Brugh v. Commissioner

REX BRUGH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Brugh v. Commissioner Docket No. 71304. United States Board of Tax Appeals 32 B.T.A. 898; 1935 BTA LEXIS 875; July 9, 1935, Promulgated *875 Petitioner received taxable income from the voluntary dissolution of the B corporation, which he returned as received in 1930. When respondent mailed deficiency notice to petitioner he appealed to the Board, alleging income was received in 1929, as to which year the statute of limitations then applied. Held, the income was received in 1930. F. M. Livezey, Esq., and W. O. Dickey, C.P.A., for the petitioner. Stanley B. Pierson, Esq., and P. M. Clark, Esq., for the respondent. SEAWELL *898 The respondent determined a deficiency in income tax against the petitioner, Rex Brugh, in the amount of $3,385.78 for the calendar year 1930. Petitioner appealed and alleged that the respondent erroneously included in petitioner's income for 1930 profit realized upon the dissolution of the Beckett-Brugh Furniture Co. in 1929. FINDINGS OF FACT. The petitioner is an individual, residing at Williamson, West Virginia. For several years prior to 1924 Denver Beckett and the petitioner were partners in the furniture business in West Virginia. In that year the Beckett-Brugh Furniture Co. (hereinafter called the Furniture Co.) was organized under*876 the laws of West Virginia and took over the partnership business, the corporation having an authorized capital stock of $50,000, owned (with the exception of a few qualifying shares) equally by the petitioner and Beckett. The Furniture Co. owned and operated two stores, one at Logan and the other at Williamson, both in West Virginia. In the latter part of 1929 they decided to distribute the assets of the corporation and liquidate it. On November 18, 1929, they entered into a written contract, whereby it was agreed that Beckett was to have conveyed to him, as his part of the corporate property, the storehouse and lot in Logan, including all its business, fixtures, and equipment there situated and also all its bills receivable and outstanding accounts and any and all other property then and there owned by the Furniture Co. Under the agreement Rex Brugh was to have transferred to him all the property and assets of every kind and character owned by the Furniture Co. which was situated in Williamson, including all bills receivable, outstanding accounts, furniture, etc. Beckett and Brugh were each to assume and pay the outstanding liabilities of the respective businesses they were*877 acquiring as heretofore indicated. Beckett, "in order to equalize the assets of said corporation in both said cities", agreed to pay to Brugh $40,000, of which $5,000 was to be paid in cash upon the execution of the written contract and *899 $15,000 was to be deposited in bank to be delivered to Brugh "as soon as letters are received from the creditors of Beckett-Brugh Furniture Company that said creditors will permit the sale of the property, as heretofore set out, and agree to accept each of the parties hereto for the debts and obligations then due or owing by both businesses, one at Williamson and one at Logan, and relieve the other party hereto of the payment of any and all indebtedness contracted by the other in the operation of their respective places of business." For the remaining $20,000 to be paid to Brugh by Beckett, the latter executed his six promissory notes payable to Brugh's order, each for $3,333.33, bearing 6 percent interest from its date, and one falling due each year thereafter and secured by a deed of trust on the building and lot in Logan, which Beckett, under the agreement, was to have and own. It was further agreed that each of the parties would immediately*878 notify his creditors of the sale or deal which had been made between them and that each would in the future be responsible for any and all debts contracted by him and in no wise would be liable for debts and obligations contracted by the other party. The agreement provided in part: "In other words, each of the parties hereto is to take charge of the respective businesses from and after this day and own and operate the same independently of the other party, in every particular." At a special meeting of the stockholders of the Furniture Co. held on November 18, 1929, at which all stockholders were present, "it was duly moved and carried that steps be taken to dissolve the corporation and divide the assets of said corporation between Denver Beckett and Rex Brugh, the holders of practically all the capital stock, as nearly equal as could be done." The minutes of the meeting recite thatBeckett and Brugh had agreed as to a division of the assets and the Furniture Co., upon motion duly made and carried, was ordered to execute and deliver to Beckett for record a deed conveying to him the real property and a bill of sale transferring to him all personal property and assets of the Furniture*879 Co. in Logan and to execute and deliver to Rex Brugh a bill of sale transferring to him all the personal property and assets owned by the Furniture Co. in Williamson. In accordance with the motion, transfers were made as ordered, proper instruments for the purpose being executed on either the 18th or 19th of November 1929 and within a few days thereafter (during the year 1929) filed for record in the office of the proper county officer. At a regular meeting of the stockholders of the company on November 19, 1929, the following resolution was adopted: RESOLVED FIRST, that Beckett-Brugh Furniture Company, Inc., a corporation, created and organized under the laws of the State of West Virginia, does *900 hereby discontinue business as a corporation, and surrenders to said State, its charter and corporate franchises. The Board of Directors will proceed to convert the proper choses in action and assets of this corporation into cash, and pay off and discharge all of its debts, liabilities and obligations, divide the remainder among the stockholders pro rata on their several holdings of stock, but no such payment shall be made to any stockholders until after the publication of*880 the notice hereinafter provided. RESOLVED SECOND, that the President of this corporation cause notice of the adoption of the foregoing resolution to be published in some newspaper of general circulation, published near the principal office or place of business of this corporation, once a week, for four successive weeks, and that he certify these resolutions to the Secretary of State, of the State of West Virginia, and deliver to him a certificate showing the publication of said notice, as provided by law. The record does not disclose when the debts and liabilities of the Furniture Co. were discharged, the four weeks' publication made, and the Secretary of State of West Virginia furnished a certified copy of the aforesaid resolution and a certificate showing the publication of the notice, as provided by law, though on January 4, 1930, a certificate of dissolution of the "Beckett-Brugh Furniture Company, Inc." was issued by the Secretary of State of West Virginia, in which he declared "that the dissolution of said corporation as set forth in the foregoing resolution [quoted above] is authorized by law." The Furniture Co. in 1930 filed an income tax return reporting its net*881 income for the entire calendar year 1929, its balance sheets showing assets at the beginning and close of the year. The petitioner on March 11, 1930, filed with the collector of internal revenue for the district of West Virginia his income tax return for the calendar year 1929 on the cash receipts and disbursements basis and did not include in the return any profit realized on the dissolution of the Furniture Co. On March 16, 1931, the petitioner filed with the said collector of internal revenue his income tax return for the calendar year 1930 and reported the amount of $22,995.79 as his profit on the dissolution and liquidation of the Furniture Co. In May 1932 a revenue agent making investigation of Brugh's 1930 return asked Denver Beckett for all written agreements or records in connection with the Furniture Co.'s dissolution and was told by the former bookkeeper of the company and by Denver Beckett that there were no such records, and only the ledgers, journals, and cash books were shown the agent; no minutes of the corporation, deed, or agreements relative to the dissolution were exhibited to the revenue agent. The petitioner, who had been secretary-treasurer of the Furniture*882 Co. in 1929, was not present and did not know of the request made by the revenue agent. In August 1932, while making further investigation and during a conference with Beckett, the revenue agent was advised as to the agreement between *901 Beckett and Brugh relative to the dissolution of the corporation and the transfer of its assets to Beckett and Brugh by proper instruments. Brugh was sick and not at the conference, and did not know what took place at it. About six months after that conference respondent mailed to petitioner the deficiency notice, treating the dissolution of the Furniture Co. as having occurred in 1930 and the profit realized therefrom as $35,246.90, after which, in due time, the petitioner was filed. There is no evidence that the amount of profit realized by petitioner on the dissolution of the Furniture Co. was less than $35,246.90, as determined by the respondent. The petitioner claims that the profit was realized in 1929 and that he is not estopped to claim and show the fact. The respondent controverts these claims. OPINION. SEAWELL: The controversy here present concerns only profits realized by petitioner in the dissolution of the Beckett-Brugh*883 Furniture Co. The parties are not in disagreement that petitioner received income by that transaction. The dispute arises only as to the year when the income was received. Respondent's deficiency notice, following petitioner's income tax return, and agreeing with it as to the year, places the income in the year 1930. Petitioner admits the correctness of the year shown in his return, but claims that in filing the return he was in error as to the time of the corporation's dissolution; that about November 19, 1929, in carrying out the stockholders' resolution for dissolution the corporation conveyed to him all the merchandise, accounts, and other property of the corporation at Williamson, West Virginia, and at the same time conveyed to the other stockholder, Denver Beckett, the store and lots at Logan, West Virginia, and the appurtenant personalty; that this constituted all the assets of the corporation and after the transfers it was without assets and ceased to do business and was dissolved. There are other factors, however, which seem requisite in determining the year in which the income was received. Petitioner was secretary-treasurer of the Furniture Co. at the time when its*884 income tax return for 1929 was filed. That return indicates that in ascertaining gross income of the Furniture Co. for the year an inventory at the beginning of the year and another at the end of the year were used. In addition, attached to the return as a part of it, there was a list of bad debts charged off by the corporation on December 31, 1929. If the corporation was dissolved and its assets distributed to the stockholders in November, as now contended, it would have had no inventory embracing the month of December, and it would have had no bad debts to charge off at December 31, 1929. *902 The law of West Virginia provides for the voluntary dissolution of corporations of that state by section 56 of chapter 53 of its code. The dissolution of the Furniture Co. was undertaken under that law, which further provides that the holders of a majority of the capital stock may resolve to discontinue business, and, after giving notice of such resolution by advertisement in some newspaper of general circulation published near the corporation's principal place of business once a week for four successive weeks, at least, "before any dividend of the capital shall be made", may*885 "divide the property and assets that may remain after paying all debts and liabilities of the corporation"; and the "corporation shall * * * before such dissolution becomes effective, pay into the state treasury the amount it may owe to the State for license tax on its charter, including the penalties * * *." The resolution of the stockholders (set out in our findings of fact) followed this law by providing for the advertisement required by the statute and certification thereof by the Furniture Co.'s president to the Secretary of State of West Virginia and the payment of all the debts and liabilities of the corporation and the division of the remainder of the assets among the stockholders, particularly providing, in conformity to the statute, "but no such payment shall be made to any stockholders until after the publication of the notice hereinafter provided." Before complying with the resolution for dissolution and the law applicable by advertising in a newspaper and paying the debts of the corporation, petitioner and the other stockholder of the Furniture Co. had the deed and bills of sale between them executed. The secretary of State certified to the compliance with the law and*886 the dissolution of the corporation on January 4, 1930. Between November 19, 1929, the date of the instruments, and January 1, 1930, the four weeks' advertisement might have been made, but it is not shown to have been done before January 4, 1930. On the Furniture Co.'s income tax return for 1929 more than $20,000 of notes and bills payable at December 31, 1929, are shown. In the West Virginia Code provision is made for a suit in chancery by any creditor and the appointment of a receiver to take over and administer the assets of a corporation in voluntary liquidation before satisfying such creditor. Cf. ; . From the foregoing it would seem that the deed and bills of sale executed November 19, 1929, were premature, or simply made to take effect according to the law when the prerequisites were complied with. Moreover, petitioner made out his personal income tax return for 1929, and filed it March 11, 1930, when all these matters were presumably fresh in his mind, and no mention was made of *903 income from the dissolution of the corporation, or that there had been a dissolution. Looking at this contemporaneous*887 action of the petitioner, we are drawn to the conclusion that on March 11, 1930, he considered the execution of the deed and bills of sale of Novemer 19, 1929, effective only after the commencement of the year 1930, and filed his return accordingly. His judgment was untrammeled and he then knew whether the prerequisites under the law entitling the stockholders to a distribution of assets had been complied with. No evidence was offered at the hearing to show that his judgment was not correct, although he was a witness in his own behalf. In effect, we are asked to presume that petitioner and the other stockholder acted not within the requirements of the law applicable to the voluntary dissolution of corporations in West Virginia and so to reach the conclusion that the presumption favoring the determination of respondent has been overcome. This would do violence to a well recognized rule of law that all persons are presumed to obey the law. We conclude that petitioner received the income in 1930. Having reached this conclusion, it is not necessary for us to pass on the plea of estoppel raised in the pleading. We conclude, therefore, that respondent committed no error in his*888 determination, and his action is affirmed. Reviewed by the Board. Judgment will be entered for the respondent.