Opinion
Docket No. 67409.
1959-10-9
CARL W. AND RUTH LUNDEEN, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Gordon D. Simons, Esq., for the petitioners. Donald W. Wolf, Esq., for the respondent.
Gordon D. Simons, Esq., for the petitioners. Donald W. Wolf, Esq., for the respondent.
A corporation, from which petitioners in 1953 received a distribution on preferred stock owned by them, had pursuant to resolution of its directors distributed $100,000 pro rata to its common stockholders on December 28, 1946, its earnings or profits on that date having been $89,647.24. Two days later, the directors of a second corporation, which owned 94 per cent of the common stock of the first corporation and had received $94,000 of the $100,000 distributed, adopted a resolution instructing its officers to contribute $100,000 to the capital surplus of the first corporation. The parties are agreed that if the payment to common stockholders on December 28, 1946, was a taxable dividend, the corporation had no earnings or profits in 1953 from which a taxable dividend could have been paid on its preferred stock. Held, that the distribution by the first corporation on December 28, 1946, was a taxable dividend, within the meaning of section 115 of the Internal Revenue Code of 1939, and exhausted all of its then-existing accumulated earnings or profits.
The respondent determined a deficiency in income tax against the petitioners for the taxable year 1953 in the amount of $139.86. The question for decision is whether a distribution received by petitioners in 1953 from the Northern Transit Company was a dividend within the meaning of section 115 of the Internal Revenue Code of 1939.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found as stipulated.
The petitioners are husband and wife, and reside in Fargo, North Dakota. They filed their joint income tax return for the year 1953 with the district director of internal revenue for North Dakota, on which return they reported their income on a cash receipts and disbursements basis.
In 1947, Carl W. Lundeen purchased 100 shares of preferred stock of the Northern Transit Company for $10,000. In 1953, the taxable year herein, he received a distribution of $600 on the said stock, which distribution petitioners did not report as income in their 1953 return.
Northern Transit Company, hereafter referred to as Transit, is a Minnesota corporation, and since its organization in 1926, has conducted a bus transportation business in the cities of Fargo, North Dakota, and Moorhead, Minnesota.
At December 19, 1945, the outstanding stock of Transit consisted of 250 shares of common stock, held as follows:
+-------------------------------+ ¦ ¦Number of ¦ +-------------------+-----------¦ ¦ ¦shares ¦ +-------------------+-----------¦ ¦Gilbert W. Haggart ¦1 ¦ +-------------------+-----------¦ ¦George E. Haggart ¦83 ¦ +-------------------+-----------¦ ¦W. R. Haggart ¦166 ¦ +-------------------+-----------¦ ¦Total ¦250 ¦ +-------------------------------+
On that date, namely, December 19, 1945, Transit declared a stock dividend of 1,000 shares of $100-par-value preferred stock on its outstanding common stock.
Both the purchase of 234 shares of Transit stock by Motor Service on June 30, 1946, and the ownership of 235 shares of such stock on December 28,1946, are according to stipulation of the parties. The manner and date of acquisition of the additional share are not shown.
On June 30,1946, Northwest Motor Service Company, hereafter called Motor Service, purchased 234 shares of Transit's common stock from George E. Haggart and W. R. Haggart for $100 per share. Motor Service's business was that of owning, renting, storing, and repairing and servicing buses and trucks.
On some undisclosed date, but at or prior to December 28, 1946, Motor Service acquired buses and trucks from Transit and Ace Lines, Inc., giving its notes therefor. Ace Lines, Inc., was a subsidiary of Transit.
The minutes of a special meeting of Transit's board of directors, dated December 28, 1946, recited the following:
A consideration of the financial affairs of the company disclosed that the company's position was such that it could and should declare dividends to its stockholders.
Thereupon, by unanimous vote, it was resolved that the company declare and pay a dividend of six percent on all of the outstanding preferred stock of the corporation, payable forthwith to the preferred stockholders of record. The officers were instructed to pay such dividends promptly.
By resolution unanimously adopted a dividend of $400.00 per share on each share of outstanding common stock was declared and ordered paid, after payment of dividends to the preferred stockholders; the dividend on the common stock was ordered paid to the common stockholders of record, and the officers were instructed to make such payment promptly.
The directors of the corporation were shown as W. R. Haggart, George E. Haggart, and Gilbert W. Haggart, Gilbert Haggart was not in attendance but, according to the minutes, had advised the directors that he would consent to whatever corporate action was taken at the meeting.
On December 28, 1946, and at the time of the special meeting of its directors, Transit's accumulated earnings and profits amounted to $89,647.24.
Pursuant to the above resolution, Transit, on the same date, December 28, 1946, paid $100,000 to the holders of its common stock pro rata as follows:
+-------------------------------------------+ ¦ ¦Amount of ¦ +-------------------------------+-----------¦ ¦ ¦dividend ¦ +-------------------------------+-----------¦ ¦Northwest Motor Service Company¦$94,000 ¦ +-------------------------------+-----------¦ ¦W. R. Haggart ¦5,200 ¦ +-------------------------------+-----------¦ ¦George E. Haggart ¦400 ¦ +-------------------------------+-----------¦ ¦Gilbert W. Haggart ¦400 ¦ +-------------------------------+-----------¦ ¦Total ¦100,000 ¦ +-------------------------------------------+
Also on December 28, 1946, the date on which it received the $94,000 from Transit pursuant to the above resolution, Motor Service issued its check for. $73,715.40 to Transit, and its check for $15,000 to Ace Lines, Inc., in payment of or on the notes it had given in connection with the acquisition of the buses of Transit and the trucks of Ace Lines.
On January 1, 1946, Transit had loaned $23,000 to Ace Lines, to finance operating losses, and on December 31, 1946, following the issuance of the December 28, 1946,$15,000 check by Motor Service to Ace Lines, the Ace Lines account on Transit's books indicates the receipt of a $15,000 payment on the $23,000 loan.
On December 28, 1946, the common stock of Transit was held as follows:
+-------------------------------------------+ ¦ ¦Number of ¦ +-------------------------------+-----------¦ ¦ ¦shares ¦ +-------------------------------+-----------¦ ¦Gilbert W. Haggart ¦1 ¦ +-------------------------------+-----------¦ ¦George E. Haggart ¦1 ¦ +-------------------------------+-----------¦ ¦W. R. Haggart ¦13 ¦ +-------------------------------+-----------¦ ¦Northwest Motor Service Company¦1 235 ¦ +-------------------------------+-----------¦ ¦ ¦----- ¦ +-------------------------------+-----------¦ ¦Total ¦250 ¦ +-------------------------------+-----------¦ ¦ ¦ ¦ +-------------------------------------------+
The holders of Transit's preferred stock on December 28, 1946, were as follows:
+-------------------------------+ ¦ ¦Number of ¦ +-------------------+-----------¦ ¦ ¦shares ¦ +-------------------+-----------¦ ¦Gilbert W. Haggart ¦4 ¦ +-------------------+-----------¦ ¦George E. Haggart ¦312 ¦ +-------------------+-----------¦ ¦W. R. Haggart ¦334 ¦ +-------------------+-----------¦ ¦J. D. Farmham ¦10 ¦ +-------------------+-----------¦ ¦Claire H. Simpson ¦10 ¦ +-------------------+-----------¦ ¦D. J. Campbell ¦10 ¦ +-------------------+-----------¦ ¦E. E. Simonson ¦10 ¦ +-------------------+-----------¦ ¦Steve Gorman ¦10 ¦ +-------------------+-----------¦ ¦George E. Gardner ¦300 ¦ +-------------------+-----------¦ ¦Total ¦1,000 ¦ +-------------------------------+
The total outstanding stock of Motor Service on December 28, 1946, consisted of 500 shares, which were held as follows:
+-------------------------------+ ¦ ¦Number of ¦ +-------------------+-----------¦ ¦ ¦shares ¦ +-------------------+-----------¦ ¦Virginia L. Haggart¦165 ¦ +-------------------+-----------¦ ¦Bess W. Haggart ¦110 ¦ +-------------------+-----------¦ ¦Stella H. Treat ¦60 ¦ +-------------------+-----------¦ ¦W. L. Haggart Trust¦165 ¦ +-------------------+-----------¦ ¦Total ¦500 ¦ +-------------------------------+
Virginia L. Haggart is the wife of W. R. Haggart, and Bess W. Haggart is the wife of George E. Haggart. Stella H. Treat is the sister of W. R., George E. and Gilbert W. Haggart. The W. L. Haggart Trust is a trust for the son of W. R. Haggart.
On December 30, 1946, 2 days after the above resolution was adopted by the directors of Transit, a meeting of the directors of Motor Service was held, the minutes of which show the following:
Consideration was given to the financial affairs of the company's subsidiary, and paid a sizeable dividend to the parent, it was thought that financial position of the subsidiary should be improved.
It was considered beneficial for both the parent and the subsidiary that preferred stock of the subsidiary continued to be held by a number of prominent citizens of Fargo, in order to create and maintain goodwill and good public relations. It was felt that the subsidiary company should at all times maintain a sound financial position in order that the holders of the preferred stock would feet secure in their investment and in order that the maximum amount of goodwill could be created and maintained.
By unanimous vote a resolution was adopted instructing the officers to contribute $100,000 to the capital surplus of the subsidiary company, the Northern Transit Company.
The minutes also show the election of Virginia L. Haggart as president, Bess W. Haggart, as vice president, and Stella H. Treat, as secretary-treasurer.
Under date of December 30, 1946, Motor Service made the following entry in its journal:
+---------------------------------------------------------------------+ ¦Stock in Other Companies—Northern Transit Co¦Dr. $100,00¦ ¦ +--------------------------------------------+-----------+------------¦ ¦Northern Transit Co. (current account) ¦ ¦Cr. $100,000¦ +---------------------------------------------------------------------+
Also under date of December 30, 1946, Transit made the following journal entry on its books:
+----------------------------------------------------+ ¦Northwest Motor Service Co¦Dr. $100,000¦ ¦ +--------------------------+------------+------------¦ ¦Surplus ¦ ¦Cr. $100,000¦ +----------------------------------------------------+
The balance sheet of Transit on December 31, 1946, disclosed the following:
+----------------------------+ ¦Net assets ¦$168,297.19¦ +----------------+-----------¦ ¦Net liabilities ¦53,649.95 ¦ +----------------+-----------¦ ¦Common stock ¦25,000.00 ¦ +----------------+-----------¦ ¦Preferred stock ¦100,000.00 ¦ +----------------+-----------¦ ¦Deficit ¦(10,352.76)¦ +----------------------------+
168,297.19
The stated deficit of $10,352.76 represented the difference between the $100,000 paid to Transit's common stockholders on December 28, 1946, as directed by the directors' resolution as of that date, and its accumulated earnings and profits of $89,647.24 at that date.
Under date of January 1, 1947, Transit's account on the books of Motor Service, which had been credited with $100,000 under date of December 30, 1946, was debited in the amount of $24,162.48, described as ‘Bus and office rental credit J-55.’ By a similar entry, described as ‘Bus and office rental credit J-56,‘ the account was debited in the amount of $23,661.92, under date of February 28, 1947. After these entries, Transit's account on Motor Service's books showed a credit balance on February 28, 1947, of $52,175.60.
Motor Service filed a corporation income tax return for the fiscal year ended February 28, 1947,reporting therein $94,000 as a dividend from Transit. On line 34 of the return, a dividend received credit of 85 per cent on the $94,000 payment was deducted, in arriving at normal tax net income.
In each year after the preferred stock of Transit was issued in 1945, that company has paid dividends of $6 per share on its preferred stock.
The net profits of Transit after taxes for the years 1946 through 1953, as per its books, were as follows:
+-----------------+ ¦1946¦$18,239.56 ¦ +----+------------¦ ¦1947¦7,905.08 ¦ +----+------------¦ ¦1948¦17,500.73 ¦ +----+------------¦ ¦1949¦17,318.02 ¦ +----+------------¦ ¦1950¦17,930.27 ¦ +----+------------¦ ¦1951¦11,196.70 ¦ +----+------------¦ ¦1952¦(6,975.24) ¦ +----+------------¦ ¦1953¦(16,009.64) ¦ +-----------------+
The accumulated earnings and profits of Transit as of December 31 of the years 1946 through 1953, with the $100,000 payment on December 28, 1946, treated as a reduction of earnings and profits and with the said payment not treated as a reduction of earnings and profits, were as follows:
+----------------------------------------------+ ¦ ¦If the payment ¦If the payment ¦ +---------+----------------+-------------------¦ ¦Dec. 31 ¦is recognized ¦is not recognized ¦ +---------+----------------+-------------------¦ ¦1946 ¦($10,352.76) ¦$89,647.24 ¦ +---------+----------------+-------------------¦ ¦1947 ¦(8,447.68) ¦91,552.32 ¦ +---------+----------------+-------------------¦ ¦1948 ¦3,053.05 ¦103,053.05 ¦ +---------+----------------+-------------------¦ ¦1949 ¦14,371.07 ¦114,371.07 ¦ +---------+----------------+-------------------¦ ¦1950 ¦26,301.34 ¦126,301.34 ¦ +---------+----------------+-------------------¦ ¦1951 ¦31,498.04 ¦131,448.04 ¦ +---------+----------------+-------------------¦ ¦1952 ¦(18,997.20) ¦81,022.20 ¦ +---------+----------------+-------------------¦ ¦1953 ¦(46,086.84) ¦53,913.16 ¦ +----------------------------------------------+
The book value of each share of Transit preferred stock as of January 1, 1953, was $100, and as of December 31, 1953, $88.60.
The respondent, in his determination of deficiency, has included in income as a taxable dividend the $600 received by Lundeen in 1953 as a distribution on the Transit preferred stock owned by him.
OPINION
TURNER, Judge:
The parties are agreed that if the payment by Transit of $400 per share to the holders of its common stock on December 28, 1946, pursuant to a resolution adopted by its directors on that date, constituted the payment of a taxable dividend, Transit in 1953 had no earnings from which a taxable dividend could have been distributed to the petitioners on their Transit preferred stock.
As supporting his determination that the $600 received by the petitioners in 1953 on the preferred stock was a taxable dividend, it is the contention of the respondent that the payment of $100,000 by Transit on December 28, 1946, to its common stockholders as a dividend, was in violation of the statutes of the State of Minnesota, and was ‘nullified’ 2 days later through repayment by Motor Service, the owner of 94 per cent of Transit's common stock. It is the contention of the petitioners that the distribution to common stockholders on December 28, 1946, was not in violation of the Minnesota statutes, that it was a taxable dividend, which was so reported by the stockholders on their income tax returns, and that the contribution of $100,000 by Motor Service to Transit on December 30, 1946, as ‘capital surplus,‘ was a real transaction and the distribution to the common stockholders 2 days prior thereto was not affected thereby.
The facts show that the business of Motor Service was that of owning, maintaining, servicing, and renting buses and trucks. The record does not show the date of its organization, but its primary, if not sole, purpose appears to have been that of acquiring the buses and trucks of Transit and Ace Lines and renting them back to the former owners for use in their operations. Presumably, they were transferred for a stated price, since according to the testimony, the books of account show that the December 28, 1946, checks for. $73,715.40 to Transit and $15,000 to Ace Lines were applied on the books in payment of or on notes shown as given in the purchase of used buses and trucks. It thus appears that to the extent of the amounts of the said checks, Motor Service was able to acquire the buses and trucks of Transit and Ace Lines without an actual outlay of cash other than that received the same day from Transit.
The facts also show that within 2 days of December 28, 1946, when the directors of Transit were spreading on the minutes of that company a statement that ‘(a) consideration of the financial affairs of the company disclosed that the company's position was such that it could and should declare dividends to its stockholders,‘ and that thereupon the dividend of $400 per share, or a total of $100,000, on its common stock was voted, the directors of Motor Service were declaring on its minutes that a consideration of ‘the financial affairs' of Transit disclosed that by reason of the dividend by Transit to it, the financial condition of Transit was such that it must be improved, whereupon it was resolved that a contribution of $100,000 to the ‘capital surplus' of Transit be made.
It would thus appear that if the declaration in the minutes of Motor Service be accepted as true, it is not possible, similarly, to accept the declaration in Transit's minutes that a consideration of Transit's financial affairs disclosed its position to be such that it could and should declare a dividend of $100,000 on its common stock. We are satisfied that the declarations so appearing in the minutes of the two companies were worked out in conjunction; that the statement in Transit's minutes was actually a tongue-in-cheek statement designed as window dressing or a backdrop for the distribution of cash which Motor Service desired. In short, we agree with the respondent that there was manipulation at least in the sense of dexterous management or contrivance.
That is not to say, however, that the December 28, 1946, distribution by Transit to its common stockholders was not a taxable dividend, and was not effective in eliminating all of the earnings and profits available to it for distribution as such. It is settled law, we think, that in the absence of a declared or plainly indicated purpose or intent that State law is to be taken into account, as was the case in United States v. Ogilvie Hardware Co., 330 U.S. 709, the taxability of corporate distributions is to be determined according to the Federal statute. See, in that connection, Helvering v. Northwest Steel Rolling Mills, Inc., 311 U.S. 46; United States v. Ogilvie Hardware Co., supra; United States v. Lesoine, 203 F.2d 123.
Under section 115(a) of the Internal Revenue Code of 1939, a taxable dividend means ‘any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.’ In section 115(b), it is provided that ‘(f)or the purposes of this chapter,’ namely chapter 1, covering the imposition of the income tax, ‘every distribution is made out of earnings or profits to the extent thereof.’ According to stipulated facts, Transit, on December 28, 1946, had accumulated earnings or profits in the amount of $89,647.24. On that date, and pursuant to the resolution of its board of directors, it in fact distributed $100,000 to its common stockholders pro rata, which under the provisions of 115(a) and (b) constituted the payment of a taxable dividend to the extent of $89,647.24, the entire amount of Transit's accumulated earnings or profits as of that date, and we so conclude and hold.
In reaching that conclusion, the facts make it unnecessary to determine whether under reasoning appearing in the court's opinion in United States v. Lesoine, supra, a rescission or refund of the dividend on December 30, 1946, 2 days after its declaration and payment, would have effected a restoration of Transit's earnings or profits. It is true that the directors of Motor Service, the owner of a substantial majority of Transit's common stock, did on that date spread on the corporate minutes a resolution instructing its officers to contribute $100,000 to Transit as capital surplus. But no comparable action was taken by any other of Transit's common stockholders, and there was in fact no actual payment in 1946 by Motor Service of any part of the $100,000 directed by the resolution to be paid to Transit's capital surplus. By entry dated January 1, 1947, Motor Service did treat $24,162.48, representing motor bus and office rentals due and owing to Motor Service by Transit, as having been paid on the said $100,000, and under date of February 28, 1947, made a further entry similarly applying $23,661.92 to the account, leaving as unpaid a balance of $52,175.60. And if ever there have been any further payments, the record does not so show. It follows, we t4ink, that there was in the instant case no rescission of the 1946 dividend declared and paid.
Decision will be entered for the petitioners.