Estate of Lewis v. Comm'r of Internal Revenue
| Decision Date | 14 March 1946 |
| Docket Number | Docket No. 6901. |
| Parties | ESTATE OF JOHN B. LEWIS, HARRIET S. W. LEWIS, JOHN B. LEWIS, JR., ARTHUR H. W. LEWIS, TRUSTEES, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Corporation A in 1941 was engaged in three lines of business. In July of that year it sold two branches of its business outright for cash and marketable securities. Thereafter, it conducted the third branch— a chemical manufacturing business— until December 27, 1941, at which time it was decided to organize corporation B. Corporation B was organized on December 29 and on the same date a part of the cash of corporation A and the operating assets used in the chemical manufacturing business were transferred to corporation B in exchange for all the stock of B. Immediately thereafter, on the same day, corporation A liquidated by distributing to its stock-holders in exchange for their stock all its assets, consisting of cash, marketable securities, and the stock of corporation B. Petitioners, as trustees of the estate, were the sole stockholders of A. They realized a gain of $66,000 on the transaction, which was less than the amount of cash received by them and less than the accumulated earnings and profits of A. Held, that there was a reorganization within the meaning of section 112(g)(1)(D), I.R.C., and that the distribution to petitioners was made in pursuance of the plan of reorganization and had the effect of the distribution of a taxable dividend within the meaning of section 112(c)(2). James F. Armstrong, Esq., for the petitioners.
A. J. McDowell, Esq., for the respondent.
An income tax deficiency of $22,347.28 for the calendar year 1941 has been asserted by respondent against the petitioners. Petitioners contest the deficiency to the extent of $22,089.53, certain minor adjustments made by respondent not being controverted. The question for decision is whether respondent erred in taxing a gain realized by the estate of John B. Lewis as an ordinary dividend under section 112(c)(2) of the Internal Revenue Code, rather than as a distribution in complete liquidation under sections 115(c) and 117.
Most of the facts have been stipulated and are found accordingly. Other facts found are based on the testimony.
Petitioners, Harriet S. W. Lewis and Arthur H. W. Lewis, are the surviving trustees under the will of John B. Lewis, who died December 29, 1930, the third trustee, John B. Lewis, Jr., having died September 1, 1945. The fiduciary income tax return of the estate of John B. Lewis for the year 1941 was filed with the collector for the district of Rhode Island.
John B. Lewis, Inc., a Rhode Island corporation, was organized January 9, 1931, to take over a business which John B. Lewis had theretofore operated. On the same day petitioners, as trustees, acquired all the issued and outstanding stock of the corporation, consisting of 4,000 shares of common stock, having a basis of $435,000 in their hands.
In 1941 the corporation was engaged in three different lines of business— the manufacture of synthetic resins, the manufacture of chemicals for the textile industry, and the distribution of chemicals. On June 30, 1941, the corporate name was changed to ‘John D. Lewis Company.‘ In the next month, July 1941, two branches of the business were sold, the synthetic resin business for a consideration of approximately $269,000, and the chemical distributing business for a consideration of approximately $56,000, in cash and marketable securities.
On December 27, 1941, the board of directors of John D. Lewis Co., at a special meeting, adopted the following:
VOTED: That this Corporation transfer, convey and assign to John D. Lewis Company, a corporation to be incorporated on or about December 29, 1941, under the laws of the State of Rhode Island, all of its assets other than (1) securities and (2) cash in excess of $90,000, including, but without limiting the generality of the foregoing, its real estate located in Mansfield, Massachusetts, and in Providence, Rhode Island, and its manufacturing business, together with the assets, property, equipment and goodwill of such business, and accounts receivable, insurance, inventories and office furniture, such transfer, conveyance and assignment to be made in consideration of the issuance to this Corporation of all of the capital stock of said new corporation and in consideration of the assignment to be made in consideration of the issuance to this Corporation and that John B. Lewis, President of this Corporation, be and he hereby is authorized and empowered, on behalf of and in the name of this Corporation and under its corporate seal where necessary or desirable, to make, execute and deliver such deeds, bills of sale, assignments, agreements, instruments of transfer, and including, but without limiting the generality of the foregoing, the instruments described in the following vote and resolution, and any other instruments which he may deem necessary or desirable in order to effect the foregoing, and to do such further acts and things as he may deem necessary or desirable in connection therewith.
The action of the directors was ratified at a special meeting of the stockholders held the same day, at which it was also voted to change the name of the corporation to Traverse Street Corporation (hereinafter called the old company). The change of name was accomplished by filing an amendment of the articles of association with the Secretary of State of Rhode Island on December 29, 1941. On December 29, 1941, John D. Lewis Co. (hereinafter called the new company) was incorporated under the laws of Rhode Island, with an authorized capital of 500 shares of no par common stock. At 11 a.m. on the same day the directors of the new company met and effected a transfer of the assets of the company to the new company in exchange for the stock of the new company and the assumption of all the obligations of the old company. All the authorized capital stock of the new company was issued to the old company as consideration for the transfer. The assets transferred to and the liabilities assumed by the new company, valued at the figures at which they were recorded on the books of the old company, with proper adjustments, were as follows:
+-------------------------------------------------------+
¦Cash ¦$90,500.00¦ ¦
+--------------------------------+----------+-----------¦
¦Accounts receivable ¦18,896.49 ¦ ¦
+--------------------------------+----------+-----------¦
¦Inventory ¦21,040.71 ¦ ¦
+--------------------------------+----------+-----------¦
¦Life insurance policies ¦19,880.86 ¦ ¦
+--------------------------------+----------+-----------¦
¦ ¦ ¦$150,318.06¦
+--------------------------------+----------+-----------¦
¦Land ¦12,140.00 ¦ ¦
+--------------------------------+----------+-----------¦
¦Buildings, net ¦30,753.84 ¦ ¦
+--------------------------------+----------+-----------¦
¦Machinery and equipment ¦16,919.53 ¦ ¦
+--------------------------------+----------+-----------¦
¦ ¦ ¦59,813.37 ¦
+--------------------------------+----------+-----------¦
¦Total assets ¦ ¦210,131.43 ¦
+--------------------------------+----------+-----------¦
¦Less liabilities taken over- ¦ ¦ ¦
+--------------------------------+----------+-----------¦
¦Accounts payable ¦16,473.50 ¦ ¦
+--------------------------------+----------+-----------¦
¦1941 Federal tax reserve ¦27,364.15 ¦ ¦
+--------------------------------+----------+-----------¦
¦ ¦ ¦43,837.65 ¦
+--------------------------------+----------+-----------¦
¦ ¦ ¦166,293.78 ¦
+--------------------------------+----------+-----------¦
¦Less 1941 additional Federal tax¦ ¦9,695.17 ¦
+--------------------------------+----------+-----------¦
¦Net ¦ ¦156,598.61 ¦
+-------------------------------------------------------+
At 11:30 a.m. on the same day, after the acquisition of the stock of the new company, the directors of the old company met and adopted the following:
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