Court Opinion

ID: 4604916
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:35:14.545489+00
Date Added: 2024-06-11T07:53:05.363278
License: Public Domain

A. C. HOLMQUIST, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  J. W. HOLMQUIST, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Holmquist v. CommissionerDocket Nos. 10084, 10085.United States Board of Tax Appeals12 B.T.A. 1436; 1928 BTA LEXIS 3337; July 20, 1928, Promulgated *3337  1.  SURPLUS ADJUSTMENTS ON ACCOUNT OF DEPRECIATION. - In respect of the depreciable properties here involved the application of a flat rate of depreciation of 4 per cent of cost of such properties held to be reasonable and to be a proper basis for the adjustment of surplus and depreciation reserve.  2.  GAIN FROM SALE OF ASSETS. - A corporation in 1917 and 1919 disposed of capital assets acquired prior to March 1, 1913, at their cost.  Commissioner determined that profits were realized on the sale in an amount equal to the depreciation sustained from date of acquisition to date of sale, and that, for the purpose of taxes to be imposed upon a liquidating dividend declared in 1922, this amount should be considered as earnings accumulated subsequent to March 1, 1913.  No sufficient proof was offered to establish the March 1, 1913, value of the assets sold.  The Commissioner's action sustained.  Ben Jenkins, Esq., for the petitioners.  Dwight H. Green, Esq., for the respondent.  LITTLETON*1437  The Commissioner determined a deficiency in respect of the income tax of A. C. Holmquist for 1921 in the amount of $34.45 and for 1922 in the amount*3338  of $5,106.69, and in respect of the tax of J. W. Holmquist of $263.70 for 1920 and $16,340.42 for 1922.  The objections by the two petitioners are to the deficiencies asserted for the year 1922.  The question in each case is upon the same facts and these are not in dispute.  The two proceedings were consolidated for hearing and decision.  The main issue is as to what portion of a liquidating dividend paid by the Holmquist Grain & Lumber Co., December 31, 1922, was from earnings and profits accumulated after February 28, 1913.  In this connection petitioners question the Commissioner's adjustment of surplus and depreciation reserves over the entire life of the corporation both before and after March 1, 1913, and the adjustment of surplus and depreciation reserves as affected by sales of capital assets made in the years 1917 and 1919.  FINDINGS OF FACT.  From 1902 to 1922, inclusive, each of the petitioners was a stockholder of the Holmquist Grain & Lumber Co., and, together, at all times, owned a majority of the outstanding capital stock of that company, which was organized in May, 1902, then taking over the assets and liabilities of the Holmquist Grain & Lumber Co., a corporation*3339  the charter of which had expired, and the business of the Holmquist Company, a partnership.  The corporation then took over tangible assets valued at $349,785.79, against which it assumed liabilities in the amount of $114,144.31.  It issued capital stock of $125,000 par value and entered the balance of the tangible assets acquired as a paid-in surplus in the amount of $110,641.48.  In 1908 the corporation issued and distributed to its then stockholders a stock dividend of $125,000.  June 29, 1917, the corporation purchased 789 1/2 shares of its outstanding stock then in the hands of a group of minority stockholders, *1438  at an agreed price of $410 a share, amounting to $323,695, which stock was paid by conveying and turning over to the sellers certain capital assets of the corporation at an agreed value of $51,075.13, and the payment to said sellers of cash in the amount of $272,619.87.  In completing this transaction the corporation turned over and conveyed to the sellers grain elevators and yard properties located at several towns in the State of Nebraska at the agreed price of $51,075.13, which amount was then the cost of said properties acquired prior to March 1, 1913, as*3340  shown on the books of said corporation.  A part of these properties had been acquired in 1902 at a cost of $35,086.18; the balance thereof had been acquired in 1908 at a cost of $15,988.95.  Immediately after the purchase of the 789 1/2 shares of minority stock the corporation caused the same number of shares to be reissued and to be distributed to its then remaining stockholders.  June 15, 1919, the corporation sold certain other of its capital assets which had been acquired in June, 1912, at the agreed selling price of $6,503.19, which amount was the cost of the properties as shown on the books of the corporation.  December 31, 1922, the corporation made a partial liquidation distribution of its assets in the form of a cash liquidating dividend in the amount of $394,568.68.  Of this amount A. C. Holmquist received $151,514.37, J. W. Holmquist received $242,107.35, and H. M. Holmquist, not a party to these actions, received $946.96.  The corporation had consistently kept its books and from and after the year 1909 made corporation excise and income-tax returns on the basis of fiscal years ending March 31 of each calendar year.  Prior to its fiscal year beginning April 1, 1912, the*3341  corporation had not shown on its books any account of depreciation upon its depreciable assets.  For its fiscal years ending March 31, 1913, and March 31, 1916, inclusive, it entered in its books depreciation reserves computed at the rate of 10 per cent upon the book cost of its depreciable assets, and it claimed the same amount as deductions in its income-tax returns for its said years.  For its fiscal years ending March 31, 1917, to March 31, 1919, inclusive, the corporation entered in its books additions to depreciation reserve computed at the rate of 5 per cent upon the cost of its depreciable assets and claimed the same amounts in its income and profits-tax returns for those years.  For the fiscal years ending March 31, 1920 to 1922, inclusive, the Commissioner adjusted the corporation's deductions for depreciation on the basis of 4 per cent upon the cost of its depreciable assets and allowed such amounts as deductions from gross income for those years.  In connection with the sales of capital assets occurring in 1917 and 1919 the corporation's books show, and its income and profits-tax *1439  returns reported, no gain realized or loss sustained as a result of such disposition. *3342  No modification or change of the corporation's income and profits-tax returns for its fiscal years ending March 31, 1913, to March 31, 1919, have been made or attempted to be made on account of the varying rates of depreciation set up on the books and claimed as deductions from gross income during those years.  Following the distribution of the partial liquidating dividend made December 31, 1922, the Commissioner made a further investigation of the books of account of the corporation for the purpose, among other things, of determining the portion of the liquidating dividend which was made up of earnings and profits accumulated after February 28, 1913, and for this purpose the Commissioner applied to the depreciable assets a rate of depreciation of 4 per cent upon the cost of such assets from the time the corporation was organized until December 31, 1922.  He further included in gains and profits realized in 1917 an amount equal to the difference between the cost of the assets then disposed of less the amount of depreciation at 4 per cent applied on cost and the sale price.  Similarly for the year 1919 he included as gains and profits realized in that year an amount equal to the*3343  difference bwtween the cost of such assets less the amount of depreciation computed at the rate of 4 per cent upon the same and the selling price.  He further made adjustments of surplus resulting from the then computation of depreciation reserves, the gains from the sale of capital assets, and the decrease of surplus resulting from the purchase of the minority stock, both with respect to surplus and undivided profits accrued prior to March 1, 1913, and surplus and undivided profits accrued subsequent to February 28, 1913.  The corporation has not, and these petitioners do not now, dispute the reasonableness of the depreciation rate of 4 per cent as applied to the depreciable assets of the corporation throughout the period of its existence to and including December 31, 1922.  The Commissioner reduced surplus account as of June 29, 1917, in the total amount of $323,695, paid for the minority stock purchase as of that date.  As a result of his investigation the Commissioner determined that the earned surplus of the corporation on December 31, 1922, was $499,074, and that of this total the amount of $178,233.75 represented earnings and profits accumulated subsequent to February 28, 1913. *3344  OPINION.  LITTLETON: That the purchase of 789 1/2 shares from the minority stockholders for $323,695 in cash and property and the immediate reissue of the shares to the remaining stockholders resulted in a decrease in the amount of the corporation's surplus as then existing, *1440  has not been questioned by the petitioners and is not an issue to be decided here.  In the determination of the amount of surplus and undivided profits accumulated after February 28, 1913, and subject to surtax when distributed as a part of a liquidating dividend paid in 1922, the Commissioner properly examined the capital and income accounts of the corporation from the time it was organized until the date of the distribution and was entirely within the purview of his administrative duties in testing both the income accounts and the allowances and reserves for depreciation of assets, and in considering depreciation which occurred both before and after March 1, 1913.  The flatrate of 4 per cent upon cost of depreciable assets adopted by the Commissioner appears to us, under the circumstances, to have been entirely reasonable and fair and it further appears that the corporation, and these petitioners*3345  as its officers, have in effect accepted the reasonableness of this rate.  We are of the opinion that adjustments of surplus and undivided profits and depreciation reserves, both as to the period prior to March 1, 1913, and since, in so far as the computation of depreciation reserves at the rate of 4 per cent of the capital cost of assets is concerned, must be taken to be supported by the rule of reasonableness as applied to the special facts and properties involved in these actions.  In connection with the sale of certain assets occurring in June, 1917, and February, 1919, it appears that the Commissioner in making his final adjustments of surplus and depreciation reserves had computed upon these assets depreciation at the rate of 4 per cent from the date acquired until the date sold, and, in view of the fact that these assets were sold for an amount equal to the original cost, he has added the amount computed as a reserve against them into income realized in June, 1917, and February, 1919.  That is, as we understand the action of the Commissioner, the profit realized on this transaction is represented by the difference between cost, less depreciation, and the sales price, and this*3346  entire profit is considered to have accumulated subsequent to March 1, 1913.  Petitioners contend that since the amount of profit is equal to the depreciation which was computed on the assets from the dates of their acquisition to the dates of the sales, and since this depreciation was considered to have accrued ratably over the years both prior and subsequent to March 1, 1913, the profits which were realized in 1917 and 1919 represent profits which accumulated in a similar manner and that, therefore, profits equal to the depreciation computed to March 1, 1913, would be nontaxable when distributed.  This proposition seems to be based on the theory that what happened was a transfer of a depreciation reserve to surplus and overlooks the real transaction, i.e., a sale on which profit was realized.  It is certainly true that in case of assets acquired prior *1441  to March 1, 1913, and sold in 1917 and 1919, the only gain which would be taxable, either on account of the sale or in subsequent distribution by, or liquidation of, the corporation, would be the amount of gain which accrued after March 1, 1913, but where the sales took place after March 1, 1913, and the Commissioner has*3347  determined that all of the profits realized were attributable to the period subsequent to March 1, 1913, we can not say that the respondent is in error when we do not have evidence as to the March 1, 1913, value of the assets sold.  This the petitioners have failed to furnish, merely contenting themselves with an argument as to the ratable increase in value of the assets.  Since the assets were sold for cost, before considering depreciation, and since there is no dispute that depreciation did take place, it appears that there was an appreciation in value which offset the depreciation sustained and upon which there was a realization when the assets were sold.  It may be that the entire appreciation in value took place prior to March 1, 1913, in such a manner as to render the entire profit realized nontaxable, but this is not established by any evidence.  The Commissioner determined that profits were realized on the sales in 1917 and 1919, and that these entire profits were accumulated subsequent to March 1, 1913.  We can not say from the mere coincidence that the depreciation sustained is equal to the profits realized that a part of these profits represents accumulations prior to March 1, 1913, and*3348  part subsequent to March 1, 1913.  We can not assume in the face of the Commissioner's determination that when a gain is realized on the sale of an asset, this gain will be deemed to have accrued ratably over the period from the time the assets were acquired to the date of the sale.  See . The burden is upon petitioners to show error by competent proof, and this they have failed to do.  Reviewed by the Board.  Judgment will be entered for the respondent.