Hatfield v. Commissioner

J. T. HATFIELD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Hatfield v. Commissioner Docket No. 72788. United States Board of Tax Appeals 32 B.T.A. 1; 1935 BTA LEXIS 1007; February 7, 1935, Promulgated *1007 A corporation of which the petitioner was a stockholder dissolved on December 2, 1930, and turned its assets, consisting of cash and stock of 11 corporations, over to its attorney for distribution according to the interests of the stockholders in the assets. None of the stockholders ever appointed the attorney or acquiesced in his appointment as their agent to receive the stock in their behalf. In 1931 the stocks were reissued in favor of, and distributed to, the corporation's stockholders. Held, that the liquidating dividend paid in stock was not received by the petitioner in 1930 for tax purposes. M. H. McLean, Esq., for the petitioner. S. B. Pierson, Esq., for the respondent. SEAWELL *1 The deficiency in income tax involved in this proceeding is in the amount of $5,802.58 for 1930. The issue is whether a liquidating dividend paid in stock was received in the taxable year. FINDINGS OF FACT. On December 2, 1930, the board of directors of the Kenton Coal & Land Co., a Kentucky corporation, hereinafter referred to as the corporation, pursuant to consent given by its stockholders, adopted a resolution dissolving the corporation*1008 and authorizing the corporation's secretary and treasurer, the petitioner here, to distribute the assets of the corporation, consisting of cash and stock of 11 corporations, to its stockholders in kind. Dissolution notices were published at the place of domicile of the corporation for four consecutive weeks. The last notice was published on January 1, 1931. By an instrument executed December 31, 1930, in which he stated that he was "acting in behalf of the stockholders of the Kenton Coal & Land Co.", M. H. McLean acknowledged receipt from the *2 corporation of its assets and undertook to distribute the property pro rata among the stockholders, as specifically set forth therein. All of the cash was received and, excepting $3,000 which was withheld to pay dissolution and other expenses, distributed to the stockholders on December 29, 1930, by letters, of which the following is typical: I have put in the hands of Mr. M. H. McLean as Trustee, the distribution of the assets of the Kenton Coal and Land Company. The amount of cash on hand and in his possession amounts to $28,868.11. The capital stock is 600 shares, and you own 40 of them, and your proportion of the cash*1009 is $1,724.54, and the check of Mr. McLean's is enclosed. After paying all the stockholders in the same proportions, there will remain in the trustee's hand $3,000.00 in cash. It is our intention to hold that $3,000.00 for a while until we get through with the government on the tax question. We are now having all the stocks belonging to the company made out and to be divided in prorata according to their holdings, the same way as the cash. It will take a couple of weeks to get that completed, as the stocks in many instances have to be sent away for transfer, but we will turn them over to you as soon as completed, at that time we will give you a list of all the stocks we have for distribution. Yours very truly, THE KENTON COAL AND LAND COMPANY, Secretary and Treas. JTH/MEM P.S. Mr. McLean has been our attorney for over thirty-five years and he is acting in behalf of the stockholders. McLean did not acquire physical possession of the stock until January 9, 1931, when he asked Westheimer & Co., a broker in Cincinnati, Ohio, to have the stock reissued in favor of the corporation's stockholders and give him a receipt for the property as a trustee. The broker*1010 declined to do the latter, but after making arrangements therefor with the officers of the corporation, on January 9, 1931, gave McLean a receipt for the stock in his individual capacity, with the understanding that it was to be transmitted to the several corporations for reissue to the corporation's stockholders as set forth in the receipt and then delivered to McLean. The secretary of the corporation informed Westheimer & Co. by letter on January 12, 1931, that the stocks delivered to it by McLean on January 9, 1931, belonged to the corporation; that the stocks were delivered to McLean for distribution in kind to the corporation's stockholders in liquidation of the corporation; and that "There has not been, nor is there to be any change in the ownership of said stocks otherwise than the transfer of title thereto from the company to the stockholders according to their interest in the company." On March 21, 1931, Westheimer & Co. returned the stocks to McLean made out in favor of the stockholders of the corporation. *3 Immediately thereafter McLean delivered the stocks to the petitioner and other stockholders in liquidation of the corporation. None of the stockholders*1011 of the corporation ever authorized McLean to act as their agent to receive liquidating dividends of the corporation. In his determination of the deficiency, the respondent treated all of the dividends as having been received in 1930. OPINION. SEAWELL: The question is the narrow one of whether the liquidating dividend paid to the petitioner in stock was received by him in 1930. The petitioner admits that the cash was distributed to him in 1930, but insists that the stock was not received until 1931. The statutes of Kentucky provide that when dissolution of a corporation organized under its laws results from voluntary action of the stockholders, as here, the corporation "may thereafter continue for the purpose of closing up its business but for no other purpose; and it shall be the duty of the officers to settle up its affairs and business as speedily as possible." Sec. 561, Carroll's Kentucky Statutes. The adoption of the resolution on December 2, 1930, to dissolve did not effect a distribution of the corporation's assets among its stockholders. *1012 ; . This rule prevails even though upon dissolution title to corporate assets vests in the stockholders. . The same cases are authority for the rule that the mere turning over of assets to liquidating trustees does not constitute receipt of the property by the stockholders for tax purposes. The respondent contends, in effect, that delivery of the assets to McLean for distribution in kind to the stockholders constituted receipt by the stockholders. The petitioner did not actually receive the stock in 1930 and the delivery of the securities to McLean did not amount to constructive receipt. McLean signed for the stock as agent for the stockholders and the postscript to the letter of December 29, 1930, is that in the distribution of the assets he was acting in behalf of the stockholders. McLean testified that none of the stockholders ever appointed him their agent in the transaction, and it does not appear that any of them ever acquiesced in the purported relationship. It is too well established to require citation*1013 of authority that the relationship of principal and agent can not exist without a meeting of the minds of the parties. There was none here between McLean and the stockholders. The officers of the corporation were charged by statute with the liquidation of the corporation's affairs as promptly as possible. As a *4 means to that end, they designated McLean to receive the property and distribute it in proper proportions to those entitled thereto. To make the distribution on a pro rata basis as required, it was necessary to divide the certificates according to the interest of each stockholder therein. To accomplish this result McLean, with approval of the corporation, on January 9, 1931, placed the stock in the hands of a broker for reissue in the names of the respective stockholders. The reissued stock was not delivered to McLean until March 1931. That the corporation did not intend delivery of the stock to McLean or the broker as conveyance of title or delivery, actual or constructive, to the stockholders, is shown by the corporate letters of December 29, 1930, and January 12, 1931. The whole record shows an intention to withhold delivery of the assets until the stocks*1014 had been reissued to the stockholders in the proper proportions. The facts in , and ; certiorari denied, , involved distinguishable facts and are not controlling here. The assets in question were not actually or constructively received by the petitioner in 1930. It follows that the action of the respondent in regarding the liquidating dividend paid in stock as a distribution made in the taxable year should be and is reversed. See ;;. The cost or other basis for the stock of the corporation held by the petitioner is not in controversy, and the parties agree that the sum of $12,502.92 cash was distributed to the petitioner in 1930. The petitioner realized no taxable profit in 1930 by reason of the distribution of liquidating dividends by the corporation except to the extent that the cash received exceeds his basis for the stock he held. This profit, if any, will be reflected in*1015 the recomputation of petitioner's income tax liability for 1930. Decision will be entered under Rule 50.