Stocker v. Commissioner

BEN STOCKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. JACOB F. MAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. H. M. MAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. B. H. MAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MAX H. MAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. SOL MAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. PAUL MAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. HARRY MAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Stocker v. Commissioner Docket Nos. 12844-12851. United States Board of Tax Appeals 12 B.T.A. 1348; 1928 BTA LEXIS 3351; July 16, 1928, Promulgated *3351 1. Amounts distributed in 1919 in liquidation of corporations out of earnings and profits accumulated since February 28, 1913, are payments in exchange for its stock subject to both normal and surtax under section 201(c) of the Revenue Act of 1918. 2. An erroneous construction of the laws by the Treasury Department does not preclude nor estop the Government from collecting a tax which is legally due. Charles F. Miller, Esq., and E. S. Vaught, Esq., for the petitioners. Arthur H. Murry, Esq., for the respondent. GREEN *1348 In these proceedings which have been consolidated for hearing and opinion, the petitioners seek a redetermination of their income *1349 taxes for the calendar year 1920, for which year the respondent has determined the following deficiencies as to: Ben Stocker $167.98 Jacob F. May 1,975.99 H. M. May 8,304.93 B. H. May 12,961.86 Max H. May $10,679.61 Sol May 192.16 Paul May 6,340.32 Harry May 10,743.33 The petitioners allege that the respondent erred: 1. In treating as taxable income the surplus accumulated subsequent to March 1, 1913, by a corporation which was dissolved*3352 in 1919 and all of its assets transferred to a partnership composed of the former stockholders of the corporation; 2. In taxing the gain resulting from the distribution of the assets of corporations in liquidation at the normal rate; and further contend, 3. That an erroneous construction of a Revenue Act by the Treasury Department and the collector of internal revenue precludes the Government from the right to collect a tax imposed by the statute. FINDINGS OF FACT. The petitioners were stockholders in the Mandansky Clothing Co., Mandansky Bros., Inc., and Mandansky Bros. Co. The Mandansky Clothing Co. was organized on January 27, 1910, with a paid-in capital stock of $30,000, divided into 300 shares of the par value of $100 each. Mandansky Bros., Inc., was organized in January, 1917, with a paid-in capital stock of $60,000, divided into 600 shares of the par value of $100 each. The Mandansky Bros. Co. was organized in August, 1917, with a paid-in capital stock of $30,000, divided into 300 shares of the par value of $100 each. The March 1, 1913, value of the stock of the Mandansky Clothing Co. was $248.96 per share. The cost of the stock of Mandansky Bros., Inc. *3353 , and Mandansky Bros. Co. was $100 per share. Under date of February 29, 1920, the Mandansky Clothing Co., Mandansky Bros., Inc., and the Mandansky Bros. Co. dissolved and their assets were transferred to three partnerships, one of each being in Tulsa, Okla., Oklahoma City, Okla., and Bartlesville, Okla. In determining the deficiencies in controversy, the respondent treated the transfer of the assets of the three corporations to the three partnerships as a distribution in liquidation of the three corporations named, and held that the difference between the cost of the stock and the value of the assets of each corporation upon dissolution constituted income subject to tax at both normal tax and surtax rates. *1350 There is no dispute between the petitioners and respondent as to the cost of the stock and the amount of surplus of the Mandansky Bros., Inc., and the Mandansky Bros., Co., as of February 29, 1920. It has been stipulated that the surplus of the Mandansky Clothing Co. on February 29, 1920, included $44,686.46 representing earnings accumulated prior to March 1, 1913. Sarah Stocker was the wife of Ben Stocker. Mr. Stocker filed a joint return for the calendar*3354 year 1920. The net income in his return was increased by the amount to which his wife was entitled upon the dissolution of the three corporations. With the exception of Ben Stocker, the petitioners owned shares of stock in the corporations referred to as follows: Mandansky Clothing Mandansky Bros. (Inc.) Mandansky Bros. Co. Co. Sarah Stocker 5/300 15/600 3 3/4/300 Jacob F. May 9/300 33/600 81 3/4/300 H. M. May 51/300 80/600 38 1/4/300 B. H. May 69/300 108/600 51 3/4/300 Max H. May 65/300 130/600 48 3/4/300 Sol May 32/600 Paul May 40/300 80/600 30/300 Harry May 61/300 122/600 45 3/4/300 The reorganization of the business in 1919 by the dissolution of the three corporations and the transfer of all their assets to partnerships composed of the former stockholders of the corporation was made upon the advice of counsel, who interpreted the then existing regulations of the Treasury Department to mean that such a transfer would not result in taxable income to the stockholders to the extent of the surplus accumulated subsequent to March 1, 1913. The collector of internal revenue was consulted and he expressed the opinion that*3355 no taxable gain would result from such reorganization. OPINION. GREEN: The petitioners were the holders of the stock of three corporations. They formed three partnerships, each of which was to take over the assets and business of one of the corporations. Each of the petitioners was to have an interest in the partnerships proportionate to his stockholding in the corporation. The assets were transferred and the corporations dissolved. The details of the transfer were not furnished us. The respondent treated the transaction as a distribution in liquidation and accordingly applied that portion of section 201(c) of the Revenue Act of 1918 which reads as follows: * * * 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. *1351 The first two questions here involved have been set at rest by the Suprme Court in the case of . The court said: The gain realized by the stockholders from the distribution of assets in liquidation were subject to normal tax*3356 in like manner as if they had sold their stock to a third person. It follows, therefore, that the gain, if any, realized by the stockholders upon liquidation, including any gain that results from the distribution of the corporate surplus, is taxable income and subject to both normal and surtaxes. We now turn to the third allegation of error. In his oral argument, the counsel for the petitioners contended that prior to the time the corporations in question were dissolved and their assets transferred to the partnerships, advice was requested of the collector of internal revenue as to whether or not any taxable gain would result from such a reorganization; that the collector of internal revenue advised that such a change was merely a change in form of ownership and would not represent a profit to the individual stockholders, and that relying upon such advice the corporations were dissolved and the copartnerships organized. It is further contended that article 1566, section (C) of Regulations 45 (1919 edition) provided that the surplus of a corporation when transferred in liquidation did not constitute taxable income to its stockholders. This regulation, promulgated April 17, 1919, was*3357 subsequently withdrawn as an erroneous interpretation of the statute and omitted from the 1920 edition of the regulations construing the Revenue Act of 1918. The above-mentioned ruling by the Commissioner of Internal Revenue was manifestly erroneous and in conflict with the provisions of section 201(c) of the statute. It seems too clear for serious argument that an administrative officer can not change a law enacted by Congress. A regulation that is merely an interpretation of the statute when once determined to have been erroneous becomes a nullity. An erroneous construction of the law by the Treasury Department or the collector of internal revenue does not preclude or estop the Government from collecting a tax which is legally due. We express no opinion as to the rights of taxpayers in a case where the regulation relied upon and subsequently changed, was not an improper construction of the statute. Judgment will be entered on 15 days' notice, under Rule 50.