Lucius Pitkin, Inc. v. Comm'r of Internal Revenue, Docket No. 17513.
| Citation | 13 T.C. 547 |
| Decision Date | 11 October 1949 |
| Docket Number | Docket No. 17513. |
| Parties | LUCIUS PITKIN, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Petitioner, in accordance with the desire of two of its stockholders, each holding one-third of its stock, to eliminate the holder of the other one-third, and pursuant to agreement, transferred to him certain of its assets, and various other matters between the stockholders were settled. The one-third of the stock was surrendered and canceled, though a few days later a dividend thereof, in equal amounts was declared to the two remaining stockholders. Held, on the facts, that there was partial liquidation, and not sale of the corporate assets for stock, that the petitioner did not deal in its shares as it might in the shares of another corporation, and that the petitioner sustained no deductible loss from the transaction. Leonard Belford, Esq., for the petitioner.
J. Richard Riggles, Esq., for the respondent.
This proceeding involves a deficiency of $1,543.94 in income tax and a deficiency of $2,327.52 in excess profits tax asserted against the petitioner for the year 1943. The only question to be determined is whether the petitioner sustained a loss from the distribution in kind of certain of its assets to one of its three stockholders in exchange for one-third of its outstanding common stock held by that stockholder.
Lucius Pitkin, Inc., the petitioner, was incorporated in 1916 under the laws of the State of New York, with principal office at 47 Fulton Street, New York City. Its income and declared value excess profits tax, and excess profits tax returns for the period here involved were filed with the collector of internal revenue for the second district of New York.
In petitioner's income and declared value excess profits tax return there was deducted a claimed loss of $8,737.42, which was computed as follows:
+-----------------------------------------------------------------------------+
¦ ¦Leasehold improvements, 45 Fulton ¦Patents and life ¦Total ¦
¦ ¦St., New York ¦insurance ¦ ¦
+------------+----------------------------------+-------------------+---------¦
¦Acquired ¦1941 ¦Various ¦ ¦
+------------+----------------------------------+-------------------+---------¦
¦“Sales ¦ ¦$5,000.00 ¦$5,000.00¦
¦Price” ¦ ¦ ¦ ¦
+------------+----------------------------------+-------------------+---------¦
¦Basis ¦$5,395.00 ¦10,413.04 ¦15,808.04¦
+------------+----------------------------------+-------------------+---------¦
¦Depreciation¦1,911.70 ¦158.92 ¦2,070.62 ¦
+------------+----------------------------------+-------------------+---------¦
¦Loss ¦3,483.30 ¦5,254.12 ¦8,737.42 ¦
+-----------------------------------------------------------------------------+
Petitioner's common stock consisted of 1,000 shares without nominal or par value; its preferred stock consisted of 500 shares without nominal or par value, with preference as to dividends and assets, cumulative as to dividends, and it was nonvoting.
On April 27, 1929, and prior thereto, Erskine B. Mayo owned 60 per cent and Thomas A. Wright owned 40 per cent of the capital stock of petitioner. Under date of April 27, 1949, Mayo, Wright, and one Sam Tour entered into an agreement under the terms of which Mayo and Wright each agreed to sell enough of their shares of common stock of petitioner to reduce each of their holdings to a one-third interest in the corporation, and Tour agreed to purchase such shares, admitting him to a one-third interest. Tour agreed to pay $4,995 for the 333 shares of common stock that he was to acquire. The agreement also provided that the three, Mayo, Wright, and Tour, were to receive equal amounts in salaries, that they were also to turn over to petitioner all contracts that they then had or were thereafter to obtain covering consulting or other professional service, and, further, with certain exceptions (not material here), they were to turn over to petitioner all patents that they should thereafter acquire in their names. The agreement further provided that petitioner would take out or assume life insurance policies on each of the three stockholders in the amount of $15,000, and provided, in case of a stockholder's death, two optional plans to be exercised by his executor. One of the options was that the petitioner would pay the total amount of the insurance, i.e., $15,000, to the decedent's estate for the common shares representing his one-third interest in petitioner. The other option was that if the executor should desire to retain the common stock with the view to the eventual entry of a son into the business, $1,000 of the proceeds of the insurance policies was to be paid to the widow, if living, or, if not, to the estate of said decedent, and that the balance of the $15,000, was to be set aside by petitioner to be disbursed as the directors desired, with one restriction, that it could not be used to increase salaries, except with the unanimous consent of all the common stockholders. The agreement provided that in case one of the signers of this agreement wanted to retire the two remaining stockholders would purchase his one-third interest at a price to be mutually agreed upon, but in no event to be less than $15 per share of common stock; further, that no share of common stock of petitioner then or thereafter held by any of the above mentioned three was to be sold or transferred to others than the parties signing the agreement except with the consent of all the common stockholders.
Pursuant to the terms of the agreement of April 27, 1929, Tour acquired 333 shares of petitioner's common stock, previously owned by Mayo and Wright, so that each of the three parties to the transaction thereafter owned 333 shares. There remained one share of common stock in the treasury of the petitioner.
Tour became vice president of petitioner and organized, managed, and was head of the metallurgical department. This department was built up to the point where petitioner could no longer accommodate it in the quarters where the company maintained its laboratories. To meet this need, two floors of the building next to the building occupied by the petitioner were leased. Petitioner equipped these leased quarters for this purpose and the entire metallurgical department was moved into that space.
Because of differences in business policies, management friction arose between Tour, on the one hand, and Mayo and Wright, on the other.
Under date of June 26, 1943, petitioner, Mayo, Wright, and Tour entered into an agreement whereby petitioner would give certain equipment and material of the value of $5,000 for the 333 shares of common stock owned by Tour, and Tour agreed to surrender the stock for the equipment and material on or before June 30, 1943. The agreement also provided that petitioner would retire from the metallurgical and engineering fields, but could reenter those fields if it chose to do so; that Tour was to take over the staff of the metallurgical and engineering departments, as well as the contracts and clients that were willing to be so taken over; and that Tour could enter the assay, chemical, spectrographic, and sampling fields if he chose to do so. Petitioner was to pay accounts payable of all natures in connection with the metallurgical engineering departments up to and including June 30, 1943. The agreement also contained certain specific provisions relating to the transfer of the property that was to be transferred to Tour, and the relinquishment of the premises to the respective parties interested. Tour was to take over the lease of the property located at 45 Fulton Street, as of July 1, 1943. Other provisions in regard to carrying of fire, public liability, workmen's compensation, and war damage insurance was also included in the agreement. Provisions were also made for the separation of electrical lines, telephone lines, and interoffice communications for the petitioner and the new enterprise to be established by Tour. Detailed provisions were made for the separation of certain parts of the business between petitioner and Tour. Petitioner agreed to continue certain royalty contracts with a third party and pay Sam Tour 25 per cent of the royalties received, and Sam Tour was to pay petitioner 25 per cent of profits from future exploitation of certain patents taken over by him. The petitioner agreed to assign to E. I. Valyi an agreement regarding ‘the soro process.‘ Petitioner was also to pay off a loan of $816.29 on ‘the life insurance policy‘ on Tour and turn ‘these policies‘ back to Tour. Petitioner was to pay Tour the amount due him on two notes, as well as all current salary to June 30, 1943. No business was to be solicited, transacted, or conducted by Tour under the name of ‘Pitkin or Lucius Pitkin, Inc.,‘ or upon the premises of 47 Fulton Street, New York, and no business was to be solicited, transacted, or conducted by petitioner from the premises of 45 Fulton Street, New York.
Minutes of a special meeting of the board of directors of the petitioner, held June 26, 1943, indicate the corporation's acceptance of the above described agreement.
At a special meeting of the board of directors of petitioner, held July 1, 1943, the resignation of Tour as vice president and director of the corporation was accepted as of June 30, 1943.
The 333 shares of common stock owned by Tour were surrendered to the petitioner and canceled by the petitioner on June 30, 1943.
At a special meeting of the board of directors of petitioner, held on July 1, 1943, a stock dividend of 334 shares of the...
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...consummated literally met the definition of partial liquidation in § 115(i) of the 1939 Code, 26 U.S.C.A. § 115(i).8 It cited Lucius Pitkin, Inc., 1949, 13 T.C. 547, in support of this conclusion9 and "As stated, the petitioner contends that there was a partial liquidation, and the responde......
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...the common business enterprise — there is a capital transaction. (See Dill Mfg. Co. v. Com'r, 39 B.T.A. 1023 (1939); Lucius Pitkin, Inc. v. Commissioner, 13 T.C. 547 (1949).) We think that the Tax Court's finding that there was a partial liquidation, rather than a sale, is amply supported b......
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FARMERS UNION CORPORATION v. Commissioner, Docket No. 69647.
...does not require a distribution among all of the stockholders of a corporation as a prerequisite of a partial liquidation. See Lucius Pitkin, Inc., 13 T. C. 547 Dec. On all of the facts and circumstances, it is held that the distribution of the assets was made to the participating stockhold......
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GRAVOIS PLANING MILL CO. v. Commissioner
...literally meets the definition of a partial liquidation contained in section 115(i) of the Internal Revenue Code of 1939.2 See Lucius Pitkin, Inc., 13 T. C. 547 Dec. 17,232. As stated, the petitioner contends that there was a partial liquidation, and the respondent on brief does not argue t......