Dirksen v. Commissioner , 24 B.T.A. 1152 ( 1931 )

ANNA L. DIRKSEN, EXECUTRIX, ESTATE OF THEODORE H. DIRKSEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Dirksen v. Commissioner

Docket No. 17717.

United States Board of Tax Appeals

24 B.T.A. 1152; 1931 BTA LEXIS 1532;

December 15, 1931, Promulgated

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1. Fair market value of corporate asserts distributed as liquidating dividend, determined.

2. Several years prior to dissolution of a corporation shares of its stock were assigned by decedent to his wife, who thereafter, until the corporation was dissolved, exercised dominion and control over such shares, although decedent retained possession of them at his wife's request. Held, decedent was not the owner of such shares at the time the company's assets were distributed.

Hugh J. Graham, Esq., and O. B. Irwin, Esq., for the petitioner.

John H. Pigg, Esq., for the respondent.

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MARQUETTE

This proceeding is for the redetermination of a deficiency in income tax asserted by the respondent for the year 1919 in the amount of $26,530.39. Of the seven errors alleged, four were waived at the hearing and later another was abandoned by the petitioner. Those remaining, and relied upon by petitioner, are: (1) Taking the book value of the property of the A. Dirksen & Sons Corporation to be the fair market value of said property at the date of dissolution of said company; (2) determining that Theodore H. Dirksen was the owner of all but one share of the capital stock of the corporation at the time of dissolution.

FINDINGS OF FACT.

The petitioner is executrix of the estate of her husband, Theodore H. Dirksen, who died in 1920.

They were married in 1894. In 1905 petitioner inherited property, in her own right, which produced an income of about $4,000 per year. She had no experience in business and transacted none, but left the handling of all her affairs to her husband, in whom she had implicit confidence. Her money was placed in her husband's bank account and she had authority to draw against that account, but seldom did so.

From 1894 to 1905 the decedent, Theodore H. Dirksen, was a partner in the firm of A. Dirksen & Sons, engaged in the business of furniture, rugs, and draperies in Springfield, Ill. In 1905 the business was incorporated under the laws of Illinois with a capital stock of $100,000. All of the stock, 1,000 shares, was issued as follows: To Anton Dirksen, 334 shares; to Henry and Theodore H. Dirksen, 333 shares each. In 1909 Anton Dirksen sold 210 shares of his stock to Theodore and 123 shares to Henry.

In 1913 Theodore Dirksen wished to buy the stock owned by Henry Dirksen, but could not unless assisted financially by his wife. He promised her that if she would so assist him he would assign to her the 543 shares which he already held in the company. She agreed, and on January 27, 1913, decedent assigned to her 533 shares of the stock in the Dirksen corporation. On December 29, 1913, the sale of 456 shares of the company's stock from Henry Dirksen to Theodore, dirksen was consummated for a price of $54,000. Of that amount, $10,000 was paid or assumed by Theodore Dirksen, individually; the balance was covered by eleven promissory nots of $4,000 each, signed by both Theodore Dirksen and his wife. Those notes were later paid off by the personal checks of Anna L. Dirksen, signed by her and drawn against funds representing income from her separate property. On January 7, 1914, decedent completely fulfilled his promise to his wife by assigning to her 10 shares of the Dirksen company's stock, and a new certificate for 543 shares of stock was issued to her by the company. On that same day the one remaining share, standing in the name of Anton Dirksen, was transferred to Anna M. Dirksen, who was the daughter of Theodore H. Dirksen and the petitioner.

Anna L. Dirksen considered herself the owner of the stock so transferred to her, but at her request her husband kept possession of it for her. She attended stockholders' meetings, although she did not vote thereat. Earnings of the stock held by her were allocated to her on the company's records and at her direction such earnings were placed in her husband's personal account with the company. She reported such earnings as income to her in her separate income-tax returns.

In 1919 Theodore Dirksen desired to dissolve the corporation. His attorney advised that all the stock be transferred to one person. Pursuant to that advice and solely for the purpose of such dissolution, the petitioner assigned to her husband 542 shares of her stock on November 29, 1919. On that date the stockholders voted to dissolve the company and also voted to turn over all the company's assets to Theodore Dirksen in consideration of his agreement to pay the corporate debts, assume its contractual obligations, and turn in all the stock for cancellation. On December 29, 1919, the petitioner and her daughter transferred to Theodore Dirksen the two remaining shares of corporate stock and on that date the entire 1,000 shares of stock were turned in to the corporation and canceled.

Prior to dissolution, Dirksen agreed with his wife that he and she would carry on the business as equal partners after the company was dissolved, and the business was so carried on from December 1, 1919, until the death of Dirksen in 1920.

At the time of dissolution of the company, November 30, 1919, the merchandise on hand was inventoried at $181,847.43. That amount represented the invoice cost of the goods and no allowance was made with respect to shopworn goods, obsolete styles, patterns, materials and the like. At that time a decided change in the demands of customers had occurred. The change began late in 1918 and became sharply manifest in the late summer or early autumn of 1919. Odd pieces of furniture dropped out of vogue and matched sets were wanted. Oak, and to some extent, mahogany, gave way to walnut. Ingrain carpets were passe and body Brussels rugs lost favor. New residences and apartments were being built with smaller rooms, which materially lessened the demand for large room-size rugs. Styles in curtains changed, likewise patterns in linoleum. Of the merchandise stock of A. Dirksen & Sons on the date of dissolution, nearly 30 per cent of the invoice value represented shopworn and out-of-date goods, such as above described, which could be sold only at reduced prices if sold at all. The actual fair market value of the company's merchandise on November 30, 1919, was: furniture, $61,506.46; rugs, carpets and linoleum, $48,760.21; draperies, $19,223.20; total, $129,489.87. The company also had other assets of the value of $12,598.87, and its net worth at the date of dissolution amounted to $142,088.64.

In his income-tax return for 1919, Theodore H. Dirksen did not report any profit on account of the dissolution of A. Dirksen & Sons. The respondent determined that at the time the company was dissolved, Theodore Dirksen owned 999 shares of the capital stock, and as the owner of such shares derived gain amounting to $82,402.40 from the transfer of the company's assets to him in exchange for the stock. The determination as to the amount of gain was based upon the inventory valuation of the merchandise, namely, $181,847.43.

OPINION.

MARQUETTE: In 1919 the A. Dirksen & Sons Corporation dissolved, having first liquidated by distributing its assets to its stockholders in exchange for their shares of stock. At the time of distribution the assets had a fair market value of $142,086.64. The par value of the company's capital stock was $100,000, and the exchange resulted in gain or profit to the stockholders. The amount of such gain or profit was taxable income to the distributees of the assets, under the provisions of section 201(c) of the Revenue Act of 1918.

Theodore H. Dirksen was a stockholder in the company at the time of dissolution, received his proportionate share of the assets, and thereby derived taxable gain. The respondent's determination of deficiency is based on the theory that Dirksen owned 999 shares of the company's stock and that the inventoried value of the assets is the proper basis upon which to compute the taxable gain.

We think the respondent is in error in both particulars. Concerning the stock ownership, the evidence establishes the fact that in 1913 and 1914 Theodore Dirksen assigned to his wife a total of 543 shares of stock in the Dirksen corporation, in exchange for which she assisted him financially in his purchase of 456 shares from another stockholder. The stock assigned to Anna L. Dirksen was transferred to her on the books of the company and a new certificate for 543 shares was issued to her. It is also established that twice each year the company allocated to Anna L. Dirksen upon its books proportionate amounts of the dividends earned upon his shares, and, at her request, credited such amounts to her husband's account. In her separate income-tax returns she reported as income to her the amounts of dividends allocated to her by the company. These facts, we think, establish Anna L. Dirksen's ownership of and dominion over the shares in question; and their effect is not overcome nor nullified by the fact that she did not vote at stockholders' meetings. The company was a close corporation, owning a business which was managed by Mrs. Dirksen's husband, in whose integrity and business ability she had complete confidence. She was not a business woman and had no experience or training in the company's affairs. Under such circumstances her failure to vote at stockholders' meetings is neither a strange nor a suspicious circumstance.

As to the proper valuation of the company's assets, section 202(b) of the Revenue Act of 1918 provides that:

When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any * * *.

This provision is directly applicable in the present proceeding. See also .

We conclude, therefore, that at the time A. Dirksen & Sons corporation was dissolved, and for several years prior thereto, Theodore H. Dirksen was the owner of only 456 shares of its capital stock. For that stock he received assets of the company amounting to $64,893.04, based upon the fair market value of the assets at the time, and as his stock cost him $54,000, his taxable gain amounted to $10,893.04.

Decision will be entered under Rule 50.