Fruit Belt Telephone Co. v. Commissioner

FRUIT BELT TELEPHONE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. A. J. EVANS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MAX L. JAMES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Fruit Belt Telephone Co. v. Commissioner Docket Nos. 32668, 33710, 33711. United States Board of Tax Appeals 22 B.T.A. 440; 1931 BTA LEXIS 2109; February 28, 1931, Promulgated *2109 Held, under the evidence, that the corporation sold its assets to its stockholders, and their subsequent sale to another does not give rise to taxable gain to the corporation. J. C. Murphy, Esq., for the petitioners. B. M. Coon, Esq., for the respondent. TRAMMELL *440 The above entitled proceedings were consolidated for the purpose of hearing and decision. In the case of the Fruit Belt Telephone Company a deficiency in income tax has been asserted for the calendar year 1925 in the amount of $3,250. In the proceedings of Evans and James, liabilities as transferees of the assets of the Fruit Belt Telephone Company have been asserted for the amount of the deficiency asserted against that company. The deficiencies arise in the case of the corporation on account of the action of the Commissioner in determining that the sale of its assets in 1925 was made to the Southern Bell Telephone Company and not to the individual stockholders. FINDINGS OF FACTS. The petitioner, the Fruit Belt Telephone Company, was a Georgia corporation with its principal office at Fort Valley. The corporation operated a telephone exchange and system. James*2110 and Evans owned all the stock of the corporation except one share. The book value of the assets was $49,517.05, the depreciation charged upon the books was $22,476.10, leaving a net value of assets according to the books of $27,040.95. In November, 1924, an appraisal was made of the assets by the Southern Bell Telephone Company for 1924 with a view of purchasing all of the assets of the petitioner corporation. The book value of assets reflected only the physical assets and did not include any value attributable to good will or going-concern value. The market value of the assets was in excess of the value of the physical property. *441 On March 28, 1925, the petitioner corporation sold all of its assets to Max L. James and A. J. Evans, its stockholders, by a deed of that date for $32,000 paid by check. This sale was consummated pursuant to a resolution of the stockholders dated December 13, 1924, and a resolution of the stockholders as of the same date. All of the property which was conveyed to James and Evans as aforesaid was on the same day conveyed by them to the Southern Bell Telephone Company for $55,000 paid in cash. The petitioner, the Fruit Belt Telephone*2111 Company, reported taxable income from the transaction based upon the $32,000 received from Evans and James, while Evans and James in their individual income tax returns reported profit received by them individually from the sale by them to the Southern Bell Telephone Company of the difference between the $32,000 paid by them and the $55,000 received from the Southern Bell Telephone Company. The Fruit Belt Telephone Company was legally dissolved and cash consisting of the $32,000 paid in to it by James and Evans was distributed to them. The Commissioner asserted a deficiency against the corporation, the Fruit Belt Telephone Company, based upon his determination that that company sold its assets to the Southern Bell Telephone Company for $55,000, disregarding the intermediate sale to the stockholders, Evans and James, for $32,000 and the sale from Evans and James to the Southern Bell Telephone Company. OPINION. TRAMMELL: The real question in this case is whether the petitioner, Fruit Belt Telephone Company, sold its assets to its stockholders in good faith, or whether it actually made the sale to the Southern Bell Telephone Company. The Commissioner takes the position*2112 that the corporation really sold its assets to the Southern Bell Telephone Company or in any event did not sell them to Evans and James in good faith. On this question, we think the evidence is perfectly clear that the assets were sold to Evans and James and that they sold them to the Southern Bell Telephone Company. So long as neither creditor nor stockholder has any objection to the sale of assets by a corporation, clearly, a corporation is not prohibited by law from selling to its stockholders even at a price less than the value of the assets and there is nothing to prevent a corporation from distributing its assets to its stockholders in liquidation if it desires to do so regardless of the value of the assets distributed. A corporation may clearly do what it has a legal right to do, even for the sole purpose of reducing its tax liability. It is not required to pursue a course which gives *442 rise to a greater tax liability if another course is open to it which will give rise to a less tax liability. If we take the position that the assets of the Fruit Belt Telephone Company were in effect distributed to its stockholders in liquidation and that they had a value*2113 at that time of $55,000, which was in excess of cost, this does not give rise to tax liability on the part of the corporation. The Commissioner's regulations are to the same effect. Article 547 of Regulations 45 provided as follows: "* * * No gain or loss is realized by a corporation from the mere distribution of its assets in kind upon dissolution, however they may have appreciated or depreciated in value since acquisition." See also Regulations 62, 65, 69, and 74. We have held that, where a corporation declares a dividend of a certain amount and then satisfies the debt thus created by distributing property in kind, a gain or loss may result to the corporation, but this is not that kind of a case. In this situation, even if we should hold that this was a distribution in kind to the stockholders, it would come within the scope of our decision to the effect that no gain or loss is realized when a corporation declares a dividend payable with assets in kind, no obligation for any particular or definite amount having been first created by the declaration of the dividend. This distinction has been clearly recognized by the Board. See *2114 ; ; ; ; ; ; affirmed by the . See also . In any event, therefore, whether the transaction between the Fruit Belt Telephone Company and Evans and James be considered a sale of assets, a liquidation of assets in kind, or a dividend, we think that there is no taxable gain to that corporation resulting from the transaction. It is to be observed also that the Commissioner makes no contention that there would be a gain thus resulting except upon the ground that the Fruit Belt Telephone Company actually sold its assets to the Southern Bell Telephone Company instead of to Evans and James, which contention we find not supported by the facts. The tax liability of the stockholders as the result of the transaction is not before us except their liability as*2115 transferees for the tax liability of the corporation. As there is no tax liability of the corporation resulting from the sale of the assets, there is no transferee liability on the part of the stockholders. We are therefore not concerned with what remedy if any might have been pursued against *443 the stockholders on account of their acquisition and sale of the assets. Since the corporation sold its assets to Evans and James and not to the Southern Bell Telephone Company, there is no deficiency against the corporation. There being no deficiency in tax on the part of the corporation arising from the transaction, there is no transferee liability of the stockholders on account thereof. The stockholders therefore are not liable as transferees. Judgment will be entered for the petitioners.