Court Opinion

ID: 4627263
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:00:56.638908+00
Date Added: 2024-06-11T07:57:01.314264
License: Public Domain

ALBERT E. DAVISON AND ALEXANDER H. DAVISON, JR., EXECUTORS OF THE ESTATE OF A. H. DAVISON, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  M. G. NICHOLSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Davison v. CommissionerDocket Nos. 2634, 2635.United States Board of Tax Appeals11 B.T.A. 493; 1928 BTA LEXIS 3789; April 11, 1928, Promulgated *3789  1.  Liquidating dividends held subject to the normal tax.  2.  The amount of liquidating dividends determined by the respondent approved.  George M. Stanton, Esq., for the petitioners.  A. S. Lisenby, Esq., for the respondent.  TRAMMELL*493  These proceedings are for the redetermination of deficiencies in income taxes with respect to the proceeding of Albert E. Davison and Alexander H. Davison, Jr., executors of the estate of A. H.  *494  Davison, deceased, Docket No. 2634, for the years 1919 and 1920, in the amounts of $7,675.83 and $2,122.81, respectively, and with respect to the proceeding of M. G. Nicholson, Docket No. 2635, for the years 1919 and 1920, in the amounts of $4,916.29 and $2,245.73, respectively.  The questions involved are: First, whether the respondent erred in determining the amount of liquidating dividends received by each of the petitioners during 1919 upon the dissolution of the Davison-Nicholson Co., a corporation; second, whether the respondent erred in imposing a normal tax upon said liquidating dividends; third, the date of dissolution of the corporation; and fourth, the correct amount of taxable income*3790  for 1920.  The two proceedings were consolidated for the purpose of hearing and decision.  FINDINGS OF FACT.  The petitioners were residents of Athens, Ga.  Prior to 1919 they were stockholders in the Davison-Nicholson Co., a corporation.  The corporation was organized in 1906 for the purpose of operating a dry goods and department store in Athens, Ga.  The corporation was dissolved on April 14, 1919.  The capital stock at the time of dissolution was owned by A. H. Davison and M. G. Nicholson in equal proportions.  Nicholson acquired his stock in 1917 for $25,000.  Davison acquired his prior to March 1, 1913.  The March 1, 1913, value of Davison's stock was $25,000, which value was in excess of cost.  After April 14, 1919, the business theretofore conducted by the corporation was conducted by a partnership under the name of Davison-Nicholson.  Co., which partnership was composed of A. H. Davison and M. G. Nicholson.  No inventory of merchandise was taken at the time the corporation was dissolved.  The corporation had prior to its dissolution kept its books and made its returns on the basis of a fiscal year ending January 31.  On January 31, 1919, the corporation had an inventory*3791  of $89,829.16, and on the same date had accounts receivable in the amount of $60,166.07.  The books of the corporation were taken over by the partnership and were continued without change.  In 1920 the partnership filed a partnership return for the fiscal year beginning February 1, 1919, and ending January 31, 1920.  The partnership return showed an allocation of income to the corporation for the period prior to its dissolution, and the remaining amount of income for the twelve-month period was allocated to the partnership.  The income for the twelve-month period ended January 31, 1920, was computed by using the closing inventory of the corporation on January 31, 1919, as the opening inventory for the twelve-month period ending January 31, 1920.  *495  The respondent determined the surplus of the corporation distributable as a liquidating dividend on April 14, 1919, by adding to the corporation's surplus as of January 31, 1919, the corporation's net income for the period from January 31, 1919, to April 14, 1919.  This net income for the period from January 31, 1919, to April 14, 1919, was determined by the respondent by the same method used by the partnership in computing the*3792  amount of the partnership's and the corporation's earnings for the twelve-month period ended January 31, 1920.  The inventory as of February 1, 1919, was determined by the corporation to be $89,829.16.  The purchases of the business, including the corporation and the partnership, during the period from February 1, 1919, to January 31, 1920, were $316,472.26.  The inventory of the partnership of January 31, 1920, was $88,084.43, from which the partnership determined the cost of goods sold at $318,216.99.  OPINION.  TRAMMELL: The principal question involved in these proceedings is whether the liquidating dividends received by the two individuals is subject both to the normal and the surtax.  The petitioners contend that the liquidating dividends were not subject to the normal tax.  This question has now been decided adversely to the contention of the petitioners by the United States Supreme Court in the case of . With respect to the amount of the liquidating dividends, the petitioners contend that the accounts receivable and inventory of January 31, 1919, being part of the corporation's assets, had a fair market value of 50*3793  per cent less than book value.  With respect to the accounts receivable, the testimony of Nicholson was that the value of the accounts was problematical and that he could not figure same without an examination.  He could not, however, name any of the debtors nor could be state what their financial status was.  He did not know the balance outstanding against any of the debtors, nor did he know whether any of the accounts had been charged off.  The return for the twelve-month period ended January 31, 1920, shows that $961.61 of debts were ascertained to be worthless and charged off during that period, but there is no evidence that any part of this amount consisted of the accounts receiable as of January 31, 1919.  In view of the uncertainty and indefiniteness and the unsatisfactory nature of the testimony with respect to the accounts receivable, we are unable to determine that they had a value less than that determined by the respondent.  *496  With respect to whether the inventory had a fair market value less than its book value as claimed by the petitioners, the record shows that during the twelve-month period after January 31, 1919.  the business showed sales 33 1/3 per*3794  cent greater than during the prior twelve months.  The inventory at January 31, 1920, was taken upon the same basis as the inventory of January 31, 1919.  The corporation carried on its business in the usual way up until the time of its dissolution in 1919.  Purchases and sales were made in the usual course of business up until the corporation was dissolved on April 14, 1919, and the business was carried on in the usual manner by the partnership thereafter.  We have considered all the evidence in the case, but it is too indefinite and uncertain to warrant us in holding that the respondent was in error in determining the value of the assets received from the corporation in 1919, and we therefore approve the determination of the respondent.  We are not satisfied from the evidence before us that there was any error on the part of the respondent in determining the income of the partnership in 1920.  The action of the respondent is, therefore, approved.  Judgment will be entered on 15 days' notice, under Rule 50.