Court Opinion

ID: 4498394
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:15:55.788392+00
Date Added: 2024-06-11T14:54:16.135860
License: Public Domain

Hill,
dissenting: I respectfully dissent from the conclusion reached in the majority opinion. The evidence establishes, I think, that petitioner’s loss was sustained in the taxable year 1935, not as a result of the liquidation of the corporation, as the majority holds, but from the fact that petitioner’s investment in the corporation’s stock became wholly worthless in that year when suit was instituted to foreclose the mortgage and sell the real estate which constituted the sole asset of substantial value owned by the corporation.
*718It is true that the corporation was wholly insolvent, the value of its assets being far less than the amount of its liabilities, in the years immediately preceding the taxable year, and its stock therefore had no liquidating value either in 1934 or 1935. Nevertheless, it can not be said that petitioner sustained his loss prior to the taxable year merely because the stock had no liquidating value. Undoubtedly the stock had a substantial potential value up to the time the foreclosure proceeding was instituted. Cf. Sterling Morton, 38 B. T. A. 1270; affd., 112 Fed. (2d) 320.
The corporation’s only business was the operation of the Arcade Building in Oklahoma City. It had no other source of income, but it had been able to meet all semiannual installments of principal and interest due "on its mortgage indebtedness up to July 1, 1932, and it also had paid $1,538.01 on the interest installment due July 1, 1933. Its net earnings, for 1935 increased materially over its net earnings for 1934. At the beginning of the taxable year the corporation was actively engaged in carrying on its business, and there was a reasonable hope and expectation that if it could continue in possession of its property and operate its business, its profits might further increase to the benefit of the stockholders. Also, there was the hope that real estate values would increase so that ultimately the value of its assets might exceed its liabilities and its stock would have a liquidating as well as potential value. However, when the foreclosure proceeding was instituted on May 2, 1935, these hopes and expectations were definitely terminated. Under the conditions existing, the corporation’s real estate could not be sold for enough to satisfy the mortgage debt; in fact, the mortgagee obtained a deficiency judgment in excess of $25,000. The filing of the foreclosure suit, in my opinion, was the “identifiable event” which established worthlessness of the corporation’s stock and the incidence of petitioner’s loss.
Since petitioner’s loss resulted from the stock having become worthless in 1935, the amount is allowable in full as an ordinary loss, and is not subject to the limitations of section 117 of the Revenue Act of 1934. I am impelled to this conclusion for the further reason that the so-called liquidating dividends were not such" in fact. So much appears to be admitted, at least by inference, in the majority opinion. It is true that the distributions made by the corporation in 1935 were designated by the directors as liquidating dividends, but the name by which they were called is immaterial; we must look to the facts to determine their true nature. The distributions were necessarily made out of capital, since the corporation was wholly insolvent. Its capital in such circumstance *719constituted a trust fund for the benefit of its creditors, and could not be legally distributed to the stockholders in liquidation or otherwise. See section 9763, Oklahoma Statutes, 1931. And upon distribution the funds did not become the property of the stockholders but in their hands an involuntary or constructive trust by operation of law, payable upon demand to the beneficial owner, the insurance company creditor. This doctrine is so well established and so universally applied that citation of authorities in addition to those referred to in the majority opinion is not deemed necessary here.
The fact that prior to the hearing of this case the insurance company had not made any demand for repayment to it of the funds distributed is wholly immaterial. Under the Oklahoma statute the right of a creditor to demand repayment of such funds is not barred by limitations, and may be made at any time. In view of the apparent emphasis laid by the majority opinion on the fact that prior to the hearing of this proceeding no demand had ever been made upon petitioner by the Arcade Co. or the insurance company to repay any portion of ¡the amounts distributed to him, it is interesting to note that on brief counsel for petitioner states that “Since the trial, and no doubt because of facts developed at the trial, the Prudential Insurance Company has demanded of petitioner and other stockholders, the amounts they received in those dividend distributions in 1935. Petitioner’s counsel knows of no defense to that demand.”
In the majority opinion the trust fund doctrine is recognized as a sound rule, and that it should be applied in proper cases. In that connection, the following decisions of this Board, among others, are cited. In Benjamin E. May, 35 B. T. A. 84, it was held that stockholders receiving the assets of a corporation upon liquidation were liable as transferees for its unpaid income taxes, a fund left for payment of creditors having been dissipated. In O. B. Barker, 3 B. T. A. 1180, it was held that a taxpayer was not subject to tax on that portion of a liquidating dividend paid on taxes assessed against the corporation. To the same effect see E. F. Cremin, 5 B. T. A. 1164; J. G. Tomlinson, 7 B. T. A. 961; and Edward S. Harkness, 31 B. T. A. 1100. The cited cases are sought to be distinguished on the ground that in each of them the taxpayer had actually paid out the amount received, while in the instant proceeding the petitioner received the amount of the so-called liquidating dividends under a claim of right and without restriction as to its disposition; further that petitioner commingled the amount so received with his other property, still retained it at the date of the hearing, and has always treated it as belonging to him. With a single exception, precisely the same state*720ments may be made in respect of each, of the cases above cited. In each of them, so far as disclosed by the reports, the taxpayer received the corporate distribution under a claim of right and without restriction as to its disposition, commingled the fund with his other property, treated it as belonging to him, and retained it until compelled to pay it over in discharge of tax liability of the corporation.
The only material ground upon which the cases referred to may be distinguished from the case at bar lies in the fact that up to the date of the hearing, no demand had been made on this petitioner, to pay over to the corporation or its creditor the amounts received as liquidating dividends. Must the application of the trust fund doctrine in favor of the taxpayer, then, be held to depend solely upon the fortuitous circumstance of repayment of the fund to a creditor prior to hearing of the tax proceeding before the Board? Would the rule have been applied differently in the majority opinion if it had been made to appear that the amounts received by petitioner had been repaid to the insurance company, or a demand therefor had been made prior to the hearing? And does it follow that because such repayment or demand was not so made, notwithstanding liability therefor still existed, that the so-called liquidating dividends received by petitioner must be regarded for tax purposes as his property? The rule has never been so interpreted in its application against taxpayers in the numerous decisions of this Board involving transferee liability for corporate taxes, of which Benjamin E. May, supra, is an example. Uniformly we have held in such cases that liquidating dividends did not constitute property of the tranferee, but trust funds to the extent of the unpaid taxes, and no inquiry was made, it being obviously immaterial, whether such distributions were received under claim of right and without restriction as to disposition, whether or not commingled with other funds, or whether or not treated by the transferees as belonging to them. And it is apparent, of course, from the nature of such proceedings that the recipients had not prior thereto parted with the funds in payment of creditors’ claims or tax liability of the corporations. In the absence of any elements of estoppel, I can find no sound reason for applying the doctrine differently in the present case, in favor of the taxpayer, than it is applied generally in transferee cases in favor of the Government.
In my opinion, the decision here should be for petitioner.