Court Opinion

ID: 4615670
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:32:51.129205+00
Date Added: 2024-06-11T07:59:40.510320
License: Public Domain

ESTATE OF HELEN GILMORE, DECEASED, BY HERBERT C. SMYTH, JR., ADMINISTRATOR, PETITIONER, ET AL., 1v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  Gilmore v. CommissionerDocket Nos. 93231, 93232, 93331, 93332, 93333, 93334, 93335.United States Board of Tax Appeals40 B.T.A. 945; 1939 BTA LEXIS 775; November 24, 1939, Promulgated *775  The indebtedness of a shareholder in an amount withdrawn from his corporation which was not repaid and was shown on the books as an asset at the time of liquidation, held improperly included in the shareholder's income as a forgiveness of indebtedness.  Herbert C. Smyth, Jr., Esq., and Bernard E. Drape, Esq., for the petitioners.  George R. Sheriff, Esq., and W. G. Ruymann, Esq., for the respondent.  STERNHAGEN *946  The Commissioner determined a deficiency of $43,393.05 in 1932 income tax of Herbert C. Smyth, executor of the estate of Frank O. Burridge, deceased, and that the petitioners were, in varying amounts, liable therefor as transferees.  The petitioners assail the inclusion in decedent's income of amounts withdrawn by him from a corporation.  They also plead the statute of limitations.  FINDINGS OF FACT.  Frank O. Burridge died September 25, 1930.  He was the owner of 1,248 shares of the Sun Typewriter Co., a New Jersey corporation.  Of the remaining two shares, one was owned by Charles Wesley Howell and the other by Charles Wesley Howell, Jr.  At the time of Burridge's death the value of the 1,248 shares was $416,396.47, *776  and upon this value in the gross estate the estate tax was computed.  The estate acquired the shares.  During his life Burridge had withdrawn $124,904 from the corporation.  This had not been repaid at the time of his death, and was carried on the corporation's books as advances to him.  It was taken as a deduction by the estate for estate tax purposes.  The corporation dissolved August 20, 1931.  Its assets were distributed in kind during the period January 1 to June 30, 1932, except that each of the two minority shareholders was paid $327.14 cash for his share, computed in accordance with the balance sheet.  This amount was less than the pro rata value of the shares at the earlier date of Burridge's death.  There was no release or forgiveness of Burridge's indebtedness to the corporation.  It was still shown on the corporation's balance sheet as an asset and was so treated in the distribution.  Soon after the corporation's distribution a new corporation was organized.  Burridge's estate received 1,248 of its 1,250 shares in exchange for some of the assets acquired from the old corporation.  OPINION.  STERNHAGEN: The respondent determined that the estate of Burridge, *777  being then a taxpayer in its own behalf, was the recipient of income from the corporation by way of a forgiveness of Burridge's indebtedness of $124,904.  This is said to have occurred in 1932, at the time of the final distribution of the corporate assets, of which this account receivable was one.  There is, however, no evidence from which any finding of fact could be made that there was at any time a forgiveness of this indebtedness, and the evidence is sufficient to show that no such forgiveness occurred.  This has been found as a fact.  The respondent, however, would have the Board hold that there was *947  a constructive forgiveness by reason of the fact that the debt was never paid and was wiped out by the liquidation of the corporation.  The evidence establishes that all of the corporation's assets were distributed and that the Burridge account receivable was treated as an asset.  This, however, can not fairly be regarded as a forgiveness of the debt.  It was an item of the liquidation proceeds.  Although the effect upon Burridge's estate was similar, in that the estate was saved the inconvenience of actually paying the amount and receiving it back in distribution, nevertheless*778  the occurrence was entirely a recognition of the subsistence of the debt and the distribution of the account to its shareholders.  From both a practical and a theoretical standpoint, this is the proper conception of the final disposition of the indebtedness.  The estate so treated the amount, for it included the account receivable as having been acquired by it in the liquidation distribution, thus serving as a factor of its liquidation gain or loss.  In addition to this it appears clearly that the estate tax was computed upon a gross income which included $416,396.47 as the value of Burridge's 1,248 shares.  This would mean a per share value of $333.65 at the time of Burridge's death; which is more than the $327.14 distributed in 1932 as the per share value of the Howell shares, the difference being accounted for by a general decline in value in the interim.  The Howell distribution was computed upon the corporation's balance sheet, and the balance sheet included the Burridge debt among the corporate assets.  Thus the indebtedness has at all times been consistently treated as an asset of the corporation, and we see no reason for regarding it as forgiven, as the respondent has held. *779  Since no deficiency in tax can be found as to the taxpayer estate, there is no occasion to consider the supplemental issue whether the petitioners here are freed from the transferee liability by the expiration of the statutory period of limitations.  Decision will be entered for the petitioners.Footnotes1. Proceedings of the following petitioners are consolidated herewith: Herbert C. Smyth; Francis G. Smyth, Jr.; Edward G. Rowley; Louise Marthe; John Anderson; and Lester A. Thatcher. ↩