Court Opinion

ID: 4605037
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:35:29.159283+00
Date Added: 2024-06-11T07:53:06.948721
License: Public Domain

SOUTHERN ICE & FUEL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Southern Ice & Fuel Co. v. CommissionerDocket No. 25543.United States Board of Tax Appeals10 B.T.A. 1213; 1928 BTA LEXIS 3935; March 7, 1928, Promulgated *3935  1.  The net profit derived from the sale of the petitioner's assets, held, under the evidence, to constitute taxable income to the petitioner for the year 1925.  2.  No return having been filed by the petitioner for the year 1925, the respondent determined that a 25 per cent penalty for failure to file the required return should be assessed.  This action of the respondent is approved.  3.  The value of certain preferred stock on January 2, 1925, determined.  Sidney J. Hayles, Esq., for the petitioner.  J. E. Marshall, Esq., for the respondent.  TRAMMELL*1213  This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1925 in the amount of $1,727.10, and a 25 per cent penalty in the amount of $431.78 for failure to file a return.  The issues are: (1) Whether the net profit realized from the sale of the corporate assets in 1925 constituted taxable income to the petitioner, or whether its assets were transferred to its sole stockholder in final liquidation so that any profit from the sale thereof was income to the stockholder; (2) whether the respondent erred in *1214  assessing a 25 per cent penalty*3936  for failure to file a return; and (3) whether the respondent erred in including in his computation of the net profit certain shares of preferred stock at par value.  FINDINGS OF FACT.  During the period involved herein the petitioner was a corporation duly organized under the laws of Georgia, with its principal place of business at Atlanta.  The petitioner surrendered its charter in February, 1925, at which time there were outstanding 1,000 shares of common stock of a par value of $100, and 250 shares of preferred stock of the same par value.  The preferred stock was issued in November, 1923, and was preferred only as to dividends; it had equal rights with the common stock as to assets.  One William M. Morris organized the petitioner and was at all times the principal stockholder and moving spirit in the enterprise.  Morris personally sold the preferred stock at par, and with each two shares of the preferred stock gave one share of the common stock as a bonus.  Morris also personally guaranteed the value of each share of the preferred stock and guaranteed a dividend of 8 per cent annually thereon.  In November, 1924, negotiations were commenced with a view to the sale of*3937  the assets of petitioner to a new corporation to be organized under the name of the Consumers Company, and on December 2, 1924, the negotiations were concluded.  Thereafter, the transaction was completed and the property of the petitioner was turned over to the purchasing company on January 2, 1925.  On or about the 8th or 9th of December, 1924, prior to closing the sale, Morris consulted an attorney as to the most economical way of handling the transaction from a tax standpoint, and was advised by the attorney that the petitioner should surrender its charter and distribute its assets among its stockholders, who in turn should sell them to the new company.  Thereupon, Morris obtained options on practically all of the outstanding stock of the petitioner, except the stock held by relatives or those closely associated with him in the affairs of the corporation.  Most of the owners of the preferred stock and bonus common stock of the petitioner were personal friends and business acquaintances of Morris, and he took options on their stock on terms that would return their investments with profits.  Morris purchased the stock of the minority stockholders under the options, and settled*3938  with some of them for all cash, and with some of them for part cash and in part with preferred stock of the new corporation.  Morris made the cash payments for the minority stock *1215  by giving to the minority stockholders checks of the petitioner signed by him as president and treasurer.  These checks were on the petitioner's bank account with the Atlanta Trust Co.  The petitioner discontinued business on January 1, 1925, but Morris continued to use said bank account of the petitioner to pay for the purchase of the minority stock, to pay the debts of the petitioner, and in certain instances to pay his personal obligations, all after the petitioner's charter had been surrendered in February, 1925.  Settlements were made with the minority stockholders on January 8, 12, 20, and 31, 1925, and July 9, 1927.  The prices paid for the minority stock under the options did not bear any relationship to the consideration received from the sale of the petitioner's property nor to the financial condition of the petitioner.  At a meeting of the stockholders of the petitioner on January 1, 1925, the following motion or resolution was adopted: WHEREAS, William M. Morris now owns, or has*3939  options on all of the outstanding capital stock of the corporation, and it is his desire that the assets of the company be transferred to him upon his surrender of the capital stock: Therefore, Be It Resolved that the entire assets of the corporation, including all property, real, personal or mixed, and all receivables, be transferred to William M. Morris, who assumes all of the indebtedness of the corporation, and that the corporation be and is hereby dissolved effective as of the close of business December 31, 1924.  And further, that the legal routine of the dissolution be done by William M. Morris in the manner most convenient to him.  Furthermore, the corporation being dissolved and William M. Morris being the sole owner of its properties and liable for all of the liabilities, he is impowered and authorized to sell or in anywise dispose of the property in any manner he may deem fit.  The petitioner executed the deed by which its properties were transferred to the new company.  The consideration paid by the purchasing company for the petitioner's assets consisted of $87,500 cash, and $37,500 of its preferred stock, having a par value of $100 per share, and 250 shares of*3940  no par value common stock.  The check received in payment of the cash consideration for the said assets was deposited in the Atlanta Trust Co. to the credit of the petitioner corporation, and was credited on the corporation's books to the account of the said Morris.  The preferred stock of the purchasing corporation given in part payment for the petitioner's assets had a fair market value at January 2, 1925, of $100 per share.  The petitioner did not at any time make or file a tax return for 1925.  OPINION.  TRAMMELL: The respondent determined that the net profit on the sale of the petitioner's manufacturing plant and other assets constituted *1216  taxable income to the petitioner for the year in which the sale was consummated, and computed the deficiency accordingly.  The petitioner contends that the assets were transferred to its sole stockholder, William M. Morris, in liquidation of its capital stock; that Morris sold the property to the new corporation, and that hence no profit on the transaction was derived by the petitioner.  In the light of the facts disclosed by the evidence, we are unable to agree with the petitioner's contentions on this point.  The evidence*3941  shows that, prior to the sale of the petitioner's assets, Morris obtained options to purchase the stock of certain minority stockholders, but his rights under the options were not exercised nor were payments made for the minority stock until after the sale of the petitioner's assets had been concluded.  Also, while the evidence shows that the stockholders, by the resolution adopted at the meeting on January 1, 1925, authorized the transfer of the petitioner's assets to Morris upon his surrender of the capital stock, such transfer was never at any time effected.  On the contrary, the assets were in fact transferred by the petitioner to the new corporation.  The check of the purchasing corporation, given in payment for the assets, was deposited to the petitioner's credit in its bank account, and the funds were later used by Morris in making settlements with the minority stockholders for their stock under the options, and for other purposes.  The amount received from the purchasing corporation was credited to the personal account of Morris on the petitioner's books, and thus it was the proceeds of the sale that he received in liquidation, after the sale had been completed, instead of*3942  the petitioner's original assets in exchange for his stock.  Onthis point, the determination of the respondent is approved.  No return was filed by the petitioner for the year 1925, and the respondent determined that there should be assessed a penalty of 25 per cent of the tax for failure to file the required return.  Substantially, there was no defense by the petitioner other than its contention that there was no tax due, and consequently no penalty.  Section 3176 of the Revised Statutes, as amended by section 1003 of the Revenue Act of 1924, provides that: * * * In case of any failure to make and file a return or list within the time prescribed by law, * * * the Commissioner shall add to the tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. * * * Not only did the petitioner fail to file a return within the time prescribed by law, but failed to file a return at any time, and thus does not come within the exception provided in the statute.  Accordingly, *1217  in the recomputation of the deficiency, *3943  a penalty of 25 per cent should be added to the tax.  . There remains for consideration only the issue with respect to the value of the preferred stock of the Consumers Company received as part consideration for the sale of the petitioner's assets.  In determining the amount of the net profits, the respondent included this stock at par, or at a valuation of $100 per share.  The burden of proof was on the petitioner to introduce evidence to show that this valuation was incorrect.  The only testimony bearing directly on this question is the statement of Morris, the principal stockholder of the petitioner corporation.  He testified that he "did not guess it right, but I took it at 80".  Later he testified, "I figure in my own mind it was worth 85".  No reason or basis for such valuation was assigned.  This is the testimony relied on by the petitioner to show that the preferred stock of the Consumers Company was worth $85 per share instead of par as determined by the respondent.  We have considered all the testimony in the record, but do not think that it is sufficient to overcome the presumption of the correctness of the respondent's*3944  determination.  Judgment will be entered on 15 days' notice, under Rule 50..