Hotel Charlevoix Co. v. Commissioner

*170 The proceeding against the petitioner, Hotel Charlevoix Company, was brought to redetermine the deficiency in its income taxes for the year 1922 in the amount of $11,040.22. The proceedings against the petitioners, Ben B. Jacob and Charles J. Higgins, were brought to hold them liable as transferees of the assets of the Hotel Charlevoix Company for the amount of the tax determined by the respondent to be due from that corporation. The three cases were *171 consolidated for hearing and decision. The Hotel Charlevoix Company will be referred to in this report as "the petitioner," except where indicated otherwise by the context.

The petitioner, Hotel Charlevoix Company, alleges the following errors:

(1) The respondent erred in assessing a tax for the year 1922 on a transaction by which the petitioner sold its assets and its stockholders sold their stock to the Realty Mortgage Corporation, instead of for the year 1921 when the transaction actually occurred.

(2) The statute of limitation bars the collection of a tax for the year 1921.

*2157 The petitioners, Ben B. Jacob and Charles J. Higgins, allege the following errors:

(1) Section 280 of the Revenue Act of 1926 is unconstitutional.

(2) The respondent erred in proposing to assess a tax against the petitioners as transferees for the reason that the petitioners neither possess nor have ever received from or through the Hotel Charlevoix Company any assets other than those disbursed by them in payment of the said company's obligations, except in payment for stock of the Hotel Charlevoix Company formerly owned by them.

(3) The respondent erred in proposing to assess such taxes against the petitioners as transferees because the primary liability of the Hotel Charlevoix Company for the payment of such taxes has never been finally determined.

FINDINGS OF FACT.

The petitioner, Hotel Charlevoix Company, is a Michigan corporation, organized September 23, 1928, under the corporate name of Woodward & Watson Realty Company, with a capital stock of $5,000. On April 3, 1920, it increased its capital stock to $100,000 with a par value of $100 per share, of which amount $96,000 was actually paid in. On February 7, 1921, the petitioner changed its corporate name to Hotel*2158 Charlevoix Company.

On January 31, 1920, the Grinnell Realty Company entered into a contract with the petitioner under its original name of Woodward & Watson Realty Company for the sale of the Hotel Charlevoix situated on Elizabeth Street, West, in the city of Detroit, Mich. The purchase price was $750,000, of which $50,000 was in payment of the furnishings and equipment of the hotel. Five thousand dollars was paid in cash, $95,000 was to be paid on February 2, 1920, and the remainder in installments of $50,000 each, payable semiannually until the entire purchase price, together with interest *172 thereon, was paid, but not later than six and one-half years from February 1, 1920. The petitioner took possession of the property and proceeded to operate the Hotel Charlevoix.

On June 15, 1921, a meeting of the petitioner's stockholders was held at which its secretary, Leon H. Hamburger, was authorized to enter into negotiations with the Realty Mortgage Corporation of Detroit, Mich., for the sale of the petitioner's equity in the Grinnell contract of purchase covering the Hotel Charlevoix property. Later, Leon H. Hamburger secured by law the change of his name to Leon H. *2159 Harmon, by which appellation he will be known hereafter. On June 23, 1921, Harmon reported to the board of directors of the petitioner that he had negotiated for such sale and on behalf of the petitioner had executed in triplicate an assignment of its interest in the Grinnell contract. The petitioner's board of directors thereupon duly ratified and confirmed Harmon's action, it appearing that the assignment had been duly made to the Realty Mortgage Company. Harmon attached a copy of the assignment to the petitioner's own copy of the Grinnell contract. At the same time the stockholders of the petitioner corporation, Ben B. Jacob, Charles J. Higgins, A. Jacob, A. S. Traxler, and Leo Zuckerman sold their common stock in the petitioner to the Realty Mortgage Company. At that time the petitioner's copy of the Grinnell contract with the assignment attached thereto was delivered to the Realty Mortgage Company. The purchase price paid by the Realty Mortgage Company was $240,000 and was applied as follows: $64,172.56 to the Detroit Mortgage Company; $47,108.89 for collateral loans, together with interest thereon amounting to $2,783.76; $18,023.33 for sundry debts owed by the petitioner; *2160 $11,911.46 for the repayment of advances made by Ben B. Jacob and Charles J. Higgins, and the remaining sum of $96,000 to the several stockholders in payment for their stock. The stockholders held common stock in the following amounts:

Later, an item of $699.45, representing advances made by Jacob and Higgins, was credited to their joint account. The Realty Mortgage Company found it impossible to pay the entire amount in cash at the time of its purchase of the petitioner's interest in the Grinnell contract and consequently made installment payments thereof during 1921, 1922, and January and February of 1923. It gave its notes for $20,000 to Leo Zuckerman in payment for his *173 stock. Zuckerman assigned $19,500 of such notes to one Zimetbaum prior to October 28, 1921. During the year 1921 the Realty Mortgage Company paid $42,990.85 on its purchase money obligations; during 1922, $61,620.06 thereof; and during January and February of 1923, $4,000.

The minutes of the Realty Mortgage Company show that on June 21, 1921, the purchase of petitioner's*2161 equity in the Hotel Charlevoix property was authorized for the price of $240,000, provided the payments therefor could be spread over a term of years. The minutes of the same board of directors for September 20, 1921, record the report of its president that the Hotel Charlevoix transaction had been satisfactorily concluded. Vouchers and bookkeeping entries of the Realty Mortgage Company reflect the purchase in June, 1921, of the petitioner's interest in the Grinnell contract and the purchase of capital stock of the petitioner from its stockholders made concurrently. Such vouchers and entries aggregate the $240,000 named as the purchase price. Some entries, erroneous from an accounting viewpoint, appear on the books but later corresponding crediting items were entered.

The Realty Mortgage Company took possession of Hotel Charlevoix and continued to operate it as a hotel, under its original name, and through Matthews and Fisher, a firm hitherto unconnected with the enterprise. In order to facilitate such operation the corporate existence of the petitioner was continued and its stockholders retained as nominal stockholders of record on behalf of the Realty Mortgage Company, although*2162 their holdings had been sold to that company. No further meetings of the petitioner were held except those necessary to enter formal corporate actions. The petitioner was dissolved in October, 1922.

The Hotel Charlevoix was being operated at a loss and it was determined to convert the hotel into an office building. In order to finance that operation approximately $100,000 was raised and negotiations were entered into with the Detroit Trust Company to secure a loan in the form of a bond issue for the purpose of completing the payment to the Grinnell Realty Company and of establishing an enterprise on a sound financial basis. The negotiations consumed considerable time, but finally the Detroit Trust Company agreed to underwrite the bond issue providing that a new corporation be formed to take title to the hotel property. This was done in order to avoid certain legal complications and for the further reason that the execution of a mortgage by the Realty Mortgage Company, which had from 1,000 to 1,500 stockholders, would involve a lengthy and cumbersome procedure. Accordingly, on June 27, 1922, the officers of the Realty Mortgage Company or ganized on its behalf a *174 *2163 new corporation, named the Park Boulevard Building Company, under the laws of Michigan and with a paid-in capital of $100,000. The officers of the Mortgage Company became stockholders of the new corporation but acted as trustees for the Mortgage Company. Thereupon they removed from the Grinnell contract the assignment made by the petitioner through its secretary on June 23, 1921, and substituted therefor an assignment to the Park Boulevard Building Company executed by the petitioner by its president and secretary and dated July 29, 1922. The Park Boulevard Building Company paid nothing for such assignment. The deficiency letter is dated October 12, 1926.

OPINION.

VAN FOSSAN: The determinative issue in these cases is whether the transaction, under the terms of which Hotel Charlevoix Company sold its assets to Realty Mortgage Company and Higgins and Jacob sold their stock in the hotel company to the same purchaser, occurred in 1921 or 1922. Counsel for the Government concedes that if it occurred in 1921 there is no liability on the part of any of the petitioners as no deficiencies were determined for that year.

The evidence, which consists of voluminous oral testimony, canceled*2164 checks, vouchers, auditor's reports, corporate minutes, and other written evidence, together with the assignment executed by the Hotel Charlevoix Company to Realty Mortgage Company dated June 23, 1921, and transferring the right, title and interest of the petitioner, Hotel Charlevoix Company, in and to the Grinnell Realty Company contract, clearly establishes that the entire transaction took place in June, 1921. The assignment was delivered to and accepted by the Realty Mortgage Company and that company proceeded to take possession of and operate the hotel until its subsequent sale to the Park Boulevard Building Company. The purchaser forthwith proceeded to adjust and cancel the loans and indebtednesses incurred by the previous management and to pay the amounts due under the assignment agreement on account of advances previously made by petitioners, Jacob and Higgins.

Under the terms of the agreement entered into in June, 1921, the Realty Mortgage Company also purchased the entire outstanding stock of Hotel Charlevoix Company, including that owned by petitioners Higgins and Jacob. The stock was paid for during 1921, 1922 and 1923. The fact that the purchaser failed to pay the*2165 entire purchase price at the time of sale, or even during the year 1921, is of no material significance, however. The sale was completed in June, 1921, and if any tax liability arose it was fixed at that time.

*175 The entire transaction involved in these cases having taken place in June, 1921, under respondent's concession there is no liability on the part of any of the petitioners.

Judgment will be entered for the petitioners.