Merchants Nat'l Bldg. Corp. v. Commissioner

MERCHANTS NATIONAL BUILDING CORPORATION, FORMERLY MERCHANTS SECURITIES CORPORATION, THE MERCHANTS NATIONAL BANK OF MOBILE, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Merchants Nat'l Bldg. Corp. v. Commissioner Docket Nos. 99181, 102155. United States Board of Tax Appeals 45 B.T.A. 417; 1941 BTA LEXIS 1124; October 22, 1941, Promulgated *1124 The X securities corporation was organized by a national bank for the purpose of carrying on types of business which it could not engage in directly. The stockholders of the bank were beneficial owners of the stock of X. X also owned and managed the bank premises. By reason of provisions of the Banking Act of 1933 it was deemed impossible for X, an affiliate of the bank, to continue in the general securities business, and in May 1934 X transferred all of its assets other than the bank premises to the bank, as trustee, for liquidation and ultimate distribution to its stockholders. X thereupon changed its name to X building corporation and continued in the business of owning and managing the bank premises until in October 1934, when it made another transfer in trust of all its remaining assets to the bank for the benefit of the latter's stockholders and dissolved. Held, the bank was, as to the assets transferred to it under the trust indenture of May 1934, a liquidating trustee and not a trustee in dissolution within the meaning of Regulations 94, article 52-2, and was not required to file a corporation return as to income resulting from such liquidation, pursuant to section*1125 52 of the Revenue Act of 1936. George E. H. Goodner, Esq., for the petitioner. Frank M. Thompson, Esq., for the respondent. KERN *417 These proceedings, which were consolidated for hearing and decision, involved a redetermination of deficiencies in income and excess profits taxes asserted by respondent as follows: Year Income taxes Excess profits taxes Total [1935] $3,182.74 $1,157.36 $4,340.10 [1936] 4,150.14 1,852.77 6,002.91 The questions presented for our determination are: (1) Whether the income from property of a corporation which has been transferred to a trustee in liquidation, the grantor corporation later surrendering its charter, is taxable as the income of a corporation or as of a trust; (2) if it is taxable as of a corporation, whether or not the trustee is required to file a capital stock tax return and be subject as to this income to the excess profits tax; and (3) whether the Commissioner's determination of the surtax on undistributed profits in 1936 is in accordance with the law. *418 FINDINGS OF FACT. The Merchants Securities Corporation, hereinafter referred to as the securities*1126 corporation, was organized in 1922 with an outstanding capital stock of 3,000 shares of a par value of $100 per share. All the shares, except for directors' qualifying shuares, were owned by the Merchants National Bank of Mobile, a national banking association, hereinafter referred to as the bank. The board of directors of the bank and the board of directors of the securities corporation were composed of the same persons. The bank had caused the securities corporation to be organized for the purpose of carrying on various types of business which, under the laws governing national banking associations, could not be carried on by the bank itself. The securities corporation owned and operated the premises and building occupied by the bank. In 1928, by appropriate corporate action, the charter of the securities corporation was amended to provide for the issuance of 7,500 shares of no par value stock, and the 3,000 shares of $100 par value stock were exchanged for the 7,500 shares of no par value stock. On July 3, 1928, the bank, as owner of 7,490 shuares of stock in the securities corporation and the 10 directors, each of whom owned a qualifying share, executed a declaration*1127 of trust in which it was stated that the 7,500 shares of stock held by the bank and the 10 directors were held solely in trust for the stockholders of the bank in proportion to their stockholdings in the bank. It was also set forth that all cash dividends accruing on the securities corporation stock should be disbursed by the securities corporation to the bank's stockholders in proportion to their stockholdings in the bank. Subsequent to July 3, 1928, the securities corporation issued 42,500 additional shares of no par stock, all of which were sold to the bank. On January 2, 1930, the bank executed a declaration of trust in which it was stated that the 42,500 shares of stock were held by the bank solely in trust for the stockholders of the bank, in conformity with the trust declaration of July 3, 1928. Endorsed on the face of all capital stock certificates of the Merchants National Bank of Mobile was the following: The ownership of the shares of stock evidenced by this certificate carries with it the ownership of the same number of shares of the capital stock of the Merchants National Building Corporation, of no par value, now held by The Merchants National Bank of Mobile, *1128 as Trustee under its Trust Agreements dated the 3rd day of July, 1928, and the 2nd day of January, 1930, and any transfer of any of the shares hereby evidenced shall operate to transfer the same number of shares of the capital stock of said Merchants National Building Corporation. Section 20 of the Banking Act of 1933 required national banks to discontinue within one year their affiliation with corporations, associations, business trusts, or similar organizations "engaged principally *419 in the issue, flotation, underwriting, public sale, or distribution at wholesale or retail or through syndicate participation of stocks, bonds, debentures, notes or other securities." Violations were punishable by penalties not to exceed $1,000 per day. The board of directors of the securities corporation met on May 31, 1934, and adopted a resolution declaring it desirable to alter the corporate charter so as to change the corporate name to "Merchants National Building Corporation", and further stating that a meeting of the stockholders had been called to meet on that day for the purpose of taking action relative to the change of name and to transact any other business which might properly*1129 come before the meeting. The stockholders all met in person later on the same day and a resolution was unanimously adopted to change the corporate name accordingly and file the proper papers incident thereto; and to alter the endorsements appearing on the face of all stock in the bank so as to insert in lieu of "Merchants Securities Corporation" the name "Merchants National Building Corporation." The chairman of the meeting, who was president of the corporation, then called the attention of the stockholders to the fact that under the Banking Act of 1933 it was necessary for the corporation, on or before June 16, 1934, to sever relations with the bank, whose shareholders were the owners of the beneficial interest in the corporation's capital stock, with the exception that under the act it was permissible for the stock of the bank to represent stock of the securities corporation, provided the corporation held only the bank premises. The chairman thereupon suggested that the stockholders adopt some form of resolution authorizing and directing the board of directors to take such steps as they should deem advisable to bring about a liquidation of the corporate affairs, "with the exception*1130 that the Merchants Securities Corporation is to continue to exist as a corporation solely for the purpose of owning and operating the property known as the Merchants National Bank Building" and further suggested that all the assets, except the bank premises, be conveyed to the bank as trustee for its shareholders in order to secure "an orderly, economical, and efficient liquidation of the assets * * * aside from the Bank building, * * * without undue sacrifices." Thereupon the stockholders unanimously adopted the following resolution: BE IT RESOLVED by the stockholders of the Merchants Securities Corporation that the Board of Directors of this corporation do forthwith take such action as is necessary and proper to convey to The Merchants National Bank of Mobile, as Trustee for its shareholders, all of the assets of the Merchants Securities Corporation with the exception of the Merchants National Bank Building, in the City of Mobile, and that the said Board of Directors be and it hereby is authorized, empowered, and directed to take such other action as it deems appropriate to bring about a liquidation of the affairs of the Merchants Securities Corporation, with the exception that*1131 the said Merchants Securities Corporation, the new name *420 of which is "Merchants National Building Corporation", shall continue to exist as a corporation solely for the purpose of owning and operating the property known as the Merchants National Bank Building in the city of Mobile, it being the purpose and intent of this resolution to vest full authority in the said Board of Directors to take such action as the said Board deems proper, the said Board of Directors being hereby expressly authorized and empowered to delegate to any one or more of the officers of this corporation full power to act in the premises. Immediately thereafter the board of directors sat at a special meeting and declared the change of name effective and adopted a resolution authorizing the conveyance to the bank, as trustee, for the purpose of orderly liquidation all the corporate assets with the exception of the bank building. The resolution specifically provided, inter alia: The Merchants National Bank of Mobile, as such Trustee, shall pay all taxes upon said property, real, personal, and mixed; manage, control, and operate same to the best interest of the owners of the beneficial interest*1132 in the capital stock of the Merchants Securities Corporation, a corporation; shall sell the same at such prices and at such times and upon such terms and conditions as to said bank may appear wise and expedient, and out of the proceeds derived from such sales shall pay the liabilities of the Merchants Securities Corporation; and shall also, whenever the said Trustee deems it advisable, pay from the funds in its hands as such Trustee, any interest, installments on principal of mortgage indebtedness, taxes, insurance premiums, repairs, or other expenses in and about the ownership, operation and maintenance of the said Merchants National Bank Building by the said Merchants Securities Corporation, it being the intent hereof to so provide that the said Trustee, from the funds in its hands as such Trustee, shall absorb and pay any deficit resulting from the maintenance and operation of the said Bank Building. In the execution and performance of said Trust, The Merchants National Bank of Mobile may execute all deeds, conveyances, assignments, or other instruments in writing, necessary or convenient to the transfer of the title to said assets to the purchasers thereof. The said Trustee shall*1133 have full power and authority to borrow money and to pledge, or otherwise encumber, such assets as security therefor, and shall have the right to extend the time for the payment of any liability or indebtedness upon such terms as it deems best, with full power and authority to compromise or settle any claim or liability of or against said Merchants Securities Corporation. And in the liquidation of the affairs of the Merchants Securities Corporation, a corporation, the Trustee shall given full power and authority to do any and all acts, deeds, and things in connection with said trust estate that the said Merchants Securities Corporation might itself do or perform. Said Trustee, in the execution and performance of this trust, shall not be liable to the Merchants Securities Corporation, or any other person, save only for wilful or intentional wrong or neglect. Upon the payment carry and transfer any overplus of the proceeds from the sale of said assets carry and transfer any overplus of the proceeds from the sale of said assets to the Undivided Profits Account of The Merchants National Bank of Mobile, since by such disposition of said overplus the same will be reflected in the value*1134 of the shares of The Merchants National Bank of Mobile, the holders and owners of which shares are the holders and owners of the beneficial interest in the capital stock of the Merchants Securities Corporation, a corporation. And, further, upon the payment of the liabilities of the Merchants Securities Corporation, The Merchants National Bank of Mobile, a National Banking Association, may acquire from itself, as Trustee, for such consideration as it deems *421 wise, or for no consideration at all, any part or all of the remaining assets in the hands of said Trustee, real, personal, and mixed, the proceeds derived therefrom to be likewise carried and transferred to the Undivided Profits Account of said The Merchants National Bank of Mobile. With certain immaterial changes in wording the forgoing was embodied in a trust indenture executed by the securities corporation and the bank on May 31, 1934, and filed for record June 14, 1934, in the Probate Court of Mobile County, Alabama. When all of the assets thus transferred were disposed of, the trust was to be automatically terminated. This did not amount to a distribution in kind of the assets to the stockholders. After*1135 May 31, 1934, the security corporation, whose name was then changed to Merchants National Building Corporation (hereinafter referred to as the building corporation), engaged in no activities other than the owning and managing of the bank building, collecting the rents, and paying the employees who operated the building. In September 1934, after appropriate action of the board of directors and the stockholders of the Merchants National Building Corporation, the building corporation transferred title to the bank building to the bank and the building corporation was forthwith dissolved. By resolution dated September 25, 1934, the bank accepted conveyance of all the assets of the building corporation, those assets being the bank building (subject to a mortgage for which the bank did not assume payment), all cash on hand, all accounts, notes and rental receivable, all leases outstanding, and all furniture and equipment belonging to the building. It was further resolved to set up the value of the property on the bank's books at an estimated reasonable value of $511,927.38, $500,000 of which was to be passed to the bank's surplus account. The resolution continued: * * * the effect*1136 of which conveyance to this Association from the said Merchants National Building Corporation is to vest in this Association title to property the beneficial ownership of which is already in the shareholders of this Association in proportion to their respective ownerships of stock in this Association; * * * The conveyance having been made, the endorsement on the bank's stock certificates relating to ownership of capital stock in the building corporation was deleted. The trust department of the bank administered the trust created by the indenture of May 31, 1934, pursuant to the terms thereof. It made no reports on the handling of this trust to either the securities corporation or the building corporation. The trust department collected on mortgages, sold securities, collected income on property not readily salable, and retained the income in trust. The funds, as realized, were used to discharge the liabilities of the securities corporation as of the time the trust was created. The trustee turned *422 nothing over to the corporation. When the trust was terminated in 1937, all such liabilities had been discharged. The trust department foreclosed some properties in administration*1137 of the trust, but was not actively engaged in the purchase and sale for profit of stocks, bonds, realty, or mortgages thereon. On March 16, 1936, the bank, as trustee, filed a fiduciary return of income for the year 1935. This return disclosed a net loss for the year of $183.76. By various adjustments to net income respondent determined that the return erroneously reported net income, which respondent determined to be $23,147.22. On March 15, 1937, the bank, as trustee, filed a return on Form 1040 for the year 1936, disclosing net income of $2,433.95. By various adjustments to net income respondent determined that the return erroneously reported net income, which respondent determined to be $20,055.94. The adjusted net income for 1936 respondent determined to be $16,768.60 and the undistributed net income to be the same amount. During all the years involved in the present controversy there was in effect a statute of the State of Alabama, section 7069, Alabama Code of 1928, providing for continued existence as bodies corporate for five years after dissolution of all dissolved corporations for the purpose of settling affairs but not for the purpose of continuing business*1138 activities. OPINION. KERN: Before proceeding to a discussion of the three questions for our determination, it will be well to note that certain other issues, raised by the pleadings, have been waived by the parties. In Docket No. 99181 petitioner alleged error in respondent's computation of depreciation and profit on the sale of securities, but at the hearing waived these allegations. The bank, as trustee, had reported profits from sale of securities in the amount of $3,904.80, which figure respondent increased to $23,395.36. The pleadings also alleged error on respondent's part in limiting to $2,000 a loss of $3,234.29 sustained on the sale of real estate in 1935. At the hearing and on brief respondent conceded that the loss should not have been limited to $2,000. In Docket No. 102155 petitioner alleged the following five errors on the part of the Commissioner: First, erroneous understatement of depreciation deduction; second, erroneous overstatement of profits on sales of securities; third, erroneous increase in income from interest and commissions and disallowance of credit for taxes paid; fourth, erroneous addition to income of cash account of $28.96; and fifth, erroneous*1139 increase of income in amount of $1,052.65, designated as "bad debts recovered." Petitioner introduced no evidence in support of any of the foregoing allegations, and, therfore, those contentions are deemed *423 to have been waived. In addition petitioner alleged in the pleadings that respondent erroneously overstated the surtax on undistributed profits through failure to compute it according to law. We now arrive at the three issues remaining in these proceedings, which call for our determination of: First, whether the income realized in 1935 and 1936 from the sale of the assets of the securities corporation by the trustee liquidating them under the terms of the trust instrument dated May 31, 1934, is taxable as the income of the grantor corporation; second, whether the trustee is required to file on behalf of the grantor corporation a capital stock tax return and be subject to the excess profits tax for 1935 and 1936; and, third, whether the Commissioner's computation of the surtax on undistributed profits is in accordance with the law. In the taxable years the grantor corporation was nonexistent, except for the purpose of winding up its affairs, having turned over all*1140 its assets to the bank in trust, the first transfer being made in May 1934 and the second in October 1934. After the second transfer it went into dissolution. The bank's duties under the trust indenture dated May 31, 1934, were merely to liquidate the assets transferred thereunder, pay off the creditors of the corporation, and retain the remainder for the benefit of its stockholders. This was intended to be, and was, merely a liquidating trust. It is the income from the liquidation of these assets by this trust (of May 31, 1934) which is here in question. Respondent requests us to find as a fact that the bank, as trustee, purchased securities in each of the taxable years, and to conclude therefrom that the bank, as trustee, was engaged in operating rather than merely liquidating. Respondent relies upon one of petitioner's exhibits to support this finding. However, the purpose of that exhibit was a limited one, and we did not accept it in evidence as establishing the truth of matters contained therein; consequently, we can not make the findings requested by respondent, without which the evidence clearly indicates that the trust was a true liquidating trust without extraordinary*1141 operations on the part of the bank. One of the petitioner's witnesses, an assistant trust officer of the bank, testified that the trust made no purchases of securities, which evidence stands uncontradicted. Trustees are required by section 142 of the Revenue Acts of 1934 and 1936 to make returns for the trust, stating specifically the items of gross income thereof and the deductions and credits allowable. Such returns are to be made on Form 1040 and, in certain instances, to be supplemented by a return on Form 1041. However, corporate returns, as required by section 52 of the Revenue Acts of 1934 and 1936, are necessary in certain instances where the corporations are not themselves operating the business of the corporations and where *424 trustees are carrying on the affairs of the corporations in their behalf. As set forth in section 52, these instances are: SEC. 52. CORPORATION RETURNS. * * * In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns. *1142 Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or property they have custody and control. The bank was not acting in the capacity of a receiver or a trustee in bankruptcy, nor was it an assignee of the grantor corporation. In addition, we have already found as an ultimate fact that the bank was not operating the property or business of the grantor corporation. Therefore, it seems clear that the language of section 52, supra, does not cover the instant situation. But respondent points to articles 22(a)-21 and 52-2 of Regulations 86 and 94, 1 as determinative of the issue here before us. In many earlier cases this Board and the courts have upheld the reasonableness of and given effect to these articles of the regulations. Taylor Oil & Gas Co.,15 B.T.A. 609; affd., 47 Fed.(2d) 109; certiorari denied, 283 U.S. 862; wherein the Circuit Court of Appeals for the Fifth Circuit approved and gave effect to article 547 of Regulations 45, which is identical with article 22(a)-21 of Regulations 86 and 94. *1143 Northwest Utilities Securities Corporation,27 B.T.A. 524; affd., 67 Fed.(2d) 619; certiorari denied, 291 U.S. 684, wherein the Circuit Court of Appeals for the Eighth Circuit approved article 548 of Regulations 69, which is identical with article 22(a)-21 of Regulations 86 and 94, and also approved and gave effect to article 622 of Regulations 69, which is identical with article 52-2 of Regulations 86 and 94. See also Burnet v. Lexington Ice & Coal Co., 62 Fed.(2d) 906; Hellebush v. Commissioner, 65 Fed.(2d) 902; Boggs-Burnam & Co.,26 B.T.A. 988; *425 affd., 71 Fed.(2d) 999; Will T. Caswell,36 B.T.A. 816; First National Bank of Greeley v. United States,9 Fed.Supp. 28; affd., 86 Fed.(2d) 938. While it is, of course, true that the solution of each case of this nature depends upon its own peculiar facts, we must give due consideration to a Treasury regulation which has been so often accorded by this Board and the courts the force and effect of law. This makes application of articles 22(a)-21 and 52-2 of Treasury*1144 Regulations 86 and 94 obligatory if the assets were all transferred as a step toward dissolution, regardless of the form of the dissolution, unless there has in fact been a distribution in kind to the stockholders. *1145 The record negatives the conclusion that dissolution was contemplated prior to September 1934, four months after the May 1934 transfer of assets to the bank in trust for the stockholders. In May there was no dissolution contemplated. The minutes of the directors' and stockholders' meetings in May, and the resolutions adopted thereat, clearly show that the action then taken was intended to effect only a liquidation of those assets of the corporation the retention of which would violate the provisions of section 20 of the Banking Act of 1933, and to continue the corporation with curtailed activities. The change of the corporate name was more fitting for the sole remaining activity, and it can not be said to evidence an intention to dissolve completely the corporate entity. Neither expressly nor by operation of law did the bank become a trustee in dissolution of the assets conveyed under the May trust indenture. In all the cases cited above dealing with articles 22(a)-21 and 52-2 of the regulations, it is noticeable that, where the taxpayer has been held taxable as a corporation, the transfer of assets was always directly connected with a plan of dissolution. *1146 Were such the situation in these proceedings, we should be forced to follow that line of cases; but, since the evidence is otherwise, we do not consider the bank's activities as trustee under the May indenture governed by the articles of the regulations set out, supra. The trust was a liquidating trust, not an operating one. Liquidating trusts of this sort are not taxable as corporations. Fidelity National Bank & Trust Co. of Kansas City,37 B.T.A. 473. Since the income involved in these proceedings was derived entirely out of the assets transferred under the May 1934 indenture, we are not faced with the question of whether the petitioner is taxable as a corporation on profits realized from assets conveyed in September. Since we find in favor of petitioner on this first issue, the second issue must be resolved in his favor as well; and, as petitioner is not taxable as a corporation, it follows that there is no liability whatsoever for undistributed profits tax. Decision will be entered under Rule 50. Footnotes 1. ART. 22(a)-21. Gross income of corporation in liquidation. - When a corporation is dissolved, its affairs are usually wound up by a receiver or trustees in dissolution. The corporate existence is continued for the purpose * * *. Any sales of property by them are to be treated as if made by the corporation for the purpose of ascertaining the gain or loss. No gain or loss is realized by a corporation from the mere distribution of its assets in kind in partial or complete liquidation, however they may have appreciated or depreciated in value since the acquisition. * * * ART. 52-2. Returns by receivers.↩ - Receivers, trustees in dissolution, trustees in bankruptcy, and assignees, operating the property or business of corporations, must make returns of income for such corporations. If a receiver has full custody of and control over the business or property of a corporation, he shall be deemed to be operating such business or property within the meaning of section 52, whether he is engaged in carrying on the business for which the corporation was organized or only in marshaling, selling, and disposing of its assets for purposes of liquidation. Notwithstanding that the powers and functions of a corporation are suspended and that the property and business are for the time being in the custody of the receiver, trustee, or assignee, subject to the order of the court, such receiver, trustee, or assignee stands in the place of the corporate officers and is required to perform all the duties and assume all the liabilities which would devolve upon the officers of the corporation were they in control. * * *