Lencard Corp. v. Commissioner

LENCARD CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Lencard Corp. v. Commissioner Docket No. 106493. United States Board of Tax Appeals 47 B.T.A. 58; 1942 BTA LEXIS 742; June 9, 1942, Promulgated *742 Petitioner realized no gain on liquidation and retirement of all of its outstanding preferred stock. Richard H. Appert, Esq., for the petitioner. Conway Kitchen, Esq., for the respondent. ARUNDELL *58 This proceeding is to test the correctness of the Commissioner's determination of deficiencies for the taxable year ended June 30, 1936, in income and excess profits taxes and in personal holding company surtaxes in the respective amounts of $10,646.59, $1,371.49, and $18,480.14. These deficiencies arise from the inclusion in gross income of $79,402.75 representing the excess of the fair market value over petitioner's bases of certain property turned over by petitioner to its sole preferred stockholder as consideration for the surrender of the outstanding shares of preferred stock held by her. *59 The facts have been stipulated and will be set forth only in so far as necessary to present the question in dispute. FINDINGS OF FACT. Petitioner was incorporated under the laws of Delaware and had its principal office in Jersey City, New Jerser. It was voluntarily dissolved upon consent of all stockholders on December 30, 1938. The*743 returns for the taxable year involved were filed with the collector of internal revenue for the fifth district of New Jersey. On and prior to June 16, 1936, petitioner had outstanding 500 shares of common stock out of 2,000 such shares authorized and 3,500 shares of preferred stock out of 5,000 shares authorized. Both classes of stock had a par value of $100 per share. The 500 shares of common stock were owned by three trusts. The beneficiaries of the trusts were the children of Max D. Steuer, deceased. The sole owner, on or prior to June 16, 1936, of all of petitioner's outstanding preferred stock was Bertha Steuer, widow of Max D. Steuer. The preferred stock was entitled to a noncumulative dividend of 8 percent per annum and on lequidation or dissolution the holders of the preferred were entitled to receive the par value of their shares and the remainder of the assets were to be distributed to the holders of the common stock. Petitioner's preferred shares were redeemable in whole or in part at the option of the board of directors upon 10 day's notice to holders of record by payment of $100 per share. On June 12, 1936, Mrs. Steuer advised petitioner that she understood*744 the corporation desired to redeem the preferred shares and stated that she waived notice of the redemption and, in lieu of cash, would accept 450 shares of stock of National Exhibition Co., 5,521 shares of Bankers Trust Co., and $11.50 in cash. On the same day the board of directors of petitioner discussed the matter of redeeming the shares of preferred stock and passed the following resolution: "RESOLVED, That all the outstanding preferred stock of this Company be redeemed and cancelled." Further resolutions were passed to carry out the transaction in the manner suggested in Mrs. Steuer's letter and, on June 16, 1936, the petitioner delivered and transferred to Mrs. Steuer 450 shares of National Exhibition Co. stock, 5,521 shares of Bankers Trust Co. stock, and $11.50 in cash. Mrs. Steuer thereupon surrendered and turned in to petitioner the 3,500 shares of its preferred stock theretofore held by her. These preferred shares were immediately retired and canceled by petitioner, so that thereafter petitioner had no preferred stock issued, either outstanding or as treasury stock. On June 30, 1936, the stockholders ratified the action of the directors in redeeming and retiring*745 all the outstanding preferred stock *60 and voted to reduce the capital of petitioner to $50,000, the amount of common stock outstanding, and to amend the certificate of incorporation so as to eliminate all the outstanding preferred stock from its capitalization. On August 18, 1936, formal action was taken by petitioner by the filing of a "Certificate of Retirement of Preferred Stock Redeemed Out of Capital" with the Secretary of the State of Delaware, covering the matter of the redemption and retirement of the preferred stock, as heretofore related. The basis to petitioner on June 16, 1936, of the 450 shares of stock of the National Exhibition Co. was $18,000 and their fair market value on that date was $27,000. The basis on June 16, 1936, of the 5,521 shares of Bankers Trust Co+ stock was $252,585.75 and their fair market value on the same day was $322,988.50. OPINION. ARUNDELL: If the real nature of the foregoing transaction was the sale of assets of petitioner in consideration of the receipt of its own shares of preferred stock, a gain was realized and respondent must prevail. Art. 22(a)-16, Regulations 86; *746 ; , affirming . If, on the other hand, the transaction was essentially the liquidation of petitioner's outstanding preferred stock, petitioner realized no gain. Art. 22(a)-21, Regulations 86; ; affirmed per curiam, ; . We have no difficulty in concluding from the stipulated facts that the true transaction between petitioner and its stockholders was a liquidation of the preferred shares and not a sale of securities. The preferred shares were immdiately retired and canceled and corporate steps were taken to reduce the capitalization to reflect the retirement of those shares and, to that end, proper papers were filed with the Secretary of State of Delaware to so amend the certificate of incorporation. Article 22(a)-21 of Regulations 86, cited above, provides that: * * * No gain or loss is realized by a corporation from the mere distribution of its assets in kind in partial*747 or complete liquidation, however they may have appreciated or depreciated in value since their acquisition. * * * This regulation has appeared in all regulations since Regulations 74 (1928 Act). It has been carried forth in regulation applicable to the Revenue Acts of 1928, 1932, 1934, 1936, and 1938. As stated by the Supreme Court in , "Congress must be taken to have approved the administrative construction and thereby to have given it the force of law." *61 It is suggested by counsel for respondent that the quoted regulation (article 22(a)-21 of Regulations 86) applies only to dissolved corporations or those in process of dissolution, and that a gain or loss may be realized in the case of a partial liquidation when the liquidation is not in connection with the winding up of the affairs of the corporation. The difficulty with that argument is that it runs counter to another regulation of the Commissioner which defines distributions in liquidation, article 115-5 of Regulations 86, 1 and also to various decisions of the courts and the Board, which specifically hold that article 115-5, supra, when*748 it refers to amounts distributed "in partial liquidation", nowhere limits such distributions to payments made in the course of winding up the corporation. ; , affirming . *749 The transaction before us clearly comes within the definition of a "partial liquidation" as set forth in article 115-5. One other point has been suggested. The retired shares were of a preferred issue which, by its terms, was redeemable at $100 per share. This fact, however, does not create an indebtedness owing by the corporation to the preferred shareholders, , nor does the retirement of these shares constitute the discharge of an indebtedness with assets the cost of which was less than the amount of the indebtedness discharged. It is clear from the record that at no time did petitioner have any obligation, in connection with the retirement of its preferred stock, to deliver to the preferred shareholders anything except the property which it did deliver. The transaction was not an undertaking to redeem the preferred stock pursuant to the retirement provisions of the certificate of incorporation and the subsequent discharge of such an undertaking by transferring the petitioner's assets. As stated by the Supreme Court in *750 , "This was no sale; assets were not used to discharge indebtedness." , and , relied on by counsel for the respondent, are not in point. In those cases the court held *62 that the transactions involved essentially the sale of assets of the corporation rather than a partial liquidation of outstanding shares. It may be observed in each of those cases that the shares of stock truned in for preferred were not canceled and retired but were held as treasury stock, nor did the transactions have any of the characteristics of a true liquidation, either partial or complete. The conclusion already reached makes unnecessary a consideration of an alternative issue covering the taxability of petitioner as a personal holding company. Decision will be entered under Rule 50. Footnotes 1. ART. 115-5. Distributions in liquidation. - Amounts distributed in complete liquidation of a corporation are to be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation are to be treated as in part of full payment in exchange for the stock so canceled or redeemed. The phrase "amounts distributed in partial liquidation" means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock. A complete cancellation or redemption of a part of the corporate stock may be accomplished, for example, by the complete retirement of all the shares of a particular preference or series,↩ or by taking up all the old shares of a particular preference or series and issuing new shares to replace a portion thereof, or by the complete retirement of any part of the stock, whether or not pro rata among the shareholders. [Italics added.]