APPEAL OF GREENWOOD, Docket No. 258.
| Decision Date | 13 January 1925 |
| Docket Number | Docket No. 258. |
| Citation | 1 BTA 291 |
| Parties | Appeal of JOHN K. GREENWOOD. |
| Court | U.S. Board of Tax Appeals |
James J. O'Byrne, Esq., for the taxpayer.
John D. Foley, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner.
Before IVINS, KORNER, and MARQUETTE.
This appeal was heard upon a stipulation of facts from which the Board makes the following
FINDINGS OF FACT.
On or about June 19, 1903, the H. H. Seaton Co. was incorporated under the laws of the State of New Jersey, and 60 shares of its capital stock of a par value of $100 each were issued as follows:
Shares
H. H. Seaton ______________________________________________________ 28
John K. Greenwood _________________________________________________ 29
A. B. Hopper ______________________________________________________ 3
The three shares of stock issued to A. B. Hopper were in fact the property of John K. Greenwood, and were held by said A. B. Hopper for organization purposes only.
Another corporation was subsequently organized under the laws of the State of New Jersey, known as the Seaton company, which was entirely independent of the H. H. Seaton Co., and the capital stock thereof was issued as follows:
Shares
John K. Greenwood _____________________________________________ 40
H. H. Seaton __________________________________________________ 40
C. H. Rayner __________________________________________________ 40
On or about April 9, 1913, H. H. Seaton transferred his stock in the H. H. Seaton Co. to John K. Greenwood in exchange for the transfer to him of Greenwood's stock in the Seaton company, as an even exchange. By this exchange John K. Greenwood acquired the ownership of the entire issue of the capital stock of the H. H. Seaton Co., and the name of the corporation was changed to J. K. Greenwood Co. This corporation carried on business until August 30, 1918, when it was legally dissolved and its entire assets were transferred in liquidation to John K. Greenwood as the sole stockholder. The assets of the corporation upon dissolution were not converted into cash nor did Greenwood at any time receive cash for his stock, but the business formerly conducted by the corporation was continued and carried on with the assets of the former corporation by Greenwood as an individual.
On April 9, 1913, the date of the above exchange of stock between Seaton and Greenwood, J. K. Greenwood Co., formerly the H. H. Seaton Co., had a surplus over liabilities and capital stock of $22,746.41, and it is agreed that the cost, the March 1, 1913 value, and the book value of the stock on April 9, 1913, were the same. On August 30, 1918, at the time of dissolution, the corporation had a surplus over liabilities and capital stock of $52,246.58, or an increase in surplus of $29,500.17. No dividends were declared or paid by the corporation between April 9, 1913, and August 30, 1918. The increase in surplus of $29,500.17 is reduced by the tentative corporation tax amounting to $2,342.50, and the surplus received by the taxpayer upon dissolution of the corporation amounted to $27,157.67.
In making his individual income-tax return for the year 1918, this amount of $27,157.67 was reported by the taxpayer as dividends and was allocated to the years in which the surplus was claimed to have been earned by the corporation as follows:
Earned prior to 1916 _____________________________________ $9,172.72
Earned in 1916 ___________________________________________ 6,372.01
Earned in 1917 ___________________________________________ 4,099.09
__________
19,643.82
Reported as stock dividends in 1918 ______________________ 7,513.85
__________
27,157.67
The Commissioner has proposed to tax the amount of $19,643.82 as a liquidating distribution subject to both the normal and surtax rates under the Revenue Act of 1913, and the $7,513.85 returned as a stock dividend for 1918 at the surtax rates only.
Neither the certificate of incorporation, nor any by-laws adopted by the stockholders of the H. H. Seaton Co. or J. K. Greenwood Co. provided for the reservation of any working capital by the directors of such corporations.
DECISION.
The Board determines that the entire gain of $27,157.67 received by the taxpayer at the time of dissolution of the J. K. Greenwood Co., is taxable at the normal and surtax rates under the Revenue Act of 1918, in the year in which it was received. The determination of the Commissioner is disapproved in part and the amount of the deficiency will be settled by the Board on consent or on seven days' notice under Rule 50.
This appeal presents two questions for determination: First, whether the taxpayer is taxable at all upon the distribution in liquidation to him as sole stockholder of the entire assets of the J. K. Greenwood Co., and, second, if he is taxable, in what manner the distribution to him should be taxed.
The facts herein show that the taxpayer acquired the entire capital stock of the predecessor to the J. K. Greenwood Co. on April 9, 1913, and it has been stipulated that the value on that date of the capital stock was the same as the March 1, 1913, value and the book value. The surplus of the corporation between that date and August 30, 1918, the date of dissolution, had increased $27,157.67, all of which was received by the taxpayer in liquidation of his interest in the corporation. No dividends had been declared or paid by the corporation between those dates, and in making his individual return for the year 1918 the taxpayer returned this amount as dividends and attempted to allocate to the years prior to 1918 the amount which had been earned by the corporation in those years and claimed it was taxable to him as dividends at the rates in force in the respective years. The amount allocated to the year 1918 appeared on the return as a stock dividend. After an examination of the corporate records the Commissioner held that the amounts received by the taxpayer in liquidation and which were allocated by the taxpayer as having been earned prior to 1918 should be taxed as a liquidating dividend and were subject to both the normal and surtax rates, and that the portion of the earnings allocated to the year 1918 should be taxed at surtax rates only. The taxpayer contends that as the J. K. Greenwood Co. and J. K. Greenwood were in substance identical, by reason of the complete ownership and control which the latter possessed over the former as the sole stockholder, any profits of the J. K. Greenwood Co. accrued to him during the years in which they were earned; and in the alternative, that under the laws of...
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