Court Opinion

ID: 4634538
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:16:14.135231+00
Date Added: 2024-06-11T07:58:14.277699
License: Public Domain

Malcolm C. Howell, Transferee, et al., 1 Petitioners, v. Commissioner of Internal Revenue, RespondentHowell v. CommissionerDocket Nos. 1406-62, 1416-62, 1433-62, 1434-62, 1435-62, 1445-62, 1448-62, 1449-62United States Tax Court40 T.C. 940; 1963 U.S. Tax Ct. LEXIS 57; September 12, 1963, Filed 1963 U.S. Tax Ct. LEXIS 57">*57 Decisions will be entered for the respondent.  In 1946 the directors of P, a real estate corporation, adopted a plan of liquidation. During 1946-1956 P sold all of its property except one tract and made various distributions to its shareholders designated as "liquidating" or "partial liquidating" dividends. It acquired no new property.  On May 23, 1958, P's directors adopted a plan of "Final Liquidation" which was to be completed within 12-months, and it in fact sold the remaining tract during that period.  Held, that the 1958 "plan" and P's activities subsequent to its adoption were merely part of P's 1946 plan of liquidation; therefore, the gains realized on sale of the remaining tract were not entitled to nonrecognition under section 337(a), I.R.C. 1954.  Samuel Byer, for the petitioners.Arthur Pelikow, for the respondent.  Raum, Judge.  RAUM40 T.C. 940">*941  In these consolidated proceedings respondent determined deficiencies in income tax of petitioner corporation Park Lake Land Co. for the taxable year 1958 and for the period January 1, 1959, to May 19, 1959, in the amounts of $ 7,230.90 and $ 2,330.04, respectively, and corresponding transferee liabilities against the other petitioners to the extent of the respective corporate assets distributed to them as stockholders.The sole issue before this Court is whether gains realized from the sale of real property by the corporation in 1958 and the period January 1, 1959, to May 19, 1959, should not be recognized because the sales were made pursuant to a plan of complete liquidation within the terms of section 3371963 U.S. Tax Ct. LEXIS 57">*59  of the Internal Revenue Code of 1954.  The parties have agreed upon the amounts of transferee liability in the event that section 337 should be held to be inapplicable.FINDINGS OF FACTSome of the facts and exhibits have been stipulated and are incorporated herein by this reference.Petitioner, Park Lake Land Co., hereinafter sometimes referred to as Park Lake, is a New Jersey corporation, with its principal office in Boonton, N.J.  It timely filed its income tax returns with the director of internal revenue, Newark, N.J., for the taxable year 1958 and for the period January 1, 1959, to May 19, 1959.Park Lake began operating in 1914.  It was founded in 1909 by two men named Howell and Kimball, who owned adjoining tracts of land which together formed a lake site in the Mountain Lakes area, Morris County, N.J.  They contributed that land to the corporation, in exchange for its stock in equal amounts.  After their deaths some years ago, the ownership of stock as between their families continued in the same proportion.  Petitioner Dudley Kimball, son of one of the founders, became the owner of 50 percent of the stock, and the remaining individual petitioners, members of the Howell family, 1963 U.S. Tax Ct. LEXIS 57">*60  became the owners of the other 50 percent.  In 1927 the corporation sold that portion of the foregoing property which formed the lake, but retained some 23 to 25 unimproved acres thereof fronting on Route 46.  With the proceeds of the sale the corporation purchased certain improved income-producing property in Boonton, about 2 1/2 miles from Route 46.  The only other property ever acquired by the corporation was certain unimproved land which it purchased thereafter, but some years before 1946, on Rainbow Trail near its Route 46 property.40 T.C. 940">*942  Park Lake was engaged in the real estate business and derived its income principally from the operation and management of the foregoing Boonton improved property as well as from sales of the foregoing vacant land and improved property.Dudley Kimball was the officer primarily in charge of formulating corporate policy and made reports to the directors pursuant thereto.  From 1927 to 1958 he was one of the two active officers of petitioner; the other was John B. Howell, a son of the other founder.Dudley Kimball was also chairman of a township committee in the adjoining township of Parsippany, with responsibility for planning and zoning activities. 1963 U.S. Tax Ct. LEXIS 57">*61  Through this position he learned, near the end of 1945, that it was the opinion of zoning, planning, and land use experts that the town of Boonton would deteriorate as a business center and that Route 46 would supersede Boonton as a business center.  He consulted with John B. Howell, showed him the reports of the experts, and recommended that petitioner's policy be changed, namely, that petitioner's properties in Boonton be sold.  Howell, in turn, consulted with his brothers and sister, who were also stockholders and are petitioners herein.Thereafter, on November 6, 1946, at a meeting of the board of directors, approved by the stockholders, it was determined "to take steps to start liquidating this Company." The minutes of that meeting, containing the resolution directed toward that end, read in part as follows:Meeting called to discuss the advisability of taking steps to begin to liquidate the company.  * * ** * * resolved that this Board of Directors of Park Lake Land Company hereby declares a liquidating dividend of sixty (60) per cent of the Capital Stock of said Corporation to wit, in the amount of twelve thousand ($ 12,000.00) Dollars.  This declaration of dividend is preliminary1963 U.S. Tax Ct. LEXIS 57">*62  to a final dissolution of said corporation, said dissolution to be effected as soon as possible, contingent upon the disposition of what remains of its property.  * * *Park Lake sold real estate and reported the gain on its income tax returns as follows:YearDescriptionAmountGainof sale1946Frame building$ 20,425$ 11,082.471946do14,0003,824.481950Vacant lot800726.671951Frame building11,3258,374.391953Vacant land2,5002,137.891955do4,0003,363.44By the end of 1955 the corporation had sold all of its Boonton property and Rainbow Trail land.  There remained only the tract along Route 46.40 T.C. 940">*943  Park Lake made liquidating distributions in each of the years pursuant to minutes of the board of directors as follows:1946 -- Liquidating dividend$ 12,0001947 -- Partial liquidating dividend8,0001948 -- Partial liquidating dividend6,0001950 -- Partial liquidating dividend5,0001951 -- Partial liquidating dividend8,0001953 -- Partial liquidating dividend7,0001954 -- Partial liquidating dividend3,0001955 -- Partial liquidating dividend4,0001956 -- Partial liquidating dividend4,000In the corporation's1963 U.S. Tax Ct. LEXIS 57">*63  1946 income tax return there appeared the following statement: "Corporation is in liquidation per resolution of Board of Directors, November 6, 1946.  Return on Form 966 was filed with Collector, Newark, New Jersey on November 13, 1946.  Liquidating dividend of 60% amounting to $ 12,000 -- was paid to shareholders on November 7, 1946."During 1950 and 1951 the corporation attempted to acquire some additional land frontage on Route 46.  The negotiations broke down because one of the three owners of the land insisted upon too high a price.  There was another attempt to add to the corporation's Route 46 property by acquiring land from an owner with whom it had previously negotiated a flood agreement that had expired.  However, upon receiving assurances from the owner in connection with a possible new flood agreement, the corporation abandoned its efforts to acquire that land.From 1956 to 1959 Dudley Kimball's health was poor and he was unable to give adequate attention to the business of the corporation.  The only other officer, John B. Howell, had retired from his regular job and spent his winters in Florida and his summers in New Hampshire.On May 23, 1958, the board of directors, 1963 U.S. Tax Ct. LEXIS 57">*64  with the approval of the stockholders, adopted the following resolution:Resolved that this Corporation adopt, and does hereby adopt, a plan of Final Liquidation, same to be effective within twelve (12) calendar Months from the date of this resolution, and further that under said plan of Final Liquidation, all of the Properties and Assets of this Corporation be sold, and the proceeds of such sale be distributed amongst the Stockholders of Record.During the calendar year 1958 and during the period January 1, 1959, to May 19, 1959, the corporation sold its remaining property, namely, its Route 46 land, and realized capital gain in the amounts of $ 28,923.58 and $ 9,522.87, respectively.  During these two taxable periods it distributed a total of $ 58,000 to its shareholders. The corporation did not report the foregoing gains on its income tax returns for the years in question.40 T.C. 940">*944  After the liquidating distributions were made during the period January 1, 1959, to May 19, 1959, the remaining corporate assets consisted of cash in the amount of $ 885.15 and a deposit of $ 36.52 for New Jersey corporation tax; there were known liabilities of $ 524.30 for Federal income tax. The1963 U.S. Tax Ct. LEXIS 57">*65  balance of $ 397.37 was retained.All of the outstanding stock was retired and canceled by May 19, 1959.  All sales of property which took place between 1946 and 1957 resulted in gains which were properly reported in the taxable year the sales were made.The corporation's balance sheets, as of January 1, 1946, and January 1, 1958, reflected, in part, the following:19461958Buildings and other fixed depreciable assets$ 41,518.93$ 11,639.78Land19,950.003,128.00Total61,468.9314,767.78OPINIONThe narrow question before us is whether Park Lake, at the time of the resolution of May 23, 1958, was already operating under a much earlier (1946) resolution calling for complete liquidation, so as to render inapplicable the nonrecognition provisions of section 337(a) of the 1954 Code.  Section 337(a) provides:SEC. 337.  GAIN OR LOSS ON SALES OR EXCHANGES IN CONNECTION WITH CERTAIN LIQUIDATIONS.(a) General Rule.  -- If -- (1) a corporation adopts a plan of complete liquidation on or after June 22, 1954, and(2) within the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete1963 U.S. Tax Ct. LEXIS 57">*66  liquidation, less assets retained to meet claims,then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within such 12-month period.Petitioners argue that the 1946 resolution did not represent a plan of complete liquidation. We hold otherwise.In 1946 Park Lake entered into a formal plan of liquidation and filed Form 966 pursuant to section 148(d) of the Internal Revenue Code of 1939 with the then collector of internal revenue.  Section 148(d) of the Internal Revenue Code of 1939 provides:(d) Contemplated Dissolution or Liquidation. -- Every corporation shall, within thirty days after the adoption by the corporation of a resolution or plan for the dissolution of the corporation or for the liquidation of the whole or any part of its capital stock, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Commissioner shall, with the approval of the Secretary, by regulations prescribe.40 T.C. 940">*945  Park Lake did not, at the time of its resolution, or at any other time prior to 1959, liquidate "the whole or any part of its capital stock." 1963 U.S. Tax Ct. LEXIS 57">*67  Thus Park Lake filed Form 966 because the course of action it was to pursue was, in the words of section 148(d), an "adoption by [Park Lake] of a resolution or plan for [its] dissolution." 21963 U.S. Tax Ct. LEXIS 57">*68 The only reasonable construction of the 1946 resolution is that it was a plan of complete liquidation which was to be, in its own words, "effected as soon as possible, contingent upon the disposition of what remains of its property." A plan of liquidation may extend over a number of years and may be carried out notwithstanding that the liquidating corporation is meanwhile engaging in some business activities.  Cf.  Bynum v. Commissioner, 113 F.2d 1 (C.A. 5), reversing 40 B.T.A. 336">40 B.T.A. 336; R. D. Merrill Co., 4 T.C. 955">4 T.C. 955, 4 T.C. 955">969-970; Rollestone Corporation, 38 B.T.A. 1093">38 B.T.A. 1093, 38 B.T.A. 1093">1105; T. T. Word Supply Co., 41 B.T.A. 965">41 B.T.A. 965, 41 B.T.A. 965">980-981.The action taken subsequent to the 1946 resolution is consistent with a plan of complete liquidation. Between 1946 and 1958 properties were sold and distributions to shareholders were made; after the resolution of November 6, 1946, and prior to 1958, Park Lake sold property in the amount of $ 53,050 and made distributions in the amount of $ 57,000.  No new property was acquired.  All of the distributions were designated1963 U.S. Tax Ct. LEXIS 57">*69  "liquidating" or "partial liquidating" dividends. These sales and distributions resulted in a marked contraction of corporate activity and a substantial reduction in corporate assets. There was no mention in the corporate records of any abandonment of the 1946 plan.  Indeed, petitioners do not contend that they abandoned the 1946 plan, but rather that the November 6, 1946, resolution was not a plan of complete liquidation, and that the conduct of the corporate affairs after 1946 shows that it was not a plan of complete liquidation. In that connection they point to the fact that prior to 1958 the corporation had sold only the Boonton and Rainbow Trail properties and had not yet disposed of any part of the Route 46 tract. We do not agree that this fact is sufficient to overcome the significance of the language of the 1946 resolution and the other considerations noted above.  The course of action 40 T.C. 940">*946  followed by the corporation seems rather to support the view that the directors and stockholders desired to hold the more promising Route 46 property until the final step in the liquidation process with the expectation of obtaining the maximum yield therefrom.The fact that there1963 U.S. Tax Ct. LEXIS 57">*70  were some isolated negotiations for acquisition of additional Route 46 property is not inconsistent with an overall plan of liquidation. Such an acquisition may have been for the purpose of making more salable other Route 46 property held by Park Lake or for the purpose of resale when the time was propitious to dispose of the Route 46 property already owned.  Entering into a related transaction with the expectation of profit in the course of winding up the affairs of a corporation would not be inconsistent with a plan of complete liquidation. Petitioners further contend that the reason for the liquidation of Park Lake was the impairment of Dudley Kimball's health.  Although there is some evidence to this effect, we think that in the context of this case it more persuasively points to an intention to accelerate an existing plan to liquidate than to the adoption of a new plan.Section 337(a) by its very terms applies only in the case of a plan of complete liquidation adopted "on or after June 22, 1954." These provisions had no counterpart in prior law, and the date selected was one during the consideration of that legislation by the Congress.  The plan before us was in fact adopted1963 U.S. Tax Ct. LEXIS 57">*71  in 1946, and cannot be brought within the statute by a subsequent readoption. Certainly, in the case of a plan adopted and initiated after June 22, 1954, a subsequent readoption could not effectively extend the 12-month period. The "new" plan would be a nullity and would not qualify under the statute.  To hold that the new plan would be effective to start the running of another 12-month period would be plainly contrary to the clear purpose of the statute.  3 Cf. Cohen, Gelberg, Surrey, Tarleau and Warren, "Corporate Liquidations Under The Internal Revenue Code of 1954," 55 Col. L. Rev. 37, 45, 46; MacLean, "Taxation of Sales of Corporate Assets in the Course of Liquidation," 56 Col. L. Rev. 641, 646.1963 U.S. Tax Ct. LEXIS 57">*72  Although section 337 was prospective in character, the 1954 Code made special provision for those corporations already in liquidation. Section 392(b)(1) provided for nonrecognition in such circumstances in respect of sales during the calendar year 1954, subject to certain conditions; and section 392(b)(3) made special provision in the case of plans adopted after December 31, 1953, and before June 22, 1954.  As argued by the respondent, section 392(b)(1) was tailor-made for corporations like Park Lake, but it did not avail itself of those provisions.  40 T.C. 940">*947  They offered the only route to nonrecognition for corporations already in the process of liquidation as of January 1, 1954.  Park Lake could not, some 4 years later, bring itself within section 337 by readopting in substance a 1946 plan of complete liquidation that had already been in operation since that time.Decisions will be entered for the respondent.  Footnotes1. Proceedings of the following petitioners are consolidated herewith: H. Clay Howell, Transferee, Docket No. 1416-62; Ruth H. Browning, Transferee, Docket No. 1433-62; William S. Howell, Transferee, Docket No. 1434-62; Otillie Howell, Transferee, Docket No. 1435-62; John B. Howell, Transferee, Docket No. 1445-62; Park Lake Land Co., Docket No. 1448-62; and Dudley B. Kimball, Transferee, Docket No. 1449-62.↩2. Regs. 111, sec. 29.148-2, provide:Return of Information Respecting Contemplated Dissolution or Liquidation. -- (a) Making and filing of returns.  -- Within 30 days after the adoption of any resolution or plan for or in respect of the dissolution of a corporation or the liquidation of the whole or any part of its capital stock, the corporation shall file with the Commissioner of Internal Revenue, Washington, D.C., attention of the Income Tax Unit, Records Division, a correct return on Form 966, made under oath or affirmation and containing the information required by paragraph (b) of this section and by such form.  A like return shall be filed by the corporation in the case of any amendment of, or supplement to, a resolution or plan for or in respect of the dissolution of the corporation or the liquidation of the whole or any part of its capital stock. A return must be filed under section 148(d)↩ in respect of a liquidation whether or not any part of the gain or loss to the shareholders upon the liquidation is recognized under the provisions of section 112.3. To be distinguished are cases such as Virginia Ice & Freezing Corporation, 30 T.C. 1251">30 T.C. 1251, and City Bank of Washington, 38 T.C. 713">38 T.C. 713↩, where the corporation had not yet adopted a plan of liquidation at the time of the transaction in question.