Copland v. Wisconsin Dept. of Taxation
| Decision Date | 04 May 1962 |
| Citation | 114 N.W.2d 858,16 Wis.2d 543 |
| Parties | Arthur F. COPLAND et al., Respondents, v. WISCONSIN DEPARTMENT OF TAXATION, Appellant. |
| Court | Wisconsin Supreme Court |
Action by petitioners, Arthur F. and Margaret Copland, husband and wife, for abatement of additional income taxes assessed in connection with the 1947 liquidation of a corporation in which they were minority shareholders.
Prior to 1947, each petitioner had acquired one-eighth of the capital stock of Madison Coca-Cola Bottling Company at a cost to each of $9,881.03. This corporation held a franchise from Western Coca-Cola Bottling Company granting it the exclusive right to bottle Coca-Cola and sell it at wholesale in a designated territory. The franchise was not assignable by the corporation and could be revoked only for cause. In August, 1947, six non-Wisconsin residents, referred to as the 'Thomson group,' purchased the other 75 per cent of the stock in the corporation for $1,050,000. None of this stock was acquired from the petitioners, and they had no hand in the negotiations.
In September, 1947, acting on the advice of tax counsel, the Thomson group decided to reorganize the business in order to obtain certain federal tax advantages. The plan was to dissolve the corporation and transfer its assets to a partnership; then to operate the business as a partnership for one month, after which the assets were to be transferred to a new corporation in exchange for the stock and debentures of the new corporation. This plan was put into effect by action at a special meeting of the stockholders held October 31, 1947. At that meeting a resolution was passed to conditionally surrender the franchise of the old corporation on the agreement that a new franchise would be issued to the partnership. Thereafter, the corporation's franchise was surrendered and a new franchise, dated October 31, 1947, was issued to the partnership.
Following the dissolution of the old corporation, the business was operated as a partnership during the month of November, 1947. Each stockholder of the old corporation held an interest in this partnership in proportion to his prior stockholdings in the corporation. Upon transfer of the corporation assets to the partnership the physical assets were revalued at a figure $193,178.91 higher than their book value in order to reflect the results of an independent appraisal. There is no dispute that this higher amount accurately reflected the then current value of these physical assets.
On November 25, 1947, the incorporators of a new corporation, Coca-Cola Bottling Company of Madison, met to consider an offer of the partnership to convey the partnership assets to the new corporation in return for all of the capital stock (stated value $400,000) and debentures of the corporation in the face amount of $1,000,000. This offer was conditioned upon the issuance of a franchise to the new corporation covering the same territory as the partnership franchise. At this meeting a resolution was adopted accepting the partnership's offer. Thereafter, the new corporation applied for and received a franchise similar to that held by the partnership.
The capital stock and debentures of the new corporation were then issued to the partners, in direct proportion to their interest in the partnership, in return for the surrender of their interest in the partnership. The petitioners each received stock in the new corporation with a stated value of $50,000 and debentures with a face value of $125,000.
Upon transfer to the new corporation, the tangible assets were valued on the same basis as they had been carried on the partnership books. However, the capitalization was increased to $400,000 and debentures in the amount of $1,000,000 were included. In order to balance these items, an intangible asset designated 'good will' was included in the amount of $1,031,055.77. Neither the old corporation nor the partnership had carried any good will on its books. The following table contains a summary of the closing financial statement of the old corporation, the opening and closing statements of the partnership, and the opening statement of the new corporation. These figures were certified as fairly reflecting the financial condition of the various entities as of these dates by H. F. Festersen, a Nebraska certified public accountant experienced in the auditing of Coca-Cola operations.
Old Corp. Partnership New Corp
Oct. 31, Nov. 1, 1947 Nov. 30, 1947 Dec. 1, 1947
1947
Assets
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Cash & Securities $63,908.95 $63,908.95 $54,352.19 $54,352.19
Accounts Receivable 5,351.58 5,351.58 4,583.00 4,583.00
Inventories 19,769.15 33,602.64 45,147.08 45,147.08
Land 20,324.75 41,100.00 41,100.00 41,100.00
Depreciable Assets 97,324.36 255,894.53 256,122.13 252,384.63
Good Will 1,031,055.77
Other Assets 4,157.53 4,157.53 4,693.93 4,393.93
$210,836.32 $404,015.23 $405,998.33 $1,433,016.60
Liabilities
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Accounts Payable 5,493.33 32,225.67 33,016.60 6,284.26
Income Tax Reserve 26,732.34 ____________ _____________ 26,732.34
Depreciation Reserve 4,037.50
Partners' Investment ____________ 371,789.56 368,944.23 _____________
Acc't
Debentures ____________ _____________ 1,000,000.00
Capital Stock 21,000.00 ____________ _____________ 400,000.00
Surplus & Undivided 157,610,65 ____________ _____________ _____________
Profit
$210,836.32 $404.015.23 $405,998.33 $1,433,016.60
On their 1947 federal income tax returns, each petitioner reported a capital gain of $165,118.97. This amount was arrived at by deducting their cost of $9,881.03 in the shares of the old corporation from the $175,000 of stock and debentures received from the new corporation. However, petitioners did not report any such gain on their 1947 Wisconsin income tax returns, as they considered the entire transaction a tax-free reorganization under Wisconsin law.
In 1951 they were given notice of an additional assessment of income taxes for the year 1947 based upon the gain of $165,118.97. Petitioners applied to the Wisconsin Department of Taxation for abatement of the tax, but their application was denied. Next they petitioned the Wisconsin Board of Tax Appeals (hereinafter the 'Board') for review of the deficiency assessment. They contended: (1) that the transaction was a tax-free reorganization; (2) that any value they had received should be limited to one-eighth of the tangible assets of the liquidated corporation because the franchise held by the corporation was not transferrable and was terminated upon dissolution; and (3) that the value of the securities and debentures received by the taxpayers from the new corporation was not equal to their stated and face values because these amounts were predicated upon capitalization of the new franchise.
The matter was heard before the Board on August 12, 1952. Testimony was taken as to the nature of the 1947 transactions and as to the value of the corporation's assets as of the date of these transactions. Archie W. Kimball, a Madison certified public accountant, testified as to the proper accounting method of valuing the intangible asset good will. He stated that, in his opinion, according to sound accounting principles the proper valuation of good will, at the time of the transaction in question, was $70,035, rather than $1,031,055.77.
The Board found that the liquidation of the old corporation was not a tax-free reorganization and that each petitioner had received assets of the value of $175,000 as a result of the liquidation. Accordingly, an order was entered on July 17, 1953, affirming the denial of the petitioners' applications for abatement. The Board based its determination of value on the sale to the Thomson group of 75 per cent of the stock in the old corporation in August, 1947, and on the fact that petitioners had reported their gain on their 1947 federal income tax returns on the basis heretofore described.
On August 13, 1953, taxpayers petitioned the Dane county circuit court for a review of the Board's determination pursuant to the Wisconsin Administrative Procedure Act (ch. 227, Stats.). Upon review the court held the determination of the Board, that the liquidation was not a tax-free reorganization, was supported by substantial evidence, but the finding that each petitioner received assets of the value of $175,000 was not supported by substantial evidence in view of the entire record. The court agreed that the franchise could properly be considered as one of the assets transferred upon liquidation of the old corporation. However, the court stated that the value of the franchise could be measured by an analysis of net earnings, such as was done by Mr. Kimball, the expert C. P. A. whose computations were offered by petitioners; and that:
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