Court Opinion

ID: 4625998
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:58:18.343099+00
Date Added: 2024-06-11T07:56:48.146083
License: Public Domain

LOUIS R. LACKEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Lackey v. CommissionerDocket No. 8495.United States Board of Tax Appeals10 B.T.A. 497; 1928 BTA LEXIS 4100; February 2, 1928, Promulgated *4100  The petitioner and other stockholders of a corporation sold all of the capital stock and assets of the corporation in the year 1920, the purchaser paying therefor $325,000 in cash and its promissory note for $254,000, payable in one year, and assuming existing mortgages in the amount of $586,000.  Held, that the sale was a completed transaction in 1920 and that the entire profit realized by the stockholders was taxable income for that year.  M. F. Mitchell, Esq., and George M. Thompson, C.P.A., for the petitioner.  L. Dana Latham, Esq., for the respondent.  MARQUETTE *498  This proceeding is for the redetermination of a deficiency in income tax asserted by the respondent for the year 1920 in the amount of $4,086.85.  FINDINGS OF FACT.  The petitioner is an individual residing at Altadena, Calif.  Prior to June 1, 1920, the petitioner owned 150 shares of the capital stock of the Superior Connellsville Coal Co., for which he had paid $13,000.  On May 19, 1920, one T. S. Lackey, on behalf of himself and the other stockholders of the coal company, entered into the following contract with the Tidewater Coal Co.: WHEREAS, The Superior Connellsville*4101  Coal Company is a corporation of the second class duly created, organized, maintained and doing business under the laws of the Commonwealth of Pennsylvania, with a capital stock of $300,000 divided into 3,000 shares of the par value of $100 per share, all of the stock - issued and treasury or unissued - together with all its property and franchises of every character is owned or controlled by the said party of the first part; and WHEREAS, Tidewater Coal Company is a corporation created, organized and maintained under the laws of the State of Delaware, duly registered to do business in the State of Pennsylvania, with an office in the City of Pittsburgh, Allegheny County, Pennsylvania; and WHEREAS, the said Superior Connellsville Coal Company pursuant to and by virtue of its corporate rights and franchises operates that certain coal property or premises, containing about 235 acres of the Nine Foot or Pittsburgh Vein or seam of coal and about 85 acres standing in the name of Guy W. Brown and L. R. Lackey in trust and leased to the said Superior Connellsville Coal Company, which said 85 acres are also underlaid with the said vein of coal, making a total of about 320 acres of said coal*4102  area, situate in Luzerne Township - Fayette County, and State of Pennsylvania, aforesaid, consisting and being composed of the following named tracts, viz: * * * Now, THEREFORE, THIS AGREEMENT WITNESSETH, That for and in consideration of the sum of ONE MILLION ONE HUNDRED SEVENTY-FIVE THOUSAND ($1,175,000.00) DOLLARS, paid and to be paid as hereinafter set forth by the party of the second part, its successors and assigns, to the party of the first part, his executors, administrators or assigns, the said party of the first part agrees to sell and hereby does sell, and the said party of the second part agrees to purchase and hereby does purchase, ALL of the stock, property and holdings of every character - real, personal and mixed - including charter, corporate franchises, seal, minute book, by-laws, and any, all and every other property, right, liberty and privilege of every character incident thereto whatsoever, except any and all cash and accounts receivable or money and credits due from any source.  THE CONSIDERATION for the said stock and all corporate holdings, rights, liberties, franchises and privileges whatsoever, one Million One Hundred Seventy Five Thousand ($1,175,000) *4103  Dollars as aforesaid, to be payable as follows, viz: (a) Ten Thousand ($10,000) Dollars cash in hand on the execution and delivery hereof, receipt whereof is hereby acknowledged; and One Hundred and Thirty Thousand ($130,000) Dollars on or before May 24, 1920.  *499  (b) One Hundred Ninety-Five Thousand ($195,000) Dollars on June 1, 1920, when the deal is to be consummated and possession of the premises and all property is to be delivered to the party of the second part, its successors and assigns; (c) The party of the second part on June 1, 1920, shall execute and deliver its promissory note to the party of the first part for Two Hundred Fifty-Four Thousand ($254,000) Dollars, payable one year after date, with interest at six per centum per annum, payable semi-annually, and as collateral security shall deposit with and deliver to the said party of the first part all the stock of the said Superior Connellsville Coke Company: (d) The remainder of the said purchase money, viz: five hundred eighty-six thousand ($586,000) dollars is to be paid by the assumption of the following bonds and mortgages, viz: (A) The balance of $156,000 of the mortgage of Elizabeth P. Sharpnack, *4104  the said balance being payable in eight annual installments of $19,500 each from and after July 1, 1919, and with interest at 5.4 per cent from last named date, interest to be paid by the Tidewater Coal Company, its successors and assigns, only from and after delivery of possession of the premises hereunder; (B) Mortgage of Columbus R. Porter for $380,000 payable in eight annual installments of $47,500 each from July 1, 1919, interest to be paid by the Tidewater Coal Company, its successors and assigns, from the date of delivery of possession hereunder: (C) Mortgage of guardian of Ada B. Van Kirk for $50,000 payable in five equal annual installments of $10,000 each from and after the 20th day of January, 1922, with interest to be paid by the Tidewater Coal Company, its successors and assigns, from date of delivery of possession hereunder: THIS SALE AND PURCHASE is made subject to the following specific understanding, conditions, terms and provisions, viz: (1) As to the contract now existing between the Superior Connellsville Coal Company and the Pioneer Coal & Coke Company relative to the marketing of the output or production of coal mined by the Superior Connellsville Coal*4105  Company of the terms of which contract the parties hereto have notice, the purchaser will accept and carry out the said contract except and unless the same is rescinded or cancelled by mutual arrangement and agreement of the parties; it is understood that the officers of the said Superior Connellsville Coal Company have no knowledge of any other outstanding contracts for the sale or supply of coal from the said mine except the one last above referred to with the Pioneer Coal & Coke Company.  (2) All contracts for supplies and materials for use at the plant and necessary for the operation of the same but not delivered at the time of the execution and delivery hereof but made in good faith by the General Manager of the said Superior Connellsville Coal Company, shall be assumed and paid for by the Tidewater Coal Company, its successors and assigns, without abatement of the aforesaid consideration, such payment to be made to the consignor: (3) The party of the first part will secure the resignation of the present officers and directors of the said Superior Connellsville Coal Company and assist as may be requested in the election of new directors and officers, and it is understood that*4106  the provisions of this agreement as to assignments and delivery of stock, resignation and election of officers, delivery of possession of property, shall be carried out and consummated on June 1, 1920, and as of the date of such consummation the Tidewater Coal Company, its successors or assigns, shall assume the above mentioned mortgages and the interest thereon, to which time all interest thereon shall be paid by the party of the first part or the Superior *500  Connellsville Coal Company, and to avoid confusion regarding interest accrued from the last interest paying period to such date may be taken into account and retained by the Tidewater Coal Company, its successors or assigns, from the cash payment last above.  It is understood that all bills payable by the Superior Connellsville Coal Company except for materials ordered and not delivered, shall be settled and paid by the party of the first part or the Superior Connellsville Coal Company: (4) The said party of the first part binds himself and agrees for the aforesaid Guy W. Brown and L. R. Lackey, who holds the title to the said Elizabeth P. Sharpnack Farm in trust, that they will make conveyance thereof to such party*4107  or parties as the said Tidewater Coal Company, its successors or assigns, may request and direct, and likewise assign and deliver the royalty lease of the same which they have and hold with the Superior Connellsville Coal Company: (5) In connection with the stock of the Said Superior Connellsville Coal Company put up as collateral with the said $254,000 note, it shall include the unissued treasury stock as well as the stock already issued and the party of the second part agrees that none of the said unissued treasury stock shall be issued without the consent of the party of the first part until the said note is paid, and likewise that the output of the said operation shall not be contracted for more than six months beyond the life of the said note without payment of the said note or approval of the said first party first had in writing: (6) This contract shall be binding on the parties hereto as well as also on their heirs, executors, administrators, successors and assigns: (7) It is understood and agreed by and between the parties hereto that the title to all properties are and shall be good and marketable: (8) That from and after the date of the execution hereof there will*4108  not be removed or taken from the said premises any of the livestock nor any supplies, equipment nor any other of the personal property belonging to the said Superior Connellsville Coal Company, nor will there be done or permitted anything beyond the usual operation of the mine to affect the value of the Real estate unless or except by accident, during the life of this contract.  * * * (Signed) T. S. LACKEY.  The contract of May 19, 1920, was carried out and the required transfers to the Tidewater Co. were made as of June 1, 1920.  The Connellsville Co. was not dissolved but was continued in active operation, with new officers and directors, by the purchaser.  On June 28, 1920, T. S. Lackey executed the following declaration of trust: WHEREAS the owners of all the outstanding stock of the Superior Connellsville Coal Company, a Pennsylvania corporation, have sold their stock to the Tidewater Coal Company at a price or sum of One Million One Hundred Forty Thousand ($1,140,000) Dollars for the entire holdings of the said Superior Connellsville Coal Company.  The said consideration of One Million One Hundred Forty Thousand ($1,140,000) Dollars to be paid by the purchaser assuming*4109  the mortgage on the Columbus H. Porter coal, $380,000, the mortgage on the Ada B. Van Kirk coal, $50,000, and the mortgage on the Elizabeth P. Sharpnack Farm of $156,000, in all $586,000, with interest on said mortgages from the first day of June, 1920, and the payment of the balance of said purchase money, to-wit: $554,000, as follows: Three Hundred Thousand ($300,000) Dollars in cash on the delivery of the stock and $254,000, in one year from the said first day of June, 1920, with interest payable semi-annually, which deferred payment is secured by note of *501  the said Tidewater Coal Company with all of the stock of the said Superior Connellsville Coal Company, with the exception of five shares, given as collateral to secure the payment thereof; the old stockholders to assume and pay all other debts of the said company contracted prior to June 1, 1920; and WHEREAS, at a meeting of the directors of the said Superior Connellsville Coal Company held on the 27th day of May, 1920, T. S. Lackey, the then president of the said company, was selected by the said Board of Directors to act as Trustee for all the stockholders of that date, and as Trustee for said stockholders to*4110  receive all money due and payable to the said Superior Connellsville Coal Company at the close of business May 31, 1920, and also to receive all purchase money for the 1705 shares of outstanding stock of the company, and to collect and receive any and all other money due and coming due the said company on said date, and make distribution of the same to and among the owners of stock, after deducting all debts of the said company, taxes and other charges, in the proportion which the stock owned by each stockholder is to the whole number of shares outstanding, to-wit: 1705.  NOW KNOW ALL MEN BY THESE PRESENTS that I, T. S. Lackey, hereby acknowledge to hold in trust for the stockholders of the said Superior Connellsville Coal Company of Record May 29, 1920, all the following cash, accounts, bills and note: FIRST: All cash in the hands of the Treasurer of the Superior Connellsville Coal Company at the close of business May 31, 1920, and which was turned over to me as Trustee on said date.  SECOND: All money due and to become due for coal marketed by said company to and including May 31, 1920, and all other accounts receivable at the close of business on said date.  THIRD: The said*4111  note of the Tidewater Coal Company, secured as aforesaid, payable to T. S. Lackey, Trustee, for $254,000, with interest at six per cent per annum payable semi-annually, dated June 1, 1920, and due one year after date.  And as Trustee for the persons hereinafter named I promise and agree to promptly collect all money as the same becomes due, pay therefrom all debts of the company contracted on or before the said 31st day of May, 1920, and all taxes of whatever nature, including income and corporation taxes, for which said company is liable to June 1st, 1920, and to promptly distribute the remainder of said Trust Funds as the same come into my hands, to and among the following named persons or former stockholders, in the proportion which the stock owned by each at the time of said sale, is to the 1705 shares outstanding at said date as follows: * * * During the year 1920 the trustee received the cash payment of $335,000 from the Tidewater Co., together with $53,458.51 on accounts receivable, a total of $388,458.51.  Out of this money the trustee paid obligations of the Connellsville Co. to the amount of $305,199.19, paid $76.820 to the former stockholders, and retained the balance*4112  for contingencies.  During 1921 the trustee received from the Tidewater Co. $254,000 in payment of its note, together with $15,740 interest; paid 1920 taxes, both State and Federal, amounting to $10,941.72; and distributed $260,682 to the former stockholders.  Some small amounts were received and paid by the trustee until the trust was terminated in 1926.  A final distribution of $736.06 was then made to the former stockholders.  *502  The distributive portions received by the petitioner for his stock were: In 1920, $6,600; in 1921, $23,100; in 1926, $64.50.  In his income-tax return for the year 1920 petitioner did not include the $6,600 received from the trustee for the reason that it was less than the amount he had paid for his stock.  In making his return for 1921 the petitioner included all he had received from the trustee, in excess of his stock purchase price of $13,000 during both 1920 and 1921.  The petitioner kept his books of account and made his income-tax return for 1920 on the cash receipts and disbursements basis.  OPINION.  MARQUETTE: The petitioner contends that the transaction involving the sale of his stock was not completed in 1920 so that his profit*4113  therefrom could be ascertained in that year, and that if the sale was completed in 1920 it was nevertheless a sale on the installment plan and that the profit thereon should be computed on that basis.  The respondent takes the position that the sale to the Tidewater Coal Co. was a completed transaction in 1920; that it was not a sale on the installment plan, and that all the profit should be reported as income for 1920.  The contract of sale, the material parts of which are set forth in the findings of fact, purports to be a contract made by T. S. Lackey, acting for himself and the other stockholders of the Superior Connellsville Coal Co., to sell all of their capital stock in, and all of the assets of that company.  Whether the stockholders, acting for themselves and not for the corporation, could sell the corporation's assets, as they purported to do, or whether the net result of the transaction was that they sold only the capital stock of the corporation, is not necessary for us to decide here, for in either case we must reach the conclusion that the sale was completed in 1920 and that it was not on the installment basis.  The purchaser paid the agreed price at once, cash, a promissory*4114  note for one year, and the assumption of certain mortgage obligations, and the purchaser was immediately put into possession.  The agreement was entirely executed, according to its terms, by the Tidewater Co. in 1920, and the seller accepted the cash, the one year promissory note, and the assumption of the mortgage as a full and complete payment.  We can not agree with the petitioner that this transaction was an installment sale under section 212(d) of the Revenue Act of 1926.  The initial payment made by the Tidewater Coal Co. amounted to more than 25 per cent of the total price which it had agreed to pay.  Only one payment was deferred and that was covered by a one year promissory note.  The note was secured by the pledge of all the capital stock of the Connellsville Co. and the record discloses nothing to indicate that it was not worth its face value, and in fact *503  it was paid with interest, when due.  The cash received by the seller amounted to $335,000.  The mortgages assumed amounted to $586,000, and the note was worth its face value, namely $254,000.  This consideration was all received by an agent for the petitioner in 1920.  The claim of the petitioner that the*4115  amount of his profit could not be determined prior to the filing of his income-tax return for the year 1920 we think is without merit.  The State and Federal taxes of the Connellsville Co., for the period up to June 1, 1920, could have been ascertained, at least approximately, before March 15, 1921.  If later the estimate of these taxes was found to be not wholly accurate, an amended return could have been filed by the petitioner.  It is not claimed that the other obligations payable by petitioner's agent out of the proceeds of the sale were unknown during the year 1920.  Judgment will be entered for the respondent.