Opinion
Docket Nos. 27949 27950 27951.
1952-12-12
ELISE AVERY JOHNSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.COURTNEY GLISSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ESTATE OF WILLIAM JOE GODWIN, DECEASED, RUTH GODWIN, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
W. G. Boone, Esq., and Charles H. Davis, Esq., for the petitioners. Homer F. Benson, Esq., for the respondent.
W. G. Boone, Esq., and Charles H. Davis, Esq., for the petitioners. Homer F. Benson, Esq., for the respondent.
1. During the taxable year petitioners as stockholder-transferees paid the taxes owed by a corporation completely liquidated in a prior year. Held, these payments constitute capital losses to petitioners, Arrowsmith v. Commissioner, 344 U.S. 6.
2. In addition to paying the tax deficiencies of the liquidated corporation, petitioners paid the interest accrued on the deficiencies. Held, that as to so much of the interest accrued subsequent to corporate liquidation, the interest was that of petitioners and is deductible by them under section 23(b) of the Code.
3. Petitioner held stock in one proportion, actual payments were made in a second proportion, and on their tax returns the loss was claimed in a third proportion. Held, in the absence of special circumstances the loss is to be divided on the basis of stock ownership in the liquidated corporation which here was on a 60-20-20 basis.
Respondent determined deficiencies in the income tax of petitioners for the year 1946 as follows:
+------------------------------------------------------+ ¦Petitioner ¦Docket No. ¦Deficiency ¦ +----------------------------+------------+------------¦ ¦Elise Avery Johnson ¦27949 ¦$283.78 ¦ +----------------------------+------------+------------¦ ¦Courtney Glisson ¦27950 ¦713.01 ¦ +----------------------------+------------+------------¦ ¦William Joe Godwin, Deceased¦27951 ¦701.86 ¦ +------------------------------------------------------+
The principal issue is whether the former stockholders of a dissolved corporation, who received distribution of its assets in liquidation and who, as transferees, were required in a subsequent year to pay corporate tax deficiencies, may deduct the amounts as ordinary losses. Since we find that the loss is a capital loss, two other issues arise. First, is the interest paid by petitioners which accrued subsequent to the liquidation of the corporation to be considered a different deduction and in computing the net income to be separated from the capital loss and allowed in full, and second, how is the total capital loss of $3,596.45 to be divided among the petitioners?
The proceedings have been consolidated.
FINDINGS OF FACT.
The facts have been stipulated by the parties and are found accordingly. Any of the facts not given below are incorporated by reference.
Petitioners Courtney Glisson and Elise Avery Johnson are residents of Baines, Tennessee. Their income tax returns for the calendar year 1946 were filed with the collector of internal revenue for the district of Tennessee at Nashville. These returns were prepared on the basis of cash receipts and disbursements.
William Joe Godwin, the original petitioner in Docket No. 27951, died on November 18, 1950, after having filed his appeal before this Court. Ruth H. Godwin is the duly appointed and acting executrix of his estate. The income tax return of Godwin for the calendar year 1946 was prepared on the basis of cash receipts and disbursements and was filed with the collector of internal revenue for the district of Tennessee at Nashville.
Courtney Glisson, Elise Avery Johnson, and William Joe Godwin at all times pertinent to this case were all of the stockholders in Southern Wholesale Florists, Inc. (hereinafter referred to as the company or corporation), a Tennessee corporation with its principal office in Memphis, Tennessee. The company was organized in 1932 to engage in the wholesale florist business. Common stock was the only class or type of stock the corporation ever issued or had outstanding during its corporate life. As of November 30, 1940, the outstanding stock consisted of 250 shares held as follows:
+----------------------------------------+ ¦Shareholder ¦Outstanding shares ¦ +-------------------+--------------------¦ ¦Courtney Glisson ¦50 ¦ +-------------------+--------------------¦ ¦Elise Avery Johnson¦150 ¦ +-------------------+--------------------¦ ¦William Joe Godwin ¦50 ¦ +-------------------+--------------------¦ ¦Total ¦250 ¦ +----------------------------------------+
Thereafter, there was no change in stock ownership in the company until liquidation and dissolution of the corporation.
Pursuant to resolution approved on September 29, 1943, by the directors and stockholders, the corporation as of September 30, 1943, ceased the conduct of any business and was liquidated. Its assets were distributed to its stockholders— Courtney Glisson, Elise Avery Johnson, and William Joe Godwin. They immediately formed a partnership with the assets received by them from the corporation and continued the wholesale florist business from that date forward as partners. In December 1945, all liabilities shown by the corporate records had been paid and all collectible assets had been converted to cash. A final liquidating distribution in cash was then paid to the stockholders on December 26, 1945, as follows:
+----------------------------+ ¦Courtney Glisson ¦$210.40¦ +--------------------+-------¦ ¦Elise Avery Johnson ¦631.23 ¦ +--------------------+-------¦ ¦William Joe Godwin ¦210.40 ¦ +----------------------------+
On December 28, 1945, the Secretary of State of the State of Tennessee issued his certificate recording the surrender of the corporate charter.
On their income tax returns for 1945, Courtney Glisson, Elise Avery Johnson, and William Joe Godwin reported the receipt of the final liquidating dividend from the company, each taxpayer showing a long term capital loss as the result of the liquidation. For income tax purposes in reporting their liquidating dividends in 1945 from the corporation, neither Courtney Glisson, Elise Avery Johnson, nor William Joe Godwin took into account any tax deficiencies owed by the corporation to respondent or to the State of Tennessee.
Thereafter, on January 7, 1946, the Department of Finance & Taxation of the State of Tennessee assessed additional excise taxes against the dissolved corporation for the years 1939 to 1942, inclusive, in the aggregate amount of $874.03 plus interest.
In a revenue agent's report dated September 26, 1946, a net deficiency in Federal excess profits tax in the amount of $2,098.73 (after allowance of postwar refund credit) plus interest was determined against the dissolved corporation in respect of a short taxable year beginning January 1, 1943, and ending September 30, 1943.
In 1946, the respective tax deficiencies plus interest were paid and each individual contributed toward such payment as follows:
+------------------------------------------------------------+ ¦ ¦Deficiency in ¦Deficiency in ¦ ¦ +-------------------+---------------+--------------+---------¦ ¦Name ¦excise tax plus¦excess profits¦Total ¦ +-------------------+---------------+--------------+---------¦ ¦ ¦interest paid ¦tax plus ¦ ¦ +-------------------+---------------+--------------+---------¦ ¦ ¦ ¦interest paid ¦ ¦ +-------------------+---------------+--------------+---------¦ ¦Courtney Glisson ¦$214.77 ¦$894.28 ¦$1,109.05¦ +-------------------+---------------+--------------+---------¦ ¦Elise Avery Johnson¦644.29 ¦894.28 ¦1,538.57 ¦ +-------------------+---------------+--------------+---------¦ ¦William Joe Godwin ¦214.77 ¦894.28 ¦1,109.05 ¦ +-------------------+---------------+--------------+---------¦ ¦Totals ¦$1,073.83 ¦$2,682.84 ¦$3,756.67¦ +------------------------------------------------------------+
In filing their income tax returns for the calendar year 1946, each of the three former stockholders claimed a deduction from gross income as an ordinary loss one-third of the total tax deficiencies and interest paid as follows:
+------------------------------+ ¦Courtney Glisson ¦$1,252.22¦ +--------------------+---------¦ ¦Elise Avery Johnson ¦1,252.23 ¦ +--------------------+---------¦ ¦William Joe Godwin ¦1,252.22 ¦ +--------------------+---------¦ ¦Total ¦$3,756.67¦ +------------------------------+
Upon examination of the tax returns of each of the foregoing individuals for 1946, the respondent disallowed as a deduction for 1946 the above-listed payments made by them as transferees. The respondent further ruled that these payments had the income tax effect of increasing the amount of long term capital loss sustained by the stockholders in 1945 upon final liquidation of the corporation and that the payments should be apportioned to the stockholders upon the basis of their respective stock interests in the corporation rather than upon the basis of the actual payments as made by each of them.
Included as a part of the excise tax payment of $1,073.83 made to the Tennessee Department of Finance & Taxation in 1946 was interest in the aggregate amount of $1.72 accruing after final liquidation and dissolution of the corporation in 1945.
Included as a part of the excess profits tax payment of $2,682.84 made to the respondent in 1946 was interest in the aggregate amount of $158.50 accruing after final liquidation and dissolution of the corporation in 1945.
OPINION.
BLACK, Judge:
The principal issue in this proceeding is whether the losses sustained during the taxable year by the petitioners are deductible as ordinary losses in full, or as capital losses subject to the limitations provided by law. The losses consist of payments made by petitioners as stockholder-transferees of taxes owned by a corporation which was liquidated in a prior year. There are also two incidental issues arising out of the losses presented for our decision here.
The Supreme Court in Arrowsmith v. Commissioner, 344 U.S. 6, affirming Commissioner v. Bauer, 193 F.2d 734, reversing Frederick R. Bauer, 15 T.C. 876, held that any such loss resulting from satisfaction of transferee liability is a capital loss in the year of payment. We find no basis for a distinction with respect to this issue between the Bauer case and the case before us. Accordingly, we hold that the losses which petitioners incurred in 1946 when they paid the taxes of the dissolved corporation were capital losses incurred in 1946, and not ordinary losses and should be so treated in a computation under Rule 50.
The second issue we decide here is whether the combined capital loss of the petitioners was only $3,596.45, or was their combined loss in the amount of $3,756.67. The difference between the two amounts is $160.22, which sum amounts to part of the interest paid by petitioners on the two corporate tax deficiencies totaling $3,596.45. It is stipulated that this amount of interest which petitioners paid accrued after the final liquidation and dissolution of the corporation in 1945. In the recent case of Arnold F. Heiderich, 19 T.C. 382, it was said:
* * * In the year 1947 the petitioners made payment of this amount, together with interest amounting to $5,028.18, of which amount $3,595.07 covered the period from September 30, 1943, the date of liquidation, through the date of payment, October 16, 1947. The parties have stipulated that this portion of the interest was fully deductible as interest by the transferees of the corporation in the amounts so paid by them. * * * It is clear that the interest of $160.22 which accrued on the deficiencies after the dissolution of the corporation and which was paid by petitioners was interest paid by petitioners for their own account and is deductible by them as interest paid under section 23(b) of the Code and is in no respect a capital loss.
The third and final issue is one of allocation, that is, how are the capital loss and the interest deduction to be apportioned among the three petitioners? We have found as a fact that each petitioner has paid interest and corporate debt and had deducted losses as follows:
+--------------------------------------------+ ¦ ¦Debt and ¦Loss deducted ¦ +------------+---------------+---------------¦ ¦Petitioner ¦interest paid ¦on tax return ¦ +------------+---------------+---------------¦ ¦Glisson ¦$1,109.05 ¦$1,252.22 ¦ +------------+---------------+---------------¦ ¦Johnson ¦1,538.57 ¦1,252.23 ¦ +------------+---------------+---------------¦ ¦Godwin ¦1,109.05 ¦1,252.22 ¦ +------------+---------------+---------------¦ ¦Total ¦3,756.67 ¦3,756.67 ¦ +--------------------------------------------+
It will be noted from the foregoing figures that petitioners did not settle the transferee liability in proportion to their stockholdings in the dissolved corporation. Why they did not do so is not explained in the stipulation. It will also be noted that in taking their deductions on their respective income tax returns, petitioners did not deduct in accordance with what they actually paid out but took deductions in equal amounts, to-wit, $1,252.22. The reason for doing this is also not explained in this record. Manifestly, Glisson and Godwin, both being on the cash basis, could not take deductions for greater amounts than they had actually paid in the taxable year, which in each case was $1,109.05.
It had been stipulated when effect is given to the balance sheet that upon liquidation the book value of corporate assets available for distribution to stockholders was $6,103.18. This sum, based upon the number of shares held by each petitioner, would have been distributed to the stockholders in the following proportions:
+-------------------------------------------+ ¦ ¦ ¦ ¦Value of ¦ +----------+------+--------+----------------¦ ¦Petitioner¦No. of¦Per cent¦corporate assets¦ +----------+------+--------+----------------¦ ¦ ¦shares¦owned ¦received ¦ +----------+------+--------+----------------¦ ¦Glisson ¦50 ¦20 ¦$1,220.64 ¦ +----------+------+--------+----------------¦ ¦Johnson ¦150 ¦60 ¦3,661.90 ¦ +----------+------+--------+----------------¦ ¦Godwin ¦50 ¦20 ¦1,220.64 ¦ +----------+------+--------+----------------¦ ¦Total ¦250 ¦100 ¦$6,103.18 ¦ +-------------------------------------------+
Based upon the above table, the maximum liability of Glisson and Godwin to corporate creditors would be $1,220.64 each, the value of assets received by each, and for Johnson the maximum liability would be $3,661.90. These sums would constitute the maximum loss they might sustain and any loss in excess thereof claimed on the tax return by any petitioner should be disallowed. While creditors of the dissolved corporation may recover from any of the petitioners the maximum amount of his liability as indicated above, the petitioner would in turn in a proper case be entitled to contribution from the other stockholders so that the latter may also share proportionately in the loss. The amounts paid by petitioners Godwin and Glisson and the amounts claimed by each of them on their returns exceed the share of the loss to be paid by each, if paid proportionately on the basis of stock ownership. We realize, of course, that there may be special circumstances which warrant a distribution of such losses on a basis other than the proportion of stock owned by each, as where one stockholder may be in financial distress, or for some other valid reason the stockholders agree to be liable in different proportions. However, there is no indication in the record here of any special circumstances. It is therefore, determined that the capital loss of $3,596.45 and the interest deduction of $160.22 are to be apportioned among the petitioners on the basis of their ownership of corporate stock. It is a loss upon the liquidation of their stock in the corporation which, under the Supreme Court's decision in the Arrowsmith case, supra, they are entitled to take. While, as we have already stated, there might be special circumstances under which they would have to pay more than their proportional share of the corporation's liability for its tax deficiencies, no such special circumstances are shown in this record. Certainly the parties could not by agreement apportion the losses equally as they apparently have done by each taking a deduction of $1,252.22. Cf. Magruder v. Supple, 316 U.S. 394.
Decision will be entered under Rule 50.