DocketNumber: Docket No. 111314.
Citation Numbers: 3 T.C.M. 631, 1944 Tax Ct. Memo LEXIS 218
Filed Date: 6/7/1944
Status: Non-Precedential
Modified Date: 11/20/2020
Memorandum Findings of Fact and Opinion
LEECH, Judge: Respondent has determined a deficiency of $223,498.95 in income tax of the petitioner for the calendar year 1938. The issues submitted are the amount of the tax liability resulting to petitioner (1) from the liquidation under section 112 (b) (7) of the Revenue Act of 1938, in December 1938 of Avalon Investment Corporation, a personal holding company, (hereinafter called "Avalon"), in which she was the sole stockholder, and (2) upon the receipt by her or her nominee of distributions of dividend claims in that and another similar liquidation.
Findings of Fact
The facts are stipulated and so found by us. Petitioner is a resident of Canton, Ohio. She reported her income on the cash basis. Her return for the taxable year involved was filed with the collector of internal revenue for the eighteenth district of Ohio. This proceeding was instituted by a petition for redetermination filed June 1, 1942.
Avalon was a personal holding company organized under the laws of Delaware in 1930. At all times pertinent hereto and at*219 the time of its liquidation petitioner was its sole stockholder, owning all of its outstanding 6,916 shares of preferred stock of a par value of $691.600, and its 1,125 shares of common stock of a par value of $112,500. At the time of the liquidation of the corporation, as hereinafter detailed, the adjusted cost to petitioner of the preferred stock was $719,860, and the common stock $495,386.96.
The articles of incorporation of Avalon provided, and the certificates for shares of preferred and common stock carried the provision reading, inter alia, as follows:
"(3) The corporation may at its option, at any time or from time to time, redeem all or any part of the preferred stock by paying therefor in cash the redemption price of One Hundred Five Dollars ( $105) per share plus dividends accrued thereon and/or in arrears to the date fixed for such redemption. * * *
"(4) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the corporation or any sale of all or substantially all of its assets, the holders of preferred stock shall be entitled to receive payment in cash of One Hundred Five Dollars ( $105) for each share of preferred stock held by them, *220 plus dividends accrued and/or in arrears to the date fixed for such redemption and no more. Dividends accrued and/or in arrears in each case shall be calculated to the date upon which the holders of preferred stock shall be entitled to receive the payment provided for in this paragraph (4) and the funds required to make such payment shall be set apart so as to be and to continue to be available only for such payment. No sum shall be paid, and no distribution of any assets of the corporation shall be made, to the holders of common stock in any such event until such payment to the holders of the preferred stock shall have been made or moneys therefor deposited in trust, but after such payment to the holders of preferred stock or deposit in trust, the remaining assets of the corporation may be distributed among the holders of the common stock and/or other stock ranking junior to the preferred stock. * * *"
Throughout 1935 and 1936, Avalon was the owner of 500 of the 800 shares of the capital stock of the Imperial Investment Company (hereinafter called "Imperial"), a personal holding company organized under the laws of Delaware, the other 300 shares of which capital stock were then owned*221 by one H. H. Timken, the husband of petitioner. In 1935 Imperial distributed to its stockholders, including Avalon, 100,000 shares of common stock of Louisiana Land & Exploration Company having an aggregate fair market value on the date of distribution of $900.000 and an adjusted basis to the distributor of $202,326.19 and, in 1936, made a similar distribution of 12,000 shares of common stock of Twin Coach Company having at the date of distribution a fair market value of $154,500 and adjusted basis to Imperial of $30,857.14. Avalon, as stockholder, received 5/8 of the distribution so made.
On December 5, 1938, a specific plan for the complete liquidation of Avalon, pursuant to section 112 (b)(7) of the Revenue Act of 1938, the pertinent provisions of which appear in the margin. 1 was adopted by its directors and assented to by petitioner as the owner of all of its outstanding stock. This plan provided in detail (1) for the redemption of the preferred stock at $105, as required by the articles of incorporation, by the transfer to petitioner or her nominee of $300,000 in cash and 58,000 shares of common stock of the Louisiana Land & Exploration Company and (2) the distribution of *222 the remaining assets to petitioner or her nominee in complete liquidation and cancellation of the common stock, petitioner to assume liability for all debts of the liquidated corporation.
*223 Following this, on December 6, 1938, these distributions were made under petitioner's direction, (1) the cash and stock transferred in redemption of the preferred stock and (2) all of the remaining assets transferred in cancellation of the common stock, with the exception of 500 shares of common stock of Imperial, were assigned and delivered to Henry H. Timken, Jr., and William R. Timken, as trustees under a revocable trust agreement executed by petitioner and hereafter referred to as the Avalon Trust, of which petitioner was the sole beneficiary. The aforementioned 500 shares of common stock of Imperial were assigned and delivered to petitioner. The assets thus transferred to the Avalon Trust and to petitioner in cancellation of the 1,125 outstanding shares of common stock of Avalon consisted of $11,333.13 in cash, certain stocks and securities determined by Avalon and petitioner to have a fair market value of $4,203,069.69, and claims for dividends already declared on these stocks, but not yet paid, in the sum of $22,570.98. Petitioner, on December 6, 1938, delivered to Avalon her preferred and common shares of stock in that corporation. These were cancelled and the charter of *224 that corporation was surrendered to and cancelled by the State of Delaware on December 8, 1938.
Petitioner duly filed with the Commissioner of Internal Revenue, within 30 days after adoption of the plan of liquidation by Avalon, her notice of election to have the benefits of section 112 (b)(7) of the Revenue Act of 1938 including subparagraph (A) of that section. No part of the stocks and securities distributed to petitioner in the redemption of the preferred stock and cancellation of the common stock, as above detailed, had been acquired by Avalon subsequent to April 9, 1938, and no distributions were made by that corporation during December 1938. except those in liquidation above mentioned.
On December 9, 1938, Imperial, 500 of the 800 shares in which were owned by petitioner as a result of their distribution to her in the above described liquidation of Avalon, formally adopted a plan of liquidation pursuant to section 112 (b)(7),
In the liquidations of both Avalon and Imperial the petitioner received, in exchange for her common stock in those companies, not only cash, stocks and securities, but also claims for dividends which had been declared upon certain of such distributed stocks payable to stockholders of record on dates prior to those upon which the distributions in liquidation of such stocks were made, but payable to such stockholders of record on dates subsequent to those upon which such distributions in liquidation were*226 made.
Opinion
The only issue submitted on these facts is the first issue stated above. It is the amount of the income tax liability of petitioner resulting from the liquidation, in December 1938 of Avalon, a personal holding company, in which petitioner was the sole stockholder, under the Revenue Act of 1938, section 112 (b)(7),
The effect of the distribution in 1936 by Imperial has recently been before us in the case of
In accordance with the decision in the above cited case, we sustain petitioner upon her computation as to the earnings and profits of Avalon. We hold that the distributions made in 1935 and 1936 by Imperial constituted dividends only to the extent of earnings and profits then realized by that corporation and that such earnings and profits may not be increased by unrealized appreciation in the value of assets distributed in kind, but that such distribution is to be charged against the cost basis of Avalon's stock in the distributing corporation.
*230 Under section 112 (b)(7)(E),
This is the second point under the first issue. The question thus posed is solely one of fact. We are not immediately concerned with the general effect or result of the liquidation of Avalon. The answer to our question depends not upon effect but rather upon what was actually done. Thus the contention of the respondent fails to take into consideration the fact that the plan of liquidation calls specifically for the redemption of the preferred stock with the cash and shares actually distributed and that the two classes of stock were in fact separately redeemed and cancelled as was intended. It further overlooks the fact that petitioner, as owner of the preferred stock, was unquestionably entitled under the articles of incorporation of Avalon in the event of liquidation of that corporation to have her preferred stock first redeemed in cash before any distribution was made with respect to the common*232 stock.
It is true that the transaction of liquidation was in a sense one aggregate. But that aggregate included two separate and distinct steps. And it does not necessarily follow that these two distinct and separate transactions going to make up that aggregate may not be treated separately and have their own individual tax significance.
The second issue involves the proper treatment of the dividend claims received by petitioner or her nominee, Avalon Trust, in the distributions in liquidation of Avalon and Imperial. These dividends, at the time of the adoption of the plans of liquidation of the respective companies, had already been declared and were paid to and received by petitioner or her nominee, the Avalon Trust, subsequent to the transfer of the stocks and rights thereunder and the dates upon which stockholdings of record would be entitled to such dividends. Respondent contends these dividend payments are taxable as dividends to petitioner. Petitioner argues that the claims for dividends, in the stipulated amount, are not so taxable. She insists they constitute an asset separate and distinct from the shares of stock and thus a return of capital to her. She seeks to allocate to these claims a proportionate amount of her total adjusted cost of her stock in Imperial. The amount which she thus allocated as capital upon her return, she has now increased slightly. We understand, however, that respondent is not contesting the amount of this recomputation, but that*234 he is merely taking issue upon the taxable character of the dividend claims. Consequently, the issue is whether these payments represent dividends received by petitioner or the liquidation of a capital asset.
Respondent rests his position upon the authority of
1. Election as to Recognition of Gain in Certain Corporate Liquidations. -
(A) General Rule. - In the case of property distributed in complete liquidation of a domestic corporation, if -
(i) the liquidation is made in pursuance of a plan of liquidation adopted after the date of the enactment of this Act, whether the taxable year of the corporation began on, before, or after January 1, 1938; and
(ii) the distribution is in complete cancellation or redemption of all the stock, and the transfer of all the property under the liquidation occurs within the month of December, 1938 - then in the case of each qualified electing shareholder (as defined in subparagraph (C)) gain upon the shares owned by him at the time of the adoption of the plan of liquidation shall be recognized only to the extent provided in subparagraph (E) * * *.
(D) Making and Filing of Elections. - The written elections referred to in subparagraph (C) must be made and filed in such manner as to be not in contravention of regulations prescribed by the Commissioner with the approval of the Secretary. The filing must be within thirty days after the adoption of the plan of liquidation, and may be by the liquidating corporation or by the shareholder.
(E) Noncorporate shareholders. - In the case of a qualified electing shareholder other than a corporation.
(i) There shall be recognized, and taxed as a dividend, so much of the gain as is not in excess of his ratable share of the earnings and profits of the corporation accumulated after February 28, 1913, such earnings and profits to be determined as of December 31, 1938, but without diminution by reason of distributions made during the month of December, 1938; and
(ii) There shall be recognized, and taxed as short-term or long-term capital gain, as the case may be, so much of the remainder of the gain as is not in excess of the amount by which the value of that portion of the assets received by him which consists of money, or of stock, or securities acquired by the corporation after April 9, 1938, exceeds his ratable share of such earnings and profits.↩
2. (1) Effect on Earnings and Profits of Gain or Loss and of Receipt of Tax-Free Distributions. - The gain or loss realized from the sale or other disposition (after February 28, 1913) of property by a corporation -
(1) for the purpose of the computation of earnings and profits of the corporation, shall be determined, except as provided in paragraph (2), by using as the adjusted basis the adjusted basis (under the law applicable to the year in which the sale or other disposition was made) for determining gain, except that no regard shall be had to the value of the property as of March 1, 1913; but
(2) for the purpose of the computation of earnings and profits of the corporation for any period beginning after February 28, 1913, shall be determined by using as the adjusted basis the adjusted basis (under the law applicable to the year in which the sale or other disposition was made) for determining gain.
Gain or loss so realized shall increase or decrease the earnings and profits to, but not beyond, the extent to which such a realized gain or loss was recognized in computing net income under the law applicable to the year in which such sale or disposition was made. Where in determining the adjusted basis used in computing such realized gain or loss the adjustment to the basis differs from the adjustment proper for the purpose of determining earnings or profits, then the latter adjustment shall be used in determining the increase or decrease above provided. For the purposes of this subsection, a loss with respect to which a deduction is disallowed under section 118. or a corresponding provision of a prior income-tax law, shall not be deemed to be recognized Where a corporation receives (after February 28, 1913) a distribution from a second corporation which (under the law applicable to the year in which the distribution was made) was not a taxable dividend to the shareholders of the second corporation, the amount of such distribution shall not increase the earnings and profits of the first corporation in the following cases:
(1) No such increase shall be made in respect of the part of such distribution which (under such law) is directly applied in reduction of the basis of the stock in respect of which the distribution was made.
(2) No such increase shall be made if (under such law) the distribution causes the basis of the stock in respect of which the distribution was made to be allocated between such stock and the property received.↩