Opinion
No. 35820.
March 26, 1945. Suggestion of Error Overruled May 14, 1945.
1. TAXATION.
Net book value of oil and gas properties of corporation at time of dissolution based on cost to corporation and not their liquidation value continued to represent their cost for purpose of computing depletion and depreciation allowances of stockholder on his interest in such properties after dissolution in determining stockholder's income tax (Code 1942, secs. 5354, 9228(8)).
2. TAXATION.
Investing of ownership of corporate assets in stockholders upon dissolution was not a sale of such assets to stockholders, and actual value of assets at time of dissolution was not their cost to stockholder for purpose of computing his depletion and depreciation allowances on his interest in oil and gas properties formerly owned by corporation in determining stockholder's income tax (Code 1942, secs. 5354, 9228(8)).
3. CORPORATIONS.
Where transactions are between the parties as stockholders and themselves as individuals, the fiction of corporate entity is to be ignored.
4. TAXATION.
Stockholder is protected against being charged with a taxable gain through transfer to him of corporate assets at an appreciated value upon dissolution of corporation and should likewise be denied privilege of computing a nontaxable loss on the same basis (Code 1942, secs. 5354, 9228(8), 9232(3)).
APPEAL from chancery court of Hinds county, HON. V.J. STRICKER, Chancellor.
Bridgeforth Love, of Yazoo City, for appellant.
The question for decision involves the meaning of the word "cost" as used in that section of the state income tax law providing for a reasonable allowance for depletion and depreciation "in the case of mines, oil and gas wells, other natural deposits and timber," (Sec. 8(8), Chapter 120, Laws of 1934; Sec. 9228, Code of 1942). As applied to this case, the question is whether a taxpayer, who acquired such property from the dissolution of a corporation solely by virtue of the fact that he was a stockholder in the corporation, is required by that statute to take depletion and depreciation on the cost of the property to the dissolved corporation.
The appellant contends that the word "cost," as used in the statute, means cost to the taxpayer, and that the dissolution of a corporation is, in legal effect, a sale of its assets to its stockholders, the stockholders surrendering their stock in the corporation and receiving in consideration therefor the assets of the corporation, in the proportions they severally owned the stock. In that event the cost to the former corporation of the assets so distributed is immaterial. It is the cost to the former stockholder, now the taxpayer, which determines; and that cost can only be measured by the value of the stock surrendered or the value of the property received, as of the dissolution date. The appellant's contention is of course based upon the legal entity of the corporation, and the distinction between it as such and its several stockholders. The dissolution of a corporation and the consequent distribution of its assets between its stockholders is not a mere "book transaction." On the dissolution of a corporation its former stockholders hold as tenants in common the actual property of the former corporation, with the legal right as separate individuals to sell on the open market the actual property acquired on the dissolution.
Rawlings v. American Oil Co., 173 Miss. 683, 161 So. 851; Illinois Cent. R. Co. v. Mississippi Cotton Seed Products Co., 166 Miss. 579, 148 So. 371; Tupelo Garment Co. v. State Tax Commission, 178 Miss. 730, 173 So. 656; Moline Properties v. Commissioner of Internal Revenue, 319 U.S. 436, 87 L.Ed. 1499; Gloyd v. Commissioner of Internal Revenue, 63 F.2d 649, 290 U.S. 663; Code of 1942, Secs. 5354, 9230, 9236, 9240, 9254, 9258; Constitution of 1890, Secs. 178-200; Laws of 1934, Ch. 120, Secs. 10(e), 18(a), 14(a), 32, 36; Laws of 1934, Ch. 120, subsec. 8 of Sec. 8, as amended by Ch. 151, Laws of 1936, and Ch. 134, Laws of 1942, and codified in Section 9228 of the Code of 1942; 13 Am. Jur. 1198; 54 C.J. 742; State Tax Commission v. Love Petroleum Co., 197 Miss. 277, 19 So.2d 923, distinguished.
J.H. Sumrall, of Jackson, for appellee.
Since no actual sale of the assets of the corporation was made which would have established a price and amount received by the owner of the stock in said company to supply a basis for determining gain or loss from the original investment, and since the income tax law of Mississippi does not regard the transfer of property from a corporation to its stockholders as such disposition of property to be used as a basis for computing gain or loss, then the petitioner in this case is bound by the actual cost to him of the property in which he retained the same relative interest, as reflected by the books of the corporation which he and his associates succeeded in their individual capacity in the ownership and operation of the properties involved.
Pugh et al. v. Commissioner of Internal Revenue, 49 F.2d 76; Darby-Lynde Co. v. Alexander, Collector of Internal Revenue, 51 F.2d 56; Dakota-Montana Oil Co. v. United States, 59 F.2d 853; Virginia Oil Co. v. Helvering, 319 U.S. 523; United States v. Ludey, 274 U.S. 295; Detroit Edison Co. v. Commissioner of Internal Revenue, 319 U.S. 98; Walker v. Commissioner of Internal Revenue, 65 F.2d 97; Badger Oil Co. v. Commissioner of Internal Revenue, 118 F.2d 791; Laws of 1934, Ch. 120.
Appellant filed return for income tax for the year 1942, disclosing a net loss of $12,605.62. Attached to the return were schedules showing an income of $143,849.73, against which depletion allowances were claimed in the amount of $155,028.74. The State Tax Commission made demand for additional tax under a proposed assessment which, by reducing the allowable depletion and depreciation to $23,287.91, increased the taxable income to $119,135.21. Appellant filed petition with the Commission, praying cancellation of the demand. After a hearing thereon and denial of the petition, appeal was taken to the chancery court, Code 1942, Sec. 9252. From a decree affirming the findings of the Commission and fixing tax liability at $7,834.46, with interest from March 15, 1942, an appeal is prosecuted to this Court.
We are spared the hardship incident to exploration through a morass of minutiae, for the parties agree on the correctness of the respective computations. Appellant was president of and owned 29.17 per cent of the stock in the Slick-Urschel Oil Company, a corporation organized in 1940. The other stockholders were his son, a stepson, and a fourth party who was the operator in charge of production. For reasons of their own the stockholders dissolved the corporation December 31, 1941. Thereupon all assets of the corporation became vested in the stockholders as tenants in common in proportion to their respective stock holdings, Code 1942, Sec. 5354. At the time of the dissolution the net book value of the assets based on cost to the corporation was $363,283.30. It was upon this basis that depletion and depreciation allowances had theretofore been computed.
It is the contention of appellant that the liquidation value of these assets is in fact $1,723,718.56. This total represents a valuation of all property items identical with the book values carried by the corporation, with the exception that the book value of the Oil and Gas Properties, $246,736.67, was increased to a "liquidation value" of $1,607,171.93. Depletion and depreciation were computed upon this liquidation value. Here, then, is the crux of the matter. Simply stated, the taxpayer claims that in surrendering his stock he has, in effect, purchased assets at a cost represented by the actual value of his stock as computed from the appraisal of its actual appreciated value. The Commission insists that depletion and depreciation of oil wells must be based upon cost, Code 1942, Sec. 9228(8), and that the book value continues to represent its cost. We find the latter the only tenable view.
The automatic transfer or investing of ownership in a stockholder upon dissolution is not a sale to the stockholder. There are times when the fiction of corporate entity is to be ignored, especially when, as here, the transactions are between the parties as stockholders and themselves as individuals. 18 C.J.S., Corporations, sec. 6; 13 Am. Jur., Corpus, Sec. 7. Nor is the actual value of the property at such time its "cost" to him. Had appellant been the sole owner of the corporation, it would be difficult for a realistic mind to construct the fiction of a sale out of a sitution where, after appellant had been disrobed of his corporate vestments, he held his assets merely in another hand. Such was in fact the situation in Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 268, 79 L.Ed. 596, 97 A.L.R. 1355, and was condemned as "an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else." The taxpayer here is protected against being charged with a taxable gain through the transfer to him of property at an appreciated value. Code 1942, Sec. 9232(3). He should likewise be denied the privilege of computing a nontaxable loss on the same basis. See Commissioner of Internal Revenue v. Court Holding Co., 65 S.Ct. 707.
We are controlled by the principles announced in State Tax Commission v. Love Petroleum Co., 197 Miss. 277, 19 So.2d 923. The transfer by reorganization in that case is no less free from attributes of a sale than the transfer by dissolution here. If it were otherwise, a taxpayer could, by such repeated transformations into and out of corporate ownership, perpetually avoid liability. Even as in the Love Petroleum case the form was a mere change in the color and character of the stock certificate, while the substance remains a continued ownership, so here the form is the substitution of a stock certificate for some other evidence of participation in the common tenancy of a joint venture, and the substance is likewise an ownership of property whose cost had theretofore been determined.
We do not discredit the practice nor challenge the motives for casting and recasting ownership from individual to corporate form. However, our attention is not to be distracted by mere changes in the evidence by which such ownership is identified.
The following cases are illustrative of conclusions in harmony with the views herein expressed and which see clearly through the changing forms which are effected by incorporation, dissolution, reorganization, and liquidation and focus attention upon that which is substance. Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596, 97 A.L.R. 1355; Minnesota Tea Co. v. Helvering, 302 U.S. 609, 58 S.Ct. 393, 82 L.Ed. 474; Higgins v. Smith, 308 U.S. 473, 60 S.Ct. 355, 84 L.Ed. 406; Commissioner of Internal Revenue v. Court Holding Co., supra; Gloyd v. Commissioner of Internal Revenue, 19 B.T.A. 966, cited by appellant, has been considered. By its failure to compute the depletion upon cost, it runs counter both to our statute and to the views expressed in the Love Petroleum case.
The strain to which ordinary words must be subjected to conform to appellant's contention impairs their power to resist the combined forces of logic and realism which oppose them.
Affirmed.