R.D. Merrill Co. v. Comm'r of Internal Revenue, Docket Nos. 101456
| Decision Date | 07 March 1945 |
| Docket Number | Docket Nos. 101456,112517.,112515 |
| Citation | 4 T.C. 955 |
| Parties | R. D. MERRILL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ESTATE OF EULA LEE MERRILL, DECEASED, RICHARD DWIGHT MERRILL, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.R. D. MERRILL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Corporate operating losses were incurred from the sale of property, based upon March 1, 1913, values which were greater than cost by an amount more than the operating losses. Held, following Loren D. Sale, 35 B.T.A. 938, that such operating losses should not be charged to later earnings in the computation of amount available for distribution as taxable dividends; held, further, that where operating losses are not incurred in sale of assets which had appreciated in value on March 1, 1913, but from sale of assets later acquired, the operating losses should be charged against subsequent earnings in the computation of earnings and profits available for later distribution as dividends.
2. A corporation distributed property in kind at a date when fair market value of property distributed was less than cost. Held, amount of earnings and profits in computation of amount available for later distribution as dividends, should be charged with cost of the property.
3. Corporate property was distributed in kind at a time when fair market value exceeded cost. The parties agreeing that cost should be charged to earnings and profits, it is so held.
4. Held, on the facts, that certain distributions were made in partial liquidation, within the meaning of section 115(c), Revenue Act of 1936. Raymond G. Wright, Esq., Clarence R. Innis, Esq., and Justin M. Martin, C.P.A., for the petitioners.
Wilford H. Payne, Esq., and C. R. Maxwell, Esq., for the respondent.
The case of R.D. Merrill Co. (hereinafter sometimes called Merrill Co.), Docket No. 101456, involves a deficiency in the amount of $4,099.32 in income tax for the calendar year 1936, and a deficiency in the amount of $75.01 in personal holding company surtax for the same year. In its petition Merrill Co. claimed an overpayment in the amount of $859.17 in income tax. The respondent in his answer requests that the deficiency in income tax be increased to $12,482.11; also that the deficiency in personal holding company surtax be increased to $8,490.68, or, in the alternative, to $6,997.15.
The cases of the estate of Eula Lee Merrill (Docket No. 112515) and of R. D. Merrill (Docket No. 112517) involve deficiencies in income tax for the calendar year 1937 in the amount of $16,242.86 determined against each taxpayer. Each petitioner claims an overpayment for the year 1937 in income tax in the amount of $8,331.69.
As a result of the abandonment by the petitioners in the Eula Lee Merrill case and in the R. D. Merrill case of certain assignments of errors, the only error assigned in each is the following:
Adding to the net income of the (taxpayer) for income tax computation for the year 1937 the sum of $34,816.89 in the form of dividends received from the R.D. Merrill Company, a Washington corporation.
Effect will be given to these modifications in the decision to be entered under Rule 50 in each case.
Several issues are presented in the Merrill Co. case. The first is whether, as contended by respondent, the entire amount of distributions in cash and stock, totaling $60,202, received by Merrill Co. from T.D. & R.D. Merrill, Inc. (hereinafter sometimes referred to as T.D. Inc.) during 1936 is taxable under section 115 of the Revenue Act of 1936, or whether, on the other hand, as now contended by petitioners, only $10,654.04 is so taxable. This depends upon the amount of accumulated earnings and profits available for distribution as dividends by T.D. Inc. as of December 31, 1935, which involves the question whether operating losses in the sum of $17,187 sustained by T.D. Inc. from March 1, 1913, to December 31, 1926, as a result of the sale of property acquired by it prior to March 1, 1913, and computed on March 1, 1913, values, which exceeded the cost of such property by more than $20,000, should be charged against earnings and profits of that company for years subsequent to 1926. It also depends upon whether the accumulated earnings and profits of T.D. Inc. available for distribution in 1936 should be charged with the cost of the stock distributed by it to the taxpayer or with the value of that stock at the date of its distribution, where the cost of the stock exceeded its value on the date of distribution.
The second issue in the Merrill Co. case, raised affirmatively by the respondent, is whether the sum of $100,000, being one-third of $300,000 distributed to Merrill & Ring Canadian Properties, Inc. (hereinafter sometimes referred to as Properties, Inc.) by Merrill & Ring Lumber Co., Ltd. (hereinafter sometimes referred to as Lumber, Ltd.) and distributed to Merrill Co. in 1936 by Properties, Inc., is subject to tax in the hands of Merrill Co. to the extent of $100,000 as an ordinary dividend. This depends upon whether a distribution to Properties Inc., by Lumber, Ltd., its parent, was a distribution in partial liquidation of Lumber, Ltd. If it was not, the further question arises whether the distribution by Properties, Inc., to Merrill Co. was a distribution in partial liquidation of Properties, Inc.
The third issue is whether the entire amount of the $100,000 cash distribution received by Merrill Co. from Merrill & Ring Lumber Co. (hereinafter sometimes referred to as M. & R. Co.) during 1936 is taxable under section 115 of the Revenue Act of 1936. This involves the question whether a deficit in accumulated earnings and profits of M. & R. Co. at the end of 1932, due to operating losses incurred as a result of the sale of property acquired by it after February 28, 1913, should be charged against subsequent earnings and profits of that company.
In Docket No. 112515 (estate of Eula Lee Merrill) and in Docket No. 112517 (R. D. Merrill) the issue presented is the same, being the extent to which the sum of $85,060 which each taxpayer received during 1937 from Merrill Co. is taxable. That depends upon how much of the $85,060 in each case constituted taxable dividends in the hands of each petitioner; and that, in turn, depends upon the amount of accumulated earnings and profits available for distribution as dividends by Merrill Co. as of December 31, 1936. The latter determination depends upon the answers reached on the issues presented in Docket No. 101456. In consideration of such issue, the following questions are presented:
(1) Whether a distribution in kind made by Merrill Co. in 1935 should be charged against the accumulated earnings and profits of the distributing company at fair market value on the date of distribution or at cost, where cost exceeded the fair market value on the date of distribution;
(2) Whether distributions in kind made by T.D. Inc. in 1937 and also by M. & R. Co. should be charged against the accumulated earnings and profits of the respective distributing company at cost; or whether the accumulated earnings and profits should first be increased by the excess of the market value over cost at the date of distribution and then charged with the market value at the date of distribution, where fair market value on the date of distribution exceeded cost;
(3) Whether the distribution in 1937 by Lumber, Ltd., to Properties, Inc., was one of a series of distributions made in partial liquidation of Lumber, Ltd., and, if not, whether the distribution in 1937 by Properties, Inc., to its stockholders was one of a series of distributions in partial liquidation.
Because of the complexity of the facts presented, clarity requires that the Merrill Co. case be first and separately considered, followed by estate of Eula Lee Merrill and R. D. Merrill.
Most of the facts are stipulated. We adopt the stipulations filed by the parties and incorporate the same herein by reference. Such parts thereof as are necessary to an understanding of the issues are set forth with our findings of fact made from evidence submitted at the hearing. Certain general facts will first be set forth and then, to set the matter forth more clearly, the particular facts applying to each issue will be stated, followed by opinion on that issue.
(In General)
Merrill Co. is a personal holding company of the R. D. Merrill family, organized under the laws of the State of Washington on July 12, 1924. Its income tax return and its personal holding company return for 1936 were filed with the collector of internal revenue for the district of Washington at Tacoma, Washington. Throughout the entire taxable year 1936 the authorized and outstanding capital stock of Merrill Co. consisted of 10,000 shares of common stock with a par value of $100 per share and 10,000 shares of preferred stock with a par value of $96 per share. At all times the stock was owned and held by R. D. Merrill, his wife Eula Lee Merrill (prior to her death), and their children.
During 1936 Merrill Co. owned 50 percent of the outstanding capital stock of T.D. Inc.; 33 1/3 percent of the outstanding capital stock of Properties, Inc.; and 33 1/3 percent of the outstanding stock of M. & R. Co.
By virtue of its ownership of 50 percent of the stock of T.D. Inc., Merrill Co. received on September 18, 1936, one-half of the following distribution of stocks:
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¦666 2/3 shares—¦Crescent Logging Co., purchased for cash in 1927, 1928, and¦
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¦ ¦1930 ¦
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¦543 shares— ¦Sol Duc Investment Co.,...To continue reading
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