Opinion
Docket Nos. 7557 7573 7592 7593 7594 7595.
1946-04-29
SAMUEL L. SLOVER, PETITIONER, ET AL.,1 v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Charles L. Kaufman, Esq., for the petitioners. Elmer L. Corbin, Esq., for the respondent.
Corporate transferee of property held not to have ‘inherited‘ earnings and profits of transferor corporation under doctrine of Commissioner v. Sansome, 60 Fed.(2d) 931, where, on reorganization, receipt of transferee's stock by transferor's sole stockholder (petitioner) had been taxed as ordinary dividend. Charles L. Kaufman, Esq., for the petitioners. Elmer L. Corbin, Esq., for the respondent.
Petitioners in these consolidated cases seek redetermination of deficiencies in Federal income tax as follows:
+----------------------------------------------------------------------+ ¦Petitioner ¦Year 1940¦Year 1941¦Total ¦ +----------------------------------------+---------+---------+---------¦ ¦Samuel L. Slover ¦$907.74 ¦$6,762.00¦$7,669.74¦ +----------------------------------------+---------+---------+---------¦ ¦Fay Slover ¦1,980.76 ¦20,496.95¦22,477.71¦ +----------------------------------------+---------+---------+---------¦ ¦Henry S. Lewis ¦47.97 ¦822.09 ¦870.06 ¦ +----------------------------------------+---------+---------+---------¦ ¦Mary Sheild Lynch ¦69.80 ¦898.93 ¦968.73 ¦ +----------------------------------------+---------+---------+---------¦ ¦Howard G. Martin ¦52.80 ¦1,038.49 ¦1,091.29 ¦ +----------------------------------------+---------+---------+---------¦ ¦James G. Martin, Jr., and Anne T. Martin¦27.34 ¦982.06 ¦1,009.40 ¦ +----------------------------------------------------------------------+
The single question, common to all petitioners, is whether distributions to petitioners during the taxable years by a realty corporation which had received its assets on a reorganization were dividends or distributions of capital.
The cases were submitted on the pleadings and a stipulation of facts.
FINDINGS OF FACT.
The stipulated facts are hereby found accordingly. They disclose the following:
Petitioners are all residents of Norfolk, Virginia. They duly filed their respective income tax returns for the years in question with the collector of internal revenue at Richmond, Virginia.
In determining the deficiencies involved, respondent included in the income of the respective petitioners for the calendar year 1940 and 1941 the following sums representing distributions made in those years to the respective petitioners by the Fayver Realty Corporation, a Virginia corporation (hereinafter sometimes referred to as Fayver):
+------------------------------------------------------------+ ¦Petitioner ¦Year 1940¦Year 1941¦ +----------------------------------------+---------+---------¦ ¦Samuel L. Slover ¦$1,375.37¦$9,800 ¦ +----------------------------------------+---------+---------¦ ¦Fay Slover ¦4,912.01 ¦35,000 ¦ +----------------------------------------+---------+---------¦ ¦Henry S. Lewis ¦392.96 ¦2,800 ¦ +----------------------------------------+---------+---------¦ ¦Mary Sheild Lynch ¦392.96 ¦2,800 ¦ +----------------------------------------+---------+---------¦ ¦Howard G. Martin ¦392.96 ¦2,800 ¦ +----------------------------------------+---------+---------¦ ¦James G. Martin, Jr., and Anne T. Martin¦392.96 ¦2,800 ¦ +------------------------------------------------------------+
Fayver was organized on or about June 17, 1935, and by deed dated July 5, 1935, the S. L. Slover Corporation, also a Virginia corporation, pursuant to a plan of reorganization, as defined by section 112(g)(1)(C) of the Revenue Act of 1934, transferred and conveyed to Fayver properties (which were principally real property) having an aggregate fair market value of $120,161.20 at the time of the transfer.
At the time of the transfer the S. L. Slover Corporation had assets which were carried on its books at a total cost of $1,637,904.13 (including the transferred properties, which were carried on its books at their aggregate cost of $531,656.11), and then had undistributed earnings accumulated since March 1, 1913, of $941,080.97. The transfer of the properties was made in exchange for all of Fayver's capital stock, consisting of 1,000 shares of common stock without par value, which stock was contemporaneously distributed to Samuel L. Slover an income tax thereon in the amount of $62,405.60 for the year 1935, which, together with the interest upon it, has been fully paid by Samuel L. Slover.
Since Fayver's organization on June 17, 1935, its earnings and distributions have been as follows:
+----------------------------------------------------------------+ ¦Year¦Earnings ¦Distributions¦Year¦Earnings ¦Distributions¦ +----+---------------+-------------+----+----------+-------------¦ ¦1935¦1 ($1,425.50)¦None ¦1939¦$92.22 ¦$12,000 ¦ +----+---------------+-------------+----+----------+-------------¦ ¦1936¦(298.01) ¦None ¦1940¦184.36 ¦10,000 ¦ +----+---------------+-------------+----+----------+-------------¦ ¦1937¦2,115.61 ¦$6,000 ¦1941¦(8,261.43)¦70,000 ¦ +----+---------------+-------------+----+----------+-------------¦ ¦1938¦657.23 ¦None ¦ ¦ ¦ ¦ +----------------------------------------------------------------+
All earnings and profits of Fayver, accrued since its organization, have been distributed and treated by both Fayver and its stockholders as ordinary taxable dividends.
During the years 1940 and 1941 Fayver sold certain of the properties acquired by it from the Slover Corporation, and the proceeds of the sales were distributed by Fayver to its stockholders on a ratable basis, pursuant to resolutions duly adopted by its board of directors providing for the distribution thereof as liquidating dividends and directing that at the time of the respective distributions Fayver's secretary place suitable legends evidencing such liquidating distributions on Fayver's outstanding stock certificates. This was done by the secretary.
During the years 1940 and 1941 petitioners respectively owned the following number of shares of stock of Fayver:
+----------------------------------------------------------------+ ¦Samuel L. Slover ¦140 shares¦Howard G. Martin ¦40 shares¦ +-----------------+----------+-------------------------+---------¦ ¦Fay Slover ¦500 shares¦James G. Martin, Jr., and¦ ¦ +-----------------+----------+-------------------------+---------¦ ¦Henry S. Lewis ¦40 shares ¦wife ¦40 shares¦ +-----------------+----------+-------------------------+---------¦ ¦Mary Sheild Lynch¦40 shares ¦ ¦ ¦ +----------------------------------------------------------------+
The Fayver stock owned by petitioners Fay Slover, Henry S. Lewis, Mary Shield Lynch, Howard G. Martin, and James G. Martin, Jr., was acquired by them prior to the year 1940, through gifts from Samuel L. Slover.
During 1940 and 1941 petitioners received distributions from Fayver in the following amounts, which they treated in the manner indicated:
+-----------------------------------------------------------------------------+ ¦ ¦ ¦Earnings since ¦Remainder of distribution ¦ ¦ ¦Total ¦organization ¦treated as a return of capital¦ ¦ ¦distribution ¦treated as taxable ¦in reduction of basis of stock¦ ¦ ¦ ¦income ¦ ¦ +------------+-------------+-------------------+------------------------------¦ ¦ ¦1940 ¦1941 ¦1940 ¦1941 ¦1940 ¦1941 ¦ +------------+------+------+-----------+-------+------------------+-----------¦ ¦Samuel L. ¦$1,400¦$9,800¦$24.63 ¦None ¦$1,375.37 ¦$9,800 ¦ ¦Slover ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------+------+------+-----------+-------+------------------+-----------¦ ¦Fay Slover ¦5,000 ¦35,000¦87.99 ¦None ¦4,912.01 ¦35,000 ¦ +------------+------+------+-----------+-------+------------------+-----------¦ ¦Henry S. ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Lewis------)¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------+------+------+-----------+-------+------------------+-----------¦ ¦Mary Sheild ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Lynch------)¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------+------+------+-----------+-------+------------------+-----------¦ ¦Howard G. ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Martin-----)¦400 ¦2,800 ¦7.04 ¦None ¦392.96 ¦2,800 ¦ ¦each ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------+------+------+-----------+-------+------------------+-----------¦ ¦James G. ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------+------+------+-----------+-------+------------------+-----------¦ ¦Martin,Jr.,)¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+
The distributions received by each of the petitioners from Fayver during all years up to and including the year 1941, totaled less than the cost basis ($120.16 per share) of their Fayver stock.
OPINION.
OPPER, Judge:
Whether the distributions to petitioners by the new corporation are taxable dividends depends in the last analysis on the applicability of the rule first announced in Commissioner v. Sansome (C.C.A., 2d Cir.), 60 Fed.(2d) 931; certiorari denied, 287 U.S. 667. It is agreed that the new corporation had exhausted its own earnings and profits, and only on the theory that some part of the earnings of its transferor were ‘inherited‘ by it, under the Sansome doctrine, would the distributions to petitioners be taxable as dividends rather than being considered as a return of capital.
The origin and purpose of the Sansome rule has repeatedly been described as based upon the danger that otherwise distributions of accumulated earnings to stockholders would escape tax. See Estate of Howard H. McClintic, 47 B.T.A. 188. Under the present facts no comparable possibility exists. Since the Revenue Act of 1934 distributions of stock even in reorganizations have been taxable to recipients to the full extent of their fair market value under the circumstances existing here.
The distribution of the new stock was treated as fully taxable and petitioner paid and respondent collected the tax upon its fair market value as ordinary income. Both now agree that this treatment was correct.
Parentheses indicate loss.
Proceedings of the following petitioners are consolidated herewith: Fay Slover; Henry S. Lewis; Mary Shield Lynch; Howard G. Martin; and James G. Martin, Jr., and Anne T. Martin, Husband and Wife.
Revenue Act of 1934, Report Committee on Ways and Means:‘The Committee proposes to limit the application of the reorganization provisions by two principal changes. In the first place, the committee recommends that section 112(g) be omitted from the bill. This paragraph provides that a corporation by means of a reorganization may distribute to its shareholders stock or securities in another corporation a party to the reorganization without any tax to the shareholder. By this method corporations have found it possible to pay what would otherwise be taxable dividends, without any taxes upon their shareholders. The committee believes that this means of avoidance should be ended.‘Section 112(g) (Revenue Act of 1932). Distribution of stock on reorganization: This section of the Revenue Act of 1932 is omitted from the bill. Under this section, if Corporation A organizes a subsidiary, Corporation B, to which it transfers part of its assets in exchange for all of the stock of Corporation B, and distributes the stock of Corporation B as a dividend to its stockholders without the surrender by the stockholders of any of their stock, then such a dividend is not subject to income tax. By omitting this section, the stockholders must pay a tax upon receipt of such dividends. * * *.‘ H. R. Rept. No. 704, 73d Cong., 2d Sess., 1939-1 C.B. (Part 2), pp. 564, 574.
Under these circumstances it is neither necessary nor logical to deal with any part of the earnings of the old corporation as having been transferred by the reorganization. These earnings have already been reduced by the full value of the property transferred and by which the amount of the dividend was measured. No further tax upon the distribution of that part of the earnings is called for. This is the only fair implication of respondent's own regulations (Regulations 103), which read in part as follows:
SEC. 19.115-11. Effect On Earnings Or Profits Of Certain Tax-Free Exchanges And Tax-Free Distributions.— If, under the law applicable to the year in which any transfer or exchange of property after February 18, 1913, was made (including transfers in connection with a reorganization * * * ), gain or loss was not recognized (or was recognized only to the extent of the property received other than that permitted by such law to be received without the recognition of gain), then proper adjustment and allocation of the earnings or profits of the transferor shall be made as between the transferor and transferee corporations.
The general rule provided in section 115(b) that every distribution is made out of earnings or profits to the extent thereof and from the most recently accumulated earnings or profits, does not apply to:
(1) The distribution, in pursuance of a plan of reorganization * * * if no gain to the distributees from the receipt of such stock or securities was recognized by law.
A distribution described in paragraph (1) * * * does not diminish the earnings or profits of any corporation. In such cases, the earnings or profits remain intact and available for distribution as dividends by the corporation making such distribution, or by another corporation to which the earnings or profits are transferred upon such reorganization or other exchange. * * *
Nor do we agree that the issuance of the dividend stock should be treated as a nontaxable exchange
because as between the corporate transferor and transferee no gain or loss was recognized under section 112. The latter relationship is dealt with in the basis sections and the consistency required is as to the treatment of the property in the hands of the transferee corporation under section 113(a). See Commissioner v. Wheeler, 324 U.S. 542. We are here concerned only with taxation of the stockholders, and, to that end, with the constitution for dividend purposes of the corporation's earnings and profits account. In this respect the prior stock distribution, even though pursuant to a reorganization, was wholly taxable and the effect on earnings and profits for purposes of determining taxability to the stockholders of future distributions should comport with that circumstance. Cf. Sidney S. Munter, 5 T.C. 108.
‘* * * It seems to us that section 202(c)(2) * * * should be read as a gloss upon section 201. That section provides for cases of corporate 'reorganization’ which shall not result in any 'gain or loss' to the shareholder participating in them, and defines them with some particularity. He must wait until he has disposed of the new shares, and use his original cost as the 'base' to subtract from what he gets upon the sale. Such a change in the form of the shares is 'an exchange of property,' not 'a sale or other disposition' of them. * * * It appears to us extremely unlikely that what was not 'recognized' as a sale or disposition for the purpose of fixing gain or loss, should be 'recognized' as changing accumulated profits into capital. * * *‘ (Commissioner v. Sansome, supra.)
In respondent's treatment of the present question, some unnecessary complication is added by reference to this as a ‘split-off‘ reorganization, in which an allocation of earnings as between the various participating corporations is required. Cf. Estate of Howard H. McClintic, supra; Stella K. Mandel, 5 T.C. 684. Such allocation, however, becomes necessary only where it is first apparent that the Sansome rule applies. Where, as in the existing circumstances, the original distribution is wholly taxable, it constitutes a diminution, to an extent we are not now called upon to decide,
of the earnings and profits of the distributing corporation without the necessity of assuming that any earnings and profits are carried over with the transferred assets and with even less necessity for determining the proper allocation.
Cf. Commissioner v. Timken Estate (C.C.A., 6th Cir.) 141 Fed. (2d) 625; V. U. Young, 5 T.C. 1251; R. D. Merrill, 4 T.C. 955.
We conclude that in the situation before us the rule of Commissioner v. Sansome does not need to be applied and that accordingly respondent's determination was erroneous.
Reviewed by the Court.
Decisions will be entered under Rule 50.