Opinion
Docket No. 4305.
1945-04-30
JOHN R. ROACH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Edward L. P. O'Connor, Esq., for the petitioner. Scott A. Dahlquist, Esq., for the respondent.
Liquidation under a plan requiring the immediate liquidation of a corporation's assets, where it appears that such assets are readily marketable and that the plan can readily be carried out, and it is in fact carried out well within the period allowed by the statute, is a ‘complete liquidation‘ within the meaning of section 115(c) of the Internal Revenue Code (1940). Edward L. P. O'Connor, Esq., for the petitioner. Scott A. Dahlquist, Esq., for the respondent.
The tax in controversy is income tax for the taxable year 1940 in the amount of $634.36.
The only question involved is whether certain liquidating dividends paid by a corporation to the petitioner during the taxable year were distributed in complete liquidation pursuant to a bona fide plan specifying a time limit, or whether they were distributed in partial liquidation. The applicable statute is section 115(c) of the Internal Revenue Code prior to its amendment by section 147 and section 101 of the Revenue Act of 1942.
FINDINGS OF FACT.
Petitioner, John R. Roach, a resident of New York, filed his income tax return for the taxable year 1940 with the collector for the first district of New York.
In 1940 and for several years prior thereto petitioner was a director and the principal officer of the Williams Line, Inc., a New York corporation. The Williams Line, Inc., hereinafter called the corporation, had issued and outstanding 475 shares of capital stock. One hundred shares were owned by petitioner and 335 were owned by David Rose and Gertrude Rose, nephew and niece of petitioner, who had acquired their shares in 1938 at the death of their mother. The remaining 40 shares were owned by three shareholders, outside of the family, whose identity is not here material. Petitioner acquired his shares in 1918 at a cost of $100 per share.
After the death of their mother, David and Gertrude Rose were determined to get their money out of the corporation and to be rid of their stockholdings therein. The assets of the corporation consisted of deck scows and lighters and some gear incidental to their use.
In the fall of 1940 various informal discussions were held among the stockholders and during these discussions David and Gertrude Rose, who were the owners of more than two-thirds of the capital stock, insisted that the assets of the corporation be immediately liquidated. At their insistence the president called a special meeting of the board of directors on September 10, 1940, at which time plans for selling the corporate property and winding up its affairs were acted on. It was decided that, if possible, the various units should be sold individually, since higher prices could be obtained if that procedure were followed. The president was directed, however, to keep open, if possible, various offers which had been received for the purchase of all the assets. If additional attractive offers were made for the assets as a whole, the matter was to be considered immediately by a special meeting of the directors. At this meeting it was determined that any cash received as a result of the sale of any of the units or for the assets as a whole should be distributed ‘as and when the directors saw fit as liquidating dividends‘ and ‘that the corporation be dissolved immediately upon the sale of the assets of the corporation or as soon thereafter as possible.‘ The directors authorized the president to accept an offer of the Bethlehem Steel Corporation to purchase Barge No. 60 for a consideration of $35,000 cash and the corporation was authorized to pay a liquidating dividend of $65 per share on all the outstanding shares as soon as possible after the receipt of the above purchase money ‘in accordance with the plan to sell the assets of the company, distribute the cash received to the stockholders and close out the business of the corporation.‘ A distribution of $65 per share was made on or about September 16, 1940.
On October 31, 1940, the corporation received an offer from the Manhattan Lighterage Corporation to purchase the remaining assets for a total consideration of $100,000, payable $75,000 in cash and $25,000 in three promissory notes in the respective amounts of $8,000, $7,500, and $9,500. The notes were to be placed in escrow for the purpose of securing the purchaser against future attachment of Williams Line Scows Nos. 50, 52, and 57. Certain liability claims against the above scows had been filed by third parties and were pending suit. Each of the above notes related to the outcome of a particular suit and as each suit was settled a note was to be paid to the corporation if no liability attached to the particular barge as a result of the suit.
At a meeting of the stockholders of the corporation held November 6, 1940, it was decided that the offer should be accepted and the president and secretary were authorized to execute the necessary instruments to consummate the transaction. Upon motion which was carried, it was ordered that the officers and directors immediately wind up any and all business, close the office, terminate the lease and hire the necessary counsel to effect the dissolution of the corporation, and the stockholders directed that any and all cash received from the sale be distributed as soon as possible. The minutes further provided that, due to the pendency of the actions against Scows Nos. 50, 52, and 57, $25,000 of the sale proceeds could not be distributed until such cases were settled. For this reason only the officers were directed not to fide formal dissolution papers until those legal matters were all cleared up. For all other purposes the corporation was to be considered as liquidated, and as soon as the pending suits were terminated a final distribution was to be made and the corporation was to be liquidated and dissolved in toto.
The actions against the scows were pending in District Courts of the United States. The claims in connection with Scows Nos. 50 and 57 were filed in the United States District Court for the Southern District of New York and the claim in connection with Scow No. 52 was filed in the United States District Court for the Eastern District of New York. At the time this meeting was held the stockholders did not know definitely how long it would be before the cases would be terminated. They anticipated that the suits would be settled within one year or two years at the most.
The Manhattan Lighterage Corporation took over the assets as of November 1, 1940, and on November 9, 1940, a liquidating dividend of $127 per share was distributed to the stockholders. On February 14, 1941, a further distribution of $65 per share was made. On or about July 1, 1941, the first of the pending suits was settled and the note in the amount of $8,000 was paid to the corporation. The two remaining suits were settled about December 13, 1941, and on or about January 10, 1942, the two notes in the total amount of $17,000 were paid to the corporation. On March 11, 1942, a further dividend of $50 per share was paid. On June 15, 1942, a final dividend of $6.41 per share was paid. This payment closed out the bank account of the corporation and represented the final act in liquidation. A certificate of dissolution for the corporation was filed on or about February 28, 1942. The capital gain realized by petitioner during the taxable year was $9,200.
The respondent has determined that there was no plan of liquidation with a specified time within which the liquidation was to be completed, with the result that the dividends were distributed in partial liquidation and the gain realized by petitioner is taxable at 100 percent as a short term capital gain.
OPINION.
ARUNDELL, Judge:
The petitioner has realized a taxable gain of $9,200 from distributions made in the taxable year. There is no dispute concerning the amount of the gain. The controversy relates solely to the question of whether the gain is short term and taxable to the extent of 100 percent thereof, as the respondent has determined, or whether it is a long term capital gain and is to be recognized to the extent of only 50 percent, as claimed by the petitioner. The applicable statute is section 115(c) of the Internal Revenue Code 1940), where is set out in the margin.
It is to be noted that under the general provisions of that section gains realized from corporate distributions in liquidation are to be considered as short term gains, unless the amounts distributed fall within the ‘complete liquidation‘ exception. The respondent concedes that there was an intention to liquidate the assets of the corporation, but insists that there was no specified time within which the liquidation was to be completed, as is required by the statute. The petitioner takes the view that a plan requiring the immediate liquidation of the corporate assets and the winding up of all corporate affairs falls well within the meaning and purpose of the statute and is a sufficient specification of a time within which the liquidation is to be completed. Hence, our decision must turn on the very narrow question of whether a plan of ‘immediate liquidation,‘ in the light of all the other factors herein, meets the statutory requirements for a distribution in ‘complete liquidation.‘
SEC. 115. DISTRIBUTION BY CORPORATIONS.(c) DISTRIBUTIONS IN LIQUIDATION.— Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchanges shall be determined under section 111, but shall be recognized only to the extent provided in section 112. Despite the provisions of section 117, the gain so recognized shall be considered as a short-term capital gain, except in the case of amounts distributed in complete liquidation. For the purpose of the preceding sentence, ‘complete liquidation‘ includes any one of a series of distributions made by a corporation cancellation or redemption of all of its stock in accordance with a bona fide plan of liquidation and under which the transfer of the property under the liquidation is to be completed within a time specified in the plan, not exceeding, from the close of the taxable year during which is made the first of the series of distributions under the plan, (1) three years, if the first of such series of distributions is made in a taxable year beginning after December 31, 1937, or (2) two years, if the first of such series of distributions was made in a taxable year beginning before January 1, 1938. * * *
The formal resolutions herein do not set forth with completeness the plan for liquidating the corporate assets and there may appear to be some question as to whether the resolutions provide unequivocally for immediate liquidation. However, the testimony and the subsequent acts of the directors and stockholders dispel any such doubts, and clearly show that the plan, in fact, required that the liquidation be carried out immediately. In John Milton, 33 B.T.A. 4, it was held that liquidation is a question of fact, and in W. F. Kennemer, 35 B.T.A. 415; affd., 96 Fed.(2d) 177, it was said that the adoption or failure to adopt a resolution of dissolution or liquidation is not determinative. A complete liquidation within the meaning of the Revenue Act of 1936 was found by a District Court of Pennsylvania in McCune v. Driscoll, decided February 16, 1940, where there appears to have been no completely formalized plan, but such a plan of complete liquidation was found by the court from the resolutions and the surrounding circumstances and acts in connection with the liquidation.
David and Gertrude Rose were the holders of more than two-thirds of the outstanding capital stock of the corporation and they were two of the three corporate directors. They had acquired their shares by inheritance. These two people were determined to get their money out of the corporation and to be rid of their stockholdings therein as quickly as possible. In the light of their determination, which had been unequivocally manifested to the petitioner herein, who was the president of the corporation and a director therein, the meeting of September 10, 1940, was held. The resolutions passed, the corporate action taken, and the final meeting of the stockholders on November 6, 1940, must all, as a matter of fact, be viewed in the light of the determination so manifested.
It seems to us that a plan to liquidate immediately necessarily means that the liquidation will be undertaken at once. In instances, such as we have before us, where the corporate assets are readily marketable and it is apparent from all the surrounding circumstances that such plan is feasible and capable of being carried out, it appears that form would be exalted over reality if it be held that the corporation has failed to specify a time within the meaning of the applicable statute. A plan to liquidate ‘immediately‘ should, under the circumstances of this case, be given an effect comparable to that which would be given to a plan which specified an exact time. At the very least the word ‘immediate‘ signifies that the liquidation is to be completed well within the three-year period allowed by the statute.
The corporation parted with all of its assets within a period of two months. That the final distribution was not made until June 15, 1942, was occasioned by the fact that such distribution could not be made until it was determined that the sale proceeds represented by the escrow notes would in any event be forthcoming to the corporation. While the evidence was to the effect, and we have so found as a fact, that all claims against the barges would be determined within a two-year period, still, under the terms of the sale to the Manhattan Lighterage Corporation, it was possible that no further payments for the assets sold would be received by the corporation. In any event, it was contemplated that a complete liquidation would be effected within the statutory period, as indeed it was.
Upon all the evidence herein, we conclude that the distributions in question were made pursuant to a plan requiring the immediate liquidation of the corporate assets and that liquidation under such plan comes within the statutory definition of complete liquidation.
Reviewed by the Court.
Decision will be entered for the petitioner.