Dandridge v. Commissioner

*421 These proceedings involve the determination by the Commissioner of deficiencies in the 1920 income tax of the respective petitioners as follows:

The deficiencies arise from the ruling of the Commissioner that certain amounts reported by the petitioners in their respective returns on dividends received from a corporation, Martin-Dandridge Dry Goods Co., as subject only to surtax, were liquidating dividends and *422 subject to both normal and surtax. The first 15 paragraphs of the findings of fact are incorporated as stipulated*3810 by the parties.

FINDINGS OF FACT.

1. The Martin-Bragg Dry Goods Co. was duly incorporated under and by virtue of the laws of the State of Texas, on July 1, 1910, with a capital stock of Twenty Thousand ($20,000) Dollars divided into two hundred (200) shares of the par value of One Hundred ($100) Dollars per share, with its principal office and place of business at Hillsboro, Texas.

2. The said Martin-Bragg Dry Goods Company amended its charter as authorized by law, on February 7, 1914, which said amendment increased the capital stock of the said corporation from Twenty Thousand ($20,000) Dollars to Thirty Thousand ($30,000) Dollars

3. On April 27, 1917, the said Martin-Bragg Dry Goods Company again amended its charter as provided by law, which said amendment changed the name of said corporation from Martin-Bragg Dry Goods Company to Martin-Dandridge Dry Goods Company.

4. In the year 1920, and until dissolution in 1920, the capital stock in the said Martin-Dandridge Dry Goods Company was owned as follows:

S. B. Dandridge 35 shares of the par value of $3,500,

*3811 which was all of the authorized and all of the outstanding capital stock of said corporation.

5. In June, 1920, and prior to June 30, 1920, the stockholders of the said Martin-Dandridge Dry Goods Company met in a called meeting and passed the following resolution and took action as set out in the following minutes which are hereinafter copied in full:

June 1920

The stockholders of the Martin Dandridge D.G. Co. met in call meeting to consider the advisability of dissolving the corporation and forming a Partnership. Meeting call to order by President J. W. Martin. All stockholders answering to role call, the matter of desolving was thoroughly discussed. After which motion was made and unanimously adopted, that the Martin Dandridge D.G. Co. resolve their corporation on June 30th forming a Partnership known as the Martin Dandridge Co. Same to take over all the assets of the Martin-Dandridge D.G. Co. and assume all the obligations of same. Motion made and carried that the officers of the corporation be the officers of the Partnership in the same capacity. Motion made and carried that all surplus and profits be divided, in proportion to the amount of each ones holdings in*3812 the company after which adjournment was taken. S. B. Dandridge Secretary.

6. In the year 1920 and prior to the dissolution of the said corporation in the year 1920, the officers and directors of the said corporation were as follows:

*423 J. W. Martin, President, Treasurer, and Director.

7. These officers and directors were all of the stockholders of the said corporation in the year 1920.

8. Under the authority of the minutes which have been set out above, under stipulation number five, the officers of the said corporation first ascertained the net income and added it to the earned surplus account on the books of the corporation and ascertained the total amount of the earned surplus to June 30, 1920.

9. The officers of the said corporation then set up on the books of the corporation the following closing journal entries:

*3814 *425 10. On June 30, 1920, the stockholders in the said corporation formed a partnership under the firm name of Martin-Dandridge Company, same taking over all the assets and assuming all of the *426 liabilities of the said corporation, Martin-Dandridge Dry Goods Company.

11. Under the authority of the minutes which have been set out above under stipulation number five, the officers of the said corporation then proceeded to dissolve the said corporation as provided by law, which dissolution was formally effected on July 10, 1920.

12. Stockholders, S. B. Dandridge and J. W. Martin, were married, living with their wives and domiciled in the State of Texas during the year 1920, and for the year 1920 these stockholders each reported one-half of the dividends credited to them as above from earned surplus, and the wife of each of them reported as dividends one-half of the dividends credited to her husband from earned surplus on the books of the said corporation as above. In each case these dividends were reported and treated as dividends received from a domestic corporation and surtax was computed on same.

13. Stockholder, G. W. Martin, for the calendar year*3815 1920 filed his individual income tax return, reporting therein as a dividend from a domestic corporation the amount which was credited to him on the said books on June 30, 1920, from earned surplus, and he computed and paid the surtax on same.

14. The amount of earned surplus of the said corporation as at June 30, 1920, was correctly stated in the Revenue Agent's report on the Martin-Dandridge Dry Goods Company, dated May 29, 1925, case No. 15241, to be Thirty-six Thousand Seven Hundred Sixty-eight and 90/100 ($36,768.90) Dollars and this amount was distributed to the said stockholders as set out in the said Revenue Agent's report correctly as follows:

15. The only question involved in this case is whether the dividends paid as above from earned surplus were liquidating dividends as the Commissioner contends and subject to both normal taxes and surtaxes, or whether these dividends were ordinary dividends as contended by petitioners and subject only to the graduated surtaxes.

16. All of the earned surplus of the Martin-Dandridge Dry Goods Company as at June 30, 1920, was accumulated*3816 after February 28, 1913, except an amount of $5,013.04. Such later amount was accumulated prior to January 1, 1916, the date of accumulation not being shown.

OPINION.

PHILLIPS: The sole question involved in the present proceeding is whether certain dividends, consisting of all surplus and profits of *427 the Martin-Dandridge Dry Goods Co. on June 30, 1920, which dividends were declared on or before that date, are subject to both the surtax and normal tax or subject only to surtax. The question arises under the provisions of section 201, subdivisions (a), (b), and (c), and section 216, subdivision (a) of the Revenue Act of 1918.

It is contended by petitioner that the dividends in question were declared prior to the dissolution of the corporation and are, therefore, not liquidating dividends; while the respondent claimed them to be in liquidation of the corporation and subject to both surtax and normal tax.

The preliminary step in the dissolution of a corporation is a proper resolution by the stockholders to dissolve. Thereafter any distribution of assets pursuant to that resolution may be said to be a distribution in the course of liquidation of the corporation. *3817 The record establishes that the stockholders' meeting was called prior to June 30, 1920, to consider the advisability of dissolving the corporation. Acting on the purpose for which they were called, the stockholders resolved to dissolve the corporation on June 30, 1920, and form a partnership, and to transfer to the partnership all the assets of the corporation. At the same meeting they determined that all of the surplus and profits be divided in proportion to the amount of each one's holdings in the corporation. These actions were consistent with the purpose of the meeting, i.e., to consider a dissolution of the corporation. On June 30, 1920, the stockholders of said corporation formed a partnership. On the same date all the stock had been turned in for cancellation. On June 30th the officers of the corporation under authority conferred upon them by the stockholders' meeting, made closing journal entries to distribute all of the surplus of the corporation among the stockholders, and to transfer to the partnership the remaining assets and liabilities of the corporation. It seems, therefore, that on June 30, 1920, liquidation was, in fact, accomplished, and the fact that the*3818 corporation was not formally dissolved as provided by law until July 10, 1920, does not affect the character of the dividend declared from surplus as a liquidating dividend. Whether we look to the situation that existed when the dividend was declared or at the time it was paid, it is clear that the distribution of surplus and profits was not merely in anticipation of liquidation and dissolution, but was a step taken while the corporation was in the process of liquidation and dissolution and is a liquidating dividend subject to both surtax and normal tax. ; 5 Am.Fed. Tax Rep. 6125; ; ; .

Reviewed by the Board.

Decision will be entered under Rule 50.