Opinion
No. L-503.
May 31, 1932.
Suit by R.A. Burnett and others, former stockholders and directors of the Burnett-Klapper Furniture Company, now dissolved, against the United States.
Petition dismissed.
The plaintiffs, former stockholders and directors of the Burnett-Klapper Furniture Company, a dissolved corporation, sue to recover $6,500, with interest, alleged overpayment of income tax by the corporation for the calendar year 1925. The entire business and assets of the furniture company were sold in 1925 through the efforts of R.A. Burnett, its president. The purchaser of the business paid $50,000 for the good will of the corporation; of this amount Burnett received $35,000 in addition to a pro rata share of the remaining sales price according to his stock holdings. Upon completion of the sale the corporation was dissolved.
In the return filed for the corporation for 1925, the entire purchase price, including the amount received for good will, was treated by the corporation as a liquidating dividend to the stockholders. It is claimed in this suit that the amount of $35,000 received by Burnett was a commission paid to him by the corporation for effecting the sale of the corporation's assets, and that it was therefore a proper and legal deduction by the corporation as an ordinary and necessary expense for 1925. The defendant insists that $35,000 of the total amount received for the sale of the corporation's assets was received by Burnett as a result of an arrangement and agreement between him and the other stockholders, and that neither at the time the agreement was entered into nor at any time subsequent thereto, until after the dissolution of the corporation, did the stockholders intend to make the corporation a party to this agreement.
The defendant further contends that the dissolution of the corporation by the superior court of Georgia on April 5, 1926, completely extinguished the legal entity of the corporation and rendered null and void a claim subsequently made for a refund of taxes and signed on behalf of the corporation by its former president and secretary, inasmuch as no receiver was appointed by the court pursuant to the statute law of the state of Georgia.
Special Findings of Fact.1. Plaintiffs, citizens and residents of the state of Georgia, were the directors and stockholders of the Burnett-Klapper Furniture Company, a Georgia corporation, dissolved April 5, 1926, by order of the superior court of Georgia. No request was made for the appointment of a receiver, and the superior court of the county in which such corporation was located did not appoint a receiver for the corporation.
2. During 1925 the corporation was engaged in the manufacture and sale of furniture at Atlanta, Ga. In November of that year the business was sold to the Fox Manufacturing Company for $232,643.72, which included $50,000 paid for the good will of the business. With the exception of the last-mentioned amount of $50,000, the total amount received was distributed to and received by the stockholders according to their respective stockholdings.
3. The corporation was organized in 1912 by R.A. Burnett and E.H. Klapper. Burnett was made president, and, from that time forward until the sale of the assets and the dissolution of the corporation, had charge of the business. Klapper became vice president and was given charge of the factory. Later certain stock was sold to F.M. Terrell, a bookkeeper, and J.L. Zachry, a salesman, who paid for the same in part from dividends. At the time of the dissolution of the corporation and for a long period prior thereto its entire capital stock of 750 shares was owned as follows: R.A. Burnett, 322 shares; E.H. Klapper, 322 shares; F.M. Terrell, 56 shares; and J.L. Zachry, 50 shares.
In the latter part of 1924 Klapper's health failed. Some time prior to November, 1925, the stockholders had considered and discussed the matter of selling the business. It was necessary for Klapper to go away from Atlanta at different times on account of his health. The stockholders orally agreed to sell the entire business and also orally agreed with Burnett authorizing him to find a purchaser, agreeing at the same time among themselves that, if he should succeed in selling the business for the book value of the machinery, equipment, and inventory of supplies and material, together with as much as $50,000 for good will, he (Burnett) should receive $35,000 of the $50,000 for good will as a bonus. It was further agreed that, if less than $50,000 should be received for good will, the amount to be received by Burnett therefrom should be proportionately less. There is no record of any action ever having been taken on either the oral or the written agreements by the stockholders or the directors of the corporation in a formal meeting of either body.
After the understanding was reached, Burnett spent some time negotiating with one or two prospective purchasers, and on October 6, 1925, he gave an option to purchase to the Fox Manufacturing Company, which company was desirous of acquiring the business and had made propositions to purchase the same. At that time Klapper was at Hot Springs, Ark., on account of his health, and Burnett visited him there. On October 26, 1925, Klapper executed the following agreement:
"For and in consideration of one dollar, receipt of which is hereby acknowledged, I hereby agree with R.A. Burnett, of the county of Fulton, State of Georgia, that in the event R.A. Burnett finds an acceptable purchaser for the Burnett-Klapper Furniture Company, of the city of Atlanta, Georgia, and in the event that said purchaser pays a bonus for the good will of said business, that R.A. Burnett shall be allowed the sum of thirty-five thousand ($35,000) dollars as his portion of the money paid for the good will of said business.
"It being understood and agreed that any amount over and above thirty-five thousand ($35,000) dollars paid by the purchaser for the good will of the said Burnett-Klapper Furniture Company is to be divided between the stockholders as their interests appear according to the stock books of the Burnett-Klapper Furniture Company, except that R.A. Burnett shall not participate in this division."
4. Burnett exhibited the above-quoted agreement to the other stockholders upon his return to Atlanta, but it was not signed by them, nor did they sign any other agreement in writing. The reason for the agreement among the stockholders that Burnett should receive the larger proportion of whatever amount should be received for good will was that he had started the Burnett-Klapper Furniture Company and had been the principal party to build it up to where it was, and that he, more than any one else, was entitled to a greater share of whatever amount should be received for good will.
5. Klapper returned from Hot Springs and assisted in the taking of the inventory. The proof does not satisfactorily establish that the agreement between the stockholders to pay Burnett the largest proportion of whatever amount should be received for good will was the act of the corporation to pay him the amount agreed upon as a commission for his services in effecting the sale of its assets. The entire business and properties of the corporation were sold and transferred to the Fox Manufacturing Company early in November, 1925.
6. At a meeting of the stockholders and directors, held November 27, 1925, the following resolution was adopted:
"Mr. Klapper made a motion, seconded by Mr. Zachry, that the $50,000 bonus received from the Fox Manufacturing Company be divided and paid as follows immediately: R.A. Burnett, $35,000; E.H. Klapper, $11,800; F.M. Terrell, $2,000; J.L. Zachry, $1,200; total, $50,000.
"This motion was carried and the meeting adjourned."
These amounts were duly paid. Burnett did not participate in the division of the remaining $15,000 after the payment to him of the $35,000.
An accountant employed by the company drafted the minutes above quoted and prepared the final entries closing the books of the corporation. At the meeting of November 27, 1925, the details relating to the distribution of the remainder of the purchase price for the business and the winding up of the corporate affairs were agreed upon. The accountant, who was located in New York City, returned to Atlanta in February, 1926, and drafted the minutes of the final meeting, showing the distribution of the proceeds of the sale in liquidation as of February 23, 1926. This meeting was not in fact held, but the directors and the stockholders affixed their signatures to the minutes as drafted.
At that time and at the time of the dissolution of the corporation, Klapper, Terrell, and Zachry were indebted to the corporation in the amounts of $3,866.66, $4,700, and $5,200, respectively, plus interest on the accounts of Terrell and Zachry of $1,606.60. Burnett owed nothing to the corporation.
7. The income tax return of the corporation for 1925 was likewise prepared by said accountant, and the distribution of $50,000 paid for the good will, being a part of the total purchase price paid by the Fox Manufacturing Company for the assets and business of the furniture company, was treated and considered on the return as a liquidating dividend to the stockholders in the amount received by each. The original return for 1925 was filed within the time required by law.
Subsequently, on December 21, 1928, more than two years after the corporation had been dissolved by order of the superior court of Georgia, an amended income tax return was filed purporting to be for and on behalf of the corporation, signed by R.A. Burnett, president, and F.M. Terrell, as secretary, in which adjustments in net income were made to reflect a different treatment of the $35,000 received by Burnett as a portion of the $50,000 cash dividend distribution. In the amended return this amount was treated as a sales commission and was deducted from the gross income of the corporation as a salary expense. The net taxable income shown in the amended return was $93,185.24, upon which a tax of $12,114.08 was computed. This tax was $6,500 less than the tax shown and paid upon the original return filed. On the same day, i.e., December 21, 1928, there was received in the office of the collector of internal revenue at Atlanta a claim for refund, form 843, for $6,500 of the tax paid by the corporation for 1925. This claim was filed for and on behalf of the Burnett-Klapper Furniture Company and was signed by R.A. Burnett, president, and Frank M. Terrell, as secretary of the corporation. The Commissioner of Internal Revenue treated the claim as a claim for refund on behalf of the corporation and rejected it July 25, 1929, on the ground that $35,000 of the $50,000 paid for good will was not an ordinary and necessary expense of the corporation. No claim for refund was filed by the corporation prior to dissolution and surrender of its corporate charter. No claim for refund has been filed by or on behalf of the former individual stockholders of the dissolved corporation.
Benjamin B. Pettus, of Washington, D.C. (Colladay, McGarraghy, Pettus Wallace, of Washington, D.C., on the brief), for plaintiffs.
James A. Cosgrove, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and LITTLETON, WHALEY, WILLIAMS, and GREEN, Judges.
The first question in this case is whether the amount of $35,000 received by R.A. Burnett out of $50,000 paid by the Fox Manufacturing Company for good will of the Burnett-Klapper Furniture Company was the payment to him by and as a result of an obligation therefor of the corporation as a commission for the sale of the assets and the business of the corporation, and, therefore, an ordinary and necessary expense deductible by the corporation from gross income for 1925.
In view of the facts and circumstances disclosed by the record, we are of opinion that the amount was not paid as a commission by the corporation, but was received by Burnett as a result of an agreement between him and the other three stockholders of the corporation as his share of a liquidating dividend in dissolution. Although the amount received by him was not in accordance with his stock ownership, it was competent for the stockholders to agree among themselves as to the manner in which the amount received for good will should be distributed. There is some testimony that the agreement between the stockholders, namely, that, if as much as $50,000 should be received for good will, Burnett should be entitled to $35,000, was intended to be the act of the corporation. But there is other positive testimony which we think discloses the real nature of the agreement, that the stockholders agreed that in the distribution of the proceeds of sale Burnett should receive the larger proportion of whatever amount should be received for good will for the reason that he had been principally responsible for the building up of a good will of a substantial value, and that he was entitled to receive a greater amount thereof than the other stockholders.
In addition to this, the agreement executed by Klapper rebuts the contention that he was acting for the corporation. If it had been the intention to act on behalf of the corporation, it would not have been necessary for Burnett to pay Klapper a cash consideration for his consent to the payment by the corporation of a salary or bonus.
We are of opinion that the corporation correctly treated the distribution of the $35,000 to Burnett as a liquidating dividend. No overpayment of tax was therefore made by the corporation for 1925. In view of this conclusion, it is unnecessary to consider the second point made by the defendant concerning the claim for refund.
The petition is dismissed. It is so ordered.