Dockum v. Commissioner

HARRY A. DOCKUM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Dockum v. Commissioner Docket No. 3874. United States Board of Tax Appeals 11 B.T.A. 39; 1928 BTA LEXIS 3882; March 16, 1928, Promulgated *3882 Assets of a liquidating corporation held to have been received by stockholder in 1918, not 1919. Albert A. Jones, Esq., Vincent A. Smith, C.P.A. and Charles A. Smith, C.P.A., for the petitioner. Maxwell E. McDowell, Esq., for the respondent. SIEFKIN *39 This is a proceeding for the redetermination of a deficiency in income taxes for the year 1919. The petition raised issues as to the income in both 1919 and 1920, in the amount of $10,384.51, and numerous errors were assigned, but at the hearing the petitioner abandoned its claims of error as to the year 1920, and all of its claims of error as to the year 1919 except one. The single error assigned is that the respondent erred in overstating the income of the petitioner by including as a liquidating dividend an amount of $35,769.77, which amount, if income, it is alleged, accrued in the year 1918. FINDINGS OF FACT. The petitioner is an individual doing business in Wichita, Kans. The Dockum Drug Co., a corporation, was formed in 1915, and the petitioner exchanged two drug stores, valued at $40,000, for most of the 200 shares of its capital stock. The purpose of the organization*3883 was to give the employees a share in the business. Twenty-six shares were issued to employees, in return for which they gave notes, providing that payment for the stock should be from the dividends. One share was also given to Mabel M. Dockum, wife of the petitioner, in order to complete the number of five for organization purposes. The stockholders remained the same up to December, 1918, with one exception. One of the stockholders had left the corporation and the petitioner had acquired his stock. The petitioner determined, on account of heavy Federal taxes on corporations, to dissolve the corporation during 1918. Accordingly, a meeting of the stockholders was held on December 28, 1918, at which all the stockholders, except the wife of the petitioner, were present. At this time the petitioner owned 190 shares of the 200 shares outstanding. He made the proposition to the other stockholders that he pay them $220 per share for their stock, dissolve the corporation, take over the assets and assume the liabilities, operate *40 the business from then on as an individual, and continue them in his employ on a percentage of the net profits. This was accepted by the stockholders, *3884 and they assigned and delivered their stock to him at this meeting. This special stockholders' meeting was informally conducted and no minutes were made. On December 30, 1918, the petitioner's wife assigned her share of stock to the petitioner, and on December 31, 1918, all the transfers were recorded on the books. On January 2, 1919, the petitioner mailed to the Secretary of State of Kansas notice of the resolution on December 28, 1918, to dissolve the corporation. This was recorded on January 6, 1919. The petitioner assumed control of the business and took over the assets immediately after the meeting on December 28, 1918, and changed its name from "The Dockum Drug Company" to "Dockum Drug Company, Harry A. Dockum, owner." He continued using the old books till the end of the year for convenience in bookkeeping. An inventory of the business, as of December 31, 1918, was taken, starting January 1, 1919. OPINION. SIEFKIN: The sole question in this case is whether the respondent erred in including in income of the petitioner in 1919 the amount of $35,769.77. Section 201(c) of the Revenue Act of 1918 provides: A dividend paid in stock of the corporation shall be*3885 considered income to the amount of the earnings or profits distributed. Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits. The respondent relied upon this section and included in the petitioner's income for 1919 the above amount as a liquidating dividend from The Dockum Drug Co. The petitioner contends that if income was realized by the petitioner as a result of this transaction it was realized in 1918 instead of 1919. An informal meeting of the stockholders of The Dockum Drug Co. was held on December 28, 1918, at which time it was resolved to dissolve the corporation. Two of the stockholders assigned their shares of stock to the petitioner on this day, the wife of the petitioner assigned her one share to the petitioner on December 30, 1918, and all of the transfers were recorded on the books on December 31, 1918. The petitioner, although he did not know the exact value of the assets which he acquired, took over all the assets, assumed the *41 liabilities, and before the close of the year 1918 began*3886 operating the business as "Dockum Drug Co., Harry A. Dockum, owner." No minutes of the meeting were kept, but as stated in , this is not necessary to constitute legal action by a corporation. In that case we stated: Closely held corporations, as is well known, act very much like partnerships, their decisions being made in conversations, and oftentimes recorded not in the minutes, but by action. To this condition the attention of the courts has been called, and the position that a corporation can act through its directors informally without written minutes or formal resolutions, and the acts of its directors effected pursuant to oral understanding are as binding as though sanctified by the most rigid adherence to legal formality, has been sustained. The respondent relies upon the decisions in , and , but both of these cases hold that income is realized at the time the business is actually taken over by a stockholder, irrespective of the time when notice of dissolution is given or the time when the corporation ceases to exist. In *3887 , we stated: The adoption by the stockholders of a resolution of dissolution is not in every case conclusive proof that they thereupon realize a gain or sustain a loss. They may or they may not receive a liquidating dividend on the date of the dissolution resolution, or when it is properly recorded. In most cases at least this is a question of fact. Section 17-801, R.S. Kansas, Annotated, 1923, provides: VOLUNTARY DISSOLUTION - Any corporation that has liquidated its obligations may be dissolved by vote of the stockholders, as provided in Sec. 17 of this act; the resolution of dissolution shall state that the corporation has no outstanding indebtedness. Upon the filing of a copy of such resolution, certified by the President and Secretary, in the office of the Secretary of State, the corporation shall cease to exist. On January 2, 1919, notice of the dissolution was mailed to the Secretary of State and he entered it of record on January 6, 1919. The fact that the corporation did not go out of existence until notice was given has no bearing upon the case. The corporation could not have transferred its assets after it ceased to exist. *3888 We find that the petitioner acquired the assets of the corporation before January 1, 1919, and any income which the petitioner may have realized as a result of that transaction accrued in 1918. Judgment will be entered upon 15 days' notice, under Rule 50.