Court Opinion

ID: 4609428
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:44:42.587302+00
Date Added: 2024-06-11T07:53:53.402620
License: Public Domain

J. L. HARRIS, EUGENE S. KAHN, ISADORE KLEIN, AND MRS. A. SICKLES, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Harris v. Commissioner (A)Docket No. 10430.United States Board of Tax Appeals14 B.T.A. 1259; 1929 BTA LEXIS 2970; January 14, 1929, Promulgated *2970  1.  The distribution of corporate assets to the stockholders as partners resulted in taxable gain to the stockholders measured by the excess of the value of such assets over the cost and/or other basis of the stock.  2.  Value of assets received in liquidation of a corporation determined from the evidence.  3.  Where, after liquidation of a corporation, the stockholders continue the business as a partnership, and accounts receivable taken over were erroneously valued at their face, collections by the partnership thereon which are pleaded affirmatively by respondent as an offset against reductions in income realized on dissolution (due to our discounting face value to reach fair value) must be established by respondent.  David S. Lansden, Esq., for the petitioner.  F. R. Shearer, Esq., for the respondent.  SIEFKIN*1260  This proceeding results from the determination of deficiencies for the calendar year 1920 against John L. Harris, Eugene S. Kahn, Isadore Klein, and Mrs. Sickles, in the respective amounts of $20,590.14; $7,650.43; $7,585.81; and $483.19.  They join in one petition due to the identity of issues raised, all of which involve the*2971  value of assets received by them on March 20, 1920, as partners, in the dissolution of a corporation of which they had been the only stockholders.  Respondent affirmatively alleges that the effect of any reduction in such value should be offset in part at least by corresponding adjustments in the taxable income derived by petitioners from the continuation of the business taken over as a partnership for the remainder of the year.  A further question was raised concerning the statute of limitations, but, in the absence of competent evidence, the question will be treated as waived.  FINDINGS OF FACT.  Petitioners are individual citizens residing at Cairo, Ill.  They are related by blood or marriage.  For some time prior to March 20, 1920, they were the only stockholders of a corporation known as the Harris Saddlery Co., organized in 1907 under the laws of Illinois and doing business at Cairo.  On March 20, 1920, the corporation was dissolved and the assets transferred to the stockholders who, under prior verbal and subsequent written agreements, continued the business under the same name as a partnership, the several interests therein being proportionate to their interests as stockholders. *2972  The March 1, 1913, value of the stock held by the several petitioners, together with the cost of stock acquired by them subsequent to the basic date, is conceded to be as follows: NameSharesCost and Mar. 1, 1913, valueJ. L. Harris220$53,967.76Eugene S. Kahn12031,187.10Isadore Klein12031,187.10Mrs. A. Sickles204,796.78*1261  The business engaged in was manufacturing and/or jobbing harness, collars and pads, bridles, saddles and blankets, chains, accessories, etc., ordinary to the saddlery and harness business.  The assets shown in the closing balance sheet of the corporation, and the adjustments made in the revenue agent's report upon which the deficiency is based, may be tabulated as follows: AssetsBooksAdjustedCash$55.39$55.39Accounts receivable161,324.50161,324.50Liberty bonds, War Savings stamps12,069.0512,069.05Merchandise inventory46,979.0746,979.07Real Estate No. 1 and building22,942.65Real Estate No. 2 and building4,533.95Real Estate (lots)5,363.68Brick building No. 126,430.54Brick building No. 23,234.75Plant and machinery2,323.004,903.23Furniture and fixtures350.00794.81Horses and wagons115.00267.74Thresher411.11902.57Unexpired insurance133.75133.75Advances to employees1,058.531,058.5310 shares, Cairo Real Estate & Improvement Co1,000.00252,296.00264,517.61*2973  The closing balance sheet of the corporation was used by petitioners and in the revenue agent's report as the opening balance sheet of the partnership.  By stipulation the Liberty bond and War Savings stamps item should be reduced by $543.24.  The accounts receivable were largely open accounts owing by approximately 500 customer dealers doing business in the territory comprising the States of Illinois, Missouri, Arkansas, Mississippi, Alabama, Kentucky and Tennessee.  By reason of the fact that petitioner was a small-town concern it was forced to do business with smaller dealers located in smaller towns and with less financial responsibility than was true of its city competitors.  About 90 per cent of the dealers were rated at $1,000 or less by R. G. Dun, and were located in villages with not more than 600 inhabitants.  The ordinary credit terms were 60 days, but most of the accounts ran for a longer time.  The business of such dealers was largely with the farm trade and collections were dependent upon crops, making them less satisfactory credit customers than those engaged in industrial pursuits.  Such conditions were in turn reflected in collections by the corporation in question. *2974  Rpobably 35 per cent of the accounts receivable on March 20, 1920, had been due since the preceding May.  The accounts receivable had a fair market value of 72 per cent of their face value.  The partnership continued during the remainder of the calendar year 1920 to do business with a large proportion of the dealers who had accounts taken over by the partnership.  Purchases made by them from the partnership totaled $217,134.96 to December 31, 1920.  *1262  During the same period payments to the partnership on the accounts totaled $282,129.36, leaving a balance of $96,658.37 due at the end of the year after $1,540.87 had been charged off as bad debts.  Most of the accounts receivable taken over by the partnership were paid in full by December 31, 1920.  Payments made to the partnership on certain of the remaining accounts, which accounts totaled $22,753.60 when acquired at dissolution, were not equal to the amount of charges for additional goods sold by the partnership during the course of the year.  An example of this class of accounts, together with all the evidence of record concerning it is as follows: Cades Mercantile Co.:Balance Mar. 20, 1920$41.92Charges Mar. 20, 1920 to Dec. 31, 1920341.58Payments Mar. 20, 1920 to Dec. 31, 1920242.95Balance Dec. 31, 1920140.55*2975  On the remaining accounts the payment received by the partnership during the year 1920 exceeded charges for additional goods, if any, sold by it prior to the close of the year.  The status of such account may be tabulated as follows: Balance Mar. 20, 1920Charges Mar. 20, 1920, to Dec. 31, 1920Payments Mar. 20, 1920, to Dec. 31, 1920Balance Dec. 31, 1920Adams & Son$382.82$594.33$782.82$194.33Atchison Lea. Products Co203.03534.72708.2129.54J. R. Banks32.50343.10344.8130.79Brock Bros451.93434.67775.63110.97City Hardware & Furn. Co478.00511.88534.31455.57D. E. Echols1,287.49801.891,485.20604.18Walter L. Guthrie847.50901.25947.50801.25Harwell & Fitzgerals488.75369.29680.15177.89W. J. Holt, jr1,015.64386.061,276.65125.05L. Khouri53.88282.11306.9429.05C. E. Knickerbocker486.12901.331,203.68183.77Lake Co. Imp. Co889.84107.12948.3048.66Leigh & Caffey437.73751.38992.73196.38Lindahl Hardware Co372.051,124.381,312.40184.03M. A. A. Lumber Co615.75322.35767.00171.10Marmaduke Store Co372.77603.33672.03304.07H. R. Meadows83.7086.75168.721.73J. L. McCrite152.50259.36378.9132.95McCutchen Merc. Co664.06308.40728.77243.69C. W. Morris133.35154.55274.9013.00Peterman Hdw. Co390.40291.83407.75274.48Petree & Nelson457.20324.97494.62287.55Pope & Pearce176.62376.37326.62226.37Pope & Sellars84.70135.13149.7070.13Ratcliff Hdw. Co112.25592.57604.82100.00W. R. Richie15.04135.01149.001.05Rosenberg Merc. Co254.69291.62364.94181.37Shach Bros. Co337.18122.63410.8948.92Sims & Veazy37.68360.84398.02.50J. W. Smith & Co67.24106.24139.7433.74Statlar Hdw. & Furn. Co283.96111.61383.9111.66Tenn. Hdw. Co2,059.791,292.142,507.07844.86Tenn. Hdw. Co899.52418.77876.00442.29White Bros. Hdw. Co60.00495.86510.6845.18W. L. Williams & Son97.4768.85144.0722.25E. W. Avery, Est149.64676.38756.7069.32L. H. Barclay1,008.38610.921,102.11517.19Rice Belton Hdw495.881,218.301,414.18300.00Bennett & McDade1,080.38278.011,283.3975.00Bertig Bros1,561.351,387.002,403.30545.05Bestgen & Westerman323.02202.21469.0356.20W. C. Bryant552.5689.12616.8024.88M. L. Burnett61.69175.76221.7015.75Sol Burkit633.381,213.581,607.38240.19Cairo Harness Co$363.38$1,883.21$2,117.29$129.30Berryman-Kennedy247.421,625.991,846.4127.00Sam Cantwell530.02727.62735.26522.38J. F. Carter273.1067.28280.0660.32N. G. Cartwright5,809.473,688.186,317.223,180.43Cauble & Cauble201.31509.55689.2121.65W. B. Conyers49.20225.73238.2236.71E. L. Crain11.18261.06262.0410.20Ben De Mays54.4162.51106.6210.30Dowdy & Hux380.20425.66796.968.90Dyersburg Hdw. Co1,482.50784.122,155.12111.50Dyersburg Vehicle Co1,180.171,084.471,620.00644.64Greenway Supply Co44.99552.65578.8618.78H. W. Hanna321.66236.98479.8078.84Harkey & Moore1,258.411,416.282,072.92601.77J. B. Heyde Sons144.03595.99679.3860.64Hickman Hdw. Co303.05464.19467.24300.00Highfield Mer. Co709.01709.84757.35661.50E. C. Hogendobler408.05109.67452.7864.94J. L. Hosick247.811,016.991,179.9284.88H. L. Hostetler403.321,211.491,246.63368.18J. T. Howell864.33503.38900.00467.71Hughes Bros1,020.06790.021,310.08500.00Hunter Supply Co776.64133.17837.7972.02Jetton Hardware Co627.32294.74629.42292.64W. E. Joyner61.531,013.111,057.0617.58J. C. Kaylor1,464.482,218.052,244.181,438.35Keiser Supply Co858.90728.461,141.36446.00La Center Imp. Co2,198.15569.432,450.00317.58J. W. Lee515.93499.12916.4198.64W. M. Lester49.97119.10158.6610.41Miller Hdw. Co80.37649.75680.3749.75J. F. McHaney216.747.25223.24.75W. D. McCann553.23781.98907.39427.82Newbern Hdwe1,481.43662.091,602.88540.64L. N. Norvel51.50430.69460.7121.48Wm. Oehler30.65421.77426.6425.78S. N. Pitzele & Co2,163.522,322.264,004.09481.69Radford McDavid416.80852.571,246.6322.74J. R. Reeves & Son674.041,579.291,989.46263.87Prather & Robinson140.59428.56510.5058.65Ed. Gordon138.00105.53143.7599.78King Sup. Co48.15183.63200.8630.92R. E. Lee416.682,101.022,131.01386.69Robinson & Cochran3,244.631,491.663,736.291,000.00G. W. Roth69.31290.35321.6638.00Scudder Gale Co105.52522.31623.334.50Shore & Phebus1,141.69468.481,598.7011.47A. P. Simmons165.4219.84180.424.84W. F. Simmons68.24140.78159.1149.91D. R. Stanley352.06553.90552.06353.90A. R. Turner1,481.15485.551,650.20316.50W. E. Vick289.67216.20498.707.17White Bros. & Co153.002,678.742,735.1196.63Whitwell Moore Co305.03691.67743.78252.92W. W. Wilbourn337.85384.94627.2695.53C. H. Wolter245.24819.80896.26168.78Edgar Woods11.331,370.111,372.498.95Selz & Hamburger434.21632.36690.32376.25Sexton Bros360.17175.80383.04152.93Voll Ferrell648.43263.70817.9694.17Hodges Merc. Co188.63704.03857.6734.99D. C. Morrow1,120.00315.861,432.863.00Mud Creek Lumber Co567.89354.66840.6881.87B. C. Smith & Son930.952,034.122,248.68716.39J. H. Still & Son409.61260.83421.61248.83Welman Bros435.46287.51441.46281.51R. D. Watson687.901,465.191,647.77505.32Lake City Supply Co136.53271.32328.8579.00Delta Hdwe. Co172.6086.3086.30J. W. Grantham263.72213.7250.00Reiman-Wolford18,329.876,037.818,513.4315,854.25Gus Bain & Co387.73309.8377.90J. F. Farris731.44240.19715.21256.42G. W. Tanner1,002.50515.37721.19796.68Tatum Bros1,127.88277.281,097.73307.43M. A. Walker & Co1,556.16597.971,081.431,072.70J. G. Smith & Sons363.49110.10250.00223.59R. C. Luter691.43257.27684.52264.18L. L. Pulliam361.06146.63300.00207.69S. E. Stewart694.87206.19448.56452.50Thalheim & Son532.62179.50412.12300.00*2976 *1264  The status of the accounts which were charged off as bad debts in whole or in part by the partnership during 1920 was, at the close of the year, as follows: Balance Mar. 20, 1920Charges Mar. 20, 1920, to Dec. 31, 1920Payments Mar. 20, 1920, to Dec. 31, 1920Balance Dec. 31, 1920Charged off to Dec. 31, 1920W. B. Clearman$65.50$56.11$9.39Feinberg & Mennen417.06$348.61214.09551.58Long & Company208.35208.35Taylor Merc. Co310.7090.00220.70C. R. Phillips10.753,099.572,822.72287.60M. Levy76.9376.93Luther Pugh4.804.80The corporation books were closed on March 20, 1920, the date of dissolution.  Its opening inventory January 1, 1920, was $126,029.08.  The business was seasonal, the three big months being January, February, and March.  Purchases to March 20 amounted to $71,716.40, which, when added to opening inventory, gives a total of $197.745.48.  Gross sales to March 20 were $208,069.17 and the closing inventory was $46,979.07, making goods sold cost $150,766.41.  The closing inventory of March 20 was used as the opening inventory for the partnership*2977  period beginning March 21.  The closing inventory of the partnership December 31, 1920, was $125,819.90.  All inventories were taken on the basis of cost or market, whichever is lower.  Fifty per cent of the closing inventory of the corporation represented nonsalable goods, consisting principally of obsolete saddles and heavy harness.  The fair market value of the goods included in such inventory was 50 per cent of $46,979.07.  Seventy-five per cent of the goods included in such inventory also appear in the partnership's closing inventory as of December 31, 1920, reducing that inventory by 37 1/2 per cent of $46,979.07 on account of nonsalable goods carried over.  The items of real estate consisted of land and buildings.  The land comprised five lots 25 by 100 feet each.  The lots, as such, were worth about $500 each.  The buildings, identified as Nos. 1 and 2, joined in an ell shape at the rear, facing on Commercial Street and on 17th Street, respectively.  Building No. 1 was 50 by 100 feet, three stories and basement.  The other building had two stories and basement.  Both were brick buildings of a type known as joisted mill construction - rough exterior of common brick with joisted*2978  ceilings.  Cairo is built upon low ground at the confluence of the Ohio and Mississippi Rivers.  The river stages have been steadily rising since the floods of 1912 and 1913.  The city did not recover from the flood reactions despite levee improvements subsequently constructed.  *1265  There have been no improvements made, and few or no buildings were constructed in the neighborhood in which the buildings in questions are located for many years prior to 1920.  Commercial Avenue was paved in 1913.  Seventeenth Street has only a gravel surface.  Properties in the neighborhood housing large liquor businesses were vacated upon the advent of prohibition and have become practically worthless since.  The population of Cairo has remained practically stationary since 1913.  There has been a gradual but slight decrease (about 10%) in realty values generally in that city since 1907.  Conditions affecting the value of real estate in the section of the city in which the property was located were about as bad as in any other section of the city at that time.  The buildings had been specially constructed for use by the saddlery and harness business.  They had a probable useful life (without*2979  considering obsolescence) of about 30 to 35 years.  One building was built about 12 years prior to 1920 and was in need of repairs.  The fair market value of the real estate assets on March 20, 1920, was $15,000.  The machinery owned by the corporation had suffered heavy depreciation and had about reached the end of its useful life.  Some of it was obsolete.  Some of the machines in use were leased for so much per stitch.  The lease machines were not included in the machinery item.  The machinery (aside from the thresher, which is separately considered below) owned by the corporation had a fair market value of $900 on March 20, 1920.  The thresher was a machine used to thresh the heads out of rye straw, which was used in stuffing collars.  Its fair market value on March 20, 1920, was $579.04, its depreciated book value.  Furniture and fixtures assets include files, desks, typewriters, chairs and a safe, all of which were second hand in 1907, and had a fair market value not exceeding $150.38 on the date in question.  The assets listed as "horses and wagons," comprising one horse and one wagon, had a fair market value of $69.51 on the dissolution date.  The only other assets the*2980  value of which was placed in question, were the 10 shares of the Cairo Real Estate & Improvement Co.  This stock is conceded to have been worthless before the close of the year 1920.  It is conceded that the liabilities of the corporation should be increased by $1,007.70, the amount of accrued taxes.  Depreciation was allowed petitioners during the period of operation as a partnership on the assets in question, as follows: AssetsAmountRateTimeDeductionPer centDaysBuilding No. 1$26,430.542286$413.07Building No. 23,234.75228650.55104.40101 72377.04Plant and machinery4,903.231028680.60107257.40Furniture and fixtures714.2110286Horse and wagon267.741028620.92*1266  OPINION.  SIEFKIN: The original petition filed in this proceeding raised the issue whether taxable income was received by petitioners at March 20, 1920, when they caused the corporation to be dissolved and took over the assets as partners.  Article 1566 of Regulations 45, which states they did not, was cited in support of this position.  Petitioners now concede the question has*2981  been decided adversely.   (Feb. 20, 1928); ; ; ; . We conclude that taxable income was received.  The issues remaining in controversy are largely questions of fact involving the value of the corporate assets received in dissolution.  The various assets will be considered in the order in which they were disposed of in the findings of fact.  Preliminary to such discussion, however, we shall inquire into respondent's contention that petitioners can not prevail because in all their testimony with respect to the fair market value of the assets they have proceeded upon the erroneous theory that such assets should be valued as if the business of the corporation were being liquidated.  Respondent further states that there is no evidence as to the value of the assets as a business unit.  The testimony referred to was given in reply to questions as to the fair market value of the several assets set out in our findings of fact.  The testimony discloses*2982  the opinion of qualified witnesses as to what value would be agreed upon by a willing seller and a willing buyer with respect to each such asset.  It is clear that no witness was testifying as to forced sale values.  In his cross-examination, counsel for respondent failed to develop a difference in fact between the values of record and the alleged values considering the assets as a part of a going business.  He succeeded only in showing that at least some of the witnesses regarded the values testified to by them as fair values though the assets be regarded as a part of the whole business.  It should be noted that counsel for petitioner in taking up the assets separately at the hearing followed the method of valuation used by the revenue agent in making his report, which is the basis *1267  for the deficiencies asserted.  The report lists the assets and sets down the value ascribed to each such asset.  The sum of such values is then recommended as the total value of the assets received by petitioners upon dissolution.  No good will, going concern, or any other similar asset is contained in the agent's list.  Petitioner merely takes the list thus provided and establishes by testimony*2983  and other evidence that the values assigned to the various assets were excessive, thereby reducing the sum total.  The opinions as to the fair market value of accounts receivable varied from 50 to 60 per cent of their face value.  We have found hat they were worth 72 per cent, in view of the evidence that only about 35 per cent of the accounts were outstanding from the preceding May 1, and the extent of the collections made by the partnership before the close of 1920.  Such fair market value represents the basis for computing future gain or loss to the partners upon the accounts.  The respondent points out that any amount recovered by the partnership before the close of the year in excess of such basis should be reflected in the income of the petitioners for 1920, and, to the extent of such excess, serves to offset any reduction in income due to our reducing the income from dissolution by discounting face value to reach fair market value.  Where the accounts were paid in full before the close of the year the reduction in income of the petitioners due to discounting the face value of the accounts to reach actual value when received is exactly offset by the increase in the respective*2984  incomes due to excess of collections over basic cost.  Accordingly, we need consider only those accounts which the evidence does not show as having been paid in full at the close of the year.  As the alleged offset is affirmatively pleaded by respondent, any deficiencies in the evidence must be resolved against him.  In some instances the payments received were less than the additional charges made for goods sold by the partnership.  As to such accounts, which were of the total face value of $22,753.60 when received by the partnership, we are unable to determine whether the payments were applied against the old account or the subsequent purchases, as there is no evidence upon that point.  Accordingly, we are unable to determine any partnership income due to excess of collections over basic cost which serves to offset reductions of income due to such accounts being discounted 28 per cent off face value to reach fair value.  This reduction of income, realized on dissolution upon this class of accounts, amounted to 28 per cent of the above total.  As no offsetting income was established, income will be reduced by that amount.  The computation productive of such result is similar in*2985  principle to the one set forth in the paragraph below regarding another class of accounts.  *1268  The list set out in the findings of fact contains all the accounts (not already discussed or taken up separately below) where we can determine there was something paid against the old account.  The treatment to be accorded this class of accounts can best be shown by example.  In the account of the Atchison Lea Products Co. the face value of the old account was $203.03.  Of such amount we can determine that $708.21 (the amount of payment) less $534.72 (the charges for additional merchandise) or $173.49 was realized in cash by the partnership leaving $29.54 balance carried over.  To the extent the face value was paid, reductions of income (due to discounting face value to reach actual value when received in dissolution) are exactly offset by excess of collections over basic cost to the partnership.  Accordingly, we need concern ourselves further only with the $29.54 balance.  That amount consists of that much of the old account and should be reduced in closing inventory by 28 per cent thereof or $8.27 which is the amount of net decrease in petitioner's income upon this account due*2986  to our finding the accounts were worth but 72 per cent of their face value after offsetting for collections in excess of such value.  Realization of such income ($8.27) is, so far as we can ascertain, postponed until the sum to which it relates ($29.54) is collected.  The same result may be reached by first reducing opening accounts receivable to 72 per cent of their face and varying the manner of the computation accordingly.  The accounts charged off in whole or in part are tabulated in a separate list in our findings of fact.  We are not informed whether the amounts charged off were claimed or allowed as bad debt deductions.  Accordingly the charge-off must be disregarded and should be treated as balance due to make the above described computations.  Our findings of fact are decisive of the questions pertaining to inventories.  Adjustments will be made accordingly.  The controversy regarding realty values is similarly disposed of by our findings of fact requiring reductions as indicated.  The remaining questions raised are covered by our findings of fact.  Adjustments will be made as indicated in the items termed Liberty bonds and War Savings stamps; plant and machinery; furniture*2987  and fixtures; horses and wagons; thresher, and Cairo Real Estate & Improvement Co. stock.  Whether the latter became worthless before or after dissolution makes no difference, as, in any event, it was worthless prior to the close of the taxable year.  The income from dissolution will further be reduced by the amount of taxes accrued as a liability against the corporation.  The depreciation deduction allowed the partnership will be recomputed, reducing the cost used by respondent to the values found.  Judgment will be entered under Rule 50.Footnotes1. Exhausted. ↩