324 Mass. 409 | Mass. | 1949
These are appeals by the commissioner of corporations and taxation from a decision of the Appellate Tax Board granting abatements of additional taxes for 1946 assessed on income alleged to have been received by the taxpayers during 1945.
Newton and one Washburn had conducted a sand and gravel business, as partners, for a number of years prior to August 31, 1945, when the firm was dissolved. Washburn sold a fourth interest to Newton for $62,500 and his remaining fourth interest to Lindholm for the same price. Newton and Lindholm in August, 1945, organized a corporation to
The transfer by the taxpayers of their interests in the partnership assets together with the personal property of Lindholm was a sale by them to the corporation. Osgood v. Tax Commissioner, 235 Mass. 88. Stone v. Tax Commissioner, 235 Mass. 93. Van Heusen v. Commissioner of Corporations & Taxation, 257 Mass. 488. Bryant v. Commissioner of Corporations & Taxation, 291 Mass. 498. Even though a sale was made to the corporation and the title to partnership assets and the personal property of Lindholm vested in the corporation, yet the control and management of the property remained exclusively in the taxpayers who, in continuing the partnership business in corporate form, had an equal interest in the corporate property and an equal voice in the conduct of its business. Of course, the corporation was a legal entity distinct from the two taxpayers, but the arrangements between the taxpayers somewhat resembled a partnership although a partnership did not exist. The statute, G. L. (Ter. Ed.) c. 62, § 5 (b), (c), under which the
The question presented is whether any taxable gain has accrued to the taxpayers from the receipt of the stock in exchange for the property conveyed to the corporation.
The contention of the commissioner that a taxable gain had accrued to the taxpayers is demonstrated by the method he employed in computing the tax. He assessed the tax against Newton in the following manner. He started out with the proposition that, the book value of all the physical assets of the corporation being $375,000, Newton’s shares of stock were worth $187,500. He next decided that Newton received no gain in purchasing a one-fourth interest in the partnership from Washburn for $62,500 and credited Newton in this amount in deciding what Newton had paid for the $187,500 worth of stock, and this left open to inquiry what Newton gave for the remaining $125,000 worth of stock. He decided that Newton should be credited with one half of the book value of the assets of the partnership, or $32,070.62, leaving Newton with a gross gain of $92,929.38, which he apportioned between a gain of $67,742.14 derived from the sale of tangible assets, taxable at one and one half per cent, and a gain of $25,187.24 from the sale of good will, taxable at three per cent. He computed the tax against Lindholm on the theory that no gain resulted from the purchase of Washburn’s one-fourth interest for $62,500, and he credited Lindholm in this amount toward the $187,500 worth of stock that Lindholm received. He also credited him in the amount of $57,257.86, the book value of the tangible personal property which Lindholm transferred to the corporation. This left a balance of $67,742.14, which he determined was a gain made by Lindholm from the sale of tangible personal property, and assessed a tax at one and one half per cent on this amount.
Neither computation corresponded to the actual transaction out of which, it.is contended, a gain accrued to the
The term income has always been broadly construed in our taxing system, Tax Commissioner v. Putnam, 227 Mass. 522, Lanning v. Tax Commissioner, 247 Mass. 496, United States Trust Co. v. Commissioner of Corporations & Taxation, 299 Mass. 296, 299; and while the statute taxing income manifests a legislative intent to include within the taxing field all income of the classes described in the enactment, Boston Safe Deposit & Trust Co. v. Commissioner of Corporations & Taxation, 262 Mass. 1, 4-5; Follett v. Commissioner of Corporations & Taxation, 267 Mass. 115; Commissioner of Corporations & Taxation v. Rathbone, 321 Mass; 312, 315-316, the only event upon which a tax can be laid is the actual or constructive receipt of income. Lanning v. Tax Commissioner, 247 Mass. 496, 497, 498. Commissioner of Corporations & Taxation v. Thayer, 314 Mass. 375, 378. Commissioner of Corporations & Taxation v. Kellaway, 317 Mass. 192,194. A mere paper profit is not taxable. Neither is an increase in the value of property while it is still held by the taxpayer and before the increase is separated, by sale or otherwise, from the property. Commissioner of Corporations & Taxation v. Fopiano, ante, 304, 308.
The joinder of the taxpayers and the joint contribution of their property in the new corporation might have given them a stronger economic and commercial position than the partnership had in the sand and gravel business, but the. advantages which might thereby be secured by the corporation cannot be considered as individual income of a stockholder where the shares at the time of their issue, when given in exchange for partnership assets and tangible personal property, had no value readily realizable in the market and where the stockholder has not converted his shares into cash or its equivalent but still retains them. Van Heusen v. Commissioner of Corporations & Taxation, 257 Mass. 488, 491. Crocker v. Commissioner of Corporations & Taxation,
Abatement is granted in the first case in the amount of $2,074.56 and in the second case in the amount of $1,188.83, with costs in both cases.
So ordered.