Court Opinion

ID: 4617534
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:36:46.652126+00
Date Added: 2024-06-11T07:55:19.164683
License: Public Domain

Joseph F. Porter, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.  Clyde H. Porter and Willie Mae Porter, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, RespondentPorter v. CommissionerDocket Nos. 11333, 11334United States Tax Court9 T.C. 556; 1947 U.S. Tax Ct. LEXIS 88; September 30, 1947, Promulgated *88 Decision will be entered for the respondent.  Upon the record, no plan of complete liquidation was adopted by the corporation of which petitioners were stockholders, as contemplated by section 115 (c) of the Internal Revenue Code.  Held, two distributions of assets in exchange for stock, made in 1941, were in partial liquidation and gains thereon taxable in full.  Ralph E. Mullin, Esq., and John H. Lucas, Esq., for the petitioners.Frank M. Cavanaugh, Esq., for the respondent.  Van Fossan, Judge.  VAN FOSSAN *556  The respondent determined deficiencies of $ 1,345.17 and $ 3,244.79 in the income tax liability of Joseph F. Porter, Jr., and Clyde H. *557  Porter and his wife, Willie Mae Porter, respectively, for the year 1941.  The petitioners, Joseph F. Porter, Jr., and Clyde H. Porter (and his wife) also claim an overpayment of their taxes for the taxable year in the sums of $ 1,187.25 and $ 3,865.49, respectively.The sole issue is whether certain distributions made to the petitioners by the Inland Bond & Share Co., a corporation, were in partial liquidation of that corporation or were parts of a series of distributions in complete liquidation of the corporation, pursuant to a bona fide plan of liquidation to be completed within the period prescribed by statute.FINDINGS OF FACT.Certain facts were stipulated.  The portions thereof material to the issue are as follows:Petitioners Clyde H. Porter and Joseph F. Porter, Jr., at the beginning of 1941 were*90  stockholders of Inland Bond & Share Corporation, hereinafter called Inland, a personal holding company organized under the laws of Delaware in 1931 by Joseph F. Porter, Sr.  Petitioners Clyde H. Porter and Willie Mae Porter are husband and wife, and they filed a joint return for the year 1941.Inland had issued and outstanding 8,000 shares held by the petitioners and their relatives, as follows:Clyde H. Porter2,000Joseph F. Porter, Jr2,000Trustees for Doris M. Porter and Dorothy E. Porter2,000Dugald G. Porter1,000Nancy Porter Power1,000A balance of 2,000 shares, making up the original authorized issue of 10,000 shares of no par value, was held in the treasury of the corporation.  Joseph F. Porter, Sr., acted as managing director of the corporation's affairs at all times prior to and including the year in controversy.The respective amounts of the gains and losses, agreed to be correct on stock of Inland, as stated in schedule F of the respective returns filed by the petitioners herein, are incorporated herein by reference.  The only matter in dispute is whether those amounts received in liquidation of stock of Inland and so reported as long term capital gains*91  are instead to be considered as short term capital gains under section 115 (c) of the Internal Revenue Code, and to be reported in income 100 per cent, as asserted in the deficiency notices.On May 20, 1941, a special meeting of the board of directors was held, at which time a resolution was passed providing for the amendment of the certificate of incorporation so as to reduce the amount of capital stock then unissued, issued, and outstanding by canceling *558  the 2,000 shares held in the treasury and calling in and exchanging 4,000 shares of the outstanding stock on June 27, 1941, for liquid assets of the company by means of a liquidating dividend, to the end that the entire amount of authorized and outstanding capital stock of the company would consist of 4,000 shares.  The relevant portions of the minutes of the meeting of the directors read as follows:The Chairman stated the purpose of the meeting was:I. To consider and vote upon the proposition of advising and recommending to the stockholders of Inland Bond and Share Corporation the advisability and necessity of amending the Certificate of Incorporation of Inland Bond and Share Corporation so as to reduce the amount of*92  Capital Stock now unissued, issued, and outstanding by:(a) Removing from the Treasury the two thousand (2,000) shares of Capital Stock now held therein and cancelling same forthwith;(b) Calling in, exchanging for liquid assets of the said Corporation by means of a Liquidating Dividend, and cancelling on a proportional basis, one-half (4,000 shares) of the Capital Stock outstanding (no par value) on June 27, 1941, based on the value of said Capital Stock as of June 20, 1941, to the end that the entire authorized and outstanding Capital Stock of said Corporation shall hereafter consist of four thousand (4,000) shares, (no par value)II. To take such other and further action and proceedings as properly and usually pertain thereto;III. To transact such other business as may lawfully and properly come before the meeting.By appropriate resolution the certificate of incorporation was amended in accord with the above declared "purpose of the meeting." The action of the board of directors was ratified by the stockholders at a special meeting held for that purpose on June 10, 1941.On June 27, 1941, a liquidating dividend of $ 200,560 was paid to the stockholders of the company pro*93  rata, in stocks, bonds, and cash.  Such action was ratified by all the stockholders. Of the sums so distributed, petitioner Clyde H. Porter received $ 50,140 in stocks, bonds, and cash.  He thereupon surrendered to the corporation the certificate for 2,000 shares then held by him and the company canceled 1,000 shares thereof and reissued to him on that date a certificate for the balance, or 1,000 shares of the capital stock of the company.  Of the sums so distributed, petitioner Joseph F. Porter, Jr., also received $ 50,140 in stocks, bonds and cash.  He thereupon surrendered to the corporation the certificate for 2,000 shares then held by him and the company canceled 1,000 shares thereof and reissued to him on that date a certificate for the balance, or 1,000 shares of the capital stock of the company.A certificate of reduction of capital of the company was executed and filed with the Secretary of State of Delaware, recording the *559  retirement of 6,000 shares of common stock, upon payment therefor of $ 60,000 of capital and $ 246,915.02 of paid-in surplus, so that the capital of the corporation was thereby reduced by the amount of capital ($ 60,000) which was applied to *94  such retirement. A certificate of amendment of the certificate of incorporation, dated July 15, 1941, was duly filed by the corporation with the Secretary of State of Delaware, by which the authorized number of shares was reduced to 4,000 shares.At a special meeting of the board of directors of Inland held on September 5, 1941, a resolution was passed amending the certificate of incorporation of the company so as to reduce the amount of the capital stock of the corporation by calling in 2,000 shares of stock in the hands of the stockholders in exchange for liquid assets of the company by means of a liquidating dividend, to the end that the entire authorized and outstanding capital stock of the corporation should consist of 2,000 shares.  The relevant portions of the minutes of the meeting of directors read as follows:The Chairman stated the purpose of the meeting was:I. To consider and vote upon the proposition of amending the Certificate of Agreement of Merger and Consolidation of Inland Bond and Share Corporation so as to reduce the amount of Capital Stock now issued and outstanding by: (a) Calling in, exchanging for liquid assets of the said Corporation by means of a Liquidating*95  Dividend, and cancelling on a proportional basis, one-half (2,000 shares) of the Capital Stock outstanding (no par value) on September 1, 1941, based on the value of said Capital Stock as of September 25, 1941, to the end that the entire authorized and outstanding Capital Stock of said Corporation shall hereafter consist of two thousand (2,000) shares, (no par value)II. To take such other and further action and proceedings as properly and usually pertain thereto;III. To transact such other business as may lawfully and properly come before the meeting.By appropriate resolution the certificate of agreement of merger and consolidation was amended to conform to such stated "purpose of the meeting." The action of the board of directors was ratified by the stockholders at a special meeting held on September 30, 1941.A certificate of reduction of capital of the company was executed and filed with the Secretary of State of Delaware, recording the retirement of the 2,000 shares of common stock, upon payment therefor of $ 20,000 of capital and $ 83,520 of paid-in surplus, so that the capital of the corporation was thereby reduced by the amount of capital ($ 20,000) which was applied*96  to such retirement. A certificate of amendment of the certificate of incorporation, dated October 10, 1941, was duly filed by the corporation with the Secretary of State of Delaware, *560  by which the authorized number of shares was reduced to 2,000 shares.Thereafter, at a special meeting of the board of directors held on November 5, 1941, a resolution was passed authorizing and directing the officers of the company to transfer to the individual stockholders, pro rata, liquid assets consisting of various securities in the respective amounts set forth in the minutes of that meeting.Accordingly, Clyde H. Porter surrendered to the corporation on or about December 31, 1941, his certificate for 1,000 shares, in respect of which the corporation canceled 500 shares and reissued to him the balance of 500 shares of common stock of the corporation, and Joseph F. Porter, Jr., also surrendered to the corporation, on or about December 31, 1941, his certificate for 1,000 shares, in respect of which the corporation canceled 500 shares and reissued to him the balance of 500 shares.At a special meeting of the board of directors held on December 29, 1941, a resolution was adopted declaring*97  an ordinary dividend of $ 7 per share, to be paid on December 31, 1941, on the 2,000 shares of stock then outstanding, to stockholders of record on December 7, 1941.On April 3, 1942, a special meeting of the board of directors was held, at which time a resolution was passed authorizing and directing the officers of the company to effect a liquidation and dissolution of the company and transfer to the individual stockholders the various stocks in the amounts set forth opposite their names.  A further resolution was passed directing the officers to transfer certain parcels of real estate to the individual stockholders. In addition, a resolution was passed stating that the stockholders of the company had put up $ 500 in cash for the purchase of various assets as listed on an attached schedule, and that when such had been liquidated, distribution was to be made to the individual stockholders from the proceeds; that the corporation be dissolved; and that all assets be forthwith distributed to the stockholders in proportion to the number of shares held by each, in complete liquidation of the corporation and in complete cancellation and redemption of all its corporate stock.Thereafter, *98  on April 30, 1942, a special meeting of the stockholders was held, at which the action of the board was ratified by the stockholders, and the directors and officers of the company were directed to make a final liquidation of the company and to transfer to the individual stockholders their proportionate share of the various assets of the company by calling in, exchanging for liquid assets of the company by means of a liquidating dividend, and canceling on a proportionate basis the balance (2,000 shares) of the capital stock *561  outstanding on April 30, 1942, to the end that the entire authorized and outstanding stock of the company be liquidated.  Elaborate and detailed motions and resolutions to accomplish the above purpose were spread on the records of Inland.The call of the directors to a special meeting incorporated the following:I. To consider and vote upon the proposition of making a final liquidation and dissolution of Inland Bond and Share Corporation by:(a) Calling in, exchanging for liquid assets of the said Corporation by means of a Liquidating Dividend, and cancelling on a proportionate basis the balance (2,000 shares) of the Capital Stock outstanding (no par*99  value) on April 30, 1942, based on the value of said Capital Stock as of April 30, 1942, to the end that the entire authorized and outstanding capital stock of said corporation shall hereafter be liquidated.II. To take such other and further action and proceedings as properly and usually pertain thereto.III. To transact such other business as may lawfully and properly come before said meeting.On August 12, 1942, the Secretary of State of Delaware issued certificate of dissolution of the company.There was filed with the Commissioner of Internal Revenue on June 29, 1942, Form 966 of the company, giving information as provided by section 148 (d) of the Internal Revenue Code and Regulations 29.148-2, prescribed thereunder, and attached thereto was consent of the stockholders to reduction of capital of the company and final liquidating dividend and distribution of all the corporation's property and assets.The plan of the corporate directors of Inland relative to the redemption of a part of its outstanding stock during the tax year was to permit gain from liquidation of Inland stock to be reported in two separate tax years, rather than having gain reported on the entire stock holdings*100  of each stock owner in the year of corporate dissolution.From the entire record we find the following additional facts:No bona fide plan of liquidation was adopted by Inland Bond and Share Corporation in 1941 nor was any such plan in existence prior to 1942.OPINION.The issue at bar is whether the distributions of June 27, 1941, November 5, 1941, and April 3, 1942, were separate transactions, each constituting a dividend "in partial liquidation," as defined by section 115 (i) of the Internal Revenue Code, or were parts *562  of a series of distributions in complete liquidation, as defined in section 115 (c).  1 It is essentially a question of fact.*101  The statute supplies the test by which the determination is to be made when it specifies that to constitute "complete liquidation" the distributions by a corporation shall be in complete cancellation or redemption of all of its stock "in accordance with a bona fide plan of liquidation," the liquidation to be completed within specified time limits.In the instant case we have searched the record assiduously for such a plan in the year 1941, but have failed to find it.  On the contrary, we have been forced to make the ultimate finding of fact that no such plan existed in 1941.  True, there was testimony by the taxpayers, on which they ask a favorable finding, but in the premises, confronted by the formal written corporate record concurrently made, such self-serving testimony can not be held to overcome the logical and reasonable inference to be drawn from such record, nor can it supply the missing steps in the formal procedure.  We can not avoid the above conclusion when it is noted that in the corporate resolutions of 1941 there is no word or suggestion of the adoption or existence of a plan of dissolution or complete liquidation; that Form 966, 2 as required by section 148 (d) of*102  the Internal Revenue Code, was not filed in 1941; that in the resolutions of April 1942 for the first time reference is made to *563  "a final liquidation and distribution" of Inland; and that in consonance with the regulations a properly filled out Form 966 was filed.  It is also to be observed that the 1942 resolution does not refer to a plan theretofore adopted or already in existence.*103  The case is to be decided by what was actually done by the corporation, not by the unconvincing or nebulous intention of some of the interested stockholders. The 1942 resolution can not be applied retroactively to 1941.  Giving full credence to the testimony of the stockholders and assuming that they did discuss complete liquidation, the deficiencies in the formal record are so pronounced and so vital that we are compelled to the conclusion that the statute has not been complied with.  Nor does the fact that they acted under advice, in an effort to reduce their tax liability by spreading their procedure over two years, fill the void in the formal record.  If, as petitioners claim, Inland had adopted a bona fide plan in 1941, normal procedure would have been to take corporate action reflecting the same, and to have acted in conformity therewith.  This was not done.  The absence of records in harmony with the statutory requirements is significant and confirms our conclusion that no bona fide plan of liquidation existed.  The action of the respondent is approved.Decision will be entered for the respondent.  Footnotes1. SEC. 115. DISTRIBUTION BY CORPORATIONS.* * * *(c) Distributions in Liquidation. -- Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112.  Despite the provisions of section 117, the gain so recognized shall be considered as a short-term capital gain, except in the case of amounts distributed in complete liquidation. For the purpose of the preceding sentence, "complete liquidation" includes any one of a series of distributions made by a corporation in complete cancellation or redemption of all of its stock in accordance with a bona fide plan of liquidation and under which the transfer of the property under the liquidation is to be completed within a time specified in the plan, not exceeding from the close of the taxable year during which is made the first of the series of distributions under the plan, (1) three years, if the first of such series of distributions is made in a taxable year beginning after December 31, 1937, or (2) two years, if the first of such series of distributions was made in a taxable year beginning before January 1, 1938.* * * *(i) Definition of Partial Liquidation. -- As used in this section the term "amounts distributed in partial liquidation" means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.* * * *↩2. Sec. 29.148-2 [Regulations 111].  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. * * *