Court Opinion

ID: 4615582
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:32:40.305213+00
Date Added: 2024-06-11T07:54:58.219762
License: Public Domain

E. G. PERRY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  V. K. PERRY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Perry v. CommissionerDocket Nos. 9023, 9022.United States Board of Tax Appeals9 B.T.A. 796; 1927 BTA LEXIS 2512; December 22, 1927, Promulgated *2512  1.  Section 201(c) of the Revenue Act of 1918, providing that distributions in liquidation of a corporation shall be treated as payments in exchange for stock, has no application to a dividend declared from profits where at the time of the declaration the corporation is not in dissolution and there is no retirement of the capital stock in whole or in part.  2.  Dividends declared from earnings with no provision for retirement of any part of the capital stock, do not fall within the term "distribution in liquidation" although at the time of declaration there may have existed an intent to dissolve the corporation and liquidate.  George S. Atkinson, Esq., for the petitioners.  George G. Witter, Esq., for the respondent.  PHILLIPS *797  The taxes in controversy are income taxes for the calendar year 1919, for which respondent determined a deficiency against E. G. Perry in the amount of $2,467.50, and against Mrs. V. K. Perry in the amount of $514.20.  The petitioners are husband and wife, the same questions are involved in both proceedings, and they were consolidated by consent.  Respondent proposes to tax certain amounts as liquidating dividends*2513  in the year 1919 and asserts a deficiency based upon the normal-tax rates on said amounts.  FINDINGS OF FACT.  Petitioners were husband and wife during the calendar year 1919 and each rendered separate individual income returns for said year on a cash receipts and disbursements basis.  On said separate returns of petitioners they each reported $18,737.53 as dividends received from the Lone Star Motor Co., a domestic corporation, and paid surtaxes on said amounts for said calendar year.  On June 30, 1919, the Lone Star Motor Co., a Texas corporation, declared a dividend of $54,050.56 from its earned surplus which was credited on its books to the stockholders as of that date.  On that date said corporation had an earned surplus of $54,850.62.  The charter of the Lone Star Motor Co. as amended authorized a capital stock of $150,000.  Petitioners herein owned about $106,000 of said capital stock, each petitioner owning one-half of said amount.  Each of the petitioners was credited with $18,737.53 of said dividend.  From November 15, 1917, to June 27, 1919, petitioner, E. G. Perry, habitually withdrew sums of money from the corporation, Lone Star Motor Co., and on June 27, 1919, he*2514  had withdrawn in excess of any profits, dividends, or other amounts which had been credited to him, the sum of $16,064.72, and that amount was carried on said books as an asset of the corporation.  On July 1, 1919, petitioners, E. G. Perry and V. K. Perry, and two of the other three stockholders executed a contract of partnership which provided for a total partnership capital of $150,000, the investment in said partnership by petitioners being $53,000 each.  On July 1, 1919, all of the stockholders of the corporation, Lone Star Motor Co., executed a consent that said corporation "shall, from and after the date of filing hereof in the office of the Secretary of State of Texas, be dissolved as provided by law," and on said date the officers of the corporation executed an application for dissolution of said corporation.  Said consent and said application were filed with the Secretary of the State of Texas, on August 25, 1919.  *798  On July 1, 1919, all the assets and liabilities of the corporation, Lone Star Motor Co., were transferred to the partnership, Lone Star Motor Co.  Among the assets and liabilities of the corporation so transferred to the partnership was an asset*2515  of the corporation resulting from the withdrawals of money prior to June 30, 1919, by petitioner, E. G. Perry, in the amount of $16,064.72, and liabilities of the corporation, resulting from the dividend of $18,737.53 credited to each of the petitioners.  In computing the deficiency, the Commissioner included said dividends of June 30, 1919, in income as subject to both normal and surtax.  OPINION.  PHILLIPS: The question involved in the present proceeding is whether a certain dividend of the Lone Star Motor Co., declared on June 30, 1919, from the surplus and profits of the corporation on that date, is subject to both the normal and surtax, or is subject only to surtax.  The pertinent provisions of the Revenue Act of 1918 are as follows: SEC. 201. (a) That the term "dividend" when used in this title * * * means (1) any distribution made by a corporation, other than a personal service corporation, to its shareholders or members, whether in cash or in other property or in stock of the corporation, out of its earnings or profits accumulated since February 28, 1913, or (2) any such distribution made by a personal service corporation out of its earnings or profits accumulated*2516  since February 28, 1913, and prior to January 1, 1918.  (b) Any distribution shall be deemed to have been made from earnings or profits unless all earnings and profits have first been distributed.  Any distribution made in the year 1918 or any year thereafter shall be deemed to have been made from earnings or profits accumulated since February 28, 1913, or, in the case of a personal service corporation, from the most recently accumulated earnings or profits; but any earnings or profits accumulated prior to March 1, 1913, may be distributed in stock dividends or otherwise, exempt from the tax, after the earnings and profits accumulated since February 28, 1913, have been distributed.  (c) * * * Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits.  SEC. 216.  That for the purpose of the normal tax only there shall be allowed the following credits: (a) The amount received as dividends from a corporation which is taxable under this title upon its net income, and amounts received as dividends from a personal service*2517  corporation out of earnings or profits upon which income tax has been imposed by Act of Congress.  If the declaration of this dividend stood alone there would seem to be no cause to doubt that it was such a dividend as fell within the provisions of section 216(a) and was exempt from normal tax.  It *799  appears, however, that on the following day the stockholders executed a consent to the dissolution of the corporation and four of the five stockholders formed a partnership to continue the business, taking over the corporate assets.  Because of this action the Commissioner took the position that the dividend of June 30, 1919, was "in liquidation of a corporation" within the meaning of section 201(c) and not exempt from normal tax under section 216(a).  See ; 5 Am.Fed. Tax Rep. 6125; ; . But see ; *2518  6 Am.Fed. Tax Rep. 6633, now pending before the Supreme Court on certiorari, which is in conflict with the decisions cited above and on which the petitioners rely should it be determined that the dividends were in fact in liquidation of the corporation. At the time the dividends were declared the corporation was not in dissolution and there was no retirement of the capital stock in whole or in part, nor was there any impairment of the capital of the corporation.  The dividends were declared wholly from surplus and earnings.  Even if it be conceded, as the respondent apparently contends, that the declaration of the dividend was in anticipation of the dissolution of the corporation and a step taken preliminary thereto, it is our opinion that the dividend would not fall within section 201(c) as made "in the liquidation of a corporation." A dividend in liquidation of a corporation implies that there has been either an impairment of its capital by a distribution thereof to its stockholders or a retirement of the capital stock in whole or in part.  It will be noted that section 201(c) provides that liquidating dividends "shall be treated as payments in exchange for stock*2519  or shares." While by no means conclusive, the language is indicative of an intention to confine the use of the term to those distributions which affect the stock or shares of the corporation.  The dividend here in question distributed profits only without in any way affecting the capital of the corporation.  The corporation might or might not liquidate later, but in either event the dividend would remain as an indebtedness to the stockholders.  We are of the opinion that whether or not there was an intention on June 30, 1919, to later dissolve the corporation, no liquidation took place on that day and that the character of the dividend then declared would not be changed by subsequently carrying out any intention to dissolve which might then have existed.  Reviewed by the Board.  Decision will be entered on 15 days' notice, under Rule 50.