Case Name: Fred T. Wood, Petitioner, v. Commissioner of Internal Revenue, Respondent
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1932-11-20
Citations: 27 B.T.A. 162
Docket Number: Docket No. 38808
Parties: Fred T. Wood, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Judges: 
Reporter: Reports of the United States Board of Tax Appeals
Volume: 27
Pages: 162–171

Head Matter:
Fred T. Wood, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Docket No. 38808.
Promulgated November 20, 1932.
V. L. Kaye, Esq., and Milton Sevier, Esq., for tbe petitioner.
F. B. Shearer, Esq., for tbe respondent.

Opinion:
OPINION.
GOODRICH:
While the issue expressly raised by the pleadings relates to the character of the distributions received by petitioner from the Lakemont Company under the resolutions adopted by its directors on December 15, 1925, the further problem called to attention upon brief naturally arises under the issue presented and, since its determination is necessary to the ascertainment of petitioner's tax liability for the year 1925, we will consider it. Petitioner, relying mainly upon Chattanooga Savings Bank v. Brewer, 9 Fed. (2d) 982; affd., 17 Fed. (2d) 79; certiorari denied, 274 U. S. 751; and Hadley v. Commissioner, 36 Fed. (2d) 543; affirming 6 B. T. A. 1031, contends that, because he was the sole owner of the stock of this corporation and gave to the corporation no notes representing his indebtedness for the funds received by him on its behalf and by him retained in years prior to 1925, such funds should be treated as distributions made by the corporation to him in those years, without the necessity of corporate declaration, and taxable to him when received, despite the fact that the company's books of account reflected these sums as accounts receivable from petitioner.
We think those decisions are not controlling of the case at bar. There, the taxpayers had received money from the corporations without the formal declaration of dividends, and the Commissioner treated such sums as income to them when received. The taxpayers failed to convince the courts that the Commissioner's action was erroneous. Here, the Commissioner has treated the sums received by petitioner according to the facts as presented by the records of the corporation, that is, he has regarded them, not as income to petitioner when received, but as debts owing to the company. Petitioner has failed to convince us that this action is erroneous. Prior to May 15, 1923, petitioner was not the sole owner of the stock of the corporation, yet had received and withheld substantial amounts of the corporate funds. What arrangements, if any, he had made with the other stockholders respecting this matter, we do not know. This record discloses no reason why the amounts charged to petitioner should not be regarded as accounts receivable from him as reflected by the books, notwithstanding the fact that the conduct of the corporate business was exceedingly informal. The company might have undertaken a new venture — its powers were sufficiently broad — and called upon petitioner for payment; former stockholders might have demanded pro rata payment of the funds retained by petitioner; creditors of the corporation might have required repayment — such occurrences were possible during the course of the company's operation. True, book entries are not necessarily binding if proved to be in error, but, we repeat, petitioner has failed to prove to us that the corporate records reflecting the sums retained by petitioner as an account receivable from him did not disclose the facts and that such sums now should be treated as distributions and taxable to him when received.
However, we are convinced that the distributions declared by the resolution of December 15, 1925, were in liquidation of the corporation. Liquidation has been defined as the operation of winding up the affairs of a corporation by realizing upon its assets, paying its debts and appropriating the amount of its profit or loss. W. E. Guild, 19 B. T. A. 1186, and cases there cited. It differs from the normal operation of the corporation for current profit in that it ordinarily results in the winding up of the corporation's affairs. There must be a manifest intention to liquidate, a continuing purpose to terminate its affairs and dissolve the corporation, and its activities must be directed and confined thereto. It contemplates an impairment of capital or a retirement of outstanding stock, though a distribution, if one of a series of distributions in liquidation, may be a liquidating dividend even if it, of itself, does not impair capital. Liquidation can not be brought about by mere declaration, and the question of whether a corporation is in liquidation is therefore one of fact. See W. E. Guild, supra; James P. Gossett, 22 B. T. A. 1279; affd., 60 Fed. (2d) 484; Martha Briggs Phelps, 20 B. T. A. 866; affd., 54 Fed. (2d) 289; E. G. Perry, 9 B. T. A. 796; Milton Tootle, Jr., 20 B. T. A. 892.
In the case before us, the facts show that the Lakemont Company was in the process of liquidation at the end of 1925. Its ordinary business had been the subdivision, development and sale of a certain tract of land. This it had accomplished — there remained to do only certain incidents necessary in installment sales and it engaged in no other activities. There was a declared intention to liquidate, manifest by the instructions given respecting compliance with the formal requisites of the distribution of the company's assets, and there was an impairment of its capital. It was engaged in winding up its affairs and was dissolved when that had been accomplished. We hold, therefore, that the distribution declared by the resolution of December 15, 1925, was one made in partial liquidation of the corporation within the meaning of paragraph (h) of section 201 of the Revenue Act of 1926; that the gain resulting to petitioner upon the receipt thereof should be determined as provided in paragraph (c) of that same section, and taxed as capital net gain in accordance with petitioner's election. Cf. Hellmich v. Hellman, 276 U. S. 233.
Reviewed by the Board.
Judgment will be entered vmider Bule 50.