Jacks v. Commissioner

ROMIE C. JACKS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Jacks v. Commissioner Docket No. 23939. United States Board of Tax Appeals 19 B.T.A. 559; 1930 BTA LEXIS 2377; April 11, 1930, Promulgated *2377 1. The Board will not disregard a corporate entity merely because the corporation was a family corporation, organized for convenience. The distinction between a corporation and its stockholders is one of substance and not of mere form. E. C. Huffman,1 B.T.A. 52. 2. Fair market value of items on live stock and lumber inventories at March 1, 1913, determined. A. F. Burke, Esq., for the petitioner. R. W. Wilson, Esq., for the respondent. LOVE *559 This is a proceeding for the redetermination of a deficiency in income tax for the year 1919 in the amount of $55,901.07. The petitioner presents four allegations of error described as follows: 1. The respondent erred in determining that the petitioner derived any taxable gain upon dissolution of the David Jacks Corporation *560 and the distribution of its assets in kind among the stockholders, of whom the petitioner was one. 2. The respondent erred in the valuation of certain real property received by the petitioner upon distribution of the assets of the David Jacks Corporation. 3. The respondent has erroneously included in petitioner's 1919 income certain*2378 dividends received by the petitioner from the David Jacks Corporation in 1920. 4. The respondent has erred in his valuation of the live stock and lumber inventories of the David Jacks Corporation at March 1, 1913, which inventory values are material in determining the fair market value of the petitioner's stock at that date. The petitioner has abandoned the second allegation of error and the respondent concedes error in respect to the third. The fourth allegation becomes material only in the event that the first issue is decided adversely to the petitioner. FINDINGS OF FACT. The petitioner is a resident of Monterey, Calif. The petitioner's father, David Jacks, came to Monterey County in 1849 and during a lifetime of activities there amassed properties worth, in 1907, approximately $3,000,000, consisting of cattle, sheep, real estate, etc. In 1907 David Jacks was approximately eighty-two years of age and his wife Mary C. Jacks, the petitioner's mother, was about sixty-nine years of age. They were the parents of five girls and two boys. At several family conferences during 1907 David Jacks discussed with his wife and children the division of his properties among the*2379 children. Mr. Jacks advised the children that he desired to transfer his property to them, but that he wished it to be held intact during the lifetimes of his wife and himself, since they had accumulated it together. He further desired the property held intact because it could be managed most advantageously under unified control and because litigation pending or anticipated could best be conducted under such control. In furtherance of the desires of David Jacks, as above discussed, the David Jacks Corporation (hereinafter referred to as the Corporation) was organized under the laws of the State of Nevada on July 2, 1907. The capital stock of the Corporation was fixed at $840,000 because this sum could be divided into any number of aliquot parts up to seven. It was also provided that the Corporation should have seven directors. The Corporation was organized under the laws of Nevada because Nevada corporations were permitted to issue stock for property and to purchase their own stock. The incorporators *561 were Mary C. Jacks, the wife, and Will and Margaret Jacks, children of David Jacks. By deed recorded July 1, 1907, David Jacks conveyed all of his property to his*2380 wife in consideration of her agreement to pay him $150 per month during his life. David Jacks desired the property to pass to the children through his wife for sentimental reasons. July 5, 1907, Mary C. Jacks, the wife, deeded her entire properties, real and personal, including those acquired from her husband on July 1, 1907, to the Corporation in consideration of (a) the issuance to her of 838 shares and the issuance to each of the other incorporators of 1 share of the Corporation's capital stock, (b) the agreement of the Corporation to pay her $500 per month during her lifetime, and (c) the agreement of the Corporation to pay her husband $150 per month during his lifetime, which sum she was under obligation to pay him. The 838 shares of stock were issued to Mary C. Jacks, who thereupon delivered 119 shares of such stock to each of the two children who were incorporators with her and 120 shares to each of the other five children. The seven children were then elected directors of the Corporation. David Jacks died in January, 1909. In 1911 one of the children, Mrs. Janet Jacks Balch, sold the 120 shares of stock held by her to the Corporation for $300,000. The shares so purchased*2381 were retained by the Corporation and the number of corporate directors was reduced from seven to six. No stock of the Corporation was ever held by any one except the wife and seven children of David Jacks. None of the stock was ever placed on the market nor could it have been purchased by an outsider. The petitioner's mother died in 1917. Shortly after the mother's death the six children who remained as stockholders began to discuss dissolution of the Corporation and the division of its assets among them in kind. Negotiations toward dissolution of the Corporation continued until September, 1919, when an amicable agreement for partition of the property among the stockholders was reached, the Corporation was dissolved and the property was partitioned in kind among the stockholders, the petitioner receiving one aliquot part. From the time of its organization until its dissolution in 1919 the Corporation neither sold nor purchased any real property, the only changes occurring in its real property during that time being various improvements. The respondent determined that upon dissolution of the Corporation and distribution of its assets as above described the petitioner derived*2382 a profit represented by the difference between the March 1, *562 1913, value of the 120 shares of stock held by him and the value of the assets he received upon the dissolution. The petitioner asserts that he derived no profit through distribution of the assets upon dissolution of the Corporation. Alternatively the petitioner asserts that the respondent's valuations of the Corporation's live stock and lumber inventories at March 1, 1913, are improper in that they do not represent the fair market value of such assets at that date. The respondent determined the value of these assets as that shown on the Corporation's inventory at December 31, 1912. The parties agree that if the petitioner derived a profit upon distribution of the Corporation's assets, the amount of such profit was $114,444.65, subject to such adjustments as may result from the Board's determination of the fair market value of the Corporation's live stock and lumber inventories at March 1, 1913. The following is a list of items on the Corporation's live stock and lumber inventories at December 1, 1912, and March 1, 1913, together with the fair market value of such assets at March 1, 1913, as claimed by*2383 the petitioner and as found by the Board: Value claimed by petitioner Value determined Item Each Total Each Total Cattle, etc 410 Hereford cows at Saucito Ro, 2 to 7 yrs. old $100.00 $41,000 $80.00 $32,800 7 reg. Missouri cows 400.00 2,800 400.00 2,800 2 common milk cows 75.00 [150] 75.00 [150] 362 stock cattle at Chemical Ro 40.00 14,480 40.00 14,480 129 yearling bulls at Chualar 100.00 12,900 100.00 12,900 29 yearling bulls at Horse Ranch 100.00 2,900 100.00 2,900 3 reg. Missouri bulls at Saucito Ro, 3 to 5 yrs 500.00 1,500 500.00 1,500 19 saddle horses 125,00 2,375 125.00 2,375 2 brood mares 100.00 [200] 100.00 [200] 2 yr. colts 40.00 [80] 40.00 [80] 1 2-yr. colt 75.00 [75] 75.00 [75] 2 3-yr. colts 90.00 [180] 90.00 [180] 2 horses - "Billy" and "Jerry" driving team [500] 2 horses - 1 horse and 1 mare cattle team [300] 1 wagon and set harness [75] 1 buggy and harness [75] Total 79,590 71,358 Sheep 2,676 at 2,974 ewes 8.50 25,279 8.50 24,236 298 at 5.00 1,314 wethers 5.00 6,570 5.00 6,570 24 merino rams 50.00 1,200 50.00 1,200 29 Shropshire rams 50.00 1,450 50.00 1,450 6 half-bred Persian rams 25.00 [150] 25.00 [150] 13 blooded Shropshire ewes 60.00 [780] 60.00 [780] 3 blooded Shropshire lambs 25.00 [75] 25.00 [75] 92 old ewes from mutton band 4.50 [414] 4.50 [414] 15 yearlings 4.00 [60] 4.00 [60] 4 horses 125.00 [500] 125.00 [500] 1 camp wagon 1 light spring wagon 1 single buggy 1 set single harness 1 set light double harness 2 sets wagon harness [300] Total 36,778 35,735 *2384 *563 Value determined (3-1-13) Lumber Per M Total Rough redwood 26,758 feet $32.00 $856.25 18,844 feet 30.00 565.32 16,615 feet 30.00 498.45 2,790 feet 30.00 83.70 32 feet 30.00 .96 10,558 ffet 30.00 316.74 468 feet 32.00 14.97 2,200 feet 32.00 70.40 2,380 feet 32.00 76.16 144 feet 34.00 4.89 696 feet 34.00 23.66 184 feet 25.00 4.60 128 feet 32.00 4.10 228 feet 32.00 7.30 Clear redwood 1,200 feet 60.00 72.00 192 feet 60.00 11.52 299 feet 60.00 17.94 90 split posts 1 .26 23.40 618 bundles shingles, 154 1/2 M 2 .75 463.50 8 bundles shingles, 154 1/2 M 2 .75 6.00 25 1 X 8-20 lap rustic R.W., 333 feet 1 .47 11.75 8 1/2 X 6-20, lap rustic, 80 feet 1 .47 3.76 Rough pine 7,258 feet $28.00 203.22 276 feet 30.00 8.28 26,778 feet 28.00 749.78 5,160 feet 30.00 154.80 4,636 feet 30.00 139.08 2,796 feet 28.00 78.28 2,268 feet 30.00 68.04 2,292 feet 28.00 64.17 3,768 feet 32.00 120.57 4,336 feet 35.00 151.76 Clear pine 264 feet 45.00 11.88 Flooring 3,274 feet 50.00 186.20 Total 5,073.43 The item*2385 listed as "410 Hereford cows" refers to a herd of purebred animals maintained as breeding stock. At or about March 1 of each year such a herd would have a calf drop of 85 to 90 per cent. The value found is that of the cows and the calves running with them. The seven registered Missouri cows were breeding stock which had been purchased in Missouri in 1911 at a cost of $400 each. The item listed as "362 stock cattle" refers to range stock or ordinary beef cattle. The items listed as "129 yearling bulls at Chualar" and "29 yearling bulls at the Horse Ranch" refer to pure bred Hereford bulls maintained for breeding purposes, each of which would be two years old at about March 1, 1913. The three registered Missouri bulls, "three to five years old," had been purchased in Missouri in 1911 at an average price of about $1,000 a head. They were breeding stock. The nineteen saddle horses were used for gathering and parting cattle and the other ordinary work of a "cow pony" on a stock ranch. The item "2 yearling colts" refers to colts which would be two years old in the spring of 1913, the one two-year colt would be three years old in the spring of 1913 and the two three-year colts*2386 would be four years old at that time. The item listed as "2 horses, 'Billy' and 'Jerry,' driving team" were coach horses used as a carriage team by the petitioner's mother. *564 Their value was greater as a team than singly, because they were matched. The item "2 horses - 1 horse and 1 mare, cattle team," was a light draft team used for hauling camp supplies. The item "2,974 ewes" refers to Merino ewes maintained as breeding stock. At or about March 1 of each year these ewes would have between 90 and 100 per cent as many lambs running with them, allowing for twin lambs. Merino wool is one of the better grade wools and brings a higher price than that received for ordinary wool. These ewes were sheared once a year between the 1st and 15th of April, and, consequently, they carried more wool at March 1, 1913, than at December 31, 1912. The condition of the wool would be considered in determining the fair market value of the ewes. The items "24 Merino rams" and "29 Shropshire rams" refer to thoroughbred stock maintained for breeding purposes. The item "13 Blooded Shropshire ewes" refers to full-blooded Shropshire ewes which had been imported from England. These*2387 ewes were bred in the yard and, consequently, there was a greater tendency for them to have twin lambs than among range bred ewes. The items "92 old ewes left over from the mutton band" and "15 yearlings left over from the mutton band" refer, respectively, to ewes culled from the breeding herd and yearlings culled from the mutton band to be fattened for market. The yearlings would be two years old in the spring of 1913. The March 1, 1913, values claimed by the petitioner for the lumber items on the inventory represent the cost of the lumber at the mill, plus freight, drayage, sorting, insurance, etc. The values determined are the fair market values of the lumber items on the ranch. The respondent determined the values of the lumber items to be the same as the mill prices. The parties are in agreement upon the items comprising the inventories. It was the practice of the Corporation to carry its live stock inventory at nominal values and its lumber inventory at mill prices at the mills in Mendenzona County or in San Francisco, as regards the redwood, and at mill prices in Oregon as regards the pine. OPINION. LOVE: Two of the four allegations of error presented by*2388 the petition have been settled by stipulation of the parties, leaving for our determination two issues, as follows: first, whether the petitioner derived any taxable gain as a distributee of the assets of the David Jacks Corporation upon its dissolution, and, second, in the event the first issue is decided adversely to the petitioner, the fair market *565 value of the live stock and lumber inventories of the Corporation at March 1, 1913. The petitioner's contention that he derived no taxable gain upon dissolution of the Corporation and distribution of its assets in kind among the stockholders is predicated upon the theory that the Corporation, quoting petitioner's brief, "was not an ordinary commercial corporation having an identity separate and apart from its stockholders, but was always a mere agency or instrumentality adopted by the stockholders for their convenience, which held the property of the Corporation as an agent or trustee for its stockholders for a period of twelve years and then surrendered it to its stockholders in accordance with plans made at the time of the organization of said Corporation." The respondent has held that the petitioner derived a gain upon*2389 distribution of the Corporation's assets, equal to the difference between the March 1, 1913, value of the petitioner's stock and the value of the assets received by the petitioner upon such distribution. The parties agree that if the petitioner did derive a taxable gain, the amount of such gain was $114,444.65, subject to inventory adjustments at March 1, 1913, as the Board shall determine. In effect, the petitioner asks us to disregard the corporate entity and to hold that the properties transferred to the Corporation in 1907 were held by it merely as an agent or trustee of the stockholders. The theory of the petitioner's case seems to be that the corporate entity should be disregarded because this was a family corporation. But no reason is offered why such preference should be shown a family corporation other than that the corporate entity was adopted for convenience and with the view that it would some day distribute its assets among the stockholders, and because it was not an ordinary commercial corporation. Convenience as a motive for corporate organization is in no way unique. It is in fact probably the sole motive common to all corporate organizations. And we can*2390 find no reason, nor have we been offered one, why the fact that this was a family corporation organized for convenience should distinguish it from any oher organized for convenience. We are not persuaded that, after having had the benefits and privileges of corporate holding and management while it was considered convenient, the petitioner as a stockholder should now have the corporate entity disregarded to avoid his incurrence of a tax liability. Courts of equity do disregard the fiction of corporate entity when such action is necessary to prevent fraud or otherwise maintain substantial justice. . The Board will look through the corporate entity in an appropriate case, . *566 The legal distinction between a corporation and its stockholders is a matter of substance and not merely of form. . In , we said: The courts have many times held that corporate entities may not be disregardd or confused with their stockholders. *2391 ; . And in , we said: The distinction * * * is preserved even when one person owns all the capital stock. ; . In discussing a contention that a corporate entity should be disregarded, we said in : * * * Congress has in several respects throughout the Revenue Acts made it clear that the ownership of capital stock is to be treated as direct ownership of the stock and not indirect ownership of the corporate assets. Were this not so a liquidation distribution of such corporate assets among the stockholders could not result in gain or loss as it has been uniformly treated under the Revenue Act of 1918 and earlier acts. The decisions in , and in *2392 , are founded upon the doctrine that stock and corporate assets are not idenical. It is upon the same principle that this Board decided , , and . We need not dwell upon the well recognized distinction between a corporation and its stockholders, nor repeat what so frequently has been said to the effect that the ownership by a corporation is not the ownership of its stockholders, and that the rights and liabilities of the former are separate from those of the latter. A corporation is not a mere form; it is a substantial legal being whose existence, rights and obligations are matters of substance, the recognition of which has permeated the entire economic existence of the Nation, and neither the Government nor the taxpayer will be heard in a bona fide case, except in extraordinary circumstances, to say that it is a mere fiction to be lightly disregarded. *2393 . We find nothing in this proceeding to warrant our consideration of it as having "extraordinary circumstances." The petitioner has cited , in which the Circuit Court of Appeals for the Tenth Circuit reversed the decision of the Board in . This case is distinguishable in that the Circuit Cour ruled that the corporation held the legal title to certain properties transferred to it by its organizers and stockholders upon express trusts as a managing trustee, and that the equitable title remained in the transferors. No comparable facts exist in the proceeding now under discussion. The petitioner has also cited . In that case the court held that while two companies were separate legal entities, yet, in fact, and for all practical purposes, *567 they were merged, one being merely a part of the other, acting as its agent and subject in all things to its proper direction and control. In our opinion the record of this proceeding does not indicate*2394 such a merger of entities of the stockholders and the David Jacks Corporation, as the court found in the case last cited. It may be pointed out that one of the petitioner's other allegations of error in this proceeding is inconsistent with his contention that the corporate entity should be disregarded. The petitioner alleged, and the respondent has conceded, that certain dividends were received from the David Jacks Corporation in 1920 rather than during 1919, the taxable year involved. Yet, if the identity of the Corporation is to be disregarded in considering the distribution of its assets upon dissolution because the Corporation "was always a mere agency or instrumentality adopted by the stockholders for their convenience, which held the property of the corporation as an agent or trustee for its stockholders," then the income of the Corporation was income of the stockholders directly, rather than indirectly as dividends, and it should be taxed accordingly. Assuming that upon its organization the stockholders did contemplate that the Corporation would be dissolved and its assets distributed after the deaths of their parents, we are not advised of any reason why such a fact*2395 constituted it a mere trustee or agent of its stockholders with respect to the property it held. The only record evidence of the contemplated life of the Corporation is that its assets would not be distributed during the lifetimes of David and Mary C. Jacks. We approve the respondent's determination that the petitioner derived a taxable gain upon distribution of the Corporation's assets. It is, therefore, incumbent upon us to determine, under the petitioner's alternative allegation of error, the March 1, 1913, value of the Corporation's live stock and lumber inventories. The results of our consideration of these inventories are set out in our findings. We have in general accepted the testimony of the petitioner as to the fair market value of the live stock and the equipment immediately pertaining to it. Such changes as have been made in the values testified to by the petitioner have resulted from clouded or uncertain evidence which we have weighed in the light of the whole record or from computations patently suggested by the record. The values which we have found for the lumber items are those claimed by the petitioner, based upon the number of board feet in each item and*2396 the corresponding value per thousand board feet. We have recomputed the value of each item and corrected the total value of the lumber inventory to eliminate mathematical errors. *568 The respondent valued each lumber item at the mill price as shown on the Corporation's books. We believe that consideration should be given to freight, drayage and related charges, necessarily incurred in laying the lumber down on the ranches where it was to be used. We believe the fair market values of the lumber items as claimed by the petitioner to be correct and we have accordingly found such values, subject to the mathematical corrections above mentioned. Judgment will be entered under Rule 50. Footnotes 1. Each. ↩ 2. Bundle. ↩