Opinion
Docket Nos. 110556 110557.
1943-07-31
ROBERT GAGE COAL COMPANY, TRANSFEREE OF THE ASSETS OF MONITOR SUGAR COMPANY (DISSOLVED), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ROBERT GAGE COAL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Edward S. Clark, Jr., Esq., for the petitioner. John H. Pigg, Esq., for the respondent.
1. Where a business was conducted by a subsidiary for the first six months and by the parent company for the second six months of a taxable year, the books of the subsidiary were not closed at the time of its liquidation, and the parties are in agreement as to the correct net income of the business for the full taxable year but are not in agreement as to how much of the net income was earned by the subsidiary and how much was earned by the parent, held, a compilation made by a certified public accountant of the net income earned by the subsidiary prior to its liquidation from data obtained from the books should be accepted in lieu of the allocation method as representing, as nearly as it is possible to determine, the net income earned by the subsidiary prior to the liquidation; held, further, the balance of the correct net income for the full taxable year, after deducting the net income earned by the subsidiary prior to the liquidation, should be accepted as representing, as nearly as it is possible to determine, the net income earned by the parent company subsequent to the liquidation.
2. A certain dividend declared and paid by the subsidiary company to the parent corporation two days after its liquidation had been decided upon, but six days prior to its complete liquidation under formal proceedings, held, to be a liquidating dividend and not taxable to petitioner under the provisions of section 112(b)(6), Revenue Act of 1936, relating to the tax free liquidation of a subsidiary corporation by its parent corporation; held, further, petitioner is not entitled to a dividend received credit of 85 per centum of such dividend under the provisions of section 26(b), Revenue Act of 1936. Edward S. Clark, Jr., Esq., for the petitioner. John H. Pigg, Esq., for the respondent.
These proceedings were consolidated.
The respondent in Docket No. 110556 determined that Robert Gage Coal Co., the petitioner in both proceedings, is liable as transferee for deficiencies in income and excess profits taxes in the respective amounts of $30,472.20 and $91.18 and interest thereon due from the Monitor Sugar Co., hereinafter sometimes referred to as Monitor, for the taxable year ended March 31, 1937. Transferee liability is admitted for any tax and interest, if any, owed by Monitor.
The respondent in Docket No. 110557 determined deficiencies in income and excess profits taxes against Robert Gage Coal Co. in its separate corporate capacity for the taxable year ended March 31, 1937, in the amounts of $56,827.71 and $2,640.51, respectively. In an amendment to his answer the respondent makes claim for deficiencies in income and excess profits taxes against petitioner of $66,951.84 and $10,561.03, respectively, in lieu of the deficiencies originally determined.
Petitioner does not contest all of the adjustments made by the respondent in arriving at the above mentioned deficiencies. The contested portion of the deficiencies in both proceedings involve (1) the proper allocation between petitioner and Monitor of $354,370.58 of net income admittedly derived from the sugar business conducted by Monitor from April 1 to September 30, 1936, and by petitioner from October 1, 1936, to March 31 1937, and (2) the tax effect, both to Monitor and to petitioner in its separate corporate capacity, of a cash dividend of $140,000 authorized and paid by Monitor to petitioner on September 24, 1936, six days prior to the complete liquidation and dissolution of Monitor by petitioner. As to these contested matters, the respondent has made inconsistent determinations, which are state in more detail below.
In Docket No. 110556, Monitor filed a corporation income and excess profits tax return for the fiscal year ended March 31, 1937. In this return it reported a net income of $175,652.30 from the sugar business, which was the only business conducted by Monitor and represented one-half of the net income from the sugar business for the full fiscal year ended March 31, 1937, as shown on a two-page computation attached to the return as schedule 1, the concluding portion of which schedule was as follows:
+-----------------------------------------------------------------------------+ ¦Net Income ¦$351,304.59¦ +-----------------------------------------------------------------+-----------¦ ¦Less: One-half of year's income belonging to the Robert Gage Coal¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦Company, Bay City, Michigan. Monitor Sugar Company and Robert ¦ ¦ +-----------------------------------------------------------------+-----------¦ ¦Gage Coal Company merged September 30, 1936 ¦175,652.29 ¦ +-----------------------------------------------------------------+-----------¦ ¦Net Income for Excess Profits Tax Computation ¦$175,652.30¦ +-----------------------------------------------------------------------------+
In schedules M and N, Monitor reported a cash dividend of $140,000 paid on September 24, 1936, and in computing its surtax on undistributed profits it claimed a dividends paid credit of a like amount.
In the statement attached to the transferee liability notice in Docket No. 110556, the respondent increased the net income reported by Monitor from $175,652.30 to $177,185.29 by adding to the net income reported two small adjustments for repairs and depreciation totaling $1,532.99 (not here contested) and, among other things, said:
On September 24, 1936 a cash dividend was paid by the Monitor Sugar Company and claimed as a dividend paid credit on line 29 of its return.
The distribution of $140,000.00 is a liquidating dividend and not an ordinary dividend. Therefore, the dividend paid credit is disallowed.
By an appropriate assignment of error petitioner contested the disallowance of the dividend paid credit, alleging that the distribution was an ordinary dividend and not a liquidating dividend. Subsequent to Helvering v. Credit Alliance Corporation, 316 U.S. 107, petitioner amended its petition by averring ‘that whether said dividend is finally determined to be either an ordinary dividend or a liquidating dividend, the dividend paid credit must in either event be allowed.‘ In his brief the respondent concedes that in view of the above mentioned decision by the Supreme Court the question in the transferee proceeding whether the distribution was an ordinary or liquidating dividend has become moot and for that reason he confesses error in Docket No. 110556 in disallowing the claimed dividend paid credit of $140,000. That would ordinarily end the transferee proceeding were it not for the fact, as further stated below, that in determining the deficiencies in Docket No. 110557, the respondent included all of the above mentioned net income of $177,185.29 as a part of the taxable net income of petitioner in its separate corporate capacity for the fiscal year ended March 31, 1937. Petitioner in Docket No. 110556 therefore assigns as an alternative assignment of error that, if the entire income of Monitor is taxable as a part of the net income of petitioner in its separate corporate capacity, then no taxes, either income or excess profits, should have been paid on behalf of Monitor by petitioner as transferee, and that in that event petitioner would be entitled to a refund of all such taxes paid. The tax liabilities reported by Monitor were $25,723.60 in income taxes and $939.14 in excess profits taxes.
In Docket No. 110557, petitioner filed a corporation income and excess profits tax return in its separate corporate capacity for the fiscal year ended March 31, 1937, and reported a gross income of $588,305.29 and a net income of $282,320.11. Included in the gross income were the $140,000 dividend received from Monitor and $175,652.29 labeled ‘Monitor Sugar Division (Supporting schedule attached).‘ The supporting schedule consisted of a two-page computation of ‘Other Income-Monitor Sugar Division,‘ the concluding portion of which was as follows:
+----------------------------------------------------------------------+ ¦Net income ¦$351,304.59¦ +----------------------------------------------------------+-----------¦ ¦Less: One-half of year's income belonging to Monitor Sugar¦ ¦ +----------------------------------------------------------+-----------¦ ¦Company. Monitor Sugar Company merged with Robert Gage ¦ ¦ +----------------------------------------------------------+-----------¦ ¦Coal Company September 30, 1936 ¦175,652.30 ¦ +----------------------------------------------------------+-----------¦ ¦To Schedule of Other Income ¦$175,652.29¦ +----------------------------------------------------------------------+
Petitioner in its return, among other things, claimed a dividends received credit equal to 85 percent of the cash distribution received from Monitor, or $119,000, which amount was included in the total dividends received credit of $133,462.75 claimed under item 15, page 1, of the return.
In the statement attached to the deficiency notice in Docket No. 110557, the respondent made adjustments to net income as follows:
+--------------------------------------------------------------------+ ¦Net income as disclosed by return ¦ ¦$282,320.11¦ +---------------------------------------------+----------+-----------¦ ¦Unallowable deductions and additional income:¦ ¦ ¦ +---------------------------------------------+----------+-----------¦ ¦(a) Capital expenditure ¦$720.00 ¦ ¦ +---------------------------------------------+----------+-----------¦ ¦(b) Depreciation--Monitor Sugar Division ¦812.99 ¦ ¦ +---------------------------------------------+----------+-----------¦ ¦(c) Depreciation--wholesale ¦552.15 ¦ ¦ +---------------------------------------------+----------+-----------¦ ¦(d) Depreciation--retail ¦2,152.22 ¦ ¦ +---------------------------------------------+----------+-----------¦ ¦(e) Taxes ¦2,450.59 ¦ ¦ +---------------------------------------------+----------+-----------¦ ¦(f) General expenses ¦4,980.79 ¦ ¦ +---------------------------------------------+----------+-----------¦ ¦(g) Legal fees, expense ¦1,000.00 ¦ ¦ +---------------------------------------------+----------+-----------¦ ¦(h) Income, Monitor Sugar Co ¦177,185.29¦ ¦ +---------------------------------------------+----------+-----------¦ ¦(i) Depletion ¦3,172.18 ¦ ¦ +---------------------------------------------+----------+-----------¦ ¦ ¦ ¦193,026.21 ¦ +---------------------------------------------+----------+-----------¦ ¦Net income as adjusted ¦ ¦$475,346.32¦ +--------------------------------------------------------------------+
EXPLANATION OF ADJUSTMENTS
(h) The income attributable to the assets received in the liquidation of Monitor Sugar Company and known as Monitor Sugar Division for the period October 1, 1936 to March 31, 1937, is held to be $354,370.58 instead of $177,185.29 as already included in your income. Hence your income has been increased in the amount of $177,185.29.
Adjustments (a) to (g), inclusive, and adjustment (i) are not contested. Adjustments (a) and (b) are the same kind of adjustments which the respondent made to the net income reported by Monitor referred to above, which, added to the above mentioned amount of $175,652.29 reported by petitioner labeled ‘Monitor Sugar Division (Supporting schedule attached)‘ and to adjustment (h), equals (lacking one cent) the amount of $354,370.58, which the parties agree is the net income derived from the sugar business conducted by Monitor from April 1 to September 30, 1936, and by petitioner from October 1, 1936, to March 31, 1937. By these determinations the respondent has included all of the admitted income of $354,370.58 in petitioner's taxable net income and one-half of the admitted income in Monitor's taxable net income. By an appropriate assignment of error petitioner contests this inconsistency.
In the statement attached to the deficiency notice in Docket No. 110557, the respondent also notified petitioner, among other things, as follows:
In the report of examination dated February 14, 1939 distributions received from the Monitor Sugar Company and the Columbia Operating Company of $140,000.00 and $3,000.00 respectively were eliminated from income.
The distributions received from the Monitor Sugar Company and the Columbia Operating Company of $140,000.00 and $3,000.00 respectively, are held to be includible in income as ordinary dividends.
The respondent in his amendment to answer in Docket No. 110557, now alleges that the cash dividend of $140,000 made by Monitor to petitioner on September 24, 1936, ‘represents and constitutes a liquidating dividend‘ instead of an ordinary dividend; that he, the respondent, erred in treating the said distribution as an ordinary dividend ‘and in his failure to disallow the dividends received credit of to wit: $119,000.00, so claimed by petitioner‘ on its return; and that as a result of now disallowing $119,000 of the dividends received credit there are due from petitioner increased deficiencies in income and excess profits taxes of $10,124.13 and $7,920.52, respectively.
Petitioner has consistently contended in both proceedings that the cash distribution was an ordinary dividend, but in Docket No. 110557 petitioner, as an alternative assignment of error, alleges in its reply to respondent's amendment to answer as follows:
A. If the said dividend of $140,000.00 is held and determined to be a liquidating dividend, the payment of said sum by the Monitor Sugar Company to Petitioner was an integral part of the tax-free liquidation of Monitor Sugar Company under Article 112(b)(6) of the Revenue Act of 1936, and Petitioner is entitled to a refund for the sum paid by it on the fifteen per cent thereof ($21,000.00).
The two issues remaining for our consideration and decision, therefore, are (1) the determination of how much of the $354,370.58 of the admitted net income from the sugar business is taxable income to petitioner and how much is taxable income to Monitor, and (2) whether the cash dividend of $140,000 authorized and paid by Monitor to petitioner on September 24, 1936, was an ordinary or a liquidating dividend and, if the latter, whether the entire distribution should be excluded from petitioner's gross income and whether the $119,000 dividends received credit should be disallowed.
FINDINGS OF FACT.
Petitioner is a Michigan corporation, with its principal office and place of business at Bay City, Michigan. Monitor Sugar Co. was, prior to its dissolution and liquidation, on September 30, 1936, a Michigan corporation, with its principal office and place of business in that city. The returns of both corporations for the fiscal year ended March 31, 1937, were filed with the collector for the district of Michigan.
Prior to September 22, 1936, the entire outstanding capital stock of Monitor was owned by the Columbia Operating Co., also a Michigan corporation, the entire outstanding capital stock of which was in turn owned by petitioner. On September 23, 1936, Columbia Operating Co. was, by appropriate action of its sole stockholder and directors, dissolved and liquidated, at which time all the outstanding capital stock of Monitor, together with other assets of the dissolved corporation, was transferred to petitioner. On September 30, 1936, by appropriate action of its sole stockholder and directors, Monitor was dissolved and liquidated, at which time all the assets of Monitor were transferred to petitioner, its then sole stockholder, and petitioner assumed all liabilities of Monitor as of that date. Subsequent to September 30, 1936, the business theretofore carried on by Monitor was conducted by petitioner, such business being operated as the ‘Monitor Sugar Division‘ of its business. Subsequent to that date, Monitor had no assets, conducted no business, and received no income.
Prior to its dissolution and liquidation on the date mentioned, Monitor was engaged in the business of manufacturing and selling beet sugar. For the business as carried on by Monitor prior to its dissolution and thereafter by petitioner, the following is sufficiently descriptive: Contracts were made with farmers for the growing of a certain acreage of sugar beets. The growing of the beets starts in the spring with the preparation of plants for planting. The contracts are entered into with the farmers about April. In April or May the farmers plant the seed. For the fiscal year in question the farmers obtained their seed and fertilizer from Monitor, which charged the selling price thereof to the farmers' accounts as advances. In June and July the beets were blocked and thinned. The harvesting season starts about the latter part of September or the first of October, at which time the processing or manufacturing of the beets into sugar begins. The processing campaign usually lasts from 75 to 90 days, depending on the tonnage or acreage, and the weather. In January their field agents undertook to line up farmer contracts and field labor for the next year. The finished product, i.e., the manufactured sugar, is sold from the time of the completion of its manufacture, about the end of December or the first part of January, until the following September. Advances were sometimes made upon the contracts with the farmers or growers in cash, seed, and fertilizer, of from $5.50 to $6 per ton. Final payment or settlement is not made until the manufactured sugar is sold or until 15 days after September 30. Such final settlements are made upon the basis of a percentage of the net profits derived from the sale of the sugar pulp and molasses produced from the sugar beets.
Monitor's books of account were kept and its return for the fiscal year ended March 31, 1937, was made on the accrual basis. Its inventories, consisting of manufactured sugar, were consistently taken on the basis of cost. Monitor never carried on its books any inventories of beets, as distinguished from the completed sugar product. The cost of the growing beets as of September 30 of any year could not be determined. The beets that were in the ground and growing on September 30 were manufactured into sugar during the period of from about the first of October to the last of December, and were not paid for until after the finished product was sold or until subsequent to the 15th of the following September.
Except for the sales of sugar made by Monitor from the inventory of the previous campaign, the period April 1 to September 30 of each year is primarily one of expense, rather than the receipt of income. Monitor's books of account were not closed as at the time of its dissolution, on September 30, 1936, and the transfer of its assets to petitioner and no attempt was made at that time to determine the actual profit or loss that had been derived or sustained by Monitor for the 6-month period ended September 30, 1936. All that was done when petitioner took over Monitor's assets and continued the business which it had theretofore been conducting was to place a notice or statement on the pages of Monitor's books to the effect that the business transactions therein recorded on and after September 30, 1936, were those of the petitioner.
The return as filed by or on behalf of Monitor for the fiscal year ended March 31, 1937, disclosed a net income of $351,304.59, as having been derived from the sugar manufacturing business during the 12-month period ended March 31, 1937, one-half of which, or $175,652.30, was therein allocated to and treated as the taxable net income of Monitor attributable to the period April 1 to September 30, 1936, the remaining half, or $175,652.29, being therein allocated to petitioner as its share of the net income for the period October 1, 1936, to March 31, 1937. The last-stated amount was included in the gross income as reported by petitioner for that fiscal year. In explanation of such allocation of income, exhibit ‘K‘ of the return of the petitioner for the fiscal year ended March 31, 1937, contained a statement which reads, in part, as follows:
As is customary with Beet Sugar Manufacturers, the taxpayer corporation, and the parent corporation, Robert Gage Coal Company, were confronted with an unusual accounting situation, in that it is very evident that it is only possible to determine with reasonable accuracy earnings or losses as of the close of the fiscal year, in this case March 31, 1937. This is due to the fact that although a Beet Sugar Campaign lasts for a period of 15 or 18 months, sugar inventories are the resultant factor of their manufacturing campaign, which commences around April 1st, when the Beet growers are contacted and agreement entered into with the Sugar Company to plant, cultivate and grow a specified number of acres of Sugar beets and delivery of sugar beets which follows during September and October when the manufacturing of the sugar commences, and which is completed within 60 or 90 days, depending largely upon the volume of the tonnage of sugar beets received from the beet growers. * * *
In anticipating the requirements under the Revenue Act of 1936, parent corporation, Robert Gage Coal Company, decided to dissolve the subsidiary, Monitor Sugar Company and merge the assets with those of the Robert Gage Coal Company. Dissolution was effective as of the close of business September 30, 1936 and was thereafter to be in a liquidating status insofar as the remaining operations until the termination of the fiscal year ended March 31, 1937. The profits undeterminable from October 1st, 1936 to March 31, 1937 (six months) were to belong to Robert Gage Coal Company.
Taxpayer due to the incompletion of the Sugar Campaign was unable to determine profit or loss with any degree of accuracy as of September 30, 1936, and decided that the only method of reporting would be to allocate the income over the entire fiscal year for two fractional parts of said taxable fiscal year, which was done, allocating six months to Monitor Sugar Company— April 1, 1936 to September 30, 1936, and six months to Robert Gage Company, October 1, 1936 to March 31, 1937.
The books of account of petitioner, and of Monitor prior to its dissolution and transfer of its assets to petitioner, have for many years been audited by R. W. Rannie, a certified public accountant, who prepared the returns of the companies for the fiscal year ended March 31, 1937. A condensed statement of the net income of $351,304.59 shown on schedule 1 attached to Monitor's return and the supporting schedule attached to petitioner's return is as follows:
+------------------------------------------------------------------------+ ¦Gross sales less returns and allowances ¦ ¦$2,273,262.93¦ +----------------------------------------------+-----------+-------------¦ ¦Less cost of goods sold ¦ ¦1,715,310.07 ¦ +----------------------------------------------+-----------+-------------¦ ¦Gross profit from sales ¦ ¦557,952.86 ¦ +----------------------------------------------------------+-------------¦ ¦Miscellaneous income (discrepancy on schedules of $790.20)¦11,962.59 ¦ +----------------------------------------------------------+-------------¦ ¦Gross income ¦ ¦569,915.45 ¦ +----------------------------------------------+-----------+-------------¦ ¦Deductions from gross income: ¦ ¦ ¦ +----------------------------------------------+-----------+-------------¦ ¦Administrative services ¦$24,150.60 ¦ ¦ +----------------------------------------------+-----------+-------------¦ ¦Interest paid ¦10,817.71 ¦ ¦ +----------------------------------------------+-----------+-------------¦ ¦Taxes paid ¦13,661.74 ¦ ¦ +----------------------------------------------+-----------+-------------¦ ¦Depreciation ¦32,827.87 ¦ ¦ +----------------------------------------------+-----------+-------------¦ ¦Salaries and wages ¦29,220.49 ¦ ¦ +----------------------------------------------+-----------+-------------¦ ¦Association dues and subscriptions ¦28,585.51 ¦ ¦ +----------------------------------------------+-----------+-------------¦ ¦Brokerage and commission ¦37,097.50 ¦ ¦ +----------------------------------------------+-----------+-------------¦ ¦Employees compensation insurance ¦16,882.43 ¦ ¦ +----------------------------------------------+-----------+-------------¦ ¦Miscellaneous deductions ¦25,427.01 ¦ ¦ +----------------------------------------------+-----------+-------------¦ ¦ ¦ ¦218,610.86 ¦ +----------------------------------------------+-----------+-------------¦ ¦Net income ¦ ¦351,304.59 ¦ +------------------------------------------------------------------------+
The respondent in his respective determinations disallowed a total of $3,065.98 of the deductions taken from repairs and depreciation, thereby increasing the net income as reported to $354,370.57. The parties agree that the correct net income from the sugar business for the full twelve months ended March 31, 1937, is $354,370.58.
Prior to the hearing in these proceedings Rannie prepared certain schedules described thereon as ‘Statement of Profit and Loss April 1, 1936— September 30, 1936.‘ ‘Balance Sheet September 30, 1936,‘ and ‘Analysis of Surplus April 1, 1936-September 30, 1936‘ of Monitor. A brief summary of the profit and loss schedule is as follows:
+---------------------------------------------------------------------------+ ¦Gross sales less returns and allowances ¦ ¦$479,704.96¦ +----------------------------------------------------+----------+-----------¦ ¦Less cost of goods sold ¦ ¦382,777.10 ¦ +----------------------------------------------------+----------+-----------¦ ¦Gross profit from sales (except seed and fertilizer)¦ ¦96,927.86 ¦ +----------------------------------------------------+----------+-----------¦ ¦Profit on seed sales ¦ ¦9,224.80 ¦ +----------------------------------------------------+----------+-----------¦ ¦Profit on fertilizer sales ¦ ¦4,118.98 ¦ +----------------------------------------------------+----------+-----------¦ ¦Miscellaneous income ¦ ¦7,123.11 ¦ +----------------------------------------------------+----------+-----------¦ ¦Gross income ¦ ¦117,394.75 ¦ +----------------------------------------------------+----------+-----------¦ ¦Deductions from gross income: ¦ ¦ ¦ +----------------------------------------------------+----------+-----------¦ ¦Selling expenses ¦$25,187.80¦ ¦ +----------------------------------------------------+----------+-----------¦ ¦General and administrative ¦34,014.71 ¦ ¦ +----------------------------------------------------+----------+-----------¦ ¦Miscellaneous deductions ¦1,703.68 ¦ ¦ +----------------------------------------------------+----------+-----------¦ ¦ ¦ ¦60,906.19 ¦ +----------------------------------------------------+----------+-----------¦ ¦Net income ¦ ¦56,488.56 ¦ +---------------------------------------------------------------------------+
We find that of the $354,370.58 of net income from the sugar business for the twelve months ended March 31, 1937, $56,488.56 was Monitor's net income for the first six-month period and $297,882.02 was the net income of the Robert Gage Coal Co. for the last six-month period.
On September 22, 1936, petitioner drew up a ‘Plan of Liquidation‘ of the Columbia Operating Co. and Monitor. The plan provided in part as follows:
The Robert Gage Coal Company owns all of the capital stock of Columbia Operating Company. Columbia Operating Company owns all of the capital stock of Monitor Sugar Company. This is all common stock, there being only one class of stock issued by either of said companies. All three companies are Michigan corporations. Under Section 73 of the Michigan General Corporation Act, as amended by Act 194 of the Public Acts of 1935, a corporation may be dissolved by the written consent of the holders of at least three-quarters of each class of its outstanding stock.
It is planned to dissolve Columbia Operating Company by the written consent of its sole stockholder, Robert Gage Coal Company. The assets of Columbia Operating Company including all of the capital stock of Monitor Sugar Company, will thereupon pass to Robert Gage Coal Company by operation of law, and Robert Gage Coal Company will thereby become the sole owner of all of the capital stock of Monitor Sugar Company.
Thereupon, Monitor Sugar Company will be dissolved by the written consent of its sole stockholder, Robert Gage Coal Company, and its assets will pass to the latter company by operation of law.
1. Monitor Sugar Company shall cease to be a going concern as of the close of business on September 30th, 1936, and it shall thereafter be in a status of liquidation. On and after October 1, 1936, its operations shall be carried on by and its income shall belong to Robert Gage Coal Company.
2. Effective October 1, 1936, all of the debts and liabilities of Monitor Sugar Company shall be paid and discharged by Robert Gage Coal Company, which has assumed and agreed to pay the same in full at maturity.
3. The assets of Monitor Sugar Company shall be distributed in kind as of October 1, 1936, to Robert Gage Coal Company, as its sole stockholder.
4. Thereafter, the statutory certificate will be filed with the Secretary of State and County Clerk consummating the dissolution.
5. Charles A. Coryell, the Treasurer of Monitor Sugar Company, shall act, if and when required, as liquidating and distributing agent.
6. The records of Monitor Sugar Company shall be deposited for safe keeping with Robert Gage Coal Company.
On September 24, 1936, subsequent to the liquidation of Columbia Operating Co., Monitor declared and paid a cash dividend of $140,000 to its then sole stockholder, the Robert Gage Coal Co., the petitioner herein. This was a liquidating dividend declared and paid after it had been definitely decided to completely liquidate Monitor.
The above portion of the plan to liquidate Monitor was consented to by the sole stockholder of Monitor on September 30, 1936, and Monitor was liquidated and dissolved in accordance therewith at meetings of the directors and the sole stockholder of Monitor held on September 30, 1936.
Petitioner, on page 2, item 12(a), of its return for the fiscal year ended March 31, 1937, reported as a part of its gross income the receipt of the $140,000 as an ordinary dividend and on page 1, item 15, it claimed as a part of a dividends received credit 85 percent of $140,000 or $119,000. This act of reporting the $140,000 and the claiming of the dividends received credit was not disturbed by the respondent in his deficiency notice addressed to petitioner in its separate corporate capacity.
OPINION.
BLACK, Judge:
The first issue is to determine how much of the admitted net income of $354,370.58 from the sugar business conducted by Monitor for the first six months and by petitioner for the last six months of the fiscal year ended March 31, 1937, is taxable to Monitor and petitioner, respectively. This is essentially a question of fact.
Petitioner, as owner of all the stock of Monitor, completely liquidated the latter on September 30, 1936. The books of Monitor were not closed at the time of the liquidation, nor were any inventories taken. The business taken over by petitioner was a seasonal business and the liquidation occurred in the midst of the season, when it would have been very difficult to take inventories and to close the books. In filing their returns each corporation reported one-half of the income, which action was explained in an exhibit which was attached to petitioner's return and has been made a part of our findings.
The respondent accepted this method of allocation as far as Monitor was concerned, but in the case of the parent company he determined that the entire income of $354,370.58 was attributable to the assets received in the liquidation of Monitor for the period October 1, 1936, to March 31, 1937. As the determinations stand, the respondent would tax $531,555.87 of income where only $354,370.58 was earned.
The respondent contends that the prima facie correctness of his factual determination in the case of the parent company (Docket No. 110557) has not been overcome by competent evidence and that we should, therefore, hold that he did not err in his determination that the entire net income of $354,370.58 is taxable to the parent company. If this contention is sustained, the respondent argues in his brief that ‘it follows that he, the respondent, erred in his failure to eliminate from the net income as reported by the Monitor Sugar Company for that fiscal year, the amount of $177,185.29, representing the one-half of the aforesaid income $354,370.58, as reported by Monitor.‘
Petitioner contends that the respondent's determination in the transferee liability proceeding (Docket No. 110556) that 50 percent of the income from the sugar business is taxable to Monitor should be approved, since it was not contested and was the way in which the income was originally reported. Petitioner also contends that it is impossible here to determine exactly how much of the admitted income was earned by Monitor and how much was earned by the parent company, and that, therefore, the income for the twelve months period should, as a matter of law, be allocated between the two companies on a time basis, citing Carl Lang, 3 B.T.A. 417; Lang v. United States, 23 A.F.T.R. 1254; Peter W. Rouss, 4 B.T.A. 516; Rouss v. Bowers, 30 Fed.(2d) 628; certiorari denied, 279 U.S. 853; C. C. Coddington, 10 B.T.A. 712; Maurice L. Stern, 11 B.T.A. 1309; Continental Oil Co., 34 B.T.A. 29; affd., 100 Fed.(2d) 101.
The above cases stand for the proposition that allocation on a time basis may be employed as a means of last resort where it is impossible to determine the correct net income of a taxpayer for a given period in any other way. The end sought is the determination of a taxpayer's net income for a given period on an as nearly accurate a basis as is possible under all the circumstances. Cf. Reynolds v. Cooper, 64 Fed.(2d) 644.
In the latter case the court, among other things, said:
* * * The Commissioner apportioned the 1923 income between the two taxpayers according to the number of days included in each of the periods in question. The propriety of such method of apportionment if the Commissioner is unable to determine the actual income received by each of the taxpayers, is not questioned. On the other hand, the Commissioner should assess the income actually received by each of the taxpayers if it can be ascertained. Rules of thumb should not be resorted to in case of necessity, for the actual is always preferable to the theoretical. (Citing cases.)
In the instant proceedings petitioner introduced in evidence as one exhibit three financial statements of Monitor for the first six months of the fiscal year in question. These statements consisted of a profit and loss statement, a balance sheet as of September 30, 1936, and an analysis of surplus as of the beginning and end of the six-month period. A balance sheet as of March 31, 1936, is in evidence as a part of Monitor's return. These statements were all prepared by R. W. Rannie, a certified public accountant, who had audited the books of both petitioner and Monitor for several years prior to the taxable year in question. A brief summary of the profit and loss statement set forth in our findings shows a net income of $56,488.56 for Monitor for the first six months from the sugar business. Monitor had no other business. Rannie testified that these figures were all real figures taken from the books pertaining to the sugar business and that the result reached, although not 100 percent accurate, was as nearly so as he thought possible. On this point he testified, as to the schedules which he had prepared, as follows: ‘Substantially correct. I wouldn't say that they were correct right to the dollar, but they are substantially correct.‘ The schedules were introduced in evidence for the purpose of showing the unquestioned incorrectness of the respondent's determination in Docket No. 110557 that the entire income of $354,370.58 was earned by the parent company in the last six months of the fiscal year. In offering the schedules petitioner announced that it did not intend to depart from its original position in Docket No. 110556 and the respondent's determination therein that one-half of the admitted income should be allocated to Monitor. Petitioner still insists on that position, with the argument that since the $56,488.56 of net income shown in these schedules is not and can not be entirely accurate, allocation on a time basis should be resorted to as a matter of law.
As we have already stated, in determining the net income of a taxpayer for a given period the method that should be used is the one that will produce the most accurate result. As the court said in Reynolds v. Cooper, supra ‘Rules of thumb should only be resorted to in case of necessity, for the actual is always preferable to the theoretical.‘ The schedules placed in evidence by petitioner unquestionably prove that the respondent's determination in Docket No. 110557 is erroneous. But we think that the schedules also prove that the respondent's determination and Monitor's treatment of the matter in Docket No. 110556 is equally erroneous. For the entire period there were gross sales less returns and allowances of $2,273,262.93. The record does not show how much of this represented gross sales of seed and fertilizer. The profit and loss statement of Monitor prepared by the witness Rannie and offered in evidence by petitioner shows that for the first six months of the period there were gross sales less returns and allowances (except seed and fertilizer sales) of only $479,704.96; that there was a profit on seed sales of $9,224.80; and that there was a profit on fertilizer sales of $4,118.98. We think these figures clearly show that the great bulk of sales took place in the period from October 1, 1936, to March 31, 1937, and that it would be erroneous to allocate one-half of the resulting net income to each six-month period when there are in evidence figures which are much more accurate than an allocation on a time basis would produce.
We are of the opinion and have found as an ultimate fact that of the $354,370.58 of net income from the sugar business for the fiscal year ended March 31, 1937, $56,488.56 is taxable as Monitor's net income, and the balance or $297,882.02 is taxable as the net income of petitioner in its separate corporate capacity. We, therefore, hold that the respondent erred in determining that Monitor was taxable on $177,185.29 and petitioner on $354,370.58. The amounts of $56,488.56 and $297,882.02 should be substituted for the amounts determined by the respondent.
The second issue in Docket No. 110557 was raised by the respondent by an amendment to his answer. It requires no citation of authorities to support the proposition that the burden of proof is on respondent to sustain the affirmative allegations in his amended answer.
The facts, however, with reference to the liquidation of Monitor are fully in evidence. Monitor's corporation income and excess profits tax return for the fiscal year ended March 31, 1937, was introduced in evidence by respondent. It contains detailed information concerning the liquidation of Monitor. This information shows that petitioner, the sole stockholder of Columbia Operating Co., which was in turn the sole stockholder of Monitor, had on September 22, 1936, definitely determined to liquidate both corporations. Columbia Operating Co. was first liquidated and on September 24, 1936, Monitor declared and paid the $140,000 cash dividend in question. While the cash dividend of $140,000 was actually paid a few days prior to the formal liquidation of Monitor, which took place September 30, 1936, nevertheless we think that, when all the circumstances are considered, we must hold that the distribution of the $140,000 was a liquidating dividend. Canal-Commercial Trust & Saving Bank, 22 B.T.A. 541; affd., 63 Fed.(2d) 619; Texas-Empire Pipe Line Co., 42 B.T.A 368; affd., on this point 127 Fed.(2d) 220. The court said in the latter case:
* * * The distribution of November 30, 1932, was not made in the ordinary course of business with intent to maintain the subsidiary as a going concern, but was paid after it had been decided to liquidate the subsidiary and was declared only one day prior to the formal action taken to effect distribution in liquidation. * * *
As shown in our findings, in its income tax return for the taxable year in question petitioner reported the $140,000 received from Monitor as an ordinary dividend and took credit for 85 per centum thereof under section 26 of the Revenue Act of 1936. This section reads in part as follows:
SEC. 26. CREDITS OF CORPORATIONS.
In the case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax
(b) DIVIDENDS RECEIVED.— 85 per centum of the amount received as dividends from a domestic corporation which is subject to taxation under title. * * *
It seems plain that the dividends referred to in the foregoing section are ordinary dividends and not liquidating dividends. Therefore, having held that the $140,000 dividends in question was a liquidating dividend, we sustain respondent's contention that the $119,000 dividends received credit taken by petitioner in its return should be disallowed.
This now brings us to petitioner's contention made in its reply to respondent's amended answer, wherein petitioner alleges:
If the said dividend of $140,000.00 is held and determined to be a liquidating dividend, the payment of said sum by the Monitor Sugar Company to Petitioner was an integral part of the tax-free liquidation of Monitor Sugar Company under Article 112(b)(6) of the Revenue Act of 1936, and Petitioner is entitled to a refund for the sum paid by it on the fifteen per cent thereof ($21,000.00).
Section 112(b)(6), Revenue Act of 1936, to which petitioner refers in the above reads, in part, as follows:
(6) PROPERTY RECEIVED BY CORPORATION ON COMPLETE LIQUIDATION OF ANOTHER.— No gain or loss shall be recognized upon the receipt by a corporation of property distributed in complete liquidation of another corporation. * * *
Prior to the 1936 Act the liquidation of a subsidiary corporation was a transaction on which gain or loss was recognized. But under the 1936 Act, which is applicable here, such a liquidation is free from the recognition of gain or loss if it meets the conditions laid down in the statute. See Mertens Law of Federal Income Taxation, vol. 1, sec. 9.86. Cf. Helvering v. Credit Alliance Corporation, supra.
The liquidation by petitioner of its wholly owned subsidiary, Monitor, appears to meet all the requirements of the statute to exempt such liquidation from the recognition of gain or loss. Therefore, no gain is to be recognized to petition in the distribution to it by Monitor of the liquidating dividend of $140,000. This distribution was simply a part of the distribution of the entire assets of Monitor to petitioner, and no gain or loss is to be recognized on any of it, under the statute which we have quoted. This being true, petitioner erred in reporting the $140,000 liquidating dividend as a part of its taxable income, and, as we have stated, petitioner also erred in taking as a dividends received credit 85 per centum of such distribution of $140,000. In a recomputation under Rule 50 both of these items should be eliminated.
Decision will be entered under Rule 50.