Docket No. 76147 76148.
03-20-1936
C. M. MENZIES, INCORPORATED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. CHARLES M. MENZIES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
H. J. Kleefisch, Esq., for the petitioners. C. P. Reilly, Esq., for the respondent.
H. J. Kleefisch, Esq., for the petitioners.
C. P. Reilly, Esq., for the respondent.
These consolidated proceedings involve deficiencies in income tax determined for the year 1931 against C. M. Menzies, Inc., in the sum of $694.31, and against Charles M. Menzies, an individual, in the sum of $6,853.03.
The record presents for our determination only one issue. This is whether an alleged sale of assets of the corporate petitioner to the individual in 1931 was a sale or a distribution in liquidation within the intendment of the Revenue Act of 1928, section 115 (c).
FINDINGS OF FACT.
For several years prior to 1931, the petitioner, Charles M. Menzies, was the president and owner of more than 90 percent of the capital stock of the petitioner, C. M. Menzies, Inc. The latter was a California corporation and conducted an automobile sales agency at Stockton, California.
At a special meeting of the board of directors of the corporate petitioner, duly held on June 16, 1931, the following proceedings were had:
The meeting was called to order by the President, C. M. Menzies. Those present were directors C. M. Menzies, W. M. Menzies, D. E. Gomas and O. C. Parkinson.
The following resolution was introduced by Director Parkinson, who moved its adoption. The motion was seconded by Director Gomas, put to a vote and declared carried. The resolution and action thereon is as follows:
WHEREAS, substantially all of the stock of this corporation is owned by C. M. Menzies, individually, and
WHEREAS, by reason of corporate taxes and other corporate expense it is less profitable to carry on said business by this corporation than for an individual to carry on the same business, and
WHEREAS, the books of the corporation show that the net worth of said corporation as of June 1, 1931, is $89,130.90,
BE IT THEREFORE RESOLVED, that this corporation, subject to the approval of its stockholders, as provided by law, do sell and convey to C. M. Menzies, an individual, all of its assets of every character and description, for the purchase price of $89,130.90, and do accept from said C. M. Menzies his promissory note, payable one year after date for the amount of said purchase price, without interest, and do accept as further consideration the written agreement of said C. M. Menzies to assume and save harmless this corporation the payment of all indebtedness existing upon June 1, 1931, against this corporation, and all indebtedness thereafter accruing up to the completion of this sale.
BE IT FURTHER RESOLVED, that the Vice-President W. M. Menzies, and the Secretary D. E. Gomas, be and they are hereby authorized to execute all papers necessary to effect said transfer upon behalf of this corporation.
Passed and so ordered by the following vote:
Ayes Noes Absent Not voting W. M. Menzies None D. R. Menzies C. M. Menzies D. E. Gomas O. C. Parkinson
In accordance with section 3440, Civil Code of California, notice of the proposed sale was duly recorded and the sale was consummated as of July 1, 1931, by the corporation delivering its property and business to the individual, Charles M. Menzies. On May 19, 1933, at a special meeting of the board of directors of the corporate petitioner, the following resolution was adopted:
The meeting was called to order by the President C. M. Menzies. Those present were directors C. M. Menzies, W. M. Menzies, D. E. Gomas and O. C. Parkinson. Director D. R. Menzies was noted absent.
The following resolution was introduced by Director Parkinson who moved its adoption. The motion as seconded by Director Gomas, put to a vote and declared carried. The resolution and action thereon is as follows:
WHEREAS, at a meeting of the Board of Directors of C. M. Menzies, Inc., a corporation, duly called and held upon the 16th day of June 1931, and reported in the minute book of said corporation, a resolution was passed authorizing the sale by the corporation of all of the assets thereto to C. M. MENZIES, an individual, in consideration of the promissory note of C. M. MENZIES in the sum of $89,130.90, being the amount of the net worth of said corporation, as of June 1, 1931, and the assumption by him of all indebtedness of the corporation existing upon said date and thereafter accruing, and
WHEREAS, the actual transfer of the assets and liabilities therein agreed upon was delayed until July 1, 1931, and certain further adjustments in the sale price were agreed upon between the parties subsequent to said meeting, making the final sale price agreed upon $86,889.29.
NOW THEREFORE, BE IT RESOLVED that the authorization of sale contained in the minutes of the meeting of June 16, 1931, be amended as follows, to-wit:
That the sale take place as of July 1, 1931, the buyer assuming all indebtedness of the corporation as of that date, and that the corporation accept from the buyer his promissory note in the sum of $86,889.29.
BE IT FURTHER RESOLVED that the said transfer heretofore made as of July 1, 1931 be and is hereby ratified, and acts of the officers of this corporation heretofore performed upon behalf of this corporation in relation to the said transfer to C. M. MENZIES, an individual, are hereby ratified, approved and confirmed.
Passed and so ordered by the following vote:
Ayes Noes Absent D. E. Gomas D. R. Menzies C. M. Menzies O. C. Parkinson W. M. Menzies
Petitioner Menzies gave his note to the corporation for the amount of $86,889.29, dated July 1, 1931, due one year thereafter, without interest. The note was credited with a number of payments, aggregating $321.32, for income and franchise taxes of the corporation paid by the maker or in his behalf before June 30, 1933. Four of these payments occurred prior to July 1, 1932. On June 30, 1933, and March 29, 1934, petitioner Menzies and his wife, in part payment of the note, conveyed to the corporate petitioner their equities in certain properties of the value of $53,861.51. These properties included their residence and the property in which Menzies was conducting the automobile business. On March 29, 1934, a certificate for 855 shares of stock in the Stockton-Woodland Mausoleum Co., Ltd., of the value of $8,000, was assigned to the corporation. The stock was subsequently transferred to the name of the corporation.
This left a balance unpaid on the original note of $24,706.45, which was covered by a new note for that amount, dated March 29, 1934, payable one year thereafter, with interest at 6 percent. This note has been fully paid with interest by various cash payments between October 16, 1934, and July 6, 1935, from Menzies' personal funds.
The corporate petitioner never dissolved and no steps for that purpose were ever taken. It is still in existence.
The income tax return of the corporate petitioner for 1931, in the balance sheet thereto attached, records neither corporate assets nor liabilities. That return, signed by the individual petitioner as president, carries the following notation:
NOTE. — All of the assets and liabilities were purchased and/or assumed by C. M. Menzies as of July 1, 1931. Said assets and liabilities were taken over at book values and without profit or loss arising from said sale. The corporation was abandoned after said disposal of net assets.
The income tax return of the corporate petitioner for the year 1932 filed April 15, 1933, reports no transactions by the corporation during that year except the payment of a franchise tax of $25 and interest of $8.05. The balance sheet attached to this return records "Accounts receivable — $86,869.29" at the beginning of the year, and "Accounts receivable — $86,592.97" at the end of the year. The corporate income tax return for 1933, in the balance sheet thereto attached, indicates no assets at the beginning of the year except "Notes receivable — $86,592.97", but at the end of the year lists as assets "Notes receivable — $46,956.46", and "Capital Assets — $100,368.06", together with several small items and liabilities as "Mortgages — $59,345", together with several other small items. That return also reports income from rentals in the amount of $4,529.36, together with deductions for rent, interest, taxes, depreciation, and other expenses. That 1933 return described the business of the corporate petitioner as "Real Estate Investments." The 1931 return described the business of the corporate petitioner as "Automobile Sales Agency" and reported gross sales for the first six months of 1931 of $373,965.26.
Neither of the petitioners returned any gain nor claimed any deductible loss for tax purposes on account of the contested transaction.
The corporate petitioner filed income tax returns and paid income tax, as follows:
1931 __________________________________________ $152.63 1932 ________________________________ None (Loss—$33.05) 1933 __________________________________________ 20.65 1934 __________________________________________ 155.36
After the transfer to the corporate petitioner of the equity of the petitioner and his wife in the real estate, on account of the second note of petitioner Menzies to the corporation, that petitioner rented these properties from the corporate petitioner under an oral agreement under which he paid interest on the mortgages encumbering the properties, in addition to taxes and other expenses, in lieu of rent. The corporation returned these items as income.
The transaction in 1931, in which the corporate petitioner transferred its assets to the individual petitioner, who assumed its liabilities, was a sale and was not a distribution in liquidation within the intendment of the Revenue Act of 1928, section 115 (c).
OPINION.
LEECH:
The respondent determined that the disposition of all the assets of the corporate petitioner in 1931 to the individual petitioner was not a sale but constituted a distribution in liquidation by the corporation. He determined a taxable profit to the individual petitioner, Charles M. Menzies, of $55,857.47, by subtracting the basis for his corporate stock from the book value of the assets transferred. The pending deficiency against Menzies resulted.
Petitioner Menzies maintains that such disposition was a valid, bona fide sale of the corporate assets to him.
The Revenue Act of 1928, section 115 (c), is applicable. A corporate liquidation may involve one or more sales of corporate assets in reducing them to a form in which its debts may be satisfied and the balance distributed to its shareholders. True, when an alleged sale to a controlling shareholder of all the assets of a corporation occurs, as here, followed by actual liquidation of the corporation and distribution of any remaining balance of the consideration received in such transaction, the courts and this Board ignore such so-called sales and treat such a disposition of corporate assets as a distribution in liquidation. Cook v. United States, 3 Fed. Supp. 47; Benjamin H. Read, 6 B. T. A. 407. But here there was no such distribution unless the alleged sale, itself, is so characterized.
115. DISTRIBUTIONS BY CORPORATIONS.
A distribution of corporate assets in liquidation differs widely from a sale of such assets. The liquidation of a corporation is the process of winding up its affairs, realizing its assets, paying its debts, and distributing to its stockholders, as such, the balance remaining. W. E. Guild, 19 B. T. A. 1186; Lafayette Trust Co. v. Beggs, 213 N. Y. 280; In re Union Bank of Brooklyn, 161 N. Y. S. 29. Cf. Canal-Commercial Trust & Savings Bank v. Commissioner, 63 Fed. (2d) 619. Such distribution is a conveyance to a stockholder in satisfaction of his right, possessed through ownership of stock, to participate in the assets of the corporation upon its liquidation, after the corporate debts are satisfied. The transferor receives nothing. It simply conveys to the stockholder something to which he has a right. A sale, on the other hand, is a transfer of property for a price which is received by the seller. The receipt of a price for the transfer is essential. Hatch v. Oil Co., 100 U. S. 124.
It necessarily follows that a mere transfer of property by a corporation, even to its majority stockholder, who pays an adequate consideration therefor, which is received by and actually becomes the property of the corporation, does not constitute a liquidating distribution within the intendment of the applicable statute. Fostoria Milling & Grain Co., 11 B. T. A. 1401. Petitioner Menzies owned more than 90 percent of the stock of the corporate petitioner. But that circumstance does not preclude recognition here of both as separate entities. Burnet v. Commonwealth Improvement Co., 287 U. S. 415. No legal barrier compels the construction of the contested transaction as a distribution in liquidation despite its proper purpose of reducing expenses of operation and taxes. Gregory v. Helvering, 293 U. S. 465. Whether the questioned disposition of assets was a sale or a distribution in statutory liquidation is thus entirely factual. Frelmort Realty Corporation, 29 B. T. A. 181.
The corporate resolution authorizing the alleged sale expressed no intention to liquidate the corporation. The corporate income tax return filed some nine months later stated: "The corporation was abandoned after said disposal of net assets." And, that return disclosed neither assets nor liabilities. But the inferences from those statements are not conclusive. Mitchell v. Doyle, 247 U. S. 179. The fact controls the inference. Weiss v. Wiener, 279 U. S. 333. Corporate income and franchise taxes have been paid in each year since 1931, except income taxes for 1932 when a small loss was sustained. The corporate failure for two years to transact any business other than that incident to its only asset, the Menzies note, is not decisive of liquidation on this record. Nor is a change of business and assets without more than here disclosed. Cf. Canaday, Inc. v. Commissioner, 76 Fed. (2d) 278, affirming 29 B. T. A. 355; certiorari denied, 296 U. S. 612. The corporation, in fact, was not dissolved. No steps to dissolve have ever been taken. It was not abandoned. It still exists.
The corporate resolution, under the authority of which Menzies acquired its assets, designated that disposition as a sale. Menzies' note given to the corporation as part of the consideration for the assets was without interest. Only small payments on account of interest were made during the two years following the giving of the note. But those facts certainly do not characterize the original note as worthless at any time. And, any possible inference that it was worthless — a mere form — is conclusively answered by the relevant and significant later sequence of events. Cf. Commonwealth v. Dyer, 74 Fed. (2d) 685. Payments on account of interest were made consistently, beginning before July 1, 1932. Substantial payments on the principal were made June 30, 1933, and March 29, 1934. Within four years from the date of the original note, it was paid in full, with interest due, by its maker. Those facts are not seriously controverted. The corporation leased to Menzies some of the real estate received in satisfaction of the note, returned the amounts paid in lieu of rents, as income, when received and paid the tax thereon.
We conclude the corporation was not liquidated, the contested disposition of its assets was not a distribution in its liquidation within the statute, but was a bona fide sale for an adequate consideration.
The corporate deficiency involved in the proceeding, consolidated herewith, arose upon respondent's disallowance of a deduction of an addition to bad debt reserve. The corporation in its return deducted no loss on the contested disposition of assets. But the book value of the corporate assets, the amount of which was part of the consideration for the disputed sale, apparently included this reserve as a corporate liability. In any event, respondent stipulated at the hearing that, if the disposition of the corporate assets was held to be a sale, then the corporate petitioner sustained a deductible loss on that sale in the amount of that reserve. Effect will be given to that stipulation on recomputation of the corporate deficiency.
Reviewed by the Board.
Decision will be entered under Rule 50.
(c) Distributions in liquidation. — Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. In the case of amounts distributed in partial liquidation (other than a distribution within the provisions of section 112 (h) of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of subsection (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation.