sole surviving trustee of this trust.
The "final return" of petitioner disclosed a net operating loss in the amount of $ 40,438.05 for the period January 1-June 15, 1962. By application of this loss as a carryback to the taxable year 1959, petitioner became entitled to a refund in the principal amount of $ 21,027.79, plus interest in the amount of $ 567.17. On or about January 17, 1963, the Treasurer of the United States issued a check payable to "Bird Management, Inc. -- formerly La Touraine Coffee, Inc." for $ 21,594.96 as payment in full of this refund. The check was deposited in the account of the A. U. Bird Trust on January 17, 1963. The State of Maryland had also, a few months earlier, issued a check payable to "Bird Management, Inc." after petitioner had "completely liquidated." That check, issued on July 17, 1962, in the amount of $ 25, represented a refund of foreign corporation filing fees which petitioner had paid in error, and was also deposited directly to the account of the A. U. Bird Trust on the day it was received.
Petitioner *79 was not formally dissolved until May 15, 1963.
Another claim for refund, executed on February 17, 1965, by Sidney M. Bird as president of Bird Management, Inc., was filed with the district director of internal revenue at Boston, Mass., on February 18, 1965, and is at issue in this case. It seeks a refund of petitioner's 1961 taxes paid in connection with petitioner's 1961 return, in the amount of $ 50,711.84 plus interest of $ 14,039.89, or a total of $ 64,751.73. The claim is grounded upon the asserted deductibility of the $ 248,201.23 loss realized upon the sale of petitioner's assets to Maritime.
OPINION
1.
That petitioner intended to comply with the provisions of
Petitioner, then, made a calculated and deliberate attempt to comply with the requirements of
The record *84 is utterly devoid of evidence as to the manner in which petitioner made its liquidating distributions. Were they made pursuant to documents transferring rights in respect of petitioner's assets? If so, were the assets identified separately, and was there any catchall clause referring to all other assets of every kind? Or was there any other language susceptible of being interpreted as dealing with contingent, future, unmatured, or unknown claims? 4*85 We do not know the answers to these and other pertinent questions that suggest themselves to us in considering this matter.
In these circumstances we are unable to conclude that the rights to future tax refunds were not transferred to petitioner's sole stockholder in the course of carrying out petitioner's attempt to liquidate completely within the statutory 12-month period. And if such rights had in fact been transferred, so that as between petitioner and its sole stockholder, the latter became entitled to the refund checks when they *593 were issued, it is clear to us that there would have been full compliance with the requirements of
It must be remembered that
Nor is *87 there any substance to petitioner's argument that it did not follow the procedure approved by
It may also be noted that the actions of the parties confirm the clearly manifested intent of both petitioner and its sole stockholder that all assets of every kind be assigned to the latter. The refund checks in question do not appear ever to have been considered as the property of petitioner, but rather were immediately deposited in the account of the stockholder. In such circumstances, one would not need even a formal, written assignment to give effect to the obvious intention of a corporation and its sole stockholder that all claims held by *594 the corporation, present or future, become the property of the stockholder upon the expiration *88 of
It is true that petitioner might have delayed the distribution of its real estate or other assets past the June 26, 1962, deadline and thus have avoided the operation of
2.
(a)
(b)
In the present case, petitioner had already sold all of its accounts receivable months prior to the close of the taxable year 1961, and its *595 1961 return discloses that it had no accounts receivable or notes outstanding as of December 31, 1961. In these circumstances, an addition to the reserve for bad debts -- which, after all, is merely a forecast of losses from worthless debts which the taxpayer reasonably expects to sustain in future years -- would be wholly unwarranted as of the close of the taxable year and would be contrary to the regulations. Petitioner had no debts "at the close of the taxable year of the proposed addition," and it is difficult to perceive any justification for any addition to a reserve for bad debts at that time. The Commissioner's disallowance of the $ 12,750 deduction was proper, and is in accord with established practice. See
(b) Petitioner's reserve *91 for bad debts at the time of the sale was $ 76,655.01, including the $ 12,750 addition which we have held was properly disallowed as a
It is not a matter of consequence that the accounts receivable may have been sold at a loss. Certainly, accounts receivable can be sold like any other asset. If a loss were sustained on the sale, it would not be a bad debt loss and its deductibility would be governed by those provisions of the law dealing with the taxability of gains or the deductibility of losses realized upon sales or exchanges. But it would not justify departure from the general rule that upon sale of the accounts receivable the bad debt reserve in respect thereof must be restored to income. The matter was dealt with clearly and carefully in
Essentially a bad debt reserve constitutes an estimate of the loss which can reasonably be expected to result from worthlessness of debts outstanding at the close of the taxable year. Under the reserve method when specific debts become *596 worthless they are charged against the reserve and serve to reduce the credit balance therein. Then, if any amount which has been charged against the reserve is subsequently collected the collection does not result in the receipt *93 of income but the amount collected is credited to the reserve. If the credit balance in the reserve at the end of the year is not adequate to cover the reasonably expected loss with respect to the debts outstanding at the end of the year, then an addition is made to the reserve to bring the credit balance to the appropriate amount, and such addition is deductible.
The petitioner *94 does not dispute this general rule, but contends that it has no application in a situation such as is here presented. The petitioner reasons that the amount of a reserve represents the amount of bad debts predicted and previously deducted and that no amount of such reserve is required to be restored to income unless, by collection of the receivables or the sale thereof, there has been a recovery of the amount which was previously deducted. It states that only to the extent that the receivables are sold at a sum above net value (face value of the receivables less the amount of the reserve), which did not occur here, is there any justification for restoration of the amount of the reserve or any portion thereof to income. It contends that the reserve for bad debts must be charged with the unrecovered sum and that when that is done in the instant case there remains no amount in the reserve to be restored to income.
We cannot agree with this contention of the petitioner. As indicated above, specific debts become a charge against the reserve only to the extent they become worthless. n1 If a debt is sold at a loss prior to being charged off, the loss does not constitute a bad debt loss, *95 but rather a loss upon the sale of property.
Thus, if the petitioner sustained any loss upon the sale of its receivables (which cannot be ascertained with certainty upon this record) the reserve for bad debts would not be affected in any way. And the fact that
It is true that in
However, the
In order to give effect to the disposition of other issues not presently in controversy,
1. -
(a) General Rule. -- If -- (1) a corporate adopts a plan of complete liquidation on or after June 22, 1954, and (2) within the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete liquidation, less assets retained to meet claims,↩
2. -
(a)
(1) A copy of the minutes of the stockholders' meeting at which the plan of liquidation was formally adopted, including a copy of the plan of liquidation.
(2) A statement of the assets sold after the adoption of the plan of liquidation, including the dates of such sales. If
(3) Information as to the date of the final liquidating distribution.
(4) A statement of the assets, if any, retained to pay liabilities and the nature of the liabilities.↩
3. The year 1961 was set down obviously in error in place of 1962.↩
4. There is nothing in this record to indicate that petitioner was aware of the fact that it was entitled to a $ 25 refund from the State of Maryland on account of foreign corporation filing fees paid in error, nor is there any indication that any of petitioner's officers or directors knew that the final taxable period from Jan. 1 to June 15, 1962, would give rise to a net operating loss, and a refund claim of $ 21,594.96 based upon the carryback of that loss to an earlier, profitable year. Petitioner's "final return" was not even filed until Sept. 17, 1962, some 3 months after the 12-month liquidation period had expired, and indeed, on brief, petitioner assures us that neither its officers, directors, nor its attorneys were aware on June 26, 1962, that it had sustained a net operating loss in its final taxable period.