Monk v. Commissioner

WILLIAM H. MONK, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. R. J. MILLING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. EARL R. GASTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Monk v. Commissioner Docket Nos. 52044-52046. United States Board of Tax Appeals 29 B.T.A. 556; 1933 BTA LEXIS 924; December 14, 1933, Promulgated *924 Held, that dividends declared when certain corporations sold all their assets and discontinued business, and paid out of the selling price of such assets, were distributions in liquidation. Geo. E. H. Goodner, Esq., and Walter K. Smith, Esq., for the petitioners. W. F. Wattles, Esq., for the respondent. LANSDON *557 The respondent has determined deficiencies in income tax for the year 1927 in the amounts of $434.19, $222.90, and $1,314.49 against the petitioners, William H. Monk, Jr., R. J. Milling, and Earl R. Gaston, respectively. The only issue is whether certain distributions of corporations in which all of the petitioners were stockholders were liquidating or ordinary dividends. The three proceedings were consolidated for hearing and report. FINDINGS OF FACT. The petitioners are individuals residing in Mobile, Alabama. Prior to and at July 15, 1927, each was a stockholder, director, and officer in two Alabama corporations, the Gaston Furniture Co., hereinafter sometimes called Gaston, and the Monk Furniture Co., hereinafter called Monk. Gaston had authorized capital in the amount of $50,000, divided into 200 shares of*925 a par value of $250 each; Monk had a similar amount of authorized capital, divided into 500 shares of a par value of $100 each. All the authorized capital of both corporations was issued for cash or value equivalent thereto. At September 29, 1927, the stock of the two companies was held as follows: Shares held Stockholder Gaston Co. Monk Co. Earl R. Gaston [125] R. J. Milling [250] Wm. H. Monk, Jr [75] Lee F. Lasker [2] H. Judd Roberts [10] Mose Kahn [1] Lou Ella Milling [10] Inez Ware [20] R. E. Moore [15] F. T. Harteau [10] Marie L. Bader [5] Total [500] On May 4 and May 21, 1927, respectively, the above named corporations gave options to one Max Hirsch to purchase all of its tangible and intangible assets. One of the conditions of such options was as follows: The individuals whose names appear below agree that in the event this option is exercised that they will not go into a like or similar business to the one now being operated by the person, or firm, or corporation signing this option for a period of 2 years within two hundred miles of the City of Mobile, Ala. except as might or may be in connection with the purchaser*926 herein. The individuals so obligated were Wm. H. Monk, Jr., and Earl Gaston, president and secretary-treasurer, respectively, of each of *558 the two corporations. Later the option agreement was clarified and modified by the execution of a supplement thereto as follows: MOBILE, ALABAMA, May 21, 1927. This is a supplement to, and a part of, option given this day to Harold Hirsch, of Atlanta, Georgia, to purchase the Monk Furniture Company, Mobile, Alabama. 1. William H. Monk, Jr., to be given preference for the position of managing the Monk Furniture Company, Mobile, Alabama, - if operated separately. 2. (a) The name of the Monk Furniture Company be changed at end of two years. (b) If services of William H. Monk, Jr. is dismissed by the corporation, or a consolidation is made, then the name be immediately changed. 3. William H. Monk, Jr. reserves a right to engage in the furniture business in Mobile County at any time he sees fit to do so - if not engaged in the services of the new corporation. On July 12, 1927, each of the corporations executed a contract of sale of its tangible and intangible assets to the National Manufacturing & Stores Corporation, *927 hereinafter called Stores or Purchaser, to which the options given to Hirsch had been assigned. These contracts provided for a transfer of all the tangible and intangible property of Gaston and Monk to Stores in exchange for certain cash payments and shares of the preferred stock of the purchaser. Such contracts were accomplished on July 14, by payments of cash by the purchaser to Gaston and Monk in the respective amounts of $178,563.63 and $127,715.25, and by the issue of its preferred stock to the vendors on the same date and in the aggregate respective amounts of 594 and 421 shares. Each sales contract expressly sets out that it is in full compliance with the option given to Hirsch as modified and clarified by supplementary agreement and transferred to Stores. After July 12, 1927, neither Gaston nor Monk engaged in any business other than the distribution of its assets to its stockholders. On July 12, 1927, the directors of Gaston adopted a motion "That when funds were available would pay out of the earnings of the company a dividend of Four Hundred Ten Dollars ( $410) per share." On the same date the directors of Monk adopted a motion "That when funds were available would*928 pay out of earnings of the company a dividend of One Hundred Twenty-five Dollars ( $125) per share." On July 14, after the receipt of cash from Stores made funds available, Gaston and Monk distributed to their several stockholders the respective amounts of $82,000 and $62,500. Petitioners Monk, Millings, and Gaston received from such distributions, respectively, $50,375, $39,450, and $38,995. On that date the books of the two corporations, after the receipt of the cash payments from the purchaser, indicated surplus in the respective amounts of $80,960.63 *559 and $46,614.08. On September 29, 1927, the two corporations distributed the preferred stock received from the purchasers ratably to the respective stockholders and were dissolved as of that date. OPINION. LANSDON: The sole question here is whether the distributions of July 14, 1927, were ordinary or liquidating dividends. In conformity with options and contracts each company sold its assets to Stores on July 12, 1927, and on that date ceased business. On July 14 the purchasers made the cash payments provided for in the contracts of sales. On July 12 each company declared a dividend as set out above, payable*929 as and when funds became available. On July 15 such dividends were paid in cash out of receipts from the sale of capital assets and in amounts which exceeded the alleged surplus of each corporation. Since final liquidation of both companies was accomplished on September 29, 1927, by the distribution of the preferred stock received by each from Stores, and without any further distributions of cash, it is evident that the amounts received from the purchaser on July 14 were first applied to the payment of obligations of Gaston and Monk and that the remainder thereof was distributed on July 15, 1927. The respondent has determined that under the terms of the option and sales contracts, and in the light of what was actually done, Gaston and Monk were each in liquidation from July 12, 1927, and that such liquidation was accomplished by the distribution of cash and preferred stock on July 15 and September 29, 1927, on which latter date both corporations were dissolved. This determination is in effect that the distribution of July 15 was "one of a series of distributions in complete cancellation or redemption of all or a portion of its stock", as set out in article 1549 of Regulations 69. *930 Petitioners contend that no steps in liquidation were taken until September 29, 1927, and that within the meaning of section 201(c) of the Revenue Act of 1926 the distributions of cash on July 15 were ordinary dividends to the extent of the surplus then available for distribution and subject only to surtax. In construing almost identical provisions of the Revenue Act of 1918 in a case involving the question at issue here, , the Supreme Court said: It is true that if section 201(a) stood alone its broad definition of the term "dividend" would apparently include distributions made to stockholders in the liquidation of a corporation - although this term, as generally understood and used, refers to the recurrent return upon stock paid to stockholders by a going corportion in the ordinary course of business, which does not reduce their stockholdings and leaves them in a position to enjoy future returns upon the same stock. (See , and *931 .) *560 However, when section 201(a) and section 201(c) are read together, under the long-established rule that the intention of the lawmaker is to be deduced from a view of every material part of the statute ( we think it clear that the general definition of a dividend in section 201(a) was not intended to apply to distributions made to stockholders in the liquidation of a corporation, but that it was intended that such distributions should be governed by section 201(c) which, dealing specifically with such liquidation, provided that the amounts distributed should "be treated as payments in exchange for stock" and that any gain realized thereby should be taxed to the stockholders "as other gains or profits." This brings the two sections into entire harmony and gives to each its natural meaning and due effect. The Treasury Regulations correctly interpreted the Act as making section 201(a) applicable to a distribution made by a going corporation to its stockholders in the ordinary course of business, and section 201(c) applicable to a distribution made*932 to stockholders in liquidation of the corporation. And this is in accord with the rulings of the Board of Tax Appeals. (; .) To prevail here the petitioners, under the rule set out above, must show that the distributions in question were made by Gaston and Monk as going concerns in the ordinary course of business. In our opinion no such showing has been made. On July 12 each sold all of its assets and from that date engaged in no business operations. It is, therefore, obvious that funds for the payments of the dividends then declared never could be available from surplus resulting from active operations. As a matter of fact the record clearly indicates that the payments, when made on July 15, were from the receipts from the sale of capital assets. In , in discussing this identical question the court said: It is difficult to see how a part of a total price for all assets * * * can be segregated and called "surplus" or "earnings". It is purchase price and nothing else. Petitioners argue at great length*933 that the respondent has merely assumed that the distributions in question were made after the two companies in question had decided to discontinue business and liquidate their assets. They also contend that no intention to liquidate is disclosed by the record. What petitioners characterize as a mere assumption by the respondent is, in fact, an authoritative determination of the Commissioner upon which the deficiencies are based and must be regarded as correct until overcome by evidence. It is true that neither corporation took any formal action preparatory to liquidation, but each had sold all its assets and discontinued its business at the date of the distribution in question and each was finally liquidated and dissolved on September 29, less than three months after the contract to sell its assets had been fully accomplished. In these circumstances we think the acts of each company indicated its intention to liquidate and that the distributions on *561 July 15, 1927, were "one of a series of distributions by a corporation in complete cancellation or redemption of its stock." This being true, it is not material that no stock was canceled or redeemed on July 15 when the cash*934 distributions were made by Gaston and Monk. In our opinion the evidence adduced by the petitioner is not sufficient to overcome the presumption of correctness which attaches to the determination of the respondent. ; affd., ; ;; . Decision will be entered for the respondent.