Hamilton Woolen Co. v. Commissioner

HAMILTON WOOLEN CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Hamilton Woolen Co. v. Commissioner Docket No. 29670. United States Board of Tax Appeals 21 B.T.A. 334; 1930 BTA LEXIS 1870; November 13, 1930, Promulgated *1870 1. Distributions made in 1923 by a corporation in liquidation held to be dividends within the meaning of section 201(a) of the Revenue Act of 1921 to the extent that they represented earnings or profits accumulated since February 28, 1913. 2. The remainder of the amounts distributed held to constitute the proper basis for computing the loss to the sole stockholder on the liquidation of the corporation. H. B. Sampson, Esq., and J. M. Haynes, Esq., for the petitioner. Maxwell E. McDowell, Esq., for the respondent. TRAMMELL *334 This proceeding is for the redetermination of a deficiency in income tax of $32,417.53 for the fiscal year ended November 30, 1923. The deficiency results in part from the action of the respondent in disallowing a deduction of $253,534.96 taken by the petitioner as a loss sustained on the liquidation of a corporation of which the petitioner was the sole stockholder and increasing the petitioner's income by an additional amount of $502.72. The case was submitted on a stipulation and oral evidence, from which we make the following findings of fact. FINDINGS OF FACT. The petitioner is a Massachusetts*1871 corporation with its principal office at Boston, and is engaged in the manufacture of worsted dress goods. On or about February 15, 1924, the petitioner filed its income-tax return for the fiscal year ended November 20, 1923, with the collector of internal revenue at Boston. The amount of net income shown on the return was $615,488.48 and the tax shown was $76,936.06. Thereafter in the calendar year 1924 the respondent assessed the tax of $76,936.06 shown on the return and on or before November 15, 1924, the petitioner paid the tax to the collector. Thereafter the petitioner's return and books were examined under the direction of the respondent and the deficiency here involved was determined by him. By an agreement dated September 21, 1923, between the petitioner and John E. Paige, it was provided that all the capital stock of the *335 Central Mills Co. (a Massachusetts corporation) other than that owned by said Paige should be acquired by the Central Mills Co. and retired, and that all assets of the said company other than cash should be disposed of except its plant. As soon as that was accomplished, the agreement provided that Paige should sell all his shares of*1872 stock to the petitioner and the petitioner should pay therefor the sum of $360,000 plus an amount equal to the cash in the treasury of Central Mills Co. at said time. The sale was completed on November 12, 1923, by the transfer by Paige to the petitioner of 110 shares of the stock of Central Mills Co. of the par value of $100 each, or a total par value of $11,000, which was all the capital stock issued and outstanding on that date. The amount paid by the petitioner to Paige for the stock was $477,571.68, being the above mentioned sum of $360,000 together with an amount equal to the cash on hand in the Central Mills Co. on that date, which amounted to $117,571.68. The petitioner then became the only stockholder of Central Mills Co. On November 23, 1923, a cash dividend of $110,000 was declared by vote of the directors of the Central Mills Co. as follows: VOTED: That a dividend of one thousand dollars per share be and hereby is declared out of the surplus and accumulated profits or earnings of the company, payable forthwith to stockholders of record this day. This dividend was paid the same day to the petitioner as sole stockholder by a check for $110,000 dated November 23, 1923. *1873 Later, on the same day at a stockholders' meeting of the Central Mills Co., it was voted to dissolve the corporation. The votes of dissolution were as follows: VOTED: That the assets of this company be transferred to the Hamilton Woolen Company as owner and holder of the entire number of shares of capital stock of this company authorized, issued and outstanding, in consideration of the agreement of said Hamilton Woolen Company to assume all liabilities and obligations of this company; and that the Treasurer, E. Benjamin Armstrong, be and he hereby is authorized in the name and on behalf of this company to execute in such form as he shall approve, an agreement with said Hamilton Woolen Company embodying the provisions of this vote and also in the name and on behalf of this company to sign, seal, acknowledge and deliver any and all deeds or other instruments that may be deemed necessary or proper to vest in said Hamilton Woolen Company full title and possession of all the assets of this company including its real estate, water rights, machinery and personal property of every description. VOTED: That upon the transfer of all the assets of this company to the Hamilton Woolen Company, *1874 the sole stockholder, all shares of capital stock of this company held by said Hamilton Woolen Company be surrendered and that the directors be and hereby are authorized and directed to take such steps as may be required to effect the dissolution of this company. *336 In accordance with said votes all the remaining property of Central Mills Co. was on November 23, 1923, transferred and conveyed to the petitioner in complete liquidation of Central Mills Co. The property so transferred to the petitioner and its fair market value at that time was as follows: Cash $8,074.40 Plant asses including land, buildings and machinery 360,000.00 Total 368,074.40 Pursuant to the foregoing votes the shares of stock of Central Mills Co. owned by the petitioner were surrendered and the Central Mills Co. was thereafter dissolved by legal proceedings in the Superior Court of Worcester County, Massachusetts. The surplus of Central Mills Co. on November 23, 1923, before the cash dividend of $110,000 was declared was as follows: Earnings accumulated since February 28, 1913, and undistributed on November 23, 1923 $246,254.95 Earnings accumulated prior to March 1, 1913, and undistributed on November 23, 1923 133,026.31 Total undistributed surplus 379,281.26 *1875 The total value of the property received by the petitioner from said dividend and the distribution in liquidation of Central Mills Co. was $478,074.40. The petitioner and Central Mills Co. always filed separate income-tax returns and never joined in the filing of a consolidated return for any taxable period. The Central Mills Co. derived all of its income from sources within the United States. In its return for the fiscal year ended November 30, 1923, the petitioner in computing its taxable income deducted the amount of $253,534.96 as a loss on the liquidation of the Central Mills Co. In determining the deficiency the respondent disallowed the deduction and determined that the difference between $478,074.40 representing the total of the dividend of $110,000 and the distribution in liquidation of $368,074.40 and the cost to the petitioner of the stock of the Central Mills Co., $477,571.68, or $502.72 was taxable to the petitioner as a gain. OPINION. TRAMMELL: Although the petitioner took a deduction of $253,534.96 in its income-tax return as a loss sustained on the liquidation of the Central Mills Co., it now claims a loss of only $245,752.23, which it computed in the*1876 following manner: Cash dividend paid November 23, 1923 $110,000.00 Balance of assets received in liquidation November 23, 1923 368,074.40 Total 478,074.40 Earnings accumulated since February 28, 1913, included in above 246,254.95 Return of capital 231,819.45 Cost of stock of Central Mills Co 477,571.68 Return of capital 231,519.45 Loss 245,752.23 *337 The respondent in an amended answer admits that he erred in determining that the petitioner realized a taxable gain of $502.72 in the liquidation of Central Mills Co. He denies, however, that the petitioner sustained a deductible loss on the liquidation of that company. The petitioner contends that under the provisions of section 201 of the Revenue Act of 1921 and under our prior decisions the cash dividend of $110,000 and other assets received in liquidation up to an amount which with the cash dividend of $110,000 would equal $246,254.95, or the amount of the earnings accumulated by the Central Mills Co. subsequent to February 28, 1913, and undistributed on November 23, 1923, constituted a dividend, and the remainder of the assets received in disribution was a return of capital. The respondent*1877 contends that the total of the cash dividend of $110,000 and the other assets received in liquidation, or $478,074.40, constituted a return of capital up to the amount of $477,571.68 and the remainder, $502.72, constituted a nontaxable distribution. Sections 201 and 202 of the Revenue Act of 1921 provide in part as follows: SEC. 201. (a) That the term "dividend" when used in this title (except in paragraph (10) of subdivision (a) of section 234 and paragraph (4) of subdivision (a) of section 245), means any distribution made by a corporation to its shareholders or members, whether in cash or in other property, out of its earnings or profits, accumulated since February 28, 1913, except a distribution made by a personal service corporation out of earnings or profits accumulated since December 31, 1917, and prior to January 1, 1922. * * * (c) Any distribution (whether in cash or other property) made by a corporation to its shareholders or members otherwise than out of (1) earnings or profits accumulated since February 28, 1913, or (2) earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, shall be applied against and reduce the basis*1878 provided in section 202 for the purpose of ascertaining the gain derived or the loss sustained from the sale or other disposition of the stock or shares by the distributee. * * * SEC. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property * * *. In *338 , we held that the term "dividend" as defined in section 201 includes distributions in liquidation of a corporation to the extent of the earnings or profits accumulated since February 28, 1913, contained therein and to the extent of these earnings, distributions are taxable as dividends. The ruling in the Darrow case was approved and followed in , and . In the Pearson case, the facts were very similar to those here before us. There, a partnership composed of the petitioners was engaged in the investment banking and brokerage business. On June 20, 1922, it purchased all the capital stock of a corporation*1879 for $2,172,600.96, the purpose of the partnership in acquiring the stock of the corporation being to "make some money out of the deal and liquidate it at the same time." On June 21, 1922, the corporation had a capital stock of $300,000 and a surplus of $1,898,923.12, of which surplus $1,823,232.38 represented earnings or profits accumulated since February 28, 1913. On June 21, 1922, the directors of the corporation declared a cash dividend of $25 per share on the stock, also distributed as a dividend certain securities owned by the corporation, and further declared a dividend of $99 per share in liquidation of the corporation. Pursuant to this action of the directors the corporation on that day distributed as dividends to the partnership $372,000 in cash, together with securities of the fair market value of $1,823,415.82. On December 29, 1922, pursuant to a resolution of the board of directors of the corporation, there were distributed to the partnership the remaining assets of the corporation, consisting of cash in the amount of $3,507.30. In its return for 1922 the partnership reported that of the amount of $2,195,415.82 received from the corporation on June 21, 1922, $371,183.44*1880 represented a return of capital and $1,823,232.38 represented a dividend paid out ot earnings accumulated since February 28, 1913, and taxable to the partners at surtax rates. The partnership also reported a loss of $1,796,910.22 on the liquidation of the corporation, the loss being measured by the difference between the amount paid for the stock, to wit, $2,172,600.96, and the amount theretofore received as a return of capital, to wit, $372,183.44, plus $3,507.30, the amount of the final dividend. Pearson and the other partners in their 1922 returns included in income their respective shares of the dividend as determined by the partnership and also took deductions from gross income of their respective shares of the loss claimed to have been sustained by the partnership in the liquidation of the corporation. We there held that in the light of our prior decisions the distributions, in so far as they represented earnings or profits of the corporation accumulated since February 28, 1913, constituted dividends within the meaning of section 201 of the Revenue Act of 1921 *339 and that the remainder of such distributions should be used as the basis for computing gain or loss under*1881 section 202 of that act. See also ; . We think the decisions heretofore mentioned are applicable and controlling here and accordingly hold that in determining taxable net income for the year here involved the petitioner is entitled to a deduction of $245,752.23 as a loss sustained on the liquidation of the Central Mills Co. Reviewed by the Board. Judgment will be entered under Rule 50.