Rabe v. Commissioner

*1242 The Commissioner has determined deficiencies in income tax against Rudolph F. Rabe, Sr., for the year 1925 and the period January 1, 1926, to September 27, 1926, in the respective amounts of $1,307.05 and $1,393.36. The errors assigned are that the Commissioner has included in the gross income of Rudolph F. Rabe, Sr., for the year 1925, $15,825 as a dividend and a like amount for the period January 1, to September 27, 1926, as a dividend.

FINDINGS OF FACT.

Rudolph F. Rabe, Sr., was a lawyer. He*1408 died on September 27, 1926. In 1917 he transferred some property to the Corvus Realty Company, a corporation, for all of its capital stock, consisting of 1,075 shares, each having a par value of $50. He then gave nine shares to his son, Rudolph, Jr., nine shares to his son-in-law, R. A. Beyer, and two shares to his law partner, Davis. The four stockholders became directors. Davis retired as a director on May 19, *1243 1925, and was succeeded by Caroline A. Beyer, daughter of Rudolph F. Rabe, Sr., to whom he gave his stock.

The property conveyed to the corporation in 1917 consisted of two apartment houses in West New York, one in West Hoboken, and twenty-three vacant lots in West New York. These properties were owned by Rabe subject to mortgages. His equity was then worth $52,750.

The directors of the corporation held a special meeting on July 3, 1925. The material part of the minutes of this meeting is as follows:

The chairman then reviewed the activities of the Company and stated that subject to the approval of the Directors, it would be the policy to liquidate the assets of the Corporation and distribute the proceeds among the stockholders as and when such liquidation*1409 could be conveniently effected without loss to the corporation. He stated that there was immediately available from the assets of the corporation in cash a sum sufficient to pay a liquidating dividend of 30% on the outstanding capital stock.

On Motion, duly made and seconded, it was:

UNANIMOUSLY RESOLVED that there be and hereby is declared a liquidating dividend of $15 per share on 1075 shares of the capital stock of this corporation, payable in cash to stockholders of record on July 10th 1925 and that the officers of the Corporation be and they hereby are directed to pay the said dividend to stockholders of record on the date hereinbefore mentioned.

The dividend thus declared was paid in 1925. Rudolph F. Rabe, Sr., received $15,825 as his share.

The minutes of a meeting of the directors of the corporation held on February 3, 1926, are in part as follows: "On motion of R. A. Beyer, the Directors declared a liquidating dividend of 30%, taking $16,125.00 of the available cash." The dividend thus declared was paid and Rudolph F. Rabe, Sr., received $15,825 as his share during his life.

Rudolph F. Rabe, Sr., was stricken with an illness in May, 1924. Thereafter he was*1410 unable to attend the meetings of the corporation. He gave a general power of attorney to his son to act for him in all business matters and vote any stock owned by him.

Prior to May, 1924, the corporation had disposed of most of the real estate originally paid in by Rabe. In disposing of this and some other property received in an exchange, the corporation had acquired a number of purchase money mortgages. After May, 1924, the corporation continued to sell its real estate as suitable profitable prices were obtained and to collect the interest and principal on its mortgages as the same became due. It acquired one new piece of land from the Rabe heirs and sold it at a profit. It was still in existence at the date of the hearing in this case, December 8, 1931. No stock was redeemed or canceled. No assets of the corporation, other than cash, were ever distributed to the stockholders. Other *1244 cash distributions, not called "liquidating dividends," were made in 1925, 1927, 1928 and 1929. The record does not show whether or not any was made in 1926. The corporation had surplus on July 3, 1925, and on February 3, 1926, in excess of the distributions made on those respective*1411 days.

The assets and liabilities of the corporation were as follows on December 31 of the following years:

On its balance sheets filed with its income-tax return the corporation showed capital stock reduced by the dividends of $16,125.

The dividend of July 3, 1925, and that of February 3, 1926, were not reported as income by or on behalf of Rudolph F. Rabe, Sr. The Commissioner has included them for the appropriate years as dividends subject to surtax only.

OPINION.

MURDOCK: The contention of the petitioner is that the distributions made to Rudolph F. Rabe, Sr., on July 3, 1925, and February 3, 1926, respectively, *1412 were amounts distributed in partial liquidation of the corporation, received by him in part payment for his stock, and therefore not taxable to him as ordinary dividends. The Commissioner has taxed the amounts as ordinary dividends. Has the petitioner proven error? No one contends that the other dividends were in liquidation. However, if the two distributions were in liquidation, why were not the others? On this theory the petitioner might owe more tax than the Commissioner has determined, depending upon what other distributions were made in 1926 prior to Rabe's death.

The provisions of the Revenue Act of 1926 upon which the petitioner relies are as follows:

SEC. 201. (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 shall *1245 be recognized only to the extent provided in section 203. In the case of amounts distributed in partial liquidation (other*1413 than a distribution within the provisions of subdivision (g) of section 203 of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of subdivision (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation.

* * *

(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.

The act of the directors in characterizing the distributions "liquidating dividends" did not make them such within the meaning of the term as used in the revenue act. In determining the nature of a distribution, the facts of the case control. If acts are inconsistent with the declared purpose of the directors or stockholders, the declarations need not control. *1414 ; ; ; . A liquidation usually begins with an agreement of the stockholders to liquidate and dissolve. No steps were taken by the stockholders or others toward dissolution. No effort was made to distribute the assets except as they were realized in cash. These distributions were not in sufficient amount to impair the capital. Beyer, the only witness, stated that the corporation was formed to accommodate Rabe's real estate transactions and these ended when Rabe became physically incapacitated in May, 1924. But he was unable to tell in particular how the activities of the corporation changed after that time from what they had been previously. Apparently it continued to operate normally, doing those things for which it was created, deriving a profit and distributing only its current and accumulated profits. It did not acquire much additional real estate thereafter, but this was not a change for it had acquired little since 1917. It went on unhurried in selling its lots at a profit. Its*1415 principal business seems to have been to hold and collect on mortgages. This continued and served a purpose of the stockholders. So far as the record discloses, its activities were always decreasing after 1917 due to the disposition of the real estate and the discharge of the mortgages as they became due. The record does not support the petitioner's contention and, therefore, we sustain the action of the Commissioner in taxing these as ordinary dividends.

Judgment will be entered for the respondent.