1940 BTA LEXIS 1118 | B.T.A. | 1940
Lead Opinion
The Supply Co. filed a consolidated return for the year 1931, in which it deducted net losses of the Specialty Co. and the Texas corporation of $34,927.61. The respondent denied the right to make a consolidated return on the ground that the three corporations were not an “affiliated group”, as defined in section 141 of the Eeve-nue Act of 1928.
A question for determination, common to these proceedings, is whether T. T. Word or the Supply Co. owned the stock of the Texas corporation. The issue in the proceeding of the Supply Co. involving the year 1931 turns upon ownership of the stock in that year and the issues in the proceedings of the Supply Co. and T. T. Word and Anna Word involving the year 1934 turn upon ownership in that year. In Word Specialty Manufacturing Corporation, Docket No. 68856, and T. T. Word Supply Co., Docket No. 68857 (34 B. T. A. 974) we found as a fact that during the years 1929 and 1930 T. T. Word owned directly in excess of 95 percent of the stock of the Texas corporation, and that such stock issued to him had not been transferred by him since its acquisition. The evidence in the present proceeding shows that no change in ownership of the stock of the Texas corporation occurred from the time of its acquisition from the Tennessee corporation in 1926 to the time of its surrender in 1934. The respondent has pleaded and here argues that the question of ownership of the stock of the Texas corporation has been adjudicated in the former proceedings and that our decision therein is res judicata. At the hearing the respondent introduced in evidence the pleadings, decision, and orders of the Board in the former proceedings, and the petitioners were permitted to introduce evidence bearing on the ownership of the stock, over an objection that it was incompetent to the extent that it should be found to be inconsistent with our former decision. The petitioners rely upon such evidence to establish that the stock was owned by the Supply Co. in 1931 and 1934 and that it was not owned by T. T. Word.
The evidence shows, and the petitioners do not deny, that legal title to the stock was taken in the name of T. T. Word upon its acquisition in 1926 from the Tennessee corporation. T. T. Word testified that he acquired the stock for and on behalf of the Supply Co., that he held it as trustee for its benefit, and that the only reason for taking title in his own name was that his counsel, who advised him throughout the negotiations, directed that this be done so as not to offend the antitrust law of Texas. His counsel is now deceased, but another witness has corroborated his statement that such advice was given. We considered testimony to the same effect in the former proceedings, but were not convinced by it for the reason that other evidence indicated that T. T. Word owned the stock in his individual capacity, and for the further reason that no authority prohibiting a Texas corporation from owning stock of another corporation had been brought to our attention. In their brief the petitioners refer to provisions of the Texas statutes, civil and penal, relating to mo
Where any corporation acquires the shares or certificates of stock * * * or the physical properties or any part thereof, of any other corporation * * * for the purpose of preventing or lessening, or where the effect of such acquisition tends to affect or lessen competition, whether such acquisition is accomplished directly or through the instrumentality of trustees or otherwise.
The statute is aimed at situations where there is an intent to lessen, or an acquisition has a tendency to effect a lessening of, competition. The evidence here is not directed to proof of intent or the effect of the transaction. However, it is sufficient to show that a direct acquisition of the stock by the Supply Co. could not have been intended, and would not have tended, to lessen competition between the Supply Co. and the Texas corporation. The two corporations were engaged in the same business — the sale of oil and gas well supplies. The Supply Co. was a selling company organized in 1926, and at that time or soon thereafter, the manufacturing branch of the Texas corporation’s business was taken over by the Tennessee corporation. In January 1926 the Texas corporation consigned all manufactured products, supplies, materials, and implements then owned by it to the Supply Co. for sale by the latter on a commission basis. The contract of consignment states that the Texas corporation is discontinuing its business generally. Thus, the acquisition of the stock by the Supply Co. would not fall within the statute. If a transfer of the stock to the Supply Co. would be under the ban of the antimonopoly statute of Texas, transfer in the name of T. T. Word in trust for the Supply Co. would likewise be. The statute applies whether the acquisition of the stock is accomplished directly or through the instrumentality of a trustee. The reasons assigned for taking title in T. T. Word’s name are therefore unconvincing. There is no evidence that any express trust was created, nor is there any evidence that a trust resulted by reason of the payment by the Supply Co. of any part of the consideration for the stock.
There is, so far as the evidence shows, no written contract covering the purchase of the stock. The contract of March 10, 1926, does not purport to sell the stock. The evidence merely shows that in the negotiations with the receivers T. T. Word also sought to acquire the stock and that several days before the contract of March 10,1926, was executed the stock was delivered to him, and at the same time assets of the Texas corporation of the value of $38,000 were delivered to the Tennessee corporation. We regard the holding of the stock by T. T.
* * * represent * * * a conclusion reached within a short time after completion of the transactions by one chiefly concerned with the result, and adhered to without change of position for a long period of time. It would require strong evidence to overcome the facts so consistently represented by the person primarily concerned with the outcome of these proceedings.
The above returns were filed under the Revenue Act of 1926, which permitted affiliation if 95 percent of the stock of two or more corporations was owned by the same interests. Sec. 240 (d). Beginning with the. taxable year 1929, affiliation was limited to chains of corporations connected through stock ownership with a common parent, if at least 95 percent of the stock of each corporation, except the common parent, was owned directly by one or more of the other corporations, or if the common parent owned directly at least 95 percent of the stock of at least one of the other corporations. Revenue Act of 1928, sec. 141 (d). T. T. Word promptly accommodated his interests to this change, in so far as his dealings with the Government were concerned, by filing consolidated returns for 1929 and subsequent years in which he represented that the Supply Co. was the owner of the stock of the Texas corporation. This shift of position took place four years after the transaction of purchase, and was intended to secure the benefits of affiliation under the new statute, but in his dealings with , his wholly-owned corporation he did not change his status with respect to the stock. He made no sale or donation of the stock to the Supply Co. His conduct is strong evidence that he intended to and did retain ownership of the stock in himself.
In his dealings with the Government with respect to his individual tax liability, T. T. Word made further representations which are inconsistent with the position now taken by him. As hereinafter shown, all of the consideration paid for the stock and obligations, was derived from the assets of the Texas corporation. The consideration included $130,000 in cash which was borrowed from the Union National Bank on a note which T. T. Word was required to endorse. Consistently, in each of the years 1926 to 1932, T. T. Word deducted substantial amounts of interest on his income tax returns, which the record shows was the interest paid to the Union National Bank on the note. This was a representation that the indebtedness
This evidence and the uncontradicted testimony that no change in the ownership of the Texas stock took place from the time it was originally acquired from the Tennessee corporation in 1926 until the surrender of the stock in 1934, together with all the other facts and circumstances shown by this record, warrants the conclusion that the stock was owned by T. T. Word at all times between March 1926 and May 8, 1934, and we so hold. Our conclusion is in accord with that reached in the former proceedings on substantially the.same evidence, and our former conclusion is quite persuasive, since the petitioners have here proven no other facts or circumstances tending to show that T. T. Word did not own the stock.
Since the conclusion thus reached is adverse to the contentions of the petitioners, it is unnecessary to pass upon the question whether, under the doctrine of res judicata, our former adjudication of ownership of the stock is conclusive upon either the Supply Co. or T. T. Word and Anna Word. It may be noted, in conclusion, that the petitioner has produced no evidence whatever respecting the ownership of the stock of the Specialty Co. during the year 1931. For this reason, even if we should hold that the Supply Co. owned all of the Texas stock in that year, we would not be justified in disturbing the respondent’s action in rejecting the consolidated return on which the aggregate net loss of both subsidiaries was deducted.
The ownership of the obligations, consisting of $141,086.14 of mortgage notes and $759,274.02 of unsecured claims, had its origin in the contract with the receivers of March 10, 1926. That contract expressly recites that the mortgage notes have been delivered to the Supply Co. and in terms sells, transfers, and assigns the unsecured claims to the Supply Co. In addition other assets, apparently of doubtful value, are transferred to other parties. Thus the legal title to the notes and claims clearly was placed in the Supply Co. All of the documents thereafter executed recognize the Supply Co. as the owner of these obligations. Such evidence would be quite convincing were it not for the fact that in the field of taxation we “are concerned with substance and realities, and formal written documents are not rigidly binding.” Helvering v. Lazarus & Co., 308 U. S. 252, and Higgins v. Smith, 308 U. S. 473. All of the stock of the Texas corporation was acquired by T. T. Word, and he also was the owner of all of the stock of the Supply Co. The evidence of the entire dealings between T. T. Word and these corporations must be closely scrutinized, and we proceed to examine it for the purpose of determining whether T. T. Word was the beneficial owner
In March 1926 the Supply Co. was a newly organized corporation with a paid-in capital of $10,000. It had some earnings over a period of two months. The Texas corporation had assets which were represented to the Union National Bank as having an appraised net value of almost $500,000. That value did not take into account the $900,000 which it owed the New York corporation on the mortgage notes and unsecured claims. The contract with the receivers provided for a payment of $160,000 in cash. The Supply Co. neither had the cash with which to make the purchase nor financial standing by which it could borrow the money. The $160,000 was raised by withdrawing $30,000 from the cash funds of the Texas corporation and borrowing $130,000 from the Union National Bank on Word’s endorsement. It was placed in the Supply Co.’s bank account, and paid by check to the receivers. The remainder of the consideration consisted of promissory notes of the Supply Co. for $30,000, which were executed and endorsed by T. T. Word as required by the contract. The bank took a promissory note of the Supply Co. for the $130,000. It not only required the endorsement of the note by T. T. Word, but it also insisted that the note of $759,274.02 payable to the Supply Co. and secured by some $220,000 of bills receivable of the Texas corporation be pledged as security for the note for $130,000. T. T. Word testified that all of the assets of the Texas corporation were pledged to the bank. Payments made from time to time on the notes to the bank and to the receivers were made from assets of the Texas corporation, except about $60,000. The latter amount was paid by the Supply Co. While the evidence does not show any reimbursement of the Supply Co. through direct cash payments, it does show that the Supply Co. credited the Texas corporation with 80 percent of the proceeds collected on all sales made on its behalf, and charged against such credits the payments made by it on the notes. When the Texas corporation was dissolved in 1934, the Supply Co. was indebted to it on that account to the extent of $109,420.99. Thus all of the consideration paid, both for the stock and the obligations, in the amount $228,000, was as a matter of fact paid through withdrawal of funds or assets of the Texas corporation. The Supply Co. did not use any of its own funds or its own credit.
The book entries relating to the'transaction are set forth in detail in our findings of fact. The petitioners oppose their consideration on the ground that they are not proof of the actual facts, and, with respect to the entries on the personal books of T. T. Word, the latter
We are of the opinon and find that at all times from March 1926 to May 8,1934, T. T. Word was the beneficial owner of the obligations of the Texas corporation.
Section 115 (c) of the statute provides that “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”, and that the “gain or loss to the dis-tributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112.” Section 115 (i) provides that “the term ‘amounts distributed in partial liquidation’ means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.” The liquidation of a corporation is the process of winding up its affairs by realizing upon its assets, paying its debts, and appropriating the amount of its profit and loss. It differs from normal operation for current profit in that it ordinarily results in the winding up of the corporation’s affairs, and there must be a manifest intention to liquidate, a continuing purpose to terminate its affairs and dissolve the corporation, and its
In view of our conclusion that T. T. Word was the owner of the stock, and that he was the beneficial owner of the claims, the facts that the Texas corporation in the resolution authorizing the exchange referred to the stock and claims as property owned by the Supply Co., that it conveyed the assets direct to the Supply Co., and that the latter released the lien of the mortgage notes and canceled the note for $159,274.02, are insufficient to show that he did not receive the assets in liquidation. As sole stockholder and owner of the claims, he was the only person entitled to the assets upon dissolution of the corporation. The Supply Co. had no interest in the Texas corporation, either as stockholder or creditor. It merely held the legal title to the claims for the benefit of T. T. Word. In receiving the assets and in canceling the liens and claims, it acted solely as the nominee or agent of T. T. Word. The assets could only pass to the Supply Co. through T. T. Word. The fact that the Supply Co. issued no stock or other thing of value for them indicates quite clearly that it acquired them as a donation or contribution of additional capital from him. The transfer of assets in complete liquidation to the wholly owned corporation of T. T. Word without consideration is analogous to those cases in which it has been held that a transfer of corporate assets to a partnership composed of the former stockholders is a distribution in the form of a liquidating dividend. See E. C. Huffman, 1 B. T. A. 52; Joseph Joseph, 6 B. T. A. 595; affd., 26 Fed. (2d) 532; John F. Prindible, 16 B. T. A. 187; Commonwealth Improvement Co., 20 B. T. A. 1189; affd., 287 U. S. 415.
The fact that in the complete liquidation T. T. Word, as creditor, surrendered claims of the face value of about $900,000 does not warrant the conclusion that nothing was distributed to him in liquidation. The evidence does not show that the claims were worth their face amount. They were purchased, along with some assets of
The contention of the petitioners that the transaction was a merger or consolidation and no taxable gain was realized is without merit. Whether any gain realized from the distribution is not to be recognized depends upon whether the transaction falls within any of the exceptions contained in section 112. Sec. 115 (c). The provisions of section 112 are exceptions to the rule taxing gains, and may not be availed of by a taxpayer unless he establishes a transaction coming clearly within their terms. Warner Co., 26 B. T. A. 1225; Dolomite, Inc., 28 B. T. A. 1271; John C. Shaffer, 28 B. T. A. 1294; Charles Hall, 81 B. T. A. 125. We need not decide whether there was a merger or consolidation, or a statutory reorganization. That of itself is not sufficient for nonrecognition of any gain under section 112. The taxpayer must further bring the transaction within one of the specific provisions of that section. See Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937. The only provisions which can have any possible application are subdivisions (b) (3) and (b) (5). The former provides that no gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. The transaction does not fall within this language, since the stock of the Texas corporation was not exchanged solely for stock of the Supply Co. Subdivision (b) (5) provides that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation and immediately after the exchange such person or persons are in control of the corporation. Here, there was a transfer of property by T. T. Word to the Supply Co., but it was not transferred solely for stock of the transferee. The Supply Co. issued no stock whatever, and, as indicated above, the assets passed to the Supply Co. as a contribution of additional capital. Since the petitioners have failed to point out any provision of section 112 which would exempt from taxation the gain derived from the distribution, it follows that, under the express provisions of section 115 (c) and 112 (a), the gain realized is subject to tax. Coxe v. Handy, 103 Fed. (2d) 873.
The Supply Co. accounts of $109,420.99 and $3,035.63 represent the balance in a current account due by the Supply Co. to the Texas corporation out of the proceeds of supplies sold on consignment. There is no evidence that this was not a valid claim or that the Supply Co. was unable to pay it. The only argument advanced by the petitioners is that these accounts were never transferred to T. T. Word in the so-called merger or consolidation of the two companies. From what has been said above, they clearly were assets of the Texas corporation, which passed to T. T. Word along with the other assets and to the Supply Co. by way of a capital contribution.
We have found as a fact that the gain realized by T. T. Word was $170,455.08. That amount should be included in computing the net income of T. T. Word and Anna Word on the community property basis. In accordance with the concession of the respondent, this conclusion requires the elimination of gain in the amount of $177,738.47 from the taxable income of the Supply Co.- for the year 1934.
The final question is’ whether the Supply Co. is entitled to a deduction of $10,424.55 for bad debts on its return for the year 1931. Deductions for bad debts are allowable only in the year in which two things occur — ascertainment of worthlessness and charge-off. Paul Pryibil, 31 B. T. A. 164. The accounts were charged off during 1931, and the question for determination is whether they were ascertained to be worthless in that year. The ascertainment need not be
Reviewed by the Board.
Decision will be entered for the resfondent in Docket No. 90991,, and. under Rule 50 in Docket Nos. 9351$, 93543, and 93544•
Sec. 141 (d) * * * an “affiliated group” means one or more chains of corporations connected through stock ownership with a common parent corporation if—
(1) At least 95 percentum of the stock of each of the corporations (except the common parent corporation) is owned directly by one or more of the other corporations; and
(2) The common parent corporation owns directly at least 95 per centum of the stock of at least one of the other corporations.