First Nat'l Bank of Wichita Falls v. Comm'r of Internal Revenue

• Decision Date: 07 February 1944
• Docket Number: 111180,Docket Nos. 111179,111181.
• Parties: FIRST NATIONAL BANK OF WICHITA FALLS, TRUSTEE TRUST NO. 2, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.FIRST NATIONAL BANK OF WICHITA FALLS, TRANSFEREE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.FIRST NATIONAL COMPANY OF WICHITA FALLS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

3 T.C. 203

FIRST NATIONAL BANK OF WICHITA FALLS, TRUSTEE TRUST NO. 2, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.FIRST NATIONAL BANK OF WICHITA FALLS, TRANSFEREE, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.FIRST NATIONAL COMPANY OF WICHITA FALLS, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 111179

111180

111181.

Tax Court of the United States.

Promulgated February 7, 1944.

1. Where a Texas corporation was duly dissolved and no receiver was appointed to settle up its affairs, and within three years after dissolution the Commissioner had notice of the dissolution but did not issue a deficiency notice to the dissolved corporation until more than three years after it was dissolved, and a proceeding was instituted by a petition which was filed in the name of the dissolved corporation and was signed by counsel and verified by the former president and a director of the dissolved corporation, held, that after three years from the date of dissolution the corporation no longer had existence under Texas law and this Court has no jurisdiction to determine the proceeding. Lincoln Tank Co., 19 B.T.A. 310, followed.

2. Where prior to dissolution and as a part of the plan of dissolution the stockholders met and resolved to dissolve the corporation and to liquidate it and caused the corporation to transfer all of its net assets to two trusts for the exclusive use and benefit of the stockholders, held, article 22(a)-21, Regulations 101, is applicable and the income from the property during the two taxable years involved in this proceeding, while the corporation still was in existence for limited purposes, was the income of the dissolved corporation and not of the trusts which were liquidating the property. Harry C. Weeks, Esq., for the petitioners.

Samuel G. Winstead, Jr., Esq., for the respondent.

In Docket No. 111179, the respondent determined deficiencies in income and excess profits taxes for the period February 7 to December 31, 1938, and for the calendar year 1939, against the First National Bank of Wichita Falls, trustee of Trust No. 2, in amounts as follows: Deficiency in income tax, 1938, $12,338.29; 1939, $9,325.91; and deficiency in excess profits tax, 1938, $8,973.30; 1939, $6,782.48.

In Docket No. 111181 the respondent determined deficiencies in income and excess profits taxes for the calendar years 1938 and 1939 against the First National Co. of Wichita Falls, a dissolved Texas corporation in amounts as follows: Deficiency in income tax, 1938, $12,623.37; 1939, $8,986.27; and deficiency in excess profits tax, 1938, $8,992.74; 1939, $6,845.35.

In Docket No. 111180 the respondent determined that the First National Bank of Wichita Falls was liable as transferee of the assets of the First National Co. of Wichita Falls for the above mentioned deficiencies in income and excess profits taxes determined against that taxpayer for the years 1938 and 1939, plus interest as provided by law.

The three proceedings have been consolidated. In his brief the respondent now concedes that there is no transferee liability of the First National Bank of Wichita Falls and ‘that petitioner in Docket No. 111179 is not liable for excess profits taxes for the years in question.‘ The appropriate effect will be given to these concessions and no further reference need be made to the questions there involved.

The respondent has determined that the same identical income is the taxable income of both the First National Co. of Wichita Falls in Docket No. 111181 and the First National Bank of Wichita Falls, trustee of Trust No. 2, in Docket No. 111179. The respondent has also included in the taxable income of the First National Co. of Wichita Falls in Docket No. 111181 certain income which, in a proceeding not before us, he has also determined was the taxable income of McGregor, McCutchen, and McGregor, trustees of Trust No. 1. On the same day that the respondent determined the deficiencies here in question, he also determined deficiencies against McGregor, McCutchen, and McGregor, trustees of Trust No. 1, which latter deficiencies have been paid. We do not have that proceeding before us.

Notwithstanding the filing of a petition in the name of the dissolved corporation (Docket No. 111181) which was signed by counsel and verified by the former president and a director of the First National Co. of Wichita Falls, petitioners in their opening brief challenge for the first time our jurisdiction in that proceeding upon the ground that the deficiency notice was mailed more than three years after the corporation was dissolved, although the respondent within the three-year period provided for in article 1389 of Vernon's Annotated Texas Statutes had notice of the dissolution. Our first question, therefore, is whether the proceeding in Docket No. 111181 should be dismissed for lack of jurisdiction.

Our second question is to determine the ownership of the duplicated income. If we determine that the income in question belongs to the dissolved corporation, and if we have jurisdiction in Docket No. 111181, the deficiencies determined against that corporation will be sustained in full, and the deficiencies determined against the First National Bank of Wichita Falls, trustee of Trust No. 2, in Docket No. 111179 will be disallowed in full. If we determine that the income in question belongs in part to Trust No. 1 and in part to Trust No. 2, then the deficiencies determined against the First National Co. of Wichita Falls in Docket No. 111181 (in case we have jurisdiction in that proceeding) will be disallowed in full and there will remain further questions to be decided in the case of the First National Bank of Wichita Falls, trustee of Trust No. 2, in Docket No. 111179. These additional questions are as follows: (1) Did the respondent err in determining that the First National Bank of Wichita Falls, trustee of Trust No. 2, was an association taxable as a corporation rather than a liquidating trust the income of which was taxable entirely to the beneficiaries of the trust? and, (2) if held to be an association taxable as a corporation, did the respondent err in disallowing certain deductions for depletion and depreciation for the period of Trust No. 2 for the calendar year 1939 certain proceeds from the sales of rights of way?

All of the above stated questions and alternative questions, except the jurisdictional question, are raised by appropriate assignments of error.

FINDINGS OF FACT.

All of the tax returns involved in these proceedings that were filed were filed with the collector of internal revenue for the second district of Texas.

The First National Co. of Wichita Falls, Texas, hereinafter sometimes referred to as the company, was a Texas corporation chartered in 1927. Its office was in Wichita Falls, Texas. Its original capital was $250,000. It was organized to make loans and deal in notes and securities of a type not ordinary handled by national banks.

In 1935 the company reduced its capital stock from $250,000 to $50,000. In carrying out this reduction it transferred to W. M. McGregor, C. E. McCutchen, and Carter McGregor, as trustees, various notes, parcels of real estate, and other assets which it then had on hand. The assets so transferred consisted of all of its remaining assets after it had segregated for retention sound assets equal to its reduced capital stock plus its liabilities. The transfer to McGregor, McCutchen, and McGregor, trustees, was for the use and benefit of the stockholders of the company. The trust thus created is sometimes referred to in the record as Trust No. 1. Although this trust filed fiduciary returns, all income and deductions with respect to the property so transferred to Trust No. 1 up to February 7, 1938, were treated by both the company and respondent as the income and deductions of the company, as a segregation of assets rather than as a distribution. Prior to the reduction in capital stock in 1935 the company had been indebted on two promissory notes— one for $6,000 and one for $2,500— but these were assumed and renewed by McGregor, McCutchen, and McGregor, trustees of Trust No. 1.

Between 1935 and February 1, 1938, the company acquired through foreclosure a tract of land in the KMA Oil Field in Wichita County, Texas, together with one-half of the minerals under the land. During this period oil was discovered upon this property. At February 1, 1938, all of this property was under oil and gas leases and was producing large quantities of oil. The principal asset of the company at that date was its royalty interest in these lands and certain oil payments which had been retained in oil and gas leases made on these lands.

At a meeting of the stockholders of the company, held on February 1, 1938, pursuant to and in accordance with article 1387, subdivision 3 of Vernon's Annotated Texas Statutes, at which more than four-fifths of the stock was represented, the stockholders unanimously adopted a resolution, the material provisions of which are as follows:

(1) It is for the best interest of the First National Company aforesaid and its stockholders that said Company be dissolved.

(2) The stockholders present in person or by proxy at this meeting, constituting more than four-fifths (4/5ths) in interest of all of the stockholders of said Company, hereby consent to the dissolution of the First National Company aforesaid, and signify said consent in writing by signing this resolution.

(3) All debts of every kind and character, direct or indirect, of the First National Company aforesaid have heretofore been fully paid off, discharged or satisfied, and there exists no necessity for an administration of the assets of the First National Company for the purpose of paying debts, and no one, save the stockholders of the First National Company, has any right to or lien or claim upon the assets now owned by said Company.

(4) To accomplish and complete the...