Court Opinion

ID: 4595538
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:15:14.986468+00
Date Added: 2024-06-11T07:51:27.550169
License: Public Domain

S. B. DANDRIDGE ET AL., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. 1Dandridge v. CommissionerDocket Nos. 9348-9351.United States Board of Tax Appeals11 B.T.A. 421; 1928 BTA LEXIS 3809; April 6, 1928, Promulgated 1928 BTA LEXIS 3809">*3809  A dividend declared by a corporation from its profits at the same time the stockholders resolved to dissolve the corporation and to form a partnership to continue its business, and paid to the stockholders at the time the corporation distributed all its assets, held to be a liquidating dividend subject to both normal and surtax under section 201(c) of the Revenue Act of 1918.  George S. Atkinson, Esq., for the petitioners.  Bruce A. Low, Esq., for the respondent.  PHILLIPS 11 B.T.A. 421">*421  These proceedings involve the determination by the Commissioner of deficiencies in the 1920 income tax of the respective petitioners as follows: S. B. Dandridge$85.80Mrs. S. B. Dandridge85.80J. W. Martin755.68Mrs. J. W. Martin755.68G. W. Martin79.27The deficiencies arise from the ruling of the Commissioner that certain amounts reported by the petitioners in their respective returns on dividends received from a corporation, Martin-Dandridge Dry Goods Co., as subject only to surtax, were liquidating dividends and 11 B.T.A. 421">*422  subject to both normal and surtax.  The first 15 paragraphs of the findings of fact are incorporated as stipulated1928 BTA LEXIS 3809">*3810  by the parties.  FINDINGS OF FACT.  1.  The Martin-Bragg Dry Goods Co. was duly incorporated under and by virtue of the laws of the State of Texas, on July 1, 1910, with a capital stock of Twenty Thousand ($20,000) Dollars divided into two hundred (200) shares of the par value of One Hundred ($100) Dollars per share, with its principal office and place of business at Hillsboro, Texas.  2.  The said Martin-Bragg Dry Goods Company amended its charter as authorized by law, on February 7, 1914, which said amendment increased the capital stock of the said corporation from Twenty Thousand ($20,000) Dollars to Thirty Thousand ($30,000) Dollars 3.  On April 27, 1917, the said Martin-Bragg Dry Goods Company again amended its charter as provided by law, which said amendment changed the name of said corporation from Martin-Bragg Dry Goods Company to Martin-Dandridge Dry Goods Company.  4.  In the year 1920, and until dissolution in 1920, the capital stock in the said Martin-Dandridge Dry Goods Company was owned as follows: J. W. Martin 175 shares of the par value of $17,500, G. W. Martin 90 shares of the par value of $9,000, S. B. Dandridge 35 shares of the par value of $3,500, 1928 BTA LEXIS 3809">*3811  which was all of the authorized and all of the outstanding capital stock of said corporation.  5.  In June, 1920, and prior to June 30, 1920, the stockholders of the said Martin-Dandridge Dry Goods Company met in a called meeting and passed the following resolution and took action as set out in the following minutes which are hereinafter copied in full: June 1920 The stockholders of the Martin Dandridge D.G. Co. met in call meeting to consider the advisability of dissolving the corporation and forming a Partnership.  Meeting call to order by President J. W. Martin. All stockholders answering to role call, the matter of desolving was thoroughly discussed.  After which motion was made and unanimously adopted, that the Martin Dandridge D.G. Co. resolve their corporation on June 30th forming a Partnership known as the Martin Dandridge Co.  Same to take over all the assets of the Martin-Dandridge D.G. Co. and assume all the obligations of same.  Motion made and carried that the officers of the corporation be the officers of the Partnership in the same capacity.  Motion made and carried that all surplus and profits be divided, in proportion to the amount of each ones holdings in1928 BTA LEXIS 3809">*3812  the company after which adjournment was taken.  S. B. Dandridge Secretary.  6.  In the year 1920 and prior to the dissolution of the said corporation in the year 1920, the officers and directors of the said corporation were as follows: 11 B.T.A. 421">*423  J. W. Martin, President, Treasurer, and Director.  S. B. Dandridge, Secretary and Director.  G. W. Martin, Vice-President and Director.  7.  These officers and directors were all of the stockholders of the said corporation in the year 1920.  8.  Under the authority of the minutes which have been set out above, under stipulation number five, the officers of the said corporation first ascertained the net income and added it to the earned surplus account on the books of the corporation and ascertained the total amount of the earned surplus to June 30, 1920.  9.  The officers of the said corporation then set up on the books of the corporation the following closing journal entries: Closing Journal EntriesMartin-Dandridge Dry Goods Company - (Corporation)June 30, 1920.Surplus$37,080.27To dividend account$37,080.27For amount of dividend declared payable to stockholders of record at close of busi-ness - June 30, 1920:1928 BTA LEXIS 3809">*3813 NameShares ownedAmountJ. W. Martin175$21,630.16G. W. Martin9011,124.08S. B. Dandridge354,326.03Total30037,080.27(2)Dividend account$37,080.27To J. W. Martin dividend account$21,630.16G. W. Martin dividend account11,124.08S. B. Dandridge dividend account4,326.03To credit the dividend account of the in- dividual stockholders with their propor- tion of dividend declared payable as of June 30, 1920.(3)Capital stock$30,000.00To J. W. Martin - Capital$17,500.00G. W. Martin - Capital9,000.00S. B. Dandridge - Capital3,500.00To credit the individual stockholders with the par value of their capital stock de- livered for cancellation in order to dis- solve the corporation and transfer the assets and liabilities to the partnership of Martin - Dandridge Dry Goods Company, as at June 30, 1920.(4)J. W. Martin dividend account$20,000.00G. W. Martin dividend account11,000.00S. B. Dandridge dividend account4,000.00To J. W. Martin capital$20,000.00G. W. Martin capital11,000.00S. B. Dandridge capital4,000.00To transfer to the credit of the latter accounts part of the dividend account standing to their credit.(5)J. W. Martin dividend account$1,630.16G. W. Martin dividend account124.08S. B. Dandridge account326.03To J. W. Martin$1,630.16G. W. Martin124.08S. B. Dandridge326.03To credit the personal accounts of the stockholders holders with the balance of their dividend accounts.(6)Martin-Dandridge Dry Goods Company (part- nership)$167,228.11To Farmers National Bank$1,026.58Checks held for customers259.11Petty cash200.00Cashier's change11.00Bills receivable3,858.37Accrued interest on bills receivable82.28Accounts receivable - Customers31,274.21Luxury taxes receivable280.35American Railway Express Company82.39M. K. and T. Railway96.25Cotton Belt Railway84.18S. B. Dandridge639.52Miss Jon Gilliam47.50Miss Taylor.25Mrs. Walter Hailey34.37Mrs. Os. Bratcher27.87George Echols.55Earl Duffie9.46E. J. Skinner13.29Mrs. Minor Williams6.37Robert Watson84.92Miss Peevy31.22Mrs. Mitchell35.33Mrs. Will Wallace5.62Janie Hickman.09Miss Eddie Watson22.52Mrs. Moon12.06Merchandise inventory104,551.58Liberty bonds200.00Eastland Oil Company stock$500.00Great Southern Oil Company stock350.00Real estate and building16,000.00Course in salesmanship324.00Prepaid insurance290.47Paper and twine328.89Surrender value of life-insurance policy282.00Furniture and fixtures5,638.76Rolling stock511.60Water Reed25.15To charge the partnership of Martin-Dan- dridge Dry Goods Company with all the assets of the company sold to the partner- ship as at June 30, 1920.(7)First State Bank$554.38Reserve for depreciation of building555.00Reserve for depreciation of furniture and fixtures3,084.15Reserve for depreciation of rolling stock219.04Colonial Trust Company - Loan12,000.00Bills payable - First State Bank21,000.00Bills payable - G. W. Martin1,367.50Accrued interest on bills payable:Colonial Trust Company$420.00First State Bank52.22G. W. Martin54.70526.92Accounts payable - Trade49,811.40J. W. Martin87.57G. W. Martin1,630.161,717.73G. W. Martin3,150.00G. W. Martin124.083,274.08Accrued interest on G. W. Martin loan126.00Accrued general taxes788.02Reserve for income and profits taxes:Additional for 1917$1,583.13Years 1919 and 19205,620.767,203.89J. W. Martin capital account37,500.00G. W. Martin capital account20,000.00S. B. Dandridge capital account7,500.00To Martin-Dandridge Dry Goods Company (partnership)167,228.11To credit the partnership of Martin-Dan- dridge Dry Goods Company with all the liabilities of this corporation, assumed by the partnership as atJune 30, 1920.1928 BTA LEXIS 3809">*3814 11 B.T.A. 421">*425  10.  On June 30, 1920, the stockholders in the said corporation formed a partnership under the firm name of Martin-Dandridge Company, same taking over all the assets and assuming all of the 11 B.T.A. 421">*426  liabilities of the said corporation, Martin-Dandridge Dry Goods Company.  11.  Under the authority of the minutes which have been set out above under stipulation number five, the officers of the said corporation then proceeded to dissolve the said corporation as provided by law, which dissolution was formally effected on July 10, 1920.  12.  Stockholders, S. B. Dandridge and J. W. Martin, were married, living with their wives and domiciled in the State of Texas during the year 1920, and for the year 1920 these stockholders each reported one-half of the dividends credited to them as above from earned surplus, and the wife of each of them reported as dividends one-half of the dividends credited to her husband from earned surplus on the books of the said corporation as above.  In each case these dividends were reported and treated as dividends received from a domestic corporation and surtax was computed on same.  13.  Stockholder, G. W. Martin, for the calendar year1928 BTA LEXIS 3809">*3815  1920 filed his individual income tax return, reporting therein as a dividend from a domestic corporation the amount which was credited to him on the said books on June 30, 1920, from earned surplus, and he computed and paid the surtax on same.  14.  The amount of earned surplus of the said corporation as at June 30, 1920, was correctly stated in the Revenue Agent's report on the Martin-Dandridge Dry Goods Company, dated May 29, 1925, case No. 15241, to be Thirty-six Thousand Seven Hundred Sixty-eight and 90/100 ($36,768.90) Dollars and this amount was distributed to the said stockholders as set out in the said Revenue Agent's report correctly as follows: J. W. Martin$21,448.52G. W. Martin11,030.67S. B. Dandridge4,289.7115.  The only question involved in this case is whether the dividends paid as above from earned surplus were liquidating dividends as the Commissioner contends and subject to both normal taxes and surtaxes, or whether these dividends were ordinary dividends as contended by petitioners and subject only to the graduated surtaxes.  16.  All of the earned surplus of the Martin-Dandridge Dry Goods Company as at June 30, 1920, was accumulated1928 BTA LEXIS 3809">*3816  after February 28, 1913, except an amount of $5,013.04.  Such later amount was accumulated prior to January 1, 1916, the date of accumulation not being shown.  OPINION.  PHILLIPS: The sole question involved in the present proceeding is whether certain dividends, consisting of all surplus and profits of 11 B.T.A. 421">*427  the Martin-Dandridge Dry Goods Co. on June 30, 1920, which dividends were declared on or before that date, are subject to both the surtax and normal tax or subject only to surtax.  The question arises under the provisions of section 201, subdivisions (a), (b), and (c), and section 216, subdivision (a) of the Revenue Act of 1918.  It is contended by petitioner that the dividends in question were declared prior to the dissolution of the corporation and are, therefore, not liquidating dividends; while the respondent claimed them to be in liquidation of the corporation and subject to both surtax and normal tax.  The preliminary step in the dissolution of a corporation is a proper resolution by the stockholders to dissolve.  Thereafter any distribution of assets pursuant to that resolution may be said to be a distribution in the course of liquidation of the corporation. 1928 BTA LEXIS 3809">*3817  The record establishes that the stockholders' meeting was called prior to June 30, 1920, to consider the advisability of dissolving the corporation.  Acting on the purpose for which they were called, the stockholders resolved to dissolve the corporation on June 30, 1920, and form a partnership, and to transfer to the partnership all the assets of the corporation.  At the same meeting they determined that all of the surplus and profits be divided in proportion to the amount of each one's holdings in the corporation.  These actions were consistent with the purpose of the meeting, i.e., to consider a dissolution of the corporation.  On June 30, 1920, the stockholders of said corporation formed a partnership.  On the same date all the stock had been turned in for cancellation.  On June 30th the officers of the corporation under authority conferred upon them by the stockholders' meeting, made closing journal entries to distribute all of the surplus of the corporation among the stockholders, and to transfer to the partnership the remaining assets and liabilities of the corporation.  It seems, therefore, that on June 30, 1920, liquidation was, in fact, accomplished, and the fact that the1928 BTA LEXIS 3809">*3818  corporation was not formally dissolved as provided by law until July 10, 1920, does not affect the character of the dividend declared from surplus as a liquidating dividend.  Whether we look to the situation that existed when the dividend was declared or at the time it was paid, it is clear that the distribution of surplus and profits was not merely in anticipation of liquidation and dissolution, but was a step taken while the corporation was in the process of liquidation and dissolution and is a liquidating dividend subject to both surtax and normal tax.  ; 5 Am.Fed. Tax Rep. 6125; ; ; . Reviewed by the Board.  Decision will be entered under Rule 50.Footnotes1. The following proceedings were consolidated with the above entitled proceeding and are decided herewith: Mrs. S. B. Dandridge, No. 9349; G. W. Martin, No. 9352; J. W. Martin, No. 9350; and Mrs. J. W. Martin, No. 9351. ↩