author: Smith:

text:
    Edwin Lindsey Cummings, Petitioner, v. Commissioner of Internal Revenue, Respondent. George L. Webb, Petitioner, v. Commissioner of Internal Revenue, Respondent. William N. Stetson, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 60321, 60401, 64923.
    Promulgated August 11, 1933.

      Samuel Gottlieb, Esq., for the petitioners.

      Thos. F. Gallaban, Esq., and E. G. Sievers, Esq., for the respondent.
   OPINION.

Smith:

The petitioners contend that they and the other stockholders, and not the corporation, were the beneficiaries of the insurance policies on the life of William B. Stevenson; that the proceeds from such policies were received by the corporation as trustee for the stockholders and not as its own funds; and that the amounts of the proceeds distributed to the stockholders were therefore not dividends but were “ amounts received under a life insurance contract ” and as such are exempt from taxation under the provisions of section 22 (b) (1) of the Revenue Act of 1928. This section of the statute reads as follows:

(b) Exclusions from gross income.- — The following items shall not be included in gross income and shall be exempt from taxation under this title:
(1) Life insurance. — Amounts received under a life insurance contract paid by reason of tlie death of the insured, whether in a single sum or in installments (but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income).

Section 22 (a) provides tbat:

(a) General definition. — “ Gross income ” includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from" any source whatever.

The term “ dividend ” is defined in section 115 (a) as:

(a) Definition of dividend. — The term “dividend” when used in this title (except in section 203 (a) (4) and section 208 (c) (1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.

Conceivably, the corporation might have acted lawfully as a trustee or at least in a fiduciary capacity in collecting the proceeds of insurance policies and paying them to the stockholders, with the result that the proceeds would never have become the corporation’s own funds subject to distribution to the stockholders as dividends. This would have been true, no doubt, if the insurance policies had been taken out in the names of the individual stockholders, with the corporation designated merely as agent for them, the premiums on the policies being paid by the stockholders. These, however, are not the facts. The policies were all made payable to the .corporation as sole beneficiary and the corporation paid all the premiums. The corporate resolutions of January 10, 1927, and February 14, 1928, both refer to the corporation as the insurer of the life of William B. Stevenson. The agreement between the corporation and the stockholders was not that the corporation would merely receive the proceeds of the insurance policies for the benefit of the stockholders, but that, upon receipt of the proceeds of the policies, it would pay them over to the stockholders as a cash dividend. Nowhere is there any reference to the corporation as a trustee nor are there present any circumstances which can be said to create a resulting trust in favor of the stockholders. It does not appear that there was any consideration for the promise of the corporation to distribute the proceeds as a cash dividend. It is not explained why, if the corporation was intended to be only the nominal beneficiary, it paid all of the premiums on the policies. There is nothing to indicate that either the corporation or the individual officers or stockholders considered the payment of the premiums as a distribution of corporate funds in the nature of dividends or as additional compensation to any of the officers or employees. See Berizzi Brothers Co., 16 B.T.A. 1307; Brown Agency, Inc., 21 B.T.A. 1111. We see no reason for treating the agreement between the corporation and the stockholders as anything different from what it purports to be, that is, an agreement that the corporation would declare and pay “ a cash dividend ” out of the proceeds of the insurance policies when and if received.

In Isaac May, 20 B.T.A. 282, we held upon facts very similar to those in the instant case that the distribution by a corporation of certain of the proceeds of a life insurance policy on its president was a taxable dividend to the stockholders. There, as in the instant case, the corporation had agreed in advance to distribute the proceeds, when received, upon a certain basis. In deciding that the corporation and not the distributees was the beneficiary under the insurance contracts, we rejected the petitioner’s contention that the corporation received and distributed the proceeds of the policy as a trustee for the stockholders.

The petitioners in their brief cite Curran v. Commissioner, 49 Fed. (2d) 129, as sustaining their contention that a distribution by a corporation is not necessarily a dividend because declared to be a dividend by the corporation and made in the corporate form of a dividend. In that case the court held, reversing the Board, 15 B.T.A. 960, that a distribution made to a stockholder was in reality payment for certain property which the stockholder had transferred to the corporation, and was not a taxable dividend. That case is clearly distinguishable on the facts from the instant case and is not authority for the conclusion herein sought by the petitioners. The same is true of Central Life Assurance Society v. Commissioner, 51 Fed. (2d) 939 (reversing 18 B.T.A. 667), also cited by the petitioners. The court held in that case that where the petitioner, a mutual company, succeeded to the business of a predecessor stock company, agreeing as part consideration to pay to the former stockholders all of the income for a certain period from the nonparticipating insurance taken over, such income was not'taxable to the petitioner, but was received in trust by it for distribution to the former stockholders. Certainly we would not feel compelled to hold that the distributions of the proceeds of the insurance policies to the petitioners constituted cash dividends merely because so termed by the corporation if, upon the evidence before us, it appeared that the distributions were made by the corporation as trustee or were other than distributions of its own assets.

The petitioners make the further contention that since the proceeds of life insurance policies are not income or profits under the decision of the Supreme Court in United States v. Supplee Biddle Hardware Co., 265 U.S. 189, any payment or distribution of such proceeds by a corporation to its stockholders does not come within the statutory definition of a dividend, which is “ any distribution made by a corporation to its shareholders * * * out of its earnings or profits ” (see sec. 115 (a), Revenue Act of 1928.) This contention also was made by the taxpayer in Isaac May, supra, and was rejected for reasons therein discussed.

On the record before us, we find no error in the respondents determination that Storrs & Bement Co. was the beneficiary of insurance policies on the life of William B. Stevenson and that it received the proceeds of the policies and paid them over to its stockholders as cash dividends. If the dividends were paid from earnings accumulated subsequent to February 28, 1913, the recipients are liable to surtax upon them. The evidence indicates that they were. It does not prove that they were not.

Judgment will be entered for the respondent.


source: Caselaw Access Project

author: Goodrich:

license: Public Domain

text:
    Ralph Modjeski, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49517.
    Promulgated August 11, 1933.

      James Graig Peacock, Esq., for the petitioner.

      G. A. Bay, Esq., for the respondent.
   OPINION.

Goodrich:

We have previously held that the Delaware River Bridge Joint Commission is a governmental agency engaged in carrying out an essential governmental function. Leon S. Moisseiff, 21 B.T.A. 515. It is not claimed here that petitioner was an officer of the state, nor that, if an independent contractor, a tax upon his compensation would burden the state government. The fundamental question is, therefore, whether petitioner was an employee of the commission whose compensation is exempt from a Federal tax, as he contends, or whether he is an independent contractor upon whose earnings the tax may be laid, as respondent maintains. We know of no clear line of demarcation between these two classifications; the question must be determined in each case under the facts there obtaining, measured by the tests suggested by the many decisions bearing on this subject.

We are of opinion that, upon the record before us, petitioner was not an independent contractor, but an employee of the commission. While his entire time was not given to the commission’s work, he was employed, not for a single project, but, “ subject to the pleasure of the Commission ”, over a continuous period. He was on the commission’s pay roll and received a regular salary. All his expenses in connection with the work, and the compensation of his assistants, whether engineers or stenographers, were paid by the commission. And we are convinced that he was at all times under the control and direction of the commission.

That is the point upon which respondent argues vigorously to the contrary. That Modjeski is a great engineer cannot be questioned. Respondent’s counsel graciously acclaims him “ the world’s foremost bridge engineer ” whose skill and learning have been universally recognized and honored. To list the tremendous projects in which he has been and is now engaged, as they are contained in the record before us, would be to enumerate the majority of the outstanding accomplishments in bridge construction in this country for many years past, and some to be completed in the future. While admitting that petitioner was subject to the control of the commission respecting matters of administration in connection with personnel and contracts, respondent’s counsel points to petitioner’s reputation and standing and declares it impossible that a body of laymen could exercise control and direction of an expert such as petitioner respecting the myriad technical and intricate details involved in the construction of this bridge. He insists that the commission retained no right to tell petitioner how his work should be done; that the duties which he was employed to discharge were beyond their capacity to direct, and demanded the exercise of his professional skill and judgment, beyond interference by the commission.

We are content with the answer to that argument given by the resolution of the commission which prescribed the duties and terms of employment of its chief engineer. When appointing petitioner to that position the commission did not say to him simply, Design and build' for us a bridge.” Rather, as we read those provisions, it made him responsible for the “ design and erection of the structure in all its details,” but it set up also a board of engineers whose duty it was to follow the progress of the work, to consider all the designs and plans of the chief engineer, to report to the commission any difference of opinion respecting the details of the work, and to keep a complete record of all its proceedings for the inspection and guidance of the commission. In other words, the members of the commission, realizing that they themselves were not engineers and lacked the technical knowledge necessary to maintain a check on the plans of the chief engineer, and his direction of the work, created a board of experts to do that for them and report to them, with the result that the final decision on important problems, whether of administration or engineering, lay in their power. That was the “ control or right of control by the employer ” which, as respondent points out, was laid as a test in differentiating between employee and independent contractor in Metcalf & Eddy v. Mitchell, 269 U.S. 514. That such control was exercised by the commission with respect to matters of administration is conceded. Whether it was exercised with respect to problems of engineering, this record does not disclose. It may be that, because of petitioner’s skill, experience, and application to his duties, the commission found it unnecessary to interfere with direction of the planning and erection of the bridge. This is immaterial. The important thing is that the right of control was maintained.

Eespondent further argues that petitioner was on a different basis of employment in 1927, after his resignation and reappointment, than he was during the time the bridge was under construction. But the “ title, powers and responsibilities of Chief Engineer ” which he reassumed have never been changed; they existed in 1927 as first set out, and petitioner did not escape them upon his reappointment. While less of his time was required than when the bridge was under construction (which accounts for the reduction in salary) petitioner remained at the command of the commission for as much of his time as might be necessary to perform properly the services demanded of him, whether consultation, the regular inspection of the bridge, preparation of his required reports, or the planning and supervising of repairs or additional construction. In our opinion, there was no change in the basis of his employment and the commission’s right of control was continued.

Respondent also argues that a determination that petitioner was an employee of the commission would be inconsistent with our decision in Leon S. Moisseif, supra, wherein we held that Moisseiff was an employee of the commission, since it appeared that he was under the direction and control of Modjeski, its chief engineer. Such a result does not follow. Obviously one may supervise and direct the work of a subordinate, although himself an employee. Cf. H. A. Underwood, 20 B.T.A. 1117; Hugh Ogden, 24 B.T.A. 1239; affd., 62 Fed. (2d) 334; G. Ridgely Sappington, 25 B.T.A. 1385; Carl Newman Davie, 26 B.T.A. 1007, and cases there cited.

Judgment will be entered for the petitioner.


author: Van Fossan: Sternhagen, Trammell, Arundell,

text:
    John J. Watts, Petitioner, v. Commissioner of Internal Revenue, Respondent. Hugh C. Sicard, Petitioner, v. Commissioner of Internal Revenue, Respondent. Parker Sloane, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 44061, 47451, 47973.
    Promulgated August 11, 1933.

      John F. MoOabe, Esq., James P. Quigley, Esq., and John J. Heberle, Esq., for the petitioners.

      W. E. Davis, Esq., and Paul Waring, Esq., for the respondent
   OPINION.

Van Fossan:

The petitioners in these proceedings contend that they exchanged all of the stock of Ferro Alloys for stock of the Vanadium Co. and bonds of Ferro Alloys guaranteed by the Vanadium Co.; that these two corporations were parties to a reorganization and that, therefore, under the provisions of section 203 (b) (2) of the Revenue Act of 1924. no gain may be recognized. The respondent, on the other hand, contends that the transaction between Sloane and the Vanadium Co. was a sale by the petitioners of all of the capital stock of Ferro Alloys and that it resulted in the creation of income taxable to the petitioners.

The applicable statutes are sections 202 and 20B of the Revenue Act of 1924. Section 202 provides, in part, as follows:

(a) Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in subdivision (a) or (h) of section 204, and the loss shall be excess of such basis over the amount realized.
*******
(rt) In the case of a sale or exchange, the extent to which the gain or loss determined under this section shall be recognized for the purpose of this title, shall be determined under the provisions of section 203.
Section 203 provides, in part:
(a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202 shall be recognized, except as hereinafter provided in this section.
* # * % # if! Sf{
(b) (2) No gain or loss shall he 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.
8j{ i}S :Jj %r % sf-
(h) As used in this section and sections 201 and 204—
(1) The term “ reorganization ” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation) * * *.

In our opinion the determinative question is that of reorganization and, unless the transaction stated in the findings of fact constituted a reorganization of Ferro Alloys and the Vanadium Co., it is unnecessary to discuss whether there was an actual sale of the stock of Ferro Alloys by the petitioners or whether the transaction was an exchange of all of the stock of Ferro Alloys for stock of the Vanadium Co. and bonds of Ferro Alloys. If the two corporations were not parties to a reorganization the gain, if any, accruing to the petitioners by reason of the transaction is taxable.

Under the provisions of section 203 (h) (1) (A), hereinbefore quoted, the term “ reorganization ” means a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation). While the Vanadium Co. acquired all the capital stock of Ferro Alloys and, therefore, obtained a full. and complete control of the latter corporation, we are of the opinion that it does not appear that the two corporations were either consolidated or merged. A consolidation of two corporations involves the dissolution, of both and the transfer of their corporate assets and franchises to a new corporation. In a merger, on the other hand, one of two merged corporations loses its identity in the other. One corporation goes out of existence; the other corporation survives and the latter absorbs the property and franchises of the merged corporation whose stock it has acquired. Railroad Co. v. Georgia, 98. U.S. 359, 362; Matter of Bergdorf, 206 N.Y. 309; 99 N.E. 714; Irvine v. N.Y. Edison Co., 207 N.Y. 425; 101 N.E. 358; Pinellas Ice & Cold Storage Co. v. Commissioner, 57 Fed. (2d) 188; affd., 287 U.S. 462; Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937.

In the Cortland Specialty Co. case, supra, cited with approval by the Supreme Court in Pinellas Ice & Cold Storage Co. v. Commissioner, supra, the Circuit Court of Appeals for the Second Circuit, referring to state statutes relating to the consolidation and merger of corporations, said:

Undoubtedly such statutes vary in the different states particularly in respect to how far the constituent companies may be deemed to survive the creation of the new or modified corporate structure, but we believe that the general purpose of them all has been to continue the interests of those owning enterprises, which have been merged or consolidated, in another corporate form. * * * When describing the hind of change in corporate structure that permits exemption from these taxes, Section 203 does not disregard the necessity of continuity of interests under modified corporate forms. Such is the purpose of the word “reorganization” in See. 203 (b) (3) where a corporation exchanges its property “ solely for stock or securities.” [Italics ours.]

The petitioners contend that there was a merger of the two corporations arising out of the provisions of the agreement between Sloane and the Vanadium Co. In our opinion the evidence does not lead to this conclusion. Under the provisions of the agreement the Vanadium Co. did acquire all of the capital stock of Ferro Alloys. This acquisition, however, created merely a change in the stock ownership of the latter company. The agreement contains no provisions looking to the creation of a “ new or modified corporate structure.” Therefore, although the former stockholders of Ferro Alloys secured for their stock in that company an interest in Vanadium Co., the transaction was not within the provisions of section 203 (b) (2) for the reason that their interest was not continued under a new or modified corporate form.

Section 203 (b) (2) 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,” etc. The evidence discloses no plan of reorganization and the agreement between Sloane and the Vanadium Co. contains none. There is no provision in the agreement that Ferro Alloys should be dissolved upon the performance of the agreement. On the contrary, there is evidence in the terms of the agreement that it was the intention of the parties thereto that that company was to maintain its separate corporate entity after the performance of the contract and the delivery of the stock of Ferro Alloys owned by the petitioners. Part of the consideration paid to the petitioners for the stock transferred,, by them was, under the terms of the agreement, bonds of Ferro Alloys. Some of these bonds, unless previously called, were not to mature prior to January 1, 1932, or eight years after the execution of the agreement and six years after the date provided in the agreement for the dissolution of the escrow deposit of the Vanadium Co.’s stock. At the very time, therefore, when it is contended that a merger of Ferro Alloys was effected it was provided that Ferro Alloys should issue obligations not maturing before 1932. At such time, therefore, it could not have been in contemplation of the parties that Ferro Alloys would be dissolved upon the performance of the agreement set out in the findings of fact.

It appears that the Vanadium Co. was incorporated under the laws of the State of Delaware and had its office in New York City. Presumptively, therefore, it was authorized as a foreign stock corporation under the laws of the State of New York to do business in that state. Ferro Alloys was organized under the laws of the State of New York. Section 85 of article 8 of the Stock Corporation Law of the State of New York, relating to the merger of corporations, provides in effect, among other things, that any foreign stock corporation authorized to do business in the State of New York owning all the stock of any domestic stock corporation may file in the office of the secretary of state a certificate of such ownership, duly executed in accordance with the provisions of the section, and that thereupon all of the estate, property, rights, privileges, and franchises of such other corporation shall vest in and be held and enjoyed by such possessor corporation as fully and entirely as the same were before held by such other corporation.

The evidence does not disclose that the Vanadium Co. at any time filed the certificate provided in the quoted statute. While it may be that a legal merger of Ferro Alloys and the Vanadium Co. might be effected without the filing of the certificate provided, yet evidence that the certificate had been filed contemporaneously with performance of the agreement between Sloane and the Vanadium Co. would be of weight with reference to the intent of the parties to merge Ferro Alloys with the Vanadium Co. Lack of such evidence is at least of some significance respecting the existence of a contrary intent.

It is true that the facts show that Ferro Alloys was dissolved in July 1928, but this date was several years after the performance of the agreement and the dissolution can not, therefore, be held to be evidence that an intention to merge the two corporations existed at the time of the performance of the transaction now in question.

It seems to us apparent that neither a merger nor a consolidation in the ordinary sense of the words occurred, nor do we believe in the face of the facts that the transaction was one of those “ things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words * * * ” embracing “ circumstances difficult to delineate

but which in strictness can not be designated as either a merger or consolidation,” as was observed by the Supreme Court in Pinellas lee & Cold Storage Co., supra. While the Supreme Court indicated in the above decision that it deemed the opinion of the circuit court in the Pinellas case to be too strict and that the language in parentheses in the statutory definition of a reorganization was intended to work an expansion or enlargement of the meaning of the words, it remains for us to determine whether the instant situation satisfies such expanded definition. In the construction of the language referred to the words “ merger or consolidation ” are still of guiding import. The transaction must resemble a merger or consolidation, though it fails to satisfy all of its legal requirements.

In the case before us, as already appears, there are certain facts of importance that weigh heavily against a conclusion that the transaction was “ of the nature of a merger or consolidation.” Definite evidence of an intention to effect a merger or consolidation is lacking. There was no provision for the dissolution of Ferro Alloys. The commitments assumed by it indicate an intended continuation of existence. Such obligations are not consistent with impending extinction. We believe them to be so foreign to the concept of a merger or consolidation that it can not be said that the transaction partook of the nature of a merger or consolidation. We, therefore, conclude that the transaction here involved did not constitute a reorganization under the statute and that any gain resulting to the petitioners therefrom must be recognized.

There is another fact which injects itself into the consideration of the case, and that is the agreement on the part of the Vanadium Co. to pay in cash the sum of $298,815.50 to the holders of certain obligations due under chrome contracts with Ferro Alloys and $40,000 to petitioner Sloane or his nominee on account of obligations due to the Niagara Falls Power Co. from Ferro Alloys. Though the parties stipulated that these payments did not of themselves constitute income to the petitioners, this does not remove the question of the effect of these payments on the alleged reorganization. Ferro Alloys was obligated on these accounts to the amount of $338,815.50. When Vanadium paid these accounts Ferro Alloys was relieved of the obligations to the creditors to the same extent as though it had been paid the cash by Vanadium and had in turn paid the obligations in the stated amount. Thereafter Vanadium appeared on the books of Ferro Alloys as a creditor. In view of these facts, can it be said that the consideration for the delivery of Ferro Alloys stock was solely stock or securities ?

The petitioners have not objected to the valuation of the securities made by the respondent in his computation of the deficiency in tax. This valuation must, therefore, be presumed to be correct.

Reviewed by the Board.

Sternhagen,

concurring: I agree that this was not a statutory

Decisions will be entered under Rule 50. reorganization, but I would place less emphasis upon to dissolve the Ferro Corporation. In other words, I should say that in a case which was otherwise within part (A) of the definition, there might be a statutory reorganization despite the continued legal existence of the corporations involved.

Leech and Adams agree with the above.

Trammell,

dissenting: In my opinion, the facts in this case bring it squarely within the reorganization provisions of the statute as interpreted by the Supreme Court in the Pinellas case and by the court of appeals in the Cortland Specialty case, cited in the above case. The reorganization provisions do not require that one corporation be dissolved. The reorganization as defined in the statute is not limited to a technical merger or reorganization, but is made broader by the parenthetical clause. There was, in my opinion, the continuing interest which the above decisions referred to as being necessary.

Arundell,

dissenting: In my. opinion the facts bring the case within too much stress is placed on the fact that dissolution of Ferro Alloys was delayed for several years after the acquisition of its stock by Vanadium. The statute does not in terms require dissolution at any time. While dissolution is a usual concomitant of a strict merger or consolidation, the parenthetical clause in section 203 (h) (1) extends the application of the statute “to include some things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words — so as to embrace circumstances difficult to delimit but which in strictness can not be designated as either merger or consolidation.” Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462. The effect of the majority opinion is to disregard the words within the parentheses and this the Supreme Court in the Pinellas case has said very definitely may not be done. Nor is it material that petitioners received bonds of the Ferro Alloys Co. as well as stock in the Vanadium Co. Section 203 (b) (2) contemplates just such cases. There was here present that continuity of interest emphasized in Portland Specialty Co. v. Commissioner, 60 Fed. (2d) 937, and Pinellas Ice & Cold Storage Co., supra.

Smith, Black, and Goodrich agree with the above dissent.


author: Black:

text:
    Liberty Service Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 53334, 60267.
    Promulgated August 15, 1933.

      Robert P. Smith, Esq., and A. H. Diebert, Esq., for the petitioner.

      Allin H. Pierce, Esq., for the respondent.
   OPINION.

Black:

Petitioner’s assignment of error is to the effect that the Commissioner of Internal Revenue has erroneously and improperly determined that the petitioner was the owner of the stoclc of the American Re-Insurance Co. at the date this stock was sold and that consequently the deficiencies which have been determined upon that basis are wrong.

Respondent contends that the attempted distribution to the stockholders by petitioner of the stock in question was ineffectual and that consequently the profit from the sale of the stock is properly taxable to the petitioner. We think this contention of respondent must be sustained. Taylor Oil & Gas Co., 15 B.T.A. 609; affd., 47 Fed. (2d) 108; James Duggan, 18 B.T.A. 608; Fred A. Hellebush et al., Trustees, 24 B.T.A. 660; affd., 65 Fed. (2d) 902; Lexington lee & Coal Co. v. Burnet, 62 Fed. (2d) 906; Nace Realty Co., 28 B.T.A. 467; Walter M. Petitflls, 24 B.T.A. 1090; affd., 64 Fed. (2d) 309.

Petitioner commenced negotiations for the sale of this stock in November 1927, and these negotiations continued without interruption until the sale was consummated on April 3, 1928. Admittedly, efforts were made prior to the consummation of the sale to conduct it in such a manner as would result in no tax to the corporation (petitioner).

It is of course lawful for taxpayers to use means and methods which are legal and not tainted with fraud to avoid taxes. Brillen v. State of Wisconsin, 240 U.S. 625; Isham v. United States, 17 Wall. 496. There is no suggestion of fraud here. However we think the efforts of the parties to consummate the sale of the stock without resulting in taxable profits to the corporation wore ineffectual. Prior to the delivery of the so-called “ assignments ” to petitioner’s stockholders, details of which are fully narrated in our findings of fact, all matters which insured the final consummation of the sale had been agreed upon. The form of the sale contract had been determined; the sale price and the terms of payment had been fixed; and the Philadelphia National Bank had been retained as depository to deliver the stock certificates and receive the cash consideration and otherwise act as agent of the parties to the sale to clear the transaction.

This sale agreement to which we are now referring, dated April 2, 1928, states, among other things:

The undersigned * * * who owns or controls 75,000 shares of the capital stock of American Re-Insurance Company, * * * hereby confirms the agreement reached with you. * * * If the foregoing is in accordance with your understanding of the agreement arrived at between us, will you please indicate your acceptance * * *.
Liberty Service Corporation.

Acceptance was noted at the bottom of this letter by the purchasers of the stock, viz., Ream, Wrightson & Co., Chase Securities Corporation, and J. & W. Seligman .& Co.

The so-called “ assignments ” were all prepared by petitioner’s president in advance of the meeting of April 2, and the stockholders were asked to sign these instruments at that meeting.

The letter to Harold J. Boulton under date of March 30, 1928, given in full in our findings of fact, throws considerable light on the manner which was being pursued in the sale of the stock. The letter states:

I enclose herewith 27 forms of assignment of stock. Will yon please sign same as Harold J. Boulton and have same witnessed. L>o not lili up the dates or any other of the blank spaces. The Liberty Service Corporation will be assigning to you 2625 shares of the American Re-Insurance Company stock and you will sell the same by these assignment forms. If the Liberty Service Corporation sold the stock itself the profit would be taxable in its treasury and again to its stockholders when paid out in dividends. We are avoiding this by having the company úÁstrilmte the stock to its stockholders and lettiny them sell. [Italics supplied.]

As a matter of fact no stock was distributed by the petitioner to its stockholders. Petitioner was in no position to make such a distribution. All the stock was held by various banks as collateral security for indebtedness of petitioner to them.

Not until after the sale was completed and the money paid over by the purchasers and part of it used to pay these debts of petitioner was the stock clear and ready to be delivered. When it was released by the payment of petitioner’s indebtedness to the banks which held it as collateral security, it was then delivered, not to the stockholders of petitioner, but to the purchasers — Ream, Wrightson & Co., Chase Securities Corporation, and J. & W. Seligman & Co. So, notwithstanding the forms and devices which were resorted to, we do not think any distribution of the stock in question was ever made by petitioner to its stockholders and consequently we hold that the sale of the stock was by petitioner to the purchasers above named.

In James Duggan, supra, a corporation, acting through its general manager, agreed orally to sell its assets at a fixed price. After the completion of all details which insured the final consummation of the sale, the stockholders, with the intent to avoid the incurring of a tax by the corporation, caused a transfer of the assets to be made without consideration to the president of the corporation, who in turn conveyed to the purchaser and collected the sale price. The Board held that the gain from the sale of the assets was taxable to the corporation and that the efforts to avoid the tax by the methods used were ineffectual.

A situation very similar to the Duggan case was the case of Fred A. Hellebush et al., Trustees, supra. In that case, after the president and the secretary-treasurer of the Blackburn Varnish Co. had negotiated a sale of its assets to the Cook Paint & Varnish Co., the following steps were taken so as to- consummate the sale in such a manner that there would be no tax to the selling corporation, the Blackburn Varnish Co.:

First, there was a special meeting of all the stockholders of the Blackburn Co. in person or by proxy at which a resolution was unanimously adopted authorizing the dissolution and liquidation of the company and the conveyance of its assets to Hellebush and Lippel-man as trustees for the stockholders, with full powers to dispose of the company’s property. The resolution further directed these trustees, after “ final liquidation ” and deduction of expenses, to distribute all remaining property or proceeds in kind pro rata to the stockholders, and contained an instruction to the officers of the company to take the necessary steps to procure its dissolution and the conveyance of its property to the trustees.

Second, following the stockholders’ meeting on the same day, the officers of the Blackburn Co. “ in consideration of the sum of one dollar ($1.00) and other good and valuable considerations ” executed a bill of sale of all the personal property of the Blackburn Co. to the above named trustees for the stockholders, and the corporation by its proper officers likewise on the same day executed and delivered to these trustees, designating them as trustees for the stockholders, its deed conveying to them its real estate in fee simple.

Third, on the same day an agreement was executed for the sale to the Cook Co. of all the assets to which Hellebush and Lippelman, as trustees for the stockholders, had received title from the Blackburn-Varnish Co-. It was signed by the trustees and by Cook, president of the Cook Co., and by the Southern Ohio Savings Bank & Trust Co., escrow agent. The instrument recited that the trustees agreed to convey all property of whatever kind or nature which they had received from the Blackburn Co. except cash and accounts and bills receivable, and further recited the concurrent delivery of a deed to the real estate and of an instrument of conveyance of all other property to the escrow agent, for which a deposit of the sum of $100,000 on the purchase price was made. The Cook Co. agreed to use reasonable diligence to collect the outstanding accounts and bills receivable and to account weekly therefor to the trustees.

We held that notwithstanding the steps taken, the assets were those of the corporation and the profit on the transaction was earned by the corporation, Blackburn Varnish Co., and the assessment of the taxes based thereon was valid. As has already been stated, our decision was affirmed by the United States Circuit Court of Appeals, Sixth Circuit, June 29, 1933.

We do not think there is enough difference between the facts of the instant case and the facts which were present in the Duggan, Hellebush and other cases, cited above, to justify us in making a distinction.

Reviewed by the Board.

Decision-will be entered for respondent.

TRAMMELL dissents.


author: Seawell:

text:
    National Capital Insurance Company of the District of Columbia, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56748.
    Promulgated August 15, 1933.

      C. B. Stovall, C.P.A., and Charles Kershenbaum, C.P.A., for the petitioner.

      L. W. Creason, Esq., for the respondent.
   OPINION.

Seawell:

The major question is whether the amounts of $9,647.52 and $490.22 received by the petitioner from the Royal Insurance Co., Ltd., under the provisions of the reinsurance contract, and the sum of $2,909.59 received for acting as broker in the writing of policies of insurance for other companies, constitute taxable income to the petitioner. No claim is being made by either party that the several amounts have any relation to investment income or gain from the sale or other disposition of property. They differ only as to whether the amounts are taxable as underwriting income. The petitioner claims that the amounts represent commissions earned in its business. We think there is a clear distinction between the amounts received under the reinsurance contract and the fees earned for writing insurance for other companies, and shall first dispose of the former items.

Section 204 (b) of the Revenue Act of 1928 provides that the gross income of an insurance company, such as the petitioner, means “the combined gross amount earned during the taxable year, from investment income and from underwriting income as provided in this subsection, computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners, and (B) gain during the taxable year from the sale or other disposition of property.” “ Underwriting income ”, as used in the section, means the “ premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred.” Subsection (4). Subsection (5) defines the phrase “ Premiums earned on insurance contracts during the taxable year ”, used in subsection (4), to mean an amount computed as follows, so far as the definition is material here:

From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance. * * *

The answer is not controlled by the manner in which the amounts were labeled in the reinsurance contract or set up in petitioner’s books and the annual statement approved by the National Convention of Insurance Commissioners. Doyle v. Mitchell Bros. Co., 247 U.S. 179; Massachusetts Protective Assn., Inc., 18 B.T.A. 810; Home Title Ins. Co. v. United States, 50 Fed. (2d) 107; affd., 285 U.S. 191.

In the case of Central Nat. Fire Ins. Co. v. Omaha Liberty Fire Ins. Co., 194 Iowa 255; 189 N.W. 723, the court, in speaking generally of reinsurance agreements, said:

The commission of tlie agent is taken from the original premium, and the reinsuring company takes its share of the premium subject to such deduction.

Nothing of record here establishes that the parties to the reinsurance contract before us intended a different result. The insurance reinsured with the Royal Insurance Co., Ltd., was subject to the same terms and rates of premium as the original policies, and losses and loss expenses paid by the petitioner were assumed by the rein-surer on a pro rata basis. All losses were to be adjusted by the petitioner alone, except that the Eoyal Insurance Co., Ltd., reserved the right to participate in the settlement of claims in which its interest exceeded that of the petitioner.

Article 8 of the reinsurance contract provided for a “ flat commission ” on net premiums received by the Eoyal Insurance Co., Ltd., from the petitioner, “such commission to cover all expenses, except taxes, Local Board expenses, losses and loss expenses.” Article 9 provided for an additional so-called commission based upon the “ net results ” of the insurance reinsured, computed in the manner set forth in the reinsurance contract. The petitioner was under a contractual obligation to reinsure a portion of its surplus risks with the Eoyal Insurance Co., Ltd., and had the parties to the contract intended that flat commissions, using the term as it is generally understood, should be paid for the mere performance of such a duty, we think clearer language would have been employed. Commissions paid by the petitioner to its agents, and brokers, for services performed in effecting the insurance reinsured with the Eoyal Insurance Co., Ltd., was an expense of the petitioner.

The amounts paid by the Eoyal Insurance Co., Ltd., to the petitioner, pursuant to articles 8 and 9 of the reinsurance contract, as “ commissions ” reimbursed the petitioner for such expenses. The petitioner, however, treated the payments as though they were commissions earned on the reinsurance contracts, instead of, as it should, reimbursement for expenses incurred in connection with the reinsured insurance. We think, and so hold, the amounts should be treated as reimbursement for expenses incurred in connection with the insurance in question.

We think the petitioner’s claim should be denied for other reasons. Section 204 (a) (5) of the Eevenue Act of 1928 specifically provides that in the computation of premiums earned on insurance contracts during the taxable year there shall be deducted from gross premiums on insurance contracts within the same year, “ return premiums and premiums paid for reinsurance.” The petitioner asks us to allow as premiums on reinsurance, the gross premiums, less cancellation and return premiums, on the insurance reinsured with the Eoyal Insurance Co., Ltd., and relieve it of tax on the so-called commissions received.

The statute contemplates the imposition of a tax on earned premiums, in the determination of the amount of which allowance is made for reinsurance premiums. The net premiums on the insurance reinsured by the petitioner in 1928 with the Eoyal Insurance Co., Ltd., were $31,922.06, and had that amount been paid without offsets of any kind, the petitioner would be entitled to deduct it from the premiums written on insurance contracts during 1928 in computing the amount of its earned premiums. The whole of the premiums on reinsurance was not paid. The petitioner deducted the sum of $9,647.52 as “ commission ” when paying the reinsurance premiums, and in addition thereto received from the Eoyal Insurance Co., Ltd., the amount of $490.22 as “ contingent commissions ” on the same reinsurance. These amounts, totaling $10,137.74, we think should be regarded as offsets to, or reductions of, the premiums of $31,922.06 on reinsurance. The remainder of $21,784.32 is all the petitioner is actually out of pocket for premiums on reinsurance paid during the taxable year and is the only amount it is entitled to deduct as “ premiums paid for reinsurance.” The reduction of the amount of premiums on reinsurance results in earned premiums, taxable as underwriting income.

The situation respecting the amount of $2,909.59 received for acting as a broker in writing policies of insurance for other companies is different. Section 204 of the statute limits taxable income of insurance companies, such as the petitioner, to investment income, consisting of interest, dividends and rents; underwriting income, defined as earnings on premiums, computed in a prescribed manner, and gain from the sale or other disposition of property. If the amount is taxable to the petitioner it must be brought within one of the three classifications of income. Massachusetts Protective Assn., Inc., supra. See Bowers v. Lawyers Mortgage Co., 285 U.S. 182. It is clear that the amount is not investment income, underwriting income, or gain from the sale or other disposition of property. Accordingly, we hold that the amount does not constitute taxable income to the petitioner.

The respondent contends, in the alternative, that if we hold, as we have, that all or a substantial part of the amounts in controversy is not taxable, the petitioner is taxable under section 13 of the 1928 Act as an ordinary domestic corporation.

The governing statute contains no definition of insurance company.” The determination of whether a corporation is taxable as an insurance company is controlled by the character of the business actually carried on by it. Bowers v. Lawyers Mortgage Co., supra.

The petitioner’s business was carried on under a name indicating it to be an insurance company; its charter authorized it to underwrite certain specified forms of insurance; and its activities were examined periodically by the Superintendent of Insurance of the District of Columbia to ascertain whether it was conducting its business pursuant to the laws of the District of Columbia governing insurance companies. It derived substantially all of its income from three sources, namely, investment income, underwriting income, and commissions on policies of insurance written for other insurance companies. For 1928 the petitioner reported net investment income of $16,057.40 and net underwriting income of $57,104.07, a total of $73,161.47, the basis for the underwriting income being gross premiums of $105,599.06, exclusive of return premiums and cancellations. Other income reported consisted of $428.75 for commissions on real estate loans and the so-called commissions of $13,047.33 in controversy here. After excluding from the latter sum the amount of $10,137.74, which we have held to be taxable as underwriting income, there remains but $2,909.59, representing commissions for writing insurance for other companies, and the item of $428.75, not actually earned in conducting a strictly insurance business. These amounts are small in comparison with gross premiums and underwriting income. Petitioner’s chief source of income was from the conduct of activities generally known as an insurance business. Other activities carried on by it were merely incidental thereto and are not sufficient, in our opinion, to warrant a holding that the petitioner is not an insurance company other than a life or mutual company within the meaning of the act.

To support his view, the respondent cites Title Guarantee & Trust Co. v. United States, 49 Fed. (2d) 641, and Louisville Title Co. v. Lucas, 27 Fed. (2d) 413. Upon reargument the court reversed itself in the former case, following Home Title Ins. Co. v. United States, supra. The facts in the other case relied upon are distinguishable. There about 42 percent of the corporation’s entire income was derived from the operation of a trustee and bond sale service, which service the court held was, in a large part, a distinct business from the insurance business conducted by it.

One other point remains. In their agreed statement of facts the parties stated that the amount of $5,430.11 included in commissions and brokerage on policies placed is an offset against the amount of $23,749.84 deducted as an expense for compensation paid to agents. As we understand the stipulation, no adjustment need be made on account of the manner in which the amounts were reported. However, if we are in error, the question may be settled under Rule 50.

Reviewed by the Board.

Judgment will be entered umder Bule 50.


author: Van Fossan:

text:
    John M. Longyear, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 47117, 56027, 62410.
    Promulgated August 15, 1933.

      J. F. Dammann, Esq., for the petitioner.

      I. Graff, Esq., for the respondent.
   OPINION.

Van Fossan:

The issue to be determined is whether or not the payments made by the trustees of John M. Longyear, deceased, to the petitioner’s divorced wife and to the guardians and trustees of the two minor children named in the findings of fact are taxable as income of the petitioner.

It is not contended that petitioner’s wife or children acquired any property right or any right to income under the will of Longyear, senior. It is clear that the wife did not. The sums paid to her and to the trustees for the children were paid pursuant to the agreement of December 29,1925, and the court decree directing settlement of the pending suit in accordance with that agreement. There had been two previous agreements between petitioner and Elizabeth B. Long-year — the Mexican and Nevada agreements — but these were superseded by that entered into in Michigan and approved by the court in that state, which court we take it, in view of that being the place of probate of the will, properly had jurisdiction in the matter.

In our opinion the agreement to pay Elizabeth B. Longyear certain sums was merely an assignment of income which in the first instance was income to petitioner and taxable to him, as in Ormsby McKnight Mitchel, 1 B.T.A. 143; affd., 15 Fed. (2d) 287; Marion Stone Burt Lansill, 17 B.T.A. 413; affd., 58 Fed. (2d) 512; Lucas v. Earl, 281 U.S. 111; Burnet v. Leininger, 285 U.S. 136. Petitioner did not divest himself of his property right in any part of the corpus of his father’s estate through the creation of a trust fund or otherwise. He agreed merely that a portion of his share of the estate “ shall stand as security for the said note ” that he executed. The situation here is very much like that in Frank P. Welch, 12 B.T.A. 800, where the taxpayer entered into a separation agreement with his wife, agreeing to pay her a specified sum annually and in order that the payments “ shall be secured ” he deposited certain securities with a bank. We said:

The situation is to be distinguished from one where a trust fund is set up for the benefit of the wife and the husband has no interest in the income from the fund. The agreement which we are here considering was no more than one for maintenance and support, with collateral deposited as security for the payment. We are accordingly of the opinion that the interest received from the bonds held under the agreement between petitioner and his wife and the bank constitutes income to the petitioner.

Nor can any of tbe payments made to petitioner’s former wife be deducted from bis gross income as interest on indebtedness. While, as heretofore stated, the Michigan agreement superseded the earlier ones, they are referred to therein and show clearly that the payments were intended by the parties to be in lieu of alimony. Alimony is not founded in contract as is an ordinary debt, but grows out of an obligation imposed on the husband. It is an award to the wife in the enforcement of a marital duty. For this reason it was held in Turner v. Turner, 108 Fed. 785, that proceedings to collect alimony could not be enjoined by a bankruptcy court. See also Lynde v. Lynde, 52 Atl. 694; Noyes v. Hubbard, 23 Atl. 727. The interest payments in question are payable as a part of the agreement made in lieu of an alimony award and, therefore, are not deductible as interest on an indebtedness.

The distributive shares of the children are in a different category. They arose under trusts created by petitioner whereby he irrevocably alienated in each case a one-eighth part of all his right, title, and interest in and to his “ family share ” of the estate, with provisions that the portion so assigned to the trustees should go to the children upon termination of the trusts and with further provisions for cross-remainders in the event of the death of either child. By the assignment in trust petitioner divested himself of all interest in the portion assigned, had no control over, and could not repossess either the corpus or income. Under these conditions, whether the payments made to the trustees for the children were out of corpus or income of the decedent’s estate, they were not taxable to petitioner. O'Malley-Keyes v. Eaton, 24 Fed. (2d) 436; Young v. Gnichtel, 28 Fed. (2d) 789; S. A. Lynch, 23 B.T.A. 435.

Reviewed by the Board.

Decision will be entered under Rule 50.


author: Black.

text:
    Holmby Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51303.
    Promulgated August 15, 1933.

      A. Calder Mackay, Esq., and Thomas R. Dempsey, Esq., for the petitioner.

      Alva C. Baird, Esq., for the respondent.
   OPINION.

Black.

The problem here is to determine the correct amount of either a gain or a loss upon the liquidation of the old company, which was completed on or about December 24, 1926, at which time it was disincorporated and petitioner, a holding corporation, received $5,010,293.09. The problem involves two questions — (1) whether the two distributions authorized on the 10th and 17th of November, 1926, and amounting in the aggregate to $3,073,775.03, were either “ amounts distributed in complete liquidation ” or “ amounts distributed in partial liquidation ” as those terms are used in section 201 (c) and as the latter term is defined in section 201 (h) of the Revenue Act of 1926, or whether such distributions were ordinary dividends as the term “ dividend ” is defined in section 201 (a) of the same act; and (2) whether the respondent erred in determining the cost to petitioner of the 30,000 shares of The Broadway Department Store purchased by it on or about August 1, 1922. The applicable sections of the Revenue Act of 1926 are set out in the margin. There is no dispute between the parties in regard to the amount of $5,010,293.09 received by petitioner on December 24, 1926, being a distribution in the liquidation of a corporation, and hence within section 201 (c), supra,; or in regard to the full amount of either a gain or a loss, whichever it may be, being recognizable under section 203 without the application of any of the several exceptions mentioned therein.

As set out in our findings the petitioner in its return claimed a loss of $1,191,201.91 on the ground that the two dividends declared on November 10, 1926, and November 17, 1926, were ordinary dividends within the meaning of the term “ dividend ” as defined in section 201 (a) of the statute, and that the cost to it of the 30,000 shares of. The Broadway Department Store was $99.41 per share, or $2,982,300, because of the applicability to the transaction of section 204 (a) (8) of the Bevenue Act of 1926, whereas the respondent accepted the petitioner’s statement as to the cost of the 30,000 shares but determined that the two dividends “ were but steps in a plan of complete liquidation * * * within the meaning of section 201 (c) of the Eevenue Act of 1926 ” and that instead of a loss, petitioner realized a profit of $1,882,573.12.

Petitioner contends, as has already been stated, that the two dividends in question were ordinary dividends and within section 201 (a), and now contends that the cost to it of the 30,000 shares of The Broadway Department Store on or about August 1, 1922, was $135 per share, or $4,050,000, instead of the $99.41 used by petitioner in its income tax return. This latter contention is based on the claim that petitioner erred when it treated the transaction as coming within the provisions of section 204 (a) (8), Eevenue Act of 1926. Petitioner now contends that because of the parenthetical clause in section 204 (a) (8), viz., “ (other than stock or securities in a corporation a party to a reorganization) ”, the transaction did not fall within the scope of section 204 (a) (8) and hence the basis for gain or loss of these 30,000 shares of stock in The Broadway Department Store is their cost to petitioner.

Petitioner’s contention that section 204 (a) (8), Eevenue Act of 1926, does not apply, and that cost to petitioner of the stock in the old company should be the basis for gain or loss in final liquidation, is sustained. Stires Corp., 28 B.T.A. 1.

Petitioner contends that on this basis of cost it sustained a loss on the liquidation of The Broadway Department Store of $2,258,-901.91, computed as follows:

Oost of 30,000 shares at $136 per share_$4, 050, 000. 00
Cost 19,995 shares at $161 per share_ 3, 219,195. 00
Total cost of all' shares_ 7, 269,195. 00
Amount received on or about Dee. 24, 1926_ 5, 010, 293.09
Loss on liquidation___ 2,258, 901.91

If petitioner is correct in both its contentions, it has overpaid its taxes for the year in question in a considerable amount. If petitioner is wrong in its contention as to the dividend issue, but is right as to the issue of the cost basis of the 30,000 shares of stock in the old company, there is a deficiency, but not in as large an amount as has been determined by respondent.

We shall first consider question number (1) as stated in the opening paragraph of this opinion.

A distribution may come within the broad definition of a “ dividend ” as defined in section 201(a), supra, and yet at the same time be the very transaction specifically provided for in section 201(c) of the statute. Langstaff v. Lucas, 9 Fed. (2d) 691; affd., 13 Fed. (2d) 1022; Hellmich v. Hellman, 276 U.S. 233.

Petitioner in support of its contention that the two distributions in question were ordinary rather than liquidating dividends, relies primarily upon the fact that no resolution of the stockholders to dissolve the corporation had been adopted until November 22-, 1926, which date was subsequent to the date of declaration of the two dividends, citing E. G. Perry, 9 B.T.A. "796, and Deposit Trust & Savings Bank, Executor, 11 B.T.A. 706. We pause to say that both those decisions were prior to the decision of the Supreme Court in Hellmieh v. Heilman, supra, and most of the other Board and court cases hereinafter cited, and we do not think they should be longer followed.

We have held that resolutions of stockholders or directors of a corporation to liquidate the corporation as soon as it could be done economically or that “ there be and hereby is declared a liquidating dividend ” does not necessarily stamp such or subsequent distributions with the name of liquidating dividends, if they are not such in fact. See W. E. Guild, 19 B.T.A. 1186; Estate of Rudolph F. Robe, Sr., 25 B.T.A. 1242. In the latter case we said “ In determining the nature of a distribution, the facts of the case control.” In the former case we also said:

Liquidation is not a technical status which can be assumed or discarded at will by a corporation by the adoption of a resolution by its stockholders, but an existing condition brought about by affirmative action, the normal and necessary result of which is the winding up of the corporate business.

In Milton Tootle, Jr., 20 B.T.A. 892, a certain dividend of $25 per share, declared on December 15, 1925, after the corporation had on November 24, 1925, sold all of its assets except cash and a certain refund claim, and had agreed with the purchaser to liquidate within one year, but before any formal resolution to dissolve had been adopted, was held to constitute “ the first step in the liquidation ” of the corporation. We there distinguished the Perry case as establishing no rule applicable to such a situation. In affirming the Board, the Eighth Circuit, at 58 Fed. (2d) 576, 580, said in part:

The second heading of the argument is that this could not logically be treated as a distribution in liquidation, “ since no corporate action for dissolution had been taken.” It is contended that a corporation cannot be “ in dissolution ” until" after corporate action to that end by a stockholders’ meeting properly convened. "Without close examination, and solely for the purpose of this controversy, it might be conceded that a corporation is not “ in dissolution ” until proper action therefor has been taken as required by the governing law. This does not help petitioners. Whatever complaint, if any, the State of Delaware or interested creditors might have made is not of concern here. The question here is not what the corporation could do but what it did. It may or may not be that the corporation could not legally distribute its assets until after it had complied with certain requirements of its parent state, but it did do that very thing, and when it did so it created the situation to which the national taxing statute directly applied.

In Canal-Commercial Trust & Savings Bank v. Commissioner, 63 Fed. (2d) 619; affirming 22 B.T.A. 541, the Fifth Circuit, in holding a certain distribution to be one in liquidation, rather than an ordinary dividend, said:

Proceedings actually begun to dissolve tbe corporation or formal action taken to liquidate it are but evidentiary and not indispensable. Tootle v. Commissioner, 68 Fed. (2d) 676.

Again, the court, in commenting upon the fact that the dividend in question was paid out of surplus instead of capital, said:

The tact that the distribution is wholly from surplus and not from capital, and therefore lawful as a dividend is only evidence. In Hellmioh v. Heilman, and Tootle v. Commissioner, supra, the distribution was wholly from profits yet held to be one in liquidation.

Petitioner in its brief contends that because the bill of sale was not signed by all the parties until November 20, 1926, the actual sale did not take place until that time. We do not think it is important to the question we have here to decide, to determine whether the sale of assets by the old company to the new company was completed when the bill of sale was signed and delivered, November 20, 1926, or when the option to purchase was exercised, October 29,1926. The question we have to decide is not the question of when the sale was completed (the tax here involved is not one laid on that particular transaction), but whether the two dividends in question were declared in the ordinary course of business with intent to maintain the old company as a going concern or as a part of a plan to quit business and liquidate its remaining assets. Cf. 0'cmal-C’ommeroial Trust do Saving Bank v. Commissioner, supra.

In Gossett v. Commissioner, 59 Fed. (2d) 365, affirming 22 B.T.A. 1279, the court said:

Certainly at the time of the payment of the dividend in question the corporation was not a going concern, in the legal sense, as its dissolution was already under way. It makes no difference what the directors called it when the dividend was declared, nor does the fact that subsequent dividends were termed “liquidating” dividends when this particular dividend, was not so termed alter its character. The question of whether it was a “ partial liquidating dividend ” is to be determined, not from what it was called, but by the facts as shown by the record. The record shows that it was a very unusual dividend, and entirely outside of the due course of the business of the corporation.
The decision of the Commissioner and the Board that it was a “ partial liquidating ” dividend was clearly right * * *.

The dividend in the Gossett case was declared after the stockholders had passed a resolution to dissolve, but, as we have already shown, such resolutions are only evidentiary and not indispensable. Canal-Commercial Trust & Savings Bank v. Commissioner, supra.

At the time the distributions in the instant case were authorized the distributing company had sold the major portion of its assets, including the business, good will, and corporate name, and simultaneously with the declaration of the second distribution in question, its board of directors authorized the sale to petitioner of the remaining assets of The Broadway Department Store. The dividends could not have been paid until part of the selling price had been received. The dividend of $50 per share, declared November 10, 1926, was paid for the most part out of the first money received from the sale of the assets under the contract with Dillon, Read & Co. Cf. Tootle v. Commissioner, supra.

In a matter of this hind the whole of the transactions must be viewed together from the beginning to the end, and in this view of the transactions we hold that each of the two distributions in question was distributed “ in partial liquidation of a corporation ” as that term is used in section 201 (c), supra, and defined in subdivision (h) of the same section as being “ one of a series of distributions in complete cancellation or redemption of all ” of the stock of The Broadway Department Store, which “cancellation or redemption” occurred on or about December 24, 1926, at which time all the remaining assets were distributed and the corporation was dis-incorporated by duly constituted proceedings in law.

Consideration will now be given to question number (2) as stated in the opening paragraph of this opinion.

On or about August 1, 1922, petitioner issued 79,788 shares of its authorized capital stock of 80,000 shares to Arthur Letts and assumed liabilities in the amount of $601,600 in exchange for shares of various corporations enumerated in our findings of fact., Among these shares were 30,000 shares of The Broadway Department Store. What was the cost to petitioner of these 30,000 shares ? It is apparent from the statement attached to petitioner’s return that had it not been for petitioner’s misconception of the applicability of section 204 (a) (8) of the Bevenue Act of 1926, it would have claimed a cost of $4,050,000 or $135 per share; but, thinking that section applicable, it claimed only a cost of $2,982,300, or $99.41 per share (cost to transferor, Arthur Letts). The latter amount was accepted by the respondent as the cost of the stock in his determination of the deficiency. The respondent’s determination is prima facie correct and the burden of disproving it is upon petitioner. Austin Co. v. Commissioner, 35 Fed. (2d) 910; Wickwire v. Reinecke, 275 U.S. 101.

In Seymour Mfg. Co., 19 B.T.A. 1280, 1285, we said: “The cost of property acquired for stock is the fair market value ’ of the stock.” To the same effect see Bay City Fuel Co., 20 B.T.A. 450; Hershey Mfg. Co., 14 B.T.A. 867, 872. In order, therefore, to determine the cost to petitioner of the 30,000 shares of The Broadway Department Store, the proper procedure would he to determine the fair market value of petitioner’s 79,788 shares of stock on the basic date, and then determine how many of such shares were issued for the 30,000 shares of the old company. The latter factor may be ascertained from the allocation made by petitioner on its books in 1922, which is set out in full in our findings. It was stipulated that the transaction was set up on petitioner’s books in the manner indicated in our findings of fact and there is nothing in the record to suggest that these values thus placed on petitioner’s books were inflated. Cf. H. H. Champlin, 28 B.T.A. 264; H. H. Blumenthal, 21 B.T.A. 901.

There were no sales of petitioner’s stock (Holmby Corporation) at or about the basic date. The stock was closely held and not traded on any exchange or over the counter market. Under such circumstances it is proper to consider evidence tending to prove the fair market value, if any, of the assets acquired by petitioner. Ambassador Petroleum Co., 28 B.T.A. 868; Commissioner v. Swenson, 56 Fed. (2d) 544; Melville Hanscom et al., Executors, 24 B.T.A. 173; Herman Adaskin, 8 B.T.A. 460. Cf. also Walls v. Commissioner, 60 Fed. (2d) 347; Mount v. Commissioner, 48 Fed. (2d) 550; Patterson v. Commissioner, 42 Fed. (2d) 148; O'Meara v. Commissioner, 34 Fed. (2d) 390; and Mead Realty Co., 21 B.T.A. 1062.

We think that the evidence fully supports petitioner’s claim that the stock of the old company had a fair market value at the time it was acquired by petitioner in 1922 of $135 per share. The principal witness who testified on this point was Malcolm McNaughten. He was president of the new company and vice president of the old company, and was a director in petitioner. He testified that his opinion was that the stock of the old company had a fair market value of $135 a share on August 1, 1922, and that he believed this valuation was conservative. He testified that his opinion as to value was based on the fact that the book value of the tangible assets underlying the shares at that date was $125 per share; that the average net earnings of the corporation during the preceding four years were $13 per share and that the net earnings for 1922 were about $20 per share.

In view of these facts, which were not contradicted by any evidence introduced by respondent, it is not difficult to believe that the stock of the old company had a fair market value of $135 per share at the basic date and that the stock of the Holmby Corporation (petitioner) was worth par, the price for which it was issued in payment of the 30,000 shares of stock in The Broadway Department Store (here involved) and other assets not involved in this proceeding.

As to the value of petitioner’s stock, the witness McNaughten testified in part as follows:

Q. Did tlie stock of the Holmby Corporation have a fair market value at the time of issue?
A. I have definitely considered it worth par, or $100 a share.
Q. In your opinion, it was worth $100 a share? '
A. Tes.

It is not difficult to believe that stock in the largest and one of the best known department stores in Los Angeles, with an earning •power of $13 per share for the four years prior to the year of sale and with earnings of $20 in the year of sale, and with $125 worth of tangible assets behind each share, had a fair market value of $135 per share on the date in question. We think this valuation is confirmed by the fact that four years later the entire stock of the old company was liquidated at a price of upwards of $161 per share ($8,084,068.12 which we hold was the amount received in liquidation divided by 49,995 shares, the amount of stock owned by the petitioner in The Broadway Department Store at the time of its liquidation in 1926).

Accordingly, respondent, in a redetermination of the profit resulting from the liquidation of these particular 30,000 shares of stock in 1926, should use as a basis of cost thereof the sum of $135 per share.

Eeviewed by the Board.

Decision will be entered under Bule 50.

       Sec. 201. (a) The term “ dividend ” when used in this title * * * means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.
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      (c) 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 exchange shall be determined under section 202, but shaU be recognized only to the extent provided in section 203. * * *
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      (h) As used in this section 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.