29 S.E.2d 529 | Ga. Ct. App. | 1944
The judgment is affirmed for reasons set out in the opinion.
The agreed facts are in substance as follows: "That on or about July 7, 1931, the defendant corporation, King Brothers Motor Company Inc., was organized under the laws of this State and the capital stock of said corporation was issued as follows: Preferred stock — par value $25 per share, 8 per cent. Cumulative: Mrs. Lora B. King, 40 shares, $1000; J. H. King Jr., 40 shares, $1000; total preferred stock, $2000. Common stock — par value $100 per share: Mrs. Lora B. King, 40 shares, $4000; J. H. King Jr., 39 shares, $3900; Mrs. J. H. King Jr., 1 share, $100; total $8000.
"Previous to the formation of defendant corporation, J. H. King Jr., and Mrs. Lora B. King were engaged in a similar business as a copartnership, and on July 7, 1931, the partnership sold and conveyed all of its assets to the defendant corporation. A copy of this instrument is hereto attached and marked exhibit A and made a part of this stipulation." For convenience we insert this exhibit at this point: "This agreement and bill of sale made this the 7th day of July, 1931, by King Brothers Motor Company, a copartnership composed of J. H. King Jr., and Mrs. Lora B. King, both of Ware County, Georgia, parties of the first part, and King Brothers Motor Company, a corporation of Ware County, Georgia, party of the second part: Witnessed, that the said parties of the first part, for and in consideration of the sum of $170,000 to them to be paid as hereinafter provided and stipulated, and for the payments, agreements, covenants, terms and conditions that are to be made, done, and performed by the said King Brothers Motor Company, a corporation, have this day bargained and sold and do hereby bargain, sell and deliver unto the said King Bros. Motor Co., a corporation, its assigns and successors, all of the following described personal property, to wit: the business and general automobile agency located in the City of Waycross, Ware County, Georgia, and known as King Brothers Motor Company, and being described generally as being promissory notes, accounts, mortgages, conditional-sale contracts, assignments, judgments, liens, security deeds, chooses in action, new automobiles, second-hand automobiles, trucks, automobile accessories, repair parts, the entire stock of goods and merchandise of said King Brothers Motor Company, automobile tires and tubes, batteries, tools, shop equipment, all shop fixtures, machinery, gasoline service-station equipment, all office furniture and fixtures, including safes, adding machines, typewriters, bookkeeping *743 machines, books, office supplies, air pumps, cash registers, Fordson tractors and tractor equipment and repair parts, and tractors attachments, show cases, automobile paint-shop fixtures and equipment, together with all other personal property of every kind and description connected with and being a part of the chattels and personal property of the business of said King Brothers Motor Company, A copartnership, and being located at the plant or place of business of the said King Brothers Motor Company, located at the southwest corner of the intersection of Jane and Tebeau Streets, in the City of Waycross, Ware County, Georgia, with the exception of all stocks in other corporations or banks and bonds held by the parties of the copartnership of said King Brothers Motor Company. The said King Brothers Motor Company, a corporation, acting through its officers, will issue to the said J. H. King Jr., $5000 of its capital stock, and shall also issue $5000 of its capital stock to the said Mrs. Lora B. King, for part of the consideration of the purchase-price of the above described property and business, and the balance of said purchase-price of $160,000 will be evidenced by one certain promissory note made by said corporation of King Brothers Motor Company, party of the second part, dated July 7, 1931, for the sum of $85,000, payable to the said Mrs. Lora B. King, bearing interest from date at 6 per cent. per annum, and due to ten years from date thereof, and also one certain promissory note made by said King Brothers Motor Company, a corporation, to J. H. King Jr., for the sum of $75,000. dated July 7, 1931, bearing interest from date at the rate of 6 per cent. per annum and due ten years after date, both of which said notes will be secured by a mortgage on the above described property, with the provision in said mortgage that whereby the lien of said mortgage shall attach to all replacements and additions to the business of King Brothers Motor Company Inc., in any manner. However, respecting the payment of interest it is understood and agreed by all parties hereto that in no event shall the interest provided to be paid as aforesaid on said notes be more than the net profits of said corporation in any one year, not exceeding 6% — that is to say, if the net profits shall be paid as interest for said period, if greater than only 6% shall be paid as interest, and if there shall be no net profits for said period, then no interest shall be paid, anything *744 in the notes to the contrary notwithstanding, and said interest shall be non-cumulative; and the liability of the party of the second part for such interest on said notes, or either of them, for any one year, shall accrue as of the date representing the closing of the corporation's books for the fiscal year immediately preceding, and shall not require further approval on the part of the board of directors, or any other officers, of said King Brothers Motor Company Inc. The above described property is purchased by the said party of the second part from the parties of the first part, after full inspection and examination, and the said parties of the first part do not make any warranties of any kind or character, either expressed or implied, concerning the said property herein conveyed, except they warrant title to same. In addition to the consideration herein before recited in this bill of sale, as a part of the consideration of this bill of sale, the said party of the second part, King Brothers Motor Company, as a copartnership, and the said King Brothers Motor Company, a corporation, as a part of the consideration of this bill of sale hereby assumes and agrees to pay all liability of every kind or any torts or rights of actions of every kind that may be outstanding or come against the said partnership business of King Brothers Motor Company, or against the said parties of the first part, growing out of the conduct of the partnership business of King Brothers Motor Company. It is understood and agreed between all parties to this bill of sale that the same is being made subject to a security deed or bill of sale to secure debt heretofore made by the said Mrs. Lora B. King to her one-half interest in the assets of the partnership business of King Brothers Motor Company. It is understood and agreed between all parties to this bill of sale that the same is being made subject to a security deed or bill of sale to secure debt heretofore made by the said Mrs. Lora B. King, conveying her one-half interest in and to the assets of the partnership business of King Brothers Motor Company to J. H. King Jr., administrator of the estate of G. R. King, deceased, and the said Mrs. Lora B. King agrees to pay the indebtedness secured by said lien in favor of said J. H. King Jr., administrator. The above described personal property and business is conveyed as a going concern, and it is the intention and purpose of this conveyance to convey the name of King Brothers Motor Company, together with the good will of same, unto said corporation of King Brothers Motor Company." *745
We continue with the stipulation of facts: "That on July 7, 1931, the defendant corporation issued its promissory notes to Mrs. Lora B. King and J. H. King Jr., respectively, copies of said notes being hereto attached as exhibit B and made a part of this stipulation." Exhibit B reads as follows: "On July 7, 1941, after date, King Brothers Motor Company, a corporation, acting through its proper officers, do promise to pay to the order of J. H. King Jr., the sum of $75,000, at Waycross, Georgia, for value received, with interest from date at the rate of 6% per annum until paid, with the exception hereinafter stated, with all cost of collection, including 10% as attorney's fees, if collected by law or through an attorney at law after maturity, same to be paid in gold coin or any lawful money acceptable to the holder of this note. This note is given by the said King Brothers Motor Company, a corporation, for the balance of the purchase-money or price of the interest and equity of the said J. H. King Jr., in the assets of the former partnership of King Brothers Motor Company of Waycross, Georgia, and being the promissory note referred to in a certain chattel mortgage, or bill of sale to secure debt this day executed by the maker of this note to J. H. King Jr., and Mrs. Lora B. King, and the terms of said mortgage relative to the interest to be paid on this note shall be applicable to this note, that is, that the maker of this note shall not be liable for interest on said note for any year in any amount in excess of the net profits of the said King Brothers Motor Company, a corporation, and any other terms, restrictions, and provisions stipulated in said mortgage shall be applicable to this note; and the maker of this note hereby waives demand, protest, and notice of demand, protest and non-payment; and further that the interest provided for in said note shall be non-cumulative." A similar note was executed to Mrs. Lora B. King for $85,000.
We proceed with the stipulation of facts: "That on July 7, 1931, the defendant corporation executed an instrument to J. H. King Jr. and Mrs. Lora B. King, a copy of said instrument being hereto attached marked exhibit C and made a part of this stipulation." Exhibit C reads as follows: "This indenture, made this the 7th day of July, 1931, between King Brothers Motor Company, a corporation under the law of the State of Georgia, with its principal office in the City of Waycross, County of Ware, and State of Georgia, of the first part, and J. H. King Jr. and Mrs. Lora B. King, *746 of the County of Ware and State of Georgia, of the second part: Witnesseth: That the party of the first part for and in consideration of the sum of $1.00 in hand paid, as well as for the purpose of securing the indebtedness hereinafter mentioned, at and before the execution of these presents, the receipt whereof is hereby acknowledged, has granted, bargained, sold and conveyed, and by these presents does grant, bargain, sell and convey unto said parties of the second part, their heirs, executors, administrators and assigns, the following described personal property to wit: [Here follows description of personal property conveyed as shown in exhibit A herein before set out]. As the assets of the said business of King Brothers Motor Company, a corporation, shall change in specifics, it is understood and agreed that this mortgage lien shall attach to all replacements, additions and increases of every kind and description, and is intended at all times to be a lien on all the assets of said corporation, including notes, accounts, stock and merchandise, furniture, fixtures, equipment, bills of sale, bills of sale to secure debt of said corporation. To have and to hold the said bargained property with the rights, members, and appurtenances to the same belonging or appertaining to the only proper use, benefit, and be hoof of the parties of the second part, their heirs, executors, administrators, and assigns, forever. And the party of the first part for itself, its successors and assigns, will warrant and forever defend the right and title of the above described property unto the said parties of the second part, their heirs, executors, administrators and assigns, against the claims of all persons whomsoever. This conveyance is to be construed as a bill of sale passing title and not as a mortgage, and is made under the provisions of the existing Code of Georgia, and is made to secure a debt of $160,000 of the party of the first part to the parties of the second part, as evidenced by two certain promissory notes bearing even date herewith, one of said notes for $85,000, payable to Mrs. Lora B. King, and the other for $75,000, payable to J. H. King Jr., each bearing interest from date at the rate of 6% per annum, or as hereinafter stipulated, and each due July 7, 1941, which said indebtedness so evidenced by said promissory notes is a part of the purchase-price of the above described property purchased by the said King Brothers Motor Company, a corporation, as stated first aforesaid from King Brothers Motor Company, a copartnership composed of J. *747 H. King Jr. and Mrs. Lora B. King, and this bill of sale to secure debt is given to secure the payment of the balance of the purchase-price of the interest and equity of the said J. H. King Jr. and Mrs. Lora B. King in the partnership business of King Brothers Motor Company. It is understood and agreed by the parties hereto that notwithstanding the said notes hereinabove described provide for the payment of interest at 6% per annum from date, yet in no event shall the interest provided to be paid as aforesaid on said notes be more than the net profits of said corporation in any one year, that is to say, if the net profits shall be less than 6% in any one year then only that amount should be paid as interest for said period, and if there shall be no net profits for any such period, then no interest shall be paid, anything in the notes to the contrary notwithstanding, and said interest shall be non-cumulative; and the liability of the party of the first part for such interest on said notes, or either of them, for any one year, shall accrue as of the date representing the closing of the corporation's books for the fiscal year immediately preceding, and shall not require further approval on the part of the board of directors, or any other officers, of said King Brothers Motor Company Inc., party of the first part herein. This indenture is also intended to and does hereby secure all renewals of the indebtedness aforesaid, any extensions or assignments of this indenture, or either or both of said notes, shall not waive any condition herein contained."
We continue the stipulation of facts: "That during the taxable year ending June 30, 1935, defendant corporation for that fiscal year paid the sum of $10,200 out of the net income of the corporation for that fiscal year to J. H. King Jr. and Mrs. Lora B. King. It is this item which is in dispute between the parties. Defendant-corporation takes the position that the payment of the said $10,200 out of the net income to J. H. King Jr. and Mrs. Lora B. King was a payment of interest on the part of the defendant-corporation and was therefore deductible under the income-tax laws of this State from its gross income. The Department of Revenue takes the position that the payment of the said $10,200 under the facts stated was a dividend payment by the corporation and therefore not deductible from its gross income. During the taxable year involved, J. H. King Jr. was president of the defendant-corporation, and Mrs. Lora B. King was secretary and treasurer, and outside of *748 the one share of common stock owned by the said Mrs. J. H. King Jr., these two parties owned the entire capital stock of said corporation. The said Mrs. J. H. King Jr. is the wife of J. H. King Jr. It is further agreed that if the contentions of the State of Georgia are correct, the amount of tax due is that stated in the fi. fa., to wit, $431.39 principal, and $94.52 interest to date of issuance of execution, plus interest from date of execution to date of payment as provided for by statute. It is also agreed that if the contentions of the taxpayer are correct, no tax at all is due in this manner. It is further agreed that the court may try all issues of law and fact without the intervention of a jury." 1. We have set forth the facts applicable to the case somewhat in detail in order to better illustrate the question for determination. It is conceded by both parties that if the $10,200 is interest, under the law there are no taxes due. While on the other hand, if under the agreed statement of facts that sum is stock dividend, the taxes are due. At the outset it will be recognized that (a) the charter for incorporation was usual and legal; that (b) if there was anything illegal in the acquisition by the corporation of the assets of the partnership, such is not pointed out; that (c) the notes executed by the corporation to the two members of the corporation to purchase the assets of the partnership were executed in conformity with our law; that (d) the bill of sale (or security deed) executed by the corporation to the individual members of the partnership to secure the payment of the purchase-price of the stock in trade was the customary and lawful method used daily in commercial barter and trade for transactions similar to the transaction in question; that (e) the fact that as a part of the consideration for the transfer of the assets of the partnership to the corporation, a part payment for such assets was to be in stocks of the corporation is also a common practice and not unusual; but (f) it is contended by the State Department of Revenue that since the partners acquired from the corporation all of its stock as a part consideration for the assets, and became the officers and controlling force in the corporation, to limit the interest on the debt to six per cent., provided the corporation earned that *749 much, and to forego interest to the extent of less than six per cent. on the remaining amount, established the transaction as one of dividend and not one of interest on indebtedness.
This brings us to the consideration whether the transaction resulted in one of dividend on stock rather than interest on indebtedness. It is noted that no incident in the organization is challenged for fraud. All of the transactions as between the partnership and the corporation were open and legal. Nothing was concealed, no challenge of value raised. We are not without precedent of cases based on facts of similar import to the situation here involved to the effect that the $10,200 is to be considered interest on indebtedness rather than dividend on shares of stock. We are of the opinion that the decision of the Supreme Court in Savannah Real Estate, Loan Building Co. v.Silverberg,
In this connection we would like to call attention to a case from the Supreme Court of the United States. In Old Colony Railroad Co. v. Commissioner of Internal Revenue,
2. The Department of Revenue cites many cases defining "dividend" and "interest" to sustain its position to the effect that the transaction before us is one which should be construed as that of shareholder and not of creditor. Among these cases will be found Coggeshall v. Georgia Land Investment Co.,
It is contended by the Department of Revenue that the case ofState Revenue Commission v. Glynn,
The court did not err in finding that the relationship was that of debtor and creditor.
Judgment affirmed. Broyles, C. J., and MacIntyre, J., concur.