Opinion
Docket Nos. 3648 3653 4545.
1945-08-30
RICHARD H. SURVAUNT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.NATIONAL TYPESETTING CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Robert D. Abbott, Esq., for the petitioners. Loyal E. Keir, Esq., for the respondent.
Liquidation of old company and acquisition of its assets by new corporation in exchange for delivery of new corporation stock and debentures to old stockholders, all pursuant to unwritten plan, held, integrated transaction resulting in ‘reorganization‘ under sections 112(g)(1)(D) and 113(a)(7), Internal Revenue Code, notwithstanding pursuit of stockholders' personal, rather than corporate, purposes; and, no gain or loss being recognized under sections 112(b), (d), and (e), held, further, basis for depreciation to corporate petitioner (new corporation) was that of its transferor, and individual petitioner (a stockholder) had no capital loss. Robert D. Abbott, Esq., for the petitioners. Loyal E. Keir, Esq., for the respondent.
Redeterminations are sought of deficiencies in income tax as follows:
+------------------------------------------------------------+ ¦ ¦Docket¦Taxable year ¦ ¦ +--------------------------------+------+-------------+------¦ ¦Petitioner ¦No. ¦ended— ¦Amount¦ +--------------------------------+------+-------------+------¦ ¦Richard H. Survaunt ¦3648 ¦Dec. 31, 1940¦$74.95¦ +--------------------------------+------+-------------+------¦ ¦National Typesetting Corporation¦3653 ¦Nov. 30, 1941¦965.30¦ +--------------------------------+------+-------------+------¦ ¦Do ¦4545 ¦------do-----¦965.30¦ +------------------------------------------------------------+
Docket Nos. 3653 and 4545 are identical appeals except that No. 4545 corrects an error existing in the other docket as to the name of petitioner, and was filed as the result of the issuance of another notice of deficiency.
The deficiency with respect to Richard H. Survaunt is occasioned by the denial of his claimed deduction for loss on the liquidation of the National Typesetting Company. The deficiency in the case of the National Typesetting Corporation is based upon the denial of part of a deduction for depreciation computed on a new basis after the corporation succeeded the company at the cost of the year 1940. The ultimate question is whether certain transactions were within the provisions of section 112, Internal Revenue Code.
FINDINGS OF FACT.
The petitioners, Richard H. Survaunt (hereinafter referred to as petitioner) and the National Typesetting Corporation (hereinafter sometimes referred to as the corporation), filed their returns for the respective taxable years with the collector of internal revenue for the first district of Missouri, at St. Louis, Missouri.
In the year 1927 the National Typesetting Co. (hereinafter referred to as the company) was organized as a corporation under the laws of the State of Missouri by Herman B. Berndsen, who served as president, Lee M. Hartwell, who served as vice president, Edward F. Kiely, who served as treasurer, and petitioner, who served as secretary. It had a capital stock consisting of 1,000 shares without par value, which was held equally by the four incorporators. In the month of March 1936 Kiely died and in the April following Berndsen died. Petitioner and Hartwell, pursuant to a prior stockholders' agreement purchased the stock interests of Kiely and Berndsen for approximately $60,000; $30,000 from petitioner, and $30,000 from Hartwell.
In connection with the purchase of these interests Hartwell and petitioner each issued promissory notes to the Kiely and Berndsen estates as follows:
Notes under date of March 16, 1936, each in the amount of $10,650.56, secured by 83 1/3 shares of stock of the Company, payable to Mercantile-Commerce Bank & Trust Company and Grace Gallaher Kiely, executors under Kiely's will, and endorsed by the executors to themselves as trustees under Kiely's will; and notes under date of April 18, 1936, each in the amount of $7,583.19, secured by 166 2/3 shares of stock of the Company, payable to Mercantile-Commerce Bank & Trust Company and Mary Hoffman Berndsen, executors under the will of Berndsen, and endorsed by the executors to themselves as trustees under Berndsen's will.
Hartwell and petitioner continued to own all of the capital stock of the company until the death of Hartwell on July 19, 1940. By the last mentioned date approximately $7,000 had been paid on the principal of the indebtedness represented by the above described notes. As of July 19, 1940, petitioner and Hartwell were unable to liquidate the obligations completely. The amount of unpaid principal on these notes on December 30, 1940 (the date of the dissolution of the old company, as hereinafter related) was $29,534.18.
The notes of petitioner and Hartwell to the Berndsen estate and trust had matured April 18, 1939, but had been extended for successive terms of six months when the semiannual interest was paid. The last renewal term matured October 18, 1940, when the bank, as one of the Berndsen cotrustees, attempted collection of the note.
On December 20, 1940, a formal written demand was made upon and claim acknowledged by Eleanor L. Hartwell, executrix of Hartwell's estate, for the balance of principal and interest accrued to that date as follows: Upon the note of Hartwell held by the Kiely trust, $9,275.88; and upon the note of Hartwell held by the Berndsen trust, $5,971.14.
This was preliminary to filing claims in the Probate Court. On February 11, 1941, that court rendered judgment on the above demands in the amount stated.
The Hartwell estate had no assets with which to pay the notes signed by Hartwell. Neither petitioner nor his family had money or holdings with which to pay off the notes signed by petitioner.
After Hartwell's death his executors and petitioner were confronted with the necessity of paying off the notes, and, having no assets other than their stock in the old company, they decided to attempt to refund the individual notes with corporate notes issued by the company. They inquired of the company's counsel whether the company could issue its notes if the trustees of the Kiely and Berndsen trusts would accept them. Their counsel advised that the company was not liable upon the notes, they being the individual obligations of Hartwell and petitioner, and that under the law of Missouri it would be impossible for the company to assume the obligations.
It was decided by the stockholders of the company that it would be necessary to dissolve and liquidate it in order to provide petitioner and the Hartwell estate with the means to meet their indebtednesses to the Kiely and Berndsen trusts. At a meeting of the stockholders of the company held December 30, 1940, all of the capital stock was unanimously voted in favor of resolutions dissolving the company and distributing all of its property to the stockholders, who assumed the company's debts so that immediate dissolution could be effected.
The foregoing was consummated and the property received by the stockholders, less enough to pay the company's debts, was conveyed by them by bill of sale to a new corporation which they had caused to be organized under the laws of Missouri on December 30, 1940, under the name of National Typesetting Corporation, which had a certificate of authority to commence business issued to it on December 31, 1940. Its articles of incorporation provided for the issuance of 4,000 shares of capital stock without par value.
An affidavit of dissolution of the company executed December 30, 1940, was duly filed with the Secretary of State of Missouri on December 31, 1940, pursuant to Missouri statutes. On or about January 13, 1941, Treasury Department Form 966, entitled ‘United States Return of Information under Section 148(d) of the Internal Revenue Code to be Filed by Corporations within 30 days after Adoption of Resolution or Plan of Dissolution, or Complete or Partial Liquidation,‘ was filed with respondent.
Subsequently there was duly filed with respondent Treasury Department Form 1096 for the year 1940, entitled ‘Supplemental United States Annual Information Return, etc.,‘ reporting the distributions made and the fair market value thereof.
In their individual income tax returns for 1940 petitioner and members of his family to whom he had transferred shares of company stock reported the value received by them respectively on the liquidation of the company, treating the transaction as one involving capital gain or loss. The transaction was not reported by the estate of Hartwell because its basis was the fair market value of the stock on July 14, 1940, which was assumed to be the same as the fair market value of the assets received in liquidation on December 30, 1940.
After the death of Hartwell petitioner invited his son Richard E. Survaunt to come into the business and as an inducement offered him stock in the company. Richard came into the business about August 8, 1940, when he became a director. On December 20, 1940, 50 shares of the company stock were transferred to Richard and on the same date petitioner transferred 50 shares to his other son, Edward, who was a student in Washington University. On the same date petitioner transferred 140 shares to his wife, Ella. All these transfers were gifts.
The stockholders of the company and the number of shares of stock held by each at the date of dissolution were as follows:
+--------------------------------------------------------+ ¦ ¦Shares¦ ¦Shares¦ +-------------------------+------+----------------+------¦ ¦Petitioner ¦259 ¦Charles F. Ernst¦1 ¦ +-------------------------+------+----------------+------¦ ¦Ella K. Survaunt (wife) ¦140 ¦Schell L. Furry ¦1 ¦ +-------------------------+------+----------------+------¦ ¦Edward E. Survaunt (son) ¦50 ¦ ¦ ¦ +-------------------------+------+----------------+------¦ ¦Richard E. Survaunt (son)¦50 ¦Total ¦1,000 ¦ +-------------------------+------+----------------+------¦ ¦Hartwell estate ¦499 ¦ ¦ ¦ +--------------------------------------------------------+
The balance sheet of the company as of December 30, 1940, was as follows:
+-----------------------------------------------------------+ ¦ASSETS ¦ +-----------------------------------------------------------¦ ¦Current assets: ¦¦ ¦ ¦ ¦ +--------------------------++----------+---------+----------¦ ¦Cash in bank and on hand ¦¦ ¦$2,341.81¦ ¦ +--------------------------++----------+---------+----------¦ ¦Accounts receivable ¦¦$17,510.44¦ ¦ ¦ +--------------------------++----------+---------+----------¦ ¦Less reserve for bad debts¦¦1,317.93 ¦16,192.51¦ ¦ +--------------------------++----------+---------+----------¦ ¦Inventory-work in process ¦¦ ¦2,620.25 ¦ ¦ +--------------------------++----------+---------+----------¦ ¦ ¦¦ ¦ ¦$21,154.57¦ +--------------------------++----------+---------+----------¦ ¦Other assets: ¦¦ ¦ ¦ ¦ +--------------------------++----------+---------+----------¦ ¦Due from employees ¦¦ ¦$593.80 ¦ ¦ +--------------------------++----------+---------+----------¦ ¦Inventory-type and metals ¦¦ ¦28,510.58¦ ¦ +--------------------------++----------+---------+----------¦ ¦ ¦¦ ¦ ¦29,104.38 ¦ +-----------------------------------------------------------+
Reserve for Cost Depreciation Net Fixed assets: Machinery-general $13,480.80 $13,480.80 Equipment-printing 56,754.94 47,921.29 $8,833.65 Factory fixtures and equipment 94.62 93.42 1.20 Office furniture and fixtures 1,172.27 941.50 230.77 Delivery truck 808.91 202.32 606.59 72,311.54 62,639.33 9,672.21 $9,672.21 Deferred charges: Prepaid insurance 484.56 Prepaid taxes 204.92 Prepaid other expense 12.50 701.98 60,633.14
LIABILITIES AND CAPITAL Current liabilities: Accounts payable $4,619.49 Due officer 1,637.65 Due estate of deceased officer 1,458.60 Accrued payroll 879.52 Reserve for social security taxes 1,160.15 $9,755.41 Capital stock and surplus: Capital stock authorized and issued, 1,000 shares, no par common stock 46,700.00 Surplus 4,177.73 50,877.73 60,633.14
On December 31, 1940, the Survaunts and the Hartwell estate, and Schell L. Furry and C. F. Ernst, the last named having each owned one share of company stock, offered to transfer to the corporation the assets which they had received on dissolution for the corporation's capital stock and its unsecured promissory notes. The agreed price and value was $113,297.57 and the notes, to be issued proportionately to the stockholders, aggregated $29,534.18. A bill of sale and assignment consummating the foregoing was duly acknowledged and accepted by the parties and the first meeting of the corporation's stockholders authorized the issuance of the capital stock and the notes. They duly elected a board of directors, which ordered the issuance of the no par value stock and the notes.
The balance sheet of the corporation as of December 31, 1940, was as follows:
+-------------------------------------------------------------+ ¦ASSETS ¦ +-------------------------------------------------------------¦ ¦Current assets: ¦ ¦ ¦ ¦ +------------------------------+---------+---------+----------¦ ¦Cash ¦ ¦$311.49 ¦ ¦ +------------------------------+---------+---------+----------¦ ¦Accounts receivable ¦$9,785.35¦ ¦ ¦ +------------------------------+---------+---------+----------¦ ¦Less reserve for bad debts ¦1,317.93 ¦8,467.42 ¦ ¦ +------------------------------+---------+---------+----------¦ ¦Inventory-work in process ¦ ¦2,620.25 ¦ ¦ +------------------------------+---------+---------+----------¦ ¦ ¦ ¦ ¦$11,399.16¦ +------------------------------+---------+---------+----------¦ ¦Other assets: ¦ ¦ ¦ ¦ +------------------------------+---------+---------+----------¦ ¦Due from employees ¦ ¦593.80 ¦ ¦ +------------------------------+---------+---------+----------¦ ¦Inventory-Type and metals ¦ ¦28,510.58¦ ¦ +------------------------------+---------+---------+----------¦ ¦ ¦ ¦ ¦29,104.38 ¦ +------------------------------+---------+---------+----------¦ ¦Fixed assets: ¦ ¦ ¦ ¦ +------------------------------+---------+---------+----------¦ ¦Machinery—general ¦ ¦62,296.69¦ ¦ +------------------------------+---------+---------+----------¦ ¦Equipment—printing ¦ ¦6,988.20 ¦ ¦ +------------------------------+---------+---------+----------¦ ¦Factory fixtures and equipment¦ ¦979.58 ¦ ¦ +------------------------------+---------+---------+----------¦ ¦Office furniture and fixtures ¦ ¦1,220.99 ¦ ¦ +------------------------------+---------+---------+----------¦ ¦Truck ¦ ¦606.59 ¦ ¦ +------------------------------+---------+---------+----------¦ ¦ ¦ ¦ ¦72,092.05 ¦ +------------------------------+---------+---------+----------¦ ¦Deferred charges: ¦ ¦ ¦ ¦ +------------------------------+---------+---------+----------¦ ¦Prepaid insurance ¦ ¦$484.56 ¦ ¦ +------------------------------+---------+---------+----------¦ ¦Prepaid taxes ¦ ¦204.92 ¦ ¦ +------------------------------+---------+---------+----------¦ ¦Prepaid other expenses ¦ ¦12.50 ¦ ¦ +------------------------------+---------+---------+----------¦ ¦ ¦ ¦ ¦701.98 ¦ +------------------------------+---------+---------+----------¦ ¦ ¦ ¦ ¦113,297.57¦ +------------------------------+---------+---------+----------¦ ¦ ¦ ¦ ¦ ¦ +-------------------------------------------------------------+
LIABILITIES AND NET WORTH Notes payable stockholders: Payable in equal semiannual installments of principal so as to mature all notes over a 15-year period with interest at the rate of 4% per annum. All notes are to be subordinate at all times to the $29,534.18 bank, trade, and operating indebtedness of National Typesetting Corporation up to an amount not to exceed $17,500 at any time Capital stock authorized and subscribed: 4,000 shares no par value common stock 83,763.39 113,297.57
The ‘fixed assets‘ had a fair market value of $55,000 on December 31, 1940.
The current assets of the corporation as shown by its opening books of account aggregated $11,399.16. The current assets of the company on the date of its dissolution and prior to distribution aggregated $21,154.57.
The business conducted by the corporation is identical with that previously conducted by the company. There was no interruption of business in the dissolution of the company and the organization of the corporation, and there was no change in the policy of the business.
The foregoing transaction whereby the corporation succeeded to the company's business was pursuant to a plan of reorganization.
After the organization of the corporation petitioner and the Hartwell estate resumed negotiations with the Kiely and Berndsen trusts and sought to induce them to accept the notes of the corporation in satisfaction of the notes of petitioner and Hartwell on which the unpaid balance of the principal amounted to the $29,534.18 which the corporation was to issue.
Negotiations were carried on relating to the satisfaction of these notes until about July 21, 1941, when a final agreement was reached.
Under the agreement of July 21, 1941, petitioner and Eleanor Hartwell (individually and not as executrix) each made payments on principal in the amount of $783.19, or a total of $1,566.38, to the Berndsen trust, which payments were applied to the notes of petitioner and Hartwell held by that trust. Of the $29,534.18 of the original notes which the corporation had agreed to issue, $1,566.38 was then canceled and new notes aggregating the balance of $27,967.80 were issued as of July 21, 1941, by the corporation. These notes were unsecured.
The new notes were made payable so that $10,000 (delivered to the Berndsen trust) matured in monthly installments in 5 years and $17,967.80 (delivered to the Kiely trust) in monthly installments over a period of 15 years.
As of July 21, 1941, the Berndsen trust accepted in payment of the Hartwell note, which had been reduced to $5,000, a promissory note of Eleanor L. Hartwell, individually, in the amount of $5,000, which was secured by the promissory note of the corporation in the amount of $5,000 and capital stock of the corporation.
As of July 21, 1941, the Berndsen trust accepted in payment of petitioner's note, which had been reduced to $5,000, the joint and several promissory note of petitioner and his wife in the principal amount of $5,000, secured by the promissory note of the corporation in that amount and capital stock of the corporation.
As of July 21, 1941, the Kiely trust accepted in full payment of the notes of petitioner and Hartwell, aggregating $17,967.80, the promissory note of the corporation in the principal amount of $17,967.80, dated July 21, 1941, and payable to Eleanor Hartwell, petitioner, his wife, and his two sons and endorsed by them without recourse to the Kiely trustees. This note was secured by the deposit with the trustees of the capital stock of the corporation.
On August 8, 1941, the Probate Court in Hartwell's estate entered an order of approval of the foregoing transaction.
The foregoing was accepted in full payment and satisfaction of the notes of Hartwell and petitioner, which notes were canceled.
The original notes, aggregating $29,534.18, called for in the bill of sale and assignment to the corporation were never actually issued, but were withheld until an agreement was reached with the trustees. The notes were actually issued, as above related, in July 1941.
OPINION.
OPPER, Judge:
That there was a ‘reorganization‘ here and not a mere liquidation of the old company seems obvious if we follow the well beaten path through the reorganization wilderness that requires all parts of the transaction to be considered together rather than separately. Alabama Asphaltic Limestone Co., 315 U.S. 179. The liquidation of the old company then assumes the character of only one step in an integrated transaction. Anna V. Gilmore, 44 B.T.A. 881; affd. (C.C.A., 3d Cir.), 130 Fed.(2d) 791; Helvering v. Schoellkopf, 100 Fed.(2d) 415; Muskegon Motor Specialties Co., 45 B.T.A. 551; affd. (C.C.A., 6th Cir.), 134 Fed.(2d) 904; certiorari denied, 320 U.S. 741. There was, by means of the entire operation ‘a transfer‘ within Internal Revenue Code, section 112(g)(1)(D), by the old ‘corporation of all or a part of its assets to another corporation‘ and ‘immediately after the transfer the transferor or its shareholders or both ‘ were in control— that is, held 80 percent of the stock (section 112(h))—of the transferee corporation. Muskegon Motor Specialties Co., supra.
It does not change the result that the stockholders acted as a conduit for the delivery of the assets, Mark Kleeden, 38 B.T.A. 821; that there was a partial alteration in the derivative interests, which occurred independently of the plan and would have taken place irrespective of it, Wilgard Realty Co., 43 B.T.A. 557; affd. (C.C.A., 2d Cir.), 127 Fed.(2d) 514; certiorari denied, 317 U.S. 655; that the plan itself was not formally reduced to writing, Hortense A. Menefee, 46 B.T.A. 865; Walter S. Heller, 2 T.C. 371; affd. (C.C.A., 9th Cir.), 147 Fed.(2d) 376; certiorari denied, 325 U.S. 868; or even that the stockholders had a personal— as opposed to a corporate— reason for the arrangement. Lyon, Inc., 42 B.T.A. 1094; affirmed on other grounds (C.C.A., 6th Cir.), 127 Fed.(2d) 210.
The effect upon the situation of the corporate petitioner is that it succeeds to the basis of its predecessor under section 113(a)(7) of the Internal Revenue Code.
For this conclusion it is unnecessary to find that there was a ‘tax-free‘ reorganization. Muskegon Motor Specialties Co., supra.
SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.(a) BASIS (UNADJUSTED) * * *(7) TRANSFERS TO CORPORATION.— If the property was acquired—(B) in a taxable year beginning after December 31, 1935, by a corporation in connection with a reorganization, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. This paragraph shall not apply if the property acquired consists of stock or securities in a corporation a party to the reorganization, unless acquired by the issuance of stock or securities of the transferee as the consideration in whole or in part for the transfer.
In fact, however, no gain or loss was recognized either to the corporate predecessor for purposes of any adjustment of basis under section 113(a)(7) or to petitioner Survaunt for purposes of determining as to him the tax consequences of the reorganization. There is, in our mind, grave doubt whether the debentures distributed to Survaunt and the other stockholders can be considered ‘securities‘ of the new corporation. But that question we find it unnecessary to decide. If they were, the recognition of gain or loss, both to the predecessor corporation and to Survaunt, is forbidden by sections 112(b)(4) and 112(b)(3) or (5), respectively. If they were not, their contemporaneous distribution relieved the transferor corporation of the recognition of gain under section 112(d). And any loss, including that claimed by Survaunt, would be eliminated by section 112(e).
It follows that respondent was correct in assigning to the corporate petitioner its transferor's basis, and in disallowing any loss to Survaunt.
Since there was a reorganization, the expenses incurred for attorney's fees and related charges are to be capitalized, and are not deductible as current expense. Skenandoa Rayon Corporation, 42 B.T.A. 1287; affd. (C.C.A., 2d Cir.), 122 Fed.(2d) 268; certiorari denied, 314 U.S. 696; see Missouri-Kansas Pipe Line Co. v. Commissioner (C.C.A., 3d Cir.), 148 Fed.(2d) 460.
The proceeding at Docket No. 3653 will be dismissed. In the other proceedings,
Decision will be entered for the respondent.