Opinion
Judgment for plaintiff.
Geo. E. H. Goodner, of Washington, D. C. (Mathews & Trimble, of Washington, D. C., on the brief), for plaintiff.
Joseph H. Sheppard, of Washington, D. C., and Charles B. Rugg, Asst. Atty. Gen., for the United States.
Before GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Plaintiff sues to recover $6,860.49, alleged overpayment of tax for 1920, on the ground that a certain liquidating dividend determined by the defendant in the amount of $26,666.42 was received in 1919 instead of in 1920. In the alternative, plaintiff claims that, if it should be held that a liquidating dividend was received in 1920, he is entitled to judgment for $3,205.95 for that year on the ground that the cost of the stock of the corporation from which the liquidating dividend was received, all of which he owned, was $23,100 instead of $12,300 as allowed by the Commissioner of Internal Revenue, and that the correct amount of the liquidating dividend was $15,866.42. It is agreed that the net value of the assets received in liquidation in excess of liabilities was $38,966.42.
The defendant takes the position that the liquidating dividend was received on January 1, 1920, and that the par value of the 123 shares of stock, as used by the Commissioner, was the correct cost, and that plaintiff is not entitled to recover.
Special Findings of Fact.
1. Plaintiff, a resident of Orlando, Fla., organized a corporation in 1906 under the name of the Cook Automobile & Carriage Company, and said corporation continued in the automobile and carriage business until 12 o'clock midnight, December 31, 1919. Its authorized capital stock was $25,000, but only 123 shares of a par value of $12,300 were ever issued. B. C. Abernethy was president of the corporation until some time in 1917 and owned 62 shares of the capital stock. Plaintiff was general manager. Plaintiff purchased 41 shares of the capital stock of the corporation in 1906, for which he paid $100 a share. In 1908 he purchased 20 shares owned by one R. O. Harris for $100 a share cash.
During and prior to 1917, the corporation had the Buick agency contract and was engaged in selling automobiles as well as automobile parts, and during that year B. C. Abernethy concluded to retire from the business. Plaintiff on June 13, 1917, purchased Abernethy's 62 shares of stock in the corporation for $17,000 which was paid $8,000 in cash, $2,000 in plaintiff's share of certain real estate, which he and Abernethy owned jointly, and $7,000 by a promissory note signed by the plaintiff and his wife and secured by a mortgage on certain real estate. Abernethy died in 1918. Said note of $7,000 was paid by plaintiff in March 1921, receipt of which payment was acknowledged and the mortgage released by Dorothy C. Smith, the widow and sole heir of B. C. Abernethy, and her husband, William B. Smith, in a release executed and recorded March 17, 1921, stating 'That we, William B. Smith, and Dorothy C. Smith, his wife, formerly Dorothy C. Abernethy, widow and sole heir of B. C. Abernethy, deceased, and Dorothy C. Abernethy (Smith) as administratrix of the estate of B. C. Abernethy, the holder and sole owner of a certain mortgage given by Elizabeth J. Cook and J. M. Cook, her husband, to B. C. Abernethy of the county of Orange and State of Florida, bearing date the 13th day of June 1917, * * * given to secure the sum of seven thousand ($7,000.00) dollars evidenced by a certain note, upon the following described property * * * have received full payment of said indebtedness and do hereby acknowledge satisfaction of said mortgage, and hereby direct the clerk of the said Circuit Court to cancel same of record, and record this satisfaction.' 2. During the summer and fall of 1919 plaintiff discussed with his manager and bookkeeper, who prepared the income tax returns of the corporation, the matter of taking over the assets, assuming the liabilities, and liquidating the corporation. Plaintiff definitely decided in October, 1919, to liquidate the corporation, take over all its assets, assume all its liabilities, and continue the business as a sole proprietor upon the close of business for December 31, 1919. On and prior to December 31, 1919, the corporation remained open and carried on business each day until 12 o'clock midnight. Upon the close of business at 12 o'clock midnight on December 31, 1919, the plaintiff took over the assets and assumed the liabilities of the corporation, and thereafter carried on the business in his individual capacity. The corporation was liquidated and the assets were received and liabilities assumed by plaintiff on January 1, 1920, and separate books of account were opened in his name as sole proprietor on that date. He continued to carry on the business formerly conducted by the corporation at the same place until March 12, 1923, when he sold the same.
3. The cost of the 123 shares of capital stock of the Cook Automobile & Carriage Company to the plaintiff was $23,100. The net value of the assets of the corporation received by plaintiff in excess of liabilities assumed by him was $38,966.42 and the liquidating dividend received by plaintiff on January 1, 1920, was $15,866.42.
Upon liquidation of the corporation and receipt of its assets, plaintiff executed to the corporation which was not dissolved until 1923 his promissory note for $38,966.42, the net worth of the corporation. For this reason the plaintiff treated the liquidation of the corporation as a sale of its assets to him and did not report any amount as a taxable liquidating dividend either in 1919 or 1920.
The Commissioner assessed an additional tax against the plaintiff for 1920 of $7,230.41 in January, 1926, and the same was paid by plaintiff May 24, 1926.
LITTLETON, Judge.
We think it is clear from the facts that the plaintiff received a taxable liquidating dividend in 1920. His claim that such liquidating dividend, if the purported sale of assets by the corporation was not effective as such, was received on December 31, 1919, and was not, therefore, taxable in 1920, cannot be sustained. The corporation carried on the business in its corporate capacity until 12 o'clock midnight, December 31, 1919. Upon the close of business at that hour, plaintiff liquidated the corporation, received its assets, and assumed its liabilities. The corporation was therefore liquidated after 12 o'clock midnight, December 31, 1919, and the liquidating dividend was taxable to the plaintiff in 1920. The purported sale by the corporation to the plaintiff cannot be recognized as relieving him from taxation upon the liquidating dividend. It must be treated as a mere bookkeeping transaction rather than as a sale. Cf. Benjamin H. Read, 6 B. T. A. 407; Rubay Co., 9 B. T. A. 133.
The evidence, however, establishes that the correct liquidating dividend taxable to the plaintiff in 1920 was $15,866.42 instead of $26,666.42 as determined by the defendant. The net value of the assets received over the liabilities assumed was $38,966.42, and the cost to the plaintiff of the entire outstanding capital stock of the corporation was $23,100.
Judgment will be entered in favor of plaintiff for $3,205.95, with interest thereon as provided by law. It is so ordered.
BOOTH, Chief Justice, took no part in the decision of this case on account of illness.