Smith v. Commissioner , 26 B.T.A. 1178 ( 1932 )

MRS. GRANT SMITH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

W. E. HAUSER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Smith v. Commissioner

Docket Nos. 43300-43302, 43305, 43306.

United States Board of Tax Appeals

26 B.T.A. 1178; 1932 BTA LEXIS 1175;

October 12, 1932, Promulgated

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">*1175 1. CORPORATION - DISSOLUTION. Where a corporation was dissolved and under the laws of the State of Washington its assets were turned over to trustees in dissolution for liquidation and distribution, held, this does not constitute a distribution to or a receipt of assets by the stockholders. Wells Fargo Bank v. Blair, 26 Fed.(2d) 532, followed.

2. Id. Where the trustees in dissolution conveyed the undivided assets to a national bank with trust powers, in trust for the purposes of liquidation and ultimate distribution to the stockholders, the transfer of the assets to the trustee was not a distribution to the stockholders. Taylor Oil & Gas Co. v. Commissioner,15 B.T.A. 609">15 B.T.A. 609 (affd., 47 Fed.(2d) 108), followed.

3. TAXABLE PERIOD - DISSOLVED CORPORATIONS IN HANDS OF TRUSTEES FOR LIQUIDATION. Trustees in liquidation should prepare and file a corporate return of annual net income for the entire year, including therein the gross income received by the corporation prior to the time of the trustees' appointment and also the gross income received under the supervision of the liquidating trustees.

The action of the">*1176 Commissioner in computing a deficiency for the period January 1 to January 12, 1925 (the date the corporation was dissolved and its affairs were put into the hands of liquidating trustees) was error, liquidation of the corporation's affairs not having been completed on January 12, 1925.

Russell D. Morrill, Esq., and Josiah Willard, Esq., for the petitioners.

J. G. Gibbs, Esq., for the respondent.

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BLACK

">*1178 These five cases were consolidated for hearing by order of the Board. Docket Nos. 43301 and 43305 involve the income-tax liability of the petitioners as transferees of the assets of the Smith Securities Company, a Washington corporation, for the calendar year 1924 in the sum of $83,021.52 and for the period January 1 ">*1179 to January 12, 1925, in the sum of $5,173.75. Docket No. 43300 involves a deficiency of $3,369.43 against petitioner Mrs. Grant Smith for the period January 1, 1925, to December 7, 1925, as transferee of the assets of the estate of Grant Smith, deceased. Docket No. 43302 involves a deficiency of $35,200 for the year 1925 against petitioner W. E. Hauser, and Docket No. 43306 involves a deficiency of $1,669.77">*1177 determined against Mrs. Grant Smith for 1925. The two issues which we have to decide will be stated in the opinion. At the hearing depositions of several witnesses were introduced in evidence and certain stipulations were filed, from which we make the following findings of fact.

FINDINGS OF FACT.

Petitioners are individuals, residing in Seattle, Washington, with their business address at 827 Henry Building in that city.

The Smith Securities Company was a corporation of the State of Washington. At the time of its dissolution on January 12, 1925, all of its stock, except directors' qualifying shares, was held in equal parts by W. E. Hauser and the estate of Grant Smith, who died on September 23, 1923. The administrators of the estate of Grant Smith were Harry H. Hunt and the decedent's widow and sole heir, Mrs. Grant Smith, who has since remarried and is now Mrs. Charles Stuart, but who will be referred to hereafter as Mrs. Grant Smith. The trustees of the company at the time of its dissolution were W. E. Hauser, Mrs. Grant Smith, and P. E. Colman.

Late in 1924 the trustees discussed among themselves, and with the administrators of the estate of Grant Smith, the desirability">*1178 of dissolving the Smith Securities Company and liquidating its assets. The liquidation of the corporation presented a difficult problem, since over half of its assets consisted of real estate, stock in corporations holding real estate and accounts receivable from close corporations, and other assets which could not be easily sold or divided. The trustees, therefore, decided that the corporation should be dissolved and that the liquid assets should be immediately divided among the stockholders and the remaining assets held and liquidated over a period of time as advantageously as possible. The three trustees were not, however, in a position to administer these assets personally, since Mr. Hauser's interests were largely centered in Louisiana and kept him away from Seattle for a greater part of the time, while Mrs. Smith had not had much business experience and did not wish to be burdened by details of administration.

It, therefore, was decided by the trustees that it would be desirable to have these assets administered by someone on their behalf, and, accordingly, they approached J. T. McVay and G. C. Morrill, ">*1180 the president and vice president, respectively, of the">*1179 Metropolitan National Bank of Seattle, Washington, and asked them if the bank would be willing to act as the agent of the trustees in the liquidation of the slow assets of the Smith Securities Company. These officers expressed their willingness to have the bank act for the trustees. Accordingly, the trustees proceeded to cause the dissolution of the corporation and on January 12, 1925, the Superior Court of the State of Washington entered decree dissolving the corporation and appointing, as trustees in dissolution, W. E. Hauser, P. E. Colman, and Mrs. Grant Smith. Immediately on the dissolution of the corporation, the trustees divided and turned over to the two stockholders, W. E. Hauser and the estate of Grant Smith, cash and marketable securities having a value of about $2,150,000, each of the two stockholders receiving, therefore, a little over $1,000,000. Since the stock of the Smith Securities Company held by Hauser had a cost to him of $2,215,642.50 and the stock of the Smith Securities Company held by the estate of Grant Smith had a cost to it of $2,274,337.67, neither of the stockholders received any profit on the distribution of these liquid assets.

At the same time, ">*1180 the remaining assets, consisting of real estate, notes, stocks, etc., were turned over to the Metropolitan National Bank to be held in accordance with the terms of a written trust agreement, the detailed provisions of which will be hereinafter stated.

During the course of the preparation of this trust agreement, the question arose as to whether it should effect a distribution of the assets in question to the two stockholders and a transfer by them of the assets so received to the Metropolitan National Bank to be administered for them, or whether it should effect a transfer by the trustees in dissolution to the Metropolitan National Bank as agent for the trustees to administer and liquidate the assets for them and turn over the proceeds of the liquidation to the two stockholders. In the course of a conference on this question on or about May 14, 1925, Hauser, who owned 50 per cent of the stock in Smith Securities Corporation, expressly instructed Morrill, president of the Metropolitan National Bank, who in turn instructed Thorgrimson, an attorney who was preparing the trust agreement, that the bank was to act as agent for the trustees and that there was to be no distribution of">*1181 these assets to the stockholders in the first instance.

After the transfer of the assets in question to it, the Metropolitan National Bank sought and received instructions from the trustees in dissolution as to the disposition and administration of the assets that had been transferred to it, and referred to the trustees all except minor routine matters that arose in the handling of the assets. ">*1181 Many written communications were introduced in evidence to prove this was the course of dealing between the parties.

The trustees filed an income-tax return for the period January 12 to December 31, 1925, on Form 1120, in which they treated the income from the assets held by the Metropolitan National Bank as income to the Smith Securities Company in dissolution.

The bank took over the assets at the values as they stood on the books of the Smith Securities Company. The bank did not credit either of the two stockholders with any of the current income from the properties, but treated that income as income to the trustees in dissolution and as part of the assets which were available for distribution. During the year 1925, $57,500 was distributed to petitioner Hauser and the">*1182 same amount was distributed to the estate of Grant Smith, so that unless the assets transferred to the bank and administered by it are held to have been received by the stockholders, the total distribution which petitioners received from the Smith Securities Company during 1925 was only about $1,100,000 each and fell short of the cost basis of their stock.

Upon the audit of the income-tax returns involved in this proceeding for 1925, the respondent took the position that the Smith Securities Company was completely liquidated January 12, 1925, and credited each of the stockholders with the receipt of one-half of all its assets on January 12, 1925. Although the value of the assets on that date was not susceptible of exact computation, the respondent determined and the parties have stipulated that their total value was $4,961,691.72, less income-tax liability then outstanding. The respondent accordingly determined a profit to each petitioner of the difference between the value of one-half of the assets and the cost to each of the stockholders of their stock. The respondent also treated the Metropolitan National Bank as trustee for the stockholders and credited the stockholders with">*1183 their distributive share of the income which the bank received from the assets in question.

In auditing the return of the Smith Securities Company for the calendar year 1924 and for the 12-day period in 1925 prior to its dissolution, the respondent determined a deficiency for the year 1924, and also determined that the Smith Securities Company was liable for a tax on its income for the period January 1 to January 12, 1925, and on January 25, 1929, sent notices of deficiency pursuant to section 274(a) of the Revenue Act of 1926 to W. E. Hauser and Mrs. Grant Smith as transferees of the assets of the Smith Securities Company pursuant to section 280 of the Revenue Act of 1926,

The trust agreement referred to in the foregoing findings of fact shows the Metropolitan National Bank of Seattle as party of the ">*1182 first part, and W. E. Hauser, Mrs. Grant Smith and P. E. Colman, sole surviving trustees of the Securities Company, as parties of the second part. The agreement was executed in June, 1925. This instrument recites by way of introduction under the prefatory "whereas" as follows:

(a) The fact that the death of Grant Smith occurred on September 27, 1923.

(b) The fact">*1184 that his widow was his sole surviving heir.

(c) The fact that Mrs. Smith and one H. H. Hunt were administrators of the estate.

(d) The fact that one-half of the stock of the Securities Company was owned by the said estate and the other half by W. E. Hauser.

(e) The fact that the parties of the second part were the sole surviving trustees of the Securities Company holding title as such to all of its assets.

(f) The fact that, "in order to conserve, care for, liquidate and divide said property, the said trustees of the Smith Securities Company, at the request of the stockholders thereof, and pursuant to previous arrangement, did on January 12, 1925, turn over to the said first party all the assets, books, accounts, papers, files and all other records of the Smith Securities Company and the books, accounts, papers, files and all records of the old partnership firm of Grant Smith and Company (dissolved by the death of Grant Smith on September 27, 1923) together with all right, title and interest therein and thereto and all the rights, privileges, appurtenances, easements, tenements and hereditaments thereunto belonging or in any wise appertaining, excepting such liquid assets">*1185 as were to be and actually were divided by said trustees, as for and at January 12, 1925 to be held, conserved, sold, liquidated and divided by said party as trustee, for the use and benefit of the aforesaid stockholders of said Smith Securities Company and subject to the terms and conditions of this instrument."

The instrument then makes the following declaration:

Now, therefore, in consideration of the premises, said first party hereby declares that on January 12, 1925, it did as trustee take over the charge and supervision of all the assets of the Smith Securities Company as above set forth, excepting those liquid assets above referred to, and that it holds title thereto for the use and benefit of the stockholders of the said Smith Securities Company, and for the purpose of collecting, conserving and liquidating such properties and paying the proceeds therefrom into a liquidation fund for the use and benefit of the aforesaid stockholders, all rights and power being subject to the terms and conditions of this agreement, as hereinafter set forth.

The instrument then proceeds to declare and define the powers and duties of the bank as trustee. Thes powers are very broad, including">*1186 the power to manage, lease or sell the real estate properties and in general include many of the powers conferred upon the trustees in liquidation. The enumerated powers are, however, subject to the following restrictions:

(a) The power to sell or otherwise dispose of the real estate is qualified by the provisions that the "beneficial owners" shall have the power to dictate the price or method of disposal of any such property. See Paragraph (b) of the instrument.

">*1183 (b) The power to vote the stock of the other corporations (constituting part of the corpus of the trust) is qualified by the provisions that if the beneficial owners or either of them shall be present at the stockholders meetings such beneficial owner or owners shall have the right to vote the stock; and further that in any event the trustee shall vote in accordance with the directions of the beneficial owners when so requested by them.

(c) Although the trustee is empowered to sell the real estate it is not expressly empowered to sell the stocks in other corporations. It is empowered to sell such stocks at the direction of the beneficial owners.

The instrument contains the following provisions with">*1187 respect to the right of the beneficial owners to withdraw from the trust:

The beneficial owners of said property shall have the right at any time to withdraw from the operation of this trust and divide between themselves any item of property, either real or personal, included herein, and said trustee shall also sell or dispose of any item of such property at the price and upon the terms and at the time or times it may in writing by such beneficial owners be directed so to do.

The instrument provides as follows in regard to the termination of the trust:

This agreement may be terminated at any time by either first party or the beneficial owners giving the other thirty days notice of its intention so to do, in which event said first party shall account for all of said property and money held by it in said trust, and convey and transfer by proper deeds, assignments and bills of sale all of said property to such beneficial owners or to such other party as they may in writing direct.

This instrument was executed by the bank and by W. E. Hauser, Mrs. Grant Smith and P. E. Colman as sole surviving trustees of the Smith Securities Company. In addition to the execution as above stated, ">*1188 the following paragraphs are added:

The undersigned, administrators of the Estate of Grant Smith, hereby consent to the execution of the foregoing agreement.

DEETTE MCAUSLEN SMITH,

H. H. HUNT,

Administrators of Estate of GRANT SMITH, deceased.

The undersigned beneficial owners of the property included in this trust hereby consent to the entering into of the foregoing instrument and agree that said trustees shall hold said property for their use and benefit under the terms and conditions herein set forth.

W. E. HAUSER, MRS. GRANT SMITH.

OPINION;

BLACK: In Docket No. 43301 it has been stipulated that the liability of petitioner W. E. Hauser as the transferee of the assets of the Smith Securities Company for the year 1924 is $3,567.91. In Docket No. 43305 it has been stipulated that the liability of petitioner Mrs. Grant Smith as the transferee of the assets of the Smith Securities ">*1184 Company for the year 1924 is $3,567.91. Determination will be made accordingly.

The remaining issues are:

1. Whether or not W. E. Hauser and the estate of Grant Smith received all of the assets of the Smith Securities Company in 1925; and

2. Whether or not">*1189 the Smith Securities Company had a taxable period from January 1 to January 12, 1925, for which it was obliged to file an income-tax return.

We will discuss issue No. 1 first. Petitioners contend that when the corporation, Smith Securities Company, was dissolved January 12, 1925, only the liquid assets were paid over to them and that the remainder of the assets, consisting of stocks in certain closely held corporations, real estate, certain bills receivable, etc., were retained by the trustees for orderly liquidation and that inasmuch as the value of the liquid assets which petitioners received in 1925 was less than the cost of their stock, there was no gain or loss for petitioners to report for 1925. Respondent contends that the entire assets of the corporation were distributed to petitioners January 12, 1925, and that the value of these assets received in liquidation was greater than the cost of the stock and that hence each petitioner is chargeable with the profit on his stock which respondent has found resulted from the liquidation.

Section 3833 of Remington's Compiled Statutes of Washington provides:

Power of Trustees upon Dissolution of Corporation. Upon the dissolution">*1190 of any corporation formed under the provisions of this chapter, the trustees at the time of the dissolution shall be trustees of the creditors and stockholders of the corporation dissolved, and shall have full power and authority to sue for and recover the debts and property of the corporation by the name of the trustees of such corporation, collect and pay the outstanding debts, settle all its affairs and divide among the stockholders the money and other property that shall remain after the payment of the debts and necessary expenses.

The decree of the Superior Court of Washington dissolving the Smith Securities Company recited:

It is therefore now ORDERED, ADJUDGED AND DECREED that the said corporation be and the same is hereby dissolved and the assets of said corporation shall be held by said three trustees above named to be divided among the stockholders above named according to their said respective interest.

It is well established that the mere dissolution of a corporation does not effect a distribution of its assets among its stockholders, and furthermore that such a distribution is not effected by the turning over of the assets of the corporation to trustees in liquidation">*1191 who may also be stockholders of the corporation.

">*1185 The case of Wells Fargo Bank & Union Trust Co. v. Blair, 26 Fed.(2d) 532, involved the question of whether or not the assets of a California corporation were received by its stockholders in 1919 or 1920. A decree of dissolution of the corporation was entered on December 30, 1919, and filed with the Secretary of State of California on the following day. The decree directed the board of directors "to settle all of the affairs of the said corporation and to distribute and convey all the property and assets of said corporation to its stockholders in proportion to their respective interests." In January, 1920, the directors, acting as liquidating trustees, sold the assets of the corporation. Under decisions of the California courts, title to the assets of a dissolved corporation vests not in the trustees, but in the stockholders. The court held that, in spite of such decisions, there was no liquidation until the property was actually transferred to the stockholders and that, accordingly, the stockholders had not received these assets until 1920.

">*1192 Respondent in his brief admits the force of Wells Fargo Bank & Union Trust Co. v. Blair, supra, and concedes that when the liquidating trustees, Hauser, Colman and Mrs. Grant Smith, took charge of the property of the corporation after the order of dissolution, it did not amount to a distribution of the property to the stockholders of the corporation, but respondent contends that, when the liquidating trustees entered into a trust agreement with the Metropolitan National Bank of Seattle, by which it was agreed that the bank should complete the liquidation, which arrangement was concurred in by the administrators of the estate of Grant Smith, deceased, and by the two beneficial owners of the assets of said corporation, this was a turning over of the assets of the corporation to the two stockholders, Hauser and Mrs. Grant Smith, and that although they did not actually receive these assets in 1925, they constructively received them in that year. Hence the transaction was taxable to petitioners. We do not agree with respondent's contention. We view the trust instrument entered into by the liquidating trustees with the bank as largely one of convenience by which the">*1193 bank, because of its superior facilities, was to complete the liquidation, turning over to the stockholders of the corporation the proceeds resulting from sales as fast as it was expedient to do so. Until the stockholders actually received the assets or the proceeds resulting from the sale thereof, there was no receipt by them.

Article 548 of Regulations 69 (Revenue Act of 1926), reads as follows:

ART. 548. Gross income of corporations in liquidation. - When a corporation is dissolved, its affairs are usually wound up by a receiver or trustees in dissolution. The corporate existence is continued for the purpose of liquidating the assets and paying the debts, and such receiver or trustees stand in the ">*1186 stead of the corporation for such purposes. (See Section 282 and Articles 1293 and 1294). Any sales of property by them are to be treated as if made by the corporation for the purpose of ascertaining the gain or loss. * * *

Article 547 of Regulations 45 (Revenue Act of 1918) is identical with the above quoted regulation and was approved by the court, as a reasonable regulation and one which should be given effect, in ">*1194 Taylor Oil & Gas Co. v. Commissioner, 47 Fed.(2d) 108 (certiorari denied, 283 U.S. 818">283 U.S. 818, affirming the Board's decision in 15 B.T.A. 609">15 B.T.A. 609. In that case, upon dissolution of the corporation, the stockholders authorized the president and directors to act as liquidating trustees. After a sale of the assets under that authorization, the question arose whether it was a sale by the corporation, or by the stockholders, on the theory that the assets had been distributed to them. The court said in part:

It is contended by petitioners that the legal title to the property vested in the president and directors as trustees by operation of law immediately upon the consummation of the necessary steps to effect the dissolution, and that the sale of the property made thereafter was for the benefit of the creditors and stockholders and not for the company. Conceding for the purpose of argument that the legal title to the property vested in the trustees by the dissolution, no part of the title passed to the stockholders thereby. The real owner was still the company until such time as its affairs were liquidated, the debts paid and the residue distributed">*1195 to the stockholders.

We followed 15 B.T.A. 609">Taylor Oil & Gas Co. v. Commissioner, supra, in Hellebush et al., Trustees,24 B.T.A. 660">24 B.T.A. 660, and again approved the Commissioner's regulations above referred to. If said regulations were applicable in 15 B.T.A. 609">Taylor Oil & Gas Co. v. Commissioner, supra, and in 24 B.T.A. 660">Hellebush et al., Trustees, supra, we see no reason why they should not be applicable and controlling in the present proceeding. On authority of the cases above cited, we hold in favor of petitioner and against respondent on Issue No. 1.

We will next discuss Issue No. 2. Section 239 of the Revenue Act of 1926, relating to the filing of income-tax returns by corporations, is printed in the margin. ¹

">*1196 Article 622 of Regulations 69 (Revenue Act of 1926), relating to returns filed by receivers or trustees in dissolution, etc., reads as follows:

ART. 622. Return by receivers. - Receivers, trustees in dissolution, trustees in bankruptcy, and assignees, operating the property or business of corporations, ">*1187 must make returns of income for such corporations on Form 1120, covering each year or part of a year during which they are in control. Notwithstanding that the powers and functions of a corporation are suspended and that the property and business are for the time being in the custody of the receiver, trustee, or assignee, subject to the order of the court, such receiver, trustee, or assignee stands in the place of the corporate officers and is required to perform all the duties and assume all the liabilities which would devolve upon the officers of the corporation were they in control. * * *

Under section 239(a), Revenue Act of 1926, printed in the margin, and article 622, above quoted, the trustees in dissolution of the Smith Securities Company should have filed a return for the corporation covering the entire calendar year 1925. Instead, the stipulation of">*1197 facts shows that the return which they filed on Form 1120 covered the period January 12, 1925, to December 31, 1925. This was wrong. But there is no warrant in law for the Commissioner's action in computing a deficiency for the period January 1 to January 12, 1925, liquidation of the corporation not having been completed by January 12, 1925, but extending throughout and beyond 1925. If there is any deficiency for 1925 it must be for the entire calendar year, and the Commissioner has made no such determination. Of course, if we had sustained the Commissioner's contention that liquidation of the Smith Securities Company was completed January 12, 1925, his action in computing a deficiency for that period would be correct. But, where a corporation is dissolved during a particular calendar year and its affairs remain in the hands of liquidating trustees for the remainder of the year, we know of nothing in the applicable revenue act and the Commissioner's regulations thereunder which warrants dividing up the calendar year into two taxable periods, viz., the first period covering the time prior to the date of dissolution of the corporation and the second period covering from the time">*1198 when trustees in liquidation took charge to the end of the calendar year.

In O.D. 821, C.B. 4, p. 279, it was said:

Section 1764, Wisconsin Statutes (1915) provides that the corporate existence of a dissolved corporation shall be continued for the purpose of liquidating its assets and winding up its affairs. It is held, therefore, that profit resulting from the sale of assets of a Wisconsin corporation in process of liquidation is subject to income and excess profits taxes in the same manner as profits derived from the active operation of the corporation. * * *

Therefore, the responsibility for filing appropriate returns for the corporation and paying taxes shown thereby to be due devolves upon the trustees in liquidation or such other legal administrators as have charge of the property and affairs of the corporation during the period of liquidation. They must make returns of income for such corporation in the same manner and form as an active corporation. Conversely, they are not required to file returns as fiduciaries.

">*1188 See also O.D. 73, C.B. 1, p. 235; O.D. 873, C.B. 4, p. 308; I.T. 1814, C.B. II-2, p. 210.

The above citations are in conformity with">*1199 the applicable statutes, we think, and hence we hold in favor of petitioners on Issue No. 2.

If the Smith Securities Company owes a deficiency for 1925, the Commissioner must determine it for the entire calendar year 1925 and not for the 12-day period January 1 to January 12, 1925.

In Docket No. 43306 it was stipulated:

If it is determined by the Board of Tax Appeals that the Smith Securities Company was liquidated and all of its assets distributed to its stockholders in 1925, then the deficiency determined by the respondent in Docket No. 43306 is correct.

If it is determined by the Board of Tax Appeals that the Smith Securities Company was not liquidated nor all of its assets distributed to its stockholders in 1925, then there is no deficiency due in said appeal filed under Docket No. 43306.

Since we have held that the Smith Securities Company was not completely liquidated in 1925, we hold, in conformity with the foregoing stipulation, that there is no deficiency in Docket No. 43306.

Reviewed by the Board.

In Docket No. 43306 decision will be entered for the petitioner. In Docket Nos. 43300, 43301, 43302, and 43305 decision will be entered under Rule 50.">*1200

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Footnotes

• 1. SEC. 239. (a) Every corporation subject to taxation under this title shall make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title. * * * In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns. Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporation of whose business or property they have custody and control. ↩