Chilhowee Mills v. Commissioner

CHILHOWEE MILLS, BY H. A. VESTAL, MANAGING PARTNER, AND BY MILES A. RIDDLE, HUBERT J. VESTAL, J. P. VESTAL, MARIE KINSER, OSCAR A. KNOX, AND H. S. MOODY, PARTNERS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Chilhowee Mills v. Commissioner Docket No. 108922. United States Board of Tax Appeals 47 B.T.A. 682; 1942 BTA LEXIS 660; September 16, 1942, Promulgated *660 In 1937 the Chilhowee Mills, Inc., surrendered its charter. Its stockholders thereupon formed a partnership which, under the name Mills, same business that had been carried on by the corporation in the same premises. Held: :1) Income from business carried on by the partnership is taxable as partnership income. :2) The partnership is a proper party petitioner under the facts for purposes of questioning the correctness of respondent's determination that it was taxable as a corporation. Homer Hendricks, Esq., and Clifford D. Buffon, C.P.A., for the petitioners. Frank M. Thompson, Esq., for the respondent. KERN *683 This proceeding involves income and excess profits taxes. The Commissioner has determined deficiency against the Chilhowee Mills, Athens, Tennessee, for the fiscal years ended June 30, 1938, and June 30, 1939, in the following amounts: Year Income tax Excess profits tax Fiscal year ended 6/30/38 $12,730.82 $3,452.36 Fiscal year ended 6/30/39 12,966.17 Chilhowee Mills filed returns for the years in question on partnership forms and treated the income shown thereon as partnership income. *661 The deficiency notice was addressed by respondent to Mills thereto is the usual statement which explains the determination as follows: "It is held that the Chilhowee Mills is taxable as a corporation for the fiscal years here under consideration. The question presented for our consideration is whether the Commissioner erred in his determination that the income of Chilhowee Mills is taxable under the rates applying to a corporation for the fiscal years ended June 30, 1938, and June 30, 1939. It is contended on behalf of petitioner, Chilhowee Mills, a partnership, that prior to those years the Chilhowee Mills, Inc., formerly a corporation, had dissolved and at all times during the taxable years here involved the business formerly carried on by the corporation was carried on by the partnership, and that, therefore, the Commissioner's determination is erroneous. FINDINGS OF FACT. Chilhowee Mills, Inc., was originally incorporated in 1917 under the laws of the State of Tennessee. In January 1920 the corporate charter was surrendered, but the business was continued, and in July 1928 it was reincorporated without business having ceased or materially changed in manner of operation*662 at any time since the original incorporation. It was engaged in the manufacture of hosiery at Athens, McMinn County, Tennessee. *684 On June 30, 1937, the directors of the Chilhowee Mills, Inc., met. The motions discussed at that meeting included a motion that the board recommend to the stockholders that the corporation's charter be surrendered as of June 30, 1937. This motion was carried. At a stockholders' meeting on the same day, at which 69.9 percent of the stock was represented, it was resolved that the charter be surrendered as of that day, since it was deemed to be in the best interest of all concerned. Although not indicated on the minutes, H. A. Vestal recommended that the stockholders should form a partnership to carry on the business of the company, and explained that if this was done there would be individual liability for corporate debts. The stockholders there present, holding more than a majority of the outstanding common stock, consented to this plan and agreed to carry on the business as partners. The meeting of the stockholders was then adjourned Prior to that date, and on June 10, 1937, an option agreement was entered into between Joseph Haines, *663 Jr., an individual, and H. A. Vestal, on behalf of Chilhowee Mills, Inc. The option agreement provided that, in consideration of $15,000 paid by Haines to the Chilhowee Mills, Inc., the latter granted the former an option to purchase Chilhowee Mills, Inc. The period during which the option was to remain effective was from June 10, 1937, to March 31, 1938, and the closing date provided for payment and delivery was April 30, 1938. The agreement further provided, inter alia, that the Chilhowee Mills, Inc., should take all steps necessary to dissolution upon the completion of the transfer and change its name to one approved by Haines. The price stipulated to be paid upon the closing date was $124,500, less any taxes accrued but then unpaid upon the property involved. On June 10, 1937, the same day, Haines assigned all his right, title, and interest under the option agreement to the Van Raalte Co., a New York corporation. Upon surrender of the charter, H. A. Vestal personally notified the credit department of the Van Raalte Co. that Chilhowee Mills, Inc., was in the process of dissolution. In accordance with the resolution adopted at the stockholders' meeting on June 30, 1937, H. *664 A. Vestal and Marie Kinser, president and secretary, respectively, of the Chilhowee Mills, Inc., certified in writing that the resolution had been adopted to the end that the corporation might be dissolved. This certificate, dated June 30, 1937, was filed in the office of the Secretary of State of Tennessee on July 2, 1937. Later, on September 3, 1937, the certificate, with the State Department's acknowledgment of filing, was filed in the miscellaneous register of McMinn County, Tennessee. *685 As of June 30, 1937, Chilhowee Mills, Inc., had outstanding common stock in the amount of $141,250 par value; 7 percent preferred stock in the amount of $26,800 par value, and 6 percent preferred stock in the amount of $15,000 par value. The common stock was held by 53 stockholders. Pursuant to a notice of meeting sent to the stockholders prior to June 30, 1937, a stockholders' meeting was held on July 20, 1937, attended in person or by proxy by 31 stockholders. A financial statement for the last fiscal year was read at the meeting. H. A. Vestal, after a reading of the minutes of the June 30 meeting, explained that the directors thought it to be the best interest of the stockholders*665 to surrender the charter, to try operating without one for at least a year, and then, if desired, to reincorporate. After discussion, a motion was made and carried ratifying the action of the directors and stockholders taken at the June 30 meeting. At this time H. A. Vestal was elected open. At this meeting all stockholders present ratified the decision to carry on the business as a partnership composed of the stockholders of the former corporation. On or about July 1, 1937, the corporate books theretofore in use were closed out and new books were opened. This latter set was opened as partnership books of account, with separate accounts for each partner. The partners were the common stockholders as of June, 30, 1937, and the interest attributed to each on the books was in proportion to his or her stockholdings. Surplus and undivided profits were carried over to the new books in the same proportion. There was no material change in the business carried on subsequent to surrender of the charter. The realty which the corporation owned was not formally conveyed to the partnership, title remaining in the name of the corporation. On June 30, 1937, the corporation owed certain*666 debts, among which was one of $20,000 to a Nashville bank. On August 28, 1937, a renewal was applied for and a new note executed by H. A. Vestal in the same amount. The signature of Vestal on this note was as manager for the Chilhowee Mills. All the debts of the corporation were paid up prior to October 1938. The partnership continued to use stationery with the heading June 30, 1937, a line was run through the stock was all retired by September 30, 1937, by the issuance of notes to these stockholders. The common stockholders who had been absent from the stockholders' meetings of June 30, 1937, and July 20, 1937, were all informed *686 that they were now partners and, as such, individually liable for the debts of the business. No objections were raised by any of them. No formal articles of partnership were ever entered into. In all formal business correspondence between H. A. Vestal and the common stockholders, he addressed them as partners and gave them reports on the petitioner's financial progress on the basis of a partnership. Financial statements for the fiscal years here involved, prepared by the partnership's regularly retained auditor, were headed, *667 "Chilhowee Mills, Partnership, Athens, Tennessee." The main reason for dissolving Chilhowee Mills, Inc., and forming a partnership in its place was to lessen the tax burden. Aside from H. A. Vestal, the partnership formally designated no one to act as an officer. There were no certificates evidencing the individuals' interests in petitioner other than the common stock certificates. No persons other than the common stockholders were given an interest in the partnership. None of these persons died subsequent to June 30, 1937, during the fiscal years here in question. Checks were sent out by the partnership to its members, on February 23, 1938, with the notation thereon that they were for Partnership Payment. Bank of Athens, were not drawn against a new account, however, for a dividend check issued to J. H. Arrants on June 30, 1937, was numbered 15849 and the February 23, 1938, check to J. H. Arrants was numbered 16478. The crossed out. The bank in which the account was maintained was informed that the business was being conducted as a partnership, the charter having been surrendered. On or about March 8, 1938, the partnership took out a standard workmen's compensation*668 and employers' liability policy with the Liberty Mutual Insurance Co. of Boston, Massachusetts. Item 1 of the declaration attached to and forming part of the policy reads as follows: Item 1. Name of this Employer Chilhowee Mills P. O. Address Athens, Tennessee * * * Individual, co-partnership, corporation or estate? Corporation The policy was in effect from June 1, 1938, to June 1, 1939. On August 31, 1938, the policy was amended as to name and status, as follows: 1. The Employer's name shall be: H. A. Vestal, Sr., Agent for the partnership of Chilhowee Mills, and the individual partners named in the Agency Authorization Endorsement. * * * Status: Co-partnership *687 The agency authorization endorsement contained the names of all the common stockholders as of June 30, 1937, with the exception of Mrs. George Ray, who held one share on that date. On March 22, 1938, letters were sent to all common stockholders by H. A. Vestal notifying them that "The partners of the Chilhowee Mills of Athens, Tennessee, will hold a special meeting at the Company office, Saturday, March 26, 1938, at 2 P.M." This meeting was called at the suggestion*669 of the Van Raalte Co. to discuss extension of the option period. At the meeting it was decided to extend the option. On March 30, 1938, an agreement was entered into with Joseph Haines, Jr., extending the date for exercise of the option to November 30, 1938. The agreement was in the form of a written offer and acceptance, the offer being directed by Haines to and the Officers and Directors thereof as Trustees in Dissolution. The acceptance was made by by H. A. Vestal. assigned by Haines to the Van Raalte Co. Earlier on the same day all the common stockholders as of June 30, 1937, had agreed in writing to let H. A. Vestal enter into this extension agreement. The signatories were referred to as :or assignees thereof), directors and officers of Chilhowee Mills, Inc. On October 1, 1938, the premises occupied by the partnership were conveyed to the Van Raalte Co., pursuant to the terms of the amended option agreement. A certified copy of the deed describes the party of the first part to be Tennessee, a corporation organized under the laws of Tennessee in process of dissolution, and H. A. Vestal, M. A. Riddle, H. P. Smiley, G. F. Lockmiller, O. A. Knox, E. L. Willson, Marie Kinser, *670 and E. B. Madison, constituting all the officers and directors of said corporation at the time it surrendered its charter and now Trustees in dissolution of Chilhowee Mills, Incorporated. deed were these various individuals, in the capacities set forth above, on behalf of Chilhowee Mills, Inc. The signatures were attested by thereon. A notary public's attestation clause appended thereto sets forth: Before me, * * *, personally appeared H. A. Vestal and Marie Kinser, with whom I am personally acquainted, and who, upon oath acknowledged themselves to be President and Secretary, respectively, of the Chilhowee Mills, Incorporated, the within named bargainor, a corporation, and that they as such President and Secretary, being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by themselves as such President and Secretary. * * * The *688 Van Raalte Co. tendered two checks totalling $149,500 for the plant and one check in the amount of $29,420.35 for the supplies and materials purchased. These checks were deposited in the account of the partnership at the Citizens National Bank, which was a continuation*671 of the bank account of Chilhowee Mills, Inc. The money was distributed among the common stockholders of the corporation on or about October 18, 1938. Certain other properties held in the name of the corporation were sold in January or February, 1939, for approximately $3,000 and this sum was likewise distributed. A Dun ,& Bradstreet report, dated May 1, 1938, found in the files of the Third National Bank of Nashville, contained, inter alia, the following statements: :1) That the business became a partnership upon surrender of the charter on June 30, 1937; :2) that five individuals collectively owned a 60 percent interest in the business, the other 40 percent being owned by eleven other individuals; and :3) that, in changing status, no change was made in the resources other than the retirement of $41,800 of preferred stock. For the two fiscal years in question the Chilhowee Mills filed partnership returns for Federal income tax purposes. Chilhowee Mills, Inc., was finally liquidated on or about February 20, 1939. Petitioner, Chilhowee Mills, was during the taxable years a partnership engaged in the business formerly carried on by Chilhowee Mills, Inc. OPINION. *672 KERN: At the time the corporate charter of Chilhowee Mills, Inc., was surrendered it was agreed that the business of the corporation should be carried on by the stockholders as partners. New books of account were opened in the name of the partnership showing the interest of each stockholder to be that of a partner with an interest in the partnership equivalent to his former stock interest, and the business was carried on in the name of the partnership. Upon the dissolution of a corporation the stockholders become the real owners of the corporate property, subject to the rights of creditors and the right of the directors and officers of the old corporation to administer it in dissolution under the state statute. 19 C.J.S. § 1730:c). When stockholders agree to and do carry on the business of a corporation as partners, a partnership is created. Fletcher, Cyc. Corp. :Perm. Ed.) § 8132. In the instant case the stockholders formed such a partnership and their rights to the income from the business became the immediate and direct rights of partners and ceased to be the secondary, derivative rights of stockholders. No *689 formal instrument in writing was drawn up creating*673 the partnership and defining the rights of the partners, but none was necessary. A partnership may be created by oral contract or one implied from the acts of the parties. 47 C.J. 649. That a partnership may result from the continuation of corporate business after the dissolution of the corporation by the stockholders has been recognized by us in , and :affd. sub. nom. Carr v. Commissioner, 28 Fed.:2d) 551). After a careful consideration of all of the evidence contained in the record before us, we conclude that the organization doing business under the name of Chilhowee Mills, against which the deficiency herein was determined, was a partnership the members of which were the stockholders of the corporation, Chilhowee Mills, Inc., then in dissolution, and the income from such business was partnership income and taxable as such. Respondent argues that :1) the organization carrying on business under the name of Chilhowee Mills is not a partnership, and (2) the business carried on under that name is in effect a continuation of the affairs of Chilhowee Mills, Inc., after the expiration*674 of its charter, and therefore, under article 1001-2, Regulations 94, and article 901-2, Regulations 101, the income therefrom should be taxed as the income of an association. Having held that the organization carrying on business under the name of Chilhowee Mills was a partnership, we must necessarily conclude that respondent's second argument has no validity, for if the business carried on was the business of a partnership it could not be the business or affairs of the corporation. The cases of , and :affd., 84 Fed.:2d) 64), may be distinguished on their facts. In those cases the business formerly carried on by the corporation was conducted and under the same corporate name that had theretofore been used, and the same books of account and forms of billheads and letterheads were used. Respondent does not make any contention on brief that the partnership, Chilhowee Mills, had so many features similar to a corporation that it should be taxed as an association :see article 1001-4, Regulations 94), nor do we find any facts in the record upon which such a contention could successfully*675 be made. Having concluded that the business of the Chilhowee Mills was conducted during the taxable years by a partnership composed of the stockholders of Chilhowee Mills, Inc., a corporation in dissolution, *690 the question then arises whether the partnership is properly before us in the instant proceeding and whether we have jurisdiction. While the partnership income tax returns for the taxable years are not in evidence, there is in the record uncontradicted testimony to the effect that these returns were made on partnership forms and reported the income involved herein as partnership income. It is also evident that the returns were made in the name of Mills determination of deficiency was addressed to and we may assume resulted from his consideration of the partnership returns filed under that name. In his determination respondent does not determine that "Chilhowee Mills" is a corporation, but determines that the fiscal years under consideration." (Italics ours.) Thus we have in this proceeding a determination of deficiency addressed by the respondent to a partnership, holding that the partnership is taxable the partnership is properly the petitioner. See, among*676 other cases in which this is implicitly recognized, , and . However, if we hold, as we have in this case, that the petitioner is a partnership and not taxable as a corporation, then the amount of taxable income, as distinguished from the rate of tax, is to be determined in proceedings in which the individual partners are proper parties petitioner. Therefore, we are foreclosed from the interesting question latent in this case of whether the proceeds from the sale of the assets of Chilhowee Mills, Inc., title to which remained in the corporation, made in the name of the corporation by the officers and directors as trustees in dissolution pursuant to an option executed before the surrender of the corporate charter and renewed after its surrender by the same officers and directors as trustees acting on behalf of the corporation, are to be considered as the income of the partnership or income taxable as corporate income pursuant to articles 22:a)-21, and 52-2, Regulations 94; Taylor Oil & Gas Co. v. Commissioner, 47 Fed.:2d) 108; First National Bank of Greeleyv. United*677 States, 86 Fed.:2d) 938; Northwest Utilities Securities Corporation v. Helvering, 67 Fed.:2d) 619; Hellebush v. Commissioner, 65 Fed.:2d) 902, affirming ; . The respondent has not determined a deficiency against Chilhowee Mills, Inc., or against its trustees in dissolution. As we have indicated, the sole question before us under the pleadings is whether petitioner is to be considered, for purposes of taxation, *691 as a partnership or as an association taxable as a corporation - a question involving the method of taxation and not the amount of taxable income. Since we have concluded that petitioner is a partnership and is to be considered as such for purposes of taxation, Decision of no deficiency will be entered.