MacDonald v. Comm'r of Internal Revenue, Docket Nos. 905

Citation3 T.C. 720
Decision Date05 May 1944
Docket Number906.,Docket Nos. 905
PartiesD. K. MACDONALD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ELISE C. MACDONALD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

Petitioners, a marital community in the State of Washington, owned all of the stock of a corporation, Carter, MacDonald & Co., engaged principally in the insurance brokerage business. At a time when liabilities exceeded the value of tangible assets, the corporation was dissolved and its assets distributed to petitioners in return for their stock; and the assets were then transferred to D. K. MacDonald for the marital community and he from that date conducted an insurance business under the same name as the old corporation. The insurance business was personal in its nature and depended very largely upon the personal relation between MacDonald and the customers. Held, on the facts, that no good will was transferred to the petitioners upon the liquidation and no income was realized by them, by virtue of the transfer and sale. H. B. Jones, Esq., and A. R. Kehoe, Esq., for the petitioners.

B. H. Neblett, Esq., for the respondent.

These cases, duly consolidated, involve income taxes for the calendar year 1941. The Commissioner determined a deficiency of $5,190.78 against each of the petitioners.

The only question presented is whether the petitioners, D. K. MacDonald and his wife, Elise C. MacDonald, realized a taxable gain as a result of the distribution and transfer to D. K. MacDonald, acting on behalf of the marital community, of all of the assets of Carter, MacDonald & Co., a corporation engaged principally in the insurance brokerage business, where the amount of the corporation's liabilities assumed by the petitioners as transferees exceeded the value of the tangible assets of the corporation so that the asserted gain consisted of the value, if any, of the alleged good will and other alleged intangible asset; of the corporation.

FINDINGS OF FACT.

Petitioners' income tax returns were filed with the collector of internal revenue for the district of Washington at Tacoma, Washington.

Petitioners are husband and wife and are residents of the State of Washington.

Carter, MacDonald & Co. (hereinafter sometimes referred to as the corporation) was a corporation existing under the laws of the State of Washington. It was originally incorporated under the name of Carter, MacDonald & Miller on September 27, 1917. Its name was changed to Carter MacDonald & Co. in 1928 and remained the same until July 31, 1941, when the assets of the corporation were liquidated and the corporation dissolved. The corporation was engaged principally in ;he insurance brokerage business; it also was engaged to a minor extent in the real estate management business. The entire authorized and outstanding capital stock of the corporation consisted of 500 shares of common stock with a par value of $100 per share. The declared value of the capital stock contained in the corporation's capital stock tax return for the year ended June 30, 1941, was $200,000. All the stock was owned on July 31, 1941, by the marital community composed of D. K. MacDonald and Elise C. MacDonald, the petitioners in the instant cases. The petitioners' basis for gain or loss from the sale or exchange of such stock was zero.

On July 30, 1941, notice was given by the secretary of the corporation that a special meeting of the shareholder and directors of the corporation would be held on July 31, 1941, for the purpose of considering and acting upon a plan for the liquidation and voluntary dissolution of the corporation. Pursuant to that notice, the special meeting was held on July 31, 1941, and the shareholder and directors unanimously resolved ‘that this company adopt and carry out the said Plan of complete liquidation and distribution of all of its assets, to its shareholder in exchange for his stock herein to be surrendered for cancellation, * * * that the affairs of the Carter, MacDonald and Co. a Washington corporation, be wound up out of court and said corporation be voluntarily dissolved * * * ; that D. K. MacDonald be and he hereby is designated as trustee to conduct the proceedings for the winding up of the affairs of this corporation; * * * ‘

The plan to which reference was made and which was incorporated in the corporate resolutions summarized above provided for the complete liquidation of the corporation and the distribution of its assets to D. K. MacDonald in exchange for the surrender of his stock certificates to the corporation for cancellation. The liquidation was to be followed by the dissolution of the corporation in accordance with the Revised Statutes of Washington, providing for voluntary dissolution proceedings out of court through designation of a trustee to conduct the winding up of the corporation. The plan contemplated that the corporation would cease its activities on July 31, 1941, and that the trustee would distribute to D. K. MacDonald all interest in and to all of the assets of the corporation on or before December 31, 1941, after payment of Federal taxes and all other accounts and known claims of the corporation.

A bill of sale and agreement, dated July 31, 1941, was executed by the corporation transferring all its properties and assets of every kind to D. K. MacDonald, trustee, for the purpose of carrying into effect the liquidation proceedings.

A second bill of sale was executed on August 1, 1941, by D. K. MacDonald as trustee of the corporation, which reads as follows:

KNOW ALL MEN BY THESE PRESENTS That D. K. MACDONALD, as Trustee of CARTER, MACDONALD & COMPANY, a Washington corporation, for the winding up of its affairs under voluntary dissolution proceedings, does hereby assign, transfer, convey and set over unto D. K. MACDONALD all of the property (real, personal and mixed) and assets of every kind and description whatsoever and wheresoever situated, received by the grantor as Trustee of Carter, MacDonald & Company, a corporation, for the winding up of its affairs under voluntary dissolution proceedings, including all personal property of every kind, character and description whatsoever, and including all office furniture, accounts receivable, notes receivable, choses in action and contracts of every name and nature, including agency contracts, said property and assets being all of the assets of said Carter, McDonald (sic) & Company, a corporation, as of July 31, 1941.

This bill of sale from D. K. MacDonald, trustee, to D. K. MacDonald individually, was filed for public record on October 9, 1941. A certificate dated August 1, 1941, signed by D. K. MacDonald setting forth the intention of D. K. MacDonald to conduct business under the assumed business name of Carter, MacDonald & Co. was filed in the office of the County Auditor for King County, Washington, on August 6, 1941. The corporation was dissolved on August 6, 1941.

The usual manner of buying and selling insurance agencies is under a contract by which the person primarily responsible for the seller's business agrees either to work for the purchaser or to refrain from competition for a stated period. The consideration paid, in addition to the value of the tangible assets, is ordinarily based upon a percentage of the commissions received by the purchaser from the renewal of expiring policies of the seller's old customers.

On July 31, 1941, the fair market value of all the tangible assets of the corporation transferred to D. K. MacDonald was $267,198.87, which included $38,088.52 in cash.

The total amount of corporate liabilities on July 31, 1941, was $289,508.73. These liabilities were assumed by D. K. MacDonald and subsequently paid in full. At the time of the liquidation of the corporation, D. K. MacDonald was personally liable for approximately $30,000 of the corporation's indebtedness.

Item 7 (‘Other assets‘) of schedule L (‘Balance Sheets‘) which is part of the corporation income, declared value excess profits and defense tax return filed by the corporation covering the period from January 1, 1941, to July 31, 1941, includes ‘good will,‘ which is valued at $74,028.55 as of July 31, 1941. In reporting no gain realized on the liquidation of the corporation for the purposes of their individual income tax liability for the calendar year 1941, petitioners described the so-called good will as being of no value and deducted the sum of $74,028.55 from the total value of the assets received from the corporation as a result of the sale of July 31, 1941. The deficiency determined by the Commissioner was based, inter alia, upon the addition to the value of the tangible assets distributed upon the liquidation of the corporation the sum of $99,635.25, which was alleged to represent the fair market value of the insurance agency accounts and business computed at 12 times the monthly average of gross insurance commissions received by the corporation during the 36 months ended July 31, 1941.

The following table shows the net income and gross commissions of the insurance department of the corporation, the net income of the corporation as a whole, and the income taxes paid by the corporation from 1936 to 1940, inclusive:

+---------------------------------------------------------------+
                ¦    ¦Net income ¦Net income       ¦Gross commissions¦          ¦
                +----+-----------+-----------------+-----------------+----------¦
                ¦Year¦(insurance)¦(corporation)    ¦(insurance)      ¦Income tax¦
                +----+-----------+-----------------+-----------------+----------¦
                ¦1936¦$2,660.13  ¦(Loss) $14,979.45¦$65,976.97       ¦$592.36   ¦
                +----+-----------+-----------------+-----------------+----------¦
                ¦1937¦3,954.24   ¦3,950.87         ¦69,909.18        ¦535.67    ¦
                +----+-----------+-----------------+-----------------+----------¦
                ¦1938¦4,584.33   ¦6,204.17         ¦70,318.47        ¦915.22    ¦
                +----+-----------+-----------------+-----------------+----------¦
...

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