Fischer v. Commissioner of Internal Revenue
| Decision Date | 28 April 1942 |
| Docket Number | 102945,102880,102881,102973.,102879,Docket No. 102878,102946 |
| Citation | 46 BTA 999 |
| Parties | JACOB FISCHER, PETITIONER, ET AL. v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Chas I. Dawson, Esq., for the petitioners.
DeWitt M. Evans, Esq., and Frank M. Cavanaugh, Esq., for the respondent.
These proceedings, duly consolidated, involve deficiencies in income tax determined by the respondent against the above named petitioners for the calendar year 1936 in the amounts of $533.09; $27,586.93; $2,009.05; $82,171.97; $506.46; $217.82; and $3,153.35, respectively.
The deficiencies are due primarily to the respondent's determination that the net income as disclosed by the return of each petitioner should be increased by one major adjustment, "Increase in dividends", common to all of the petitioners. Petitioners are all stockholders of the Henry Fischer Packing Co. During the taxable year 1936 a readjustment of the corporation's capital was effected by amendment of its articles of incorporation to provide for an authorized capital stock in the amount of $700,000 represented by 35,000 shares of common stock with a par value of $10 per share and 14,000 shares of 6 percent sinking fund cumulative preferred stock with a par value of $25 per share, instead of an authorized capital stock of $700,000 represented by 7,000 shares of common stock with a par value of $100 per share. In effecting the readjustment the corporation delivered to each of its 11 stockholders (including the 7 petitioners herein) 5 shares of new common and 2 shares of new preferred for the surrender of each share of old common previously held. The respondent determined that the fair market value of the new preferred thus received by each petitioner represented a taxable stock dividend to each petitioner, respectively, and that the net income of each petitioner should be increased accordingly. Each petitioner, by appropriate assignments of error, has contested this major adjustment and contends that the readjustment of the corporation's capital was a "recapitalization" and hence a reorganization under section 112 (g) (1) (D) of the Revenue Act of 1936, and that the exchange of the old common solely for new common and new preferred was nontaxable under section 112 (b) (3) of the same act which provides that "No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization." The respondent also made one or more minor adjustments to the net income of each petitioner, but those adjustments are not at issue in these proceedings.
FINDINGS OF FACT.
Each of the petitioners is an individual, with his residence at Louisville, Kentucky, and filed his income tax return for the calendar year 1936 with the collector of internal revenue for the district of Kentucky.
Prior to 1909 Henry Fischer embarked upon the business of peddling meat in Louisville, and about 1909 he started on a very small scale to manufacture meat products which he sold. He had associated with him his wife, Regina Fischer, and later their only child, Carl T. Fischer, all of whom are petitioners herein. On October 31, 1923, the "Henry Fischer Packing Company" (herein sometimes referred to as the corporation) was incorporated under the laws of the Commonwealth of Kentucky with an authorized capitalization of $250,000, to take over the business theretofore operated as a sole proprietorship by Henry Fischer. The original stockholders and the amounts paid for their stock in 1923 and 1924 were as follows:
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| | Amount
Issued to | How paid | paid
-----------------------|-------------------|---------
Henry Fischer ________ | Assets and cash _ | $114,200
J. L. Allgeier _______ | Cash ____________ | 12,000
E. J. Roppel _________ | Cash ____________ | 5,000
Herman Hornung _______ | Cash ____________ | 2,000
Ruddy Miller _________ | Cash ____________ | 7,000
Reinert Rausch _______ | Cash ____________ | 2,000
Jacob Fischer ________ | Cash ____________ | $3,000
Emiel Fleischer ______ | Cash ____________ | 2,000
John C. Bower ________ | Cash ____________ | 5,000
| | ________
Total (1,522 | |
shares) _____ | _________________ | 152,200
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Carl T. Fischer and Regina Fischer became stockholders of the corporation at a later date. Petitioner Jacob Fischer is a brother of Henry Fischer.
On February 13, 1925, the capitalization of the corporation was changed so that the common stock was $155,000 and employees' participating common stock was $95,000. Stock dividends were declared on May 1, 1925, in employees' participating stock in the amount of $46,600, being a dividend of 30.9 percent on outstanding common stock, and an additional 162 shares were sold to employees for $16,200.
On January 11, 1932, the capitalization of the corporation was increased from $250,000 to $700,000, all of which was common stock and a stock dividend of 300 percent was declared upon the outstanding common stock. New shares of common stock were issued for the outstanding employees' participating stock, share for share. A total of 6,716 new shares were thus issued as follows:
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| Shares | Par value
-----------------------------------------------------------------|--------|----------
Replace original common ________________________________________ | 1,522 | $152,200
300% stock dividend ____________________________________________ | 4,566 | 456,600
Replace 30.9% stock dividend employees _________________________ | 466 | 46,600
To replace employees' participating stock paid for in cash _____ | 162 | 16,200
| ______ | _________
Total ______________________________________________________ | 6,716 | 671,600
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On July 31, 1936, a stock dividend of 284 shares, par value $28,400, was distributed so that on that date the entire authorized capital stock, amounting to 7,000 shares of a par value of $700,000, was issued and outstanding. At that time the corporation had no preferred stock or bonds authorized or outstanding.
From the date of the incorporation in 1923 up to the date of the readjustment in 1936 hereinafter mentioned, Henry Fischer owned in excess of 52 percent of the corporation's outstanding capital stock. During all of that period he was president of the corporation and the entire business was under his supervision and direction. Each of the stockholders had been trained for his or her job by Henry Fischer, and each of them devoted his or her entire time to the corporation's business. The work performed by each of them was of the character essential to the proper operation of the plant, and their connection with the corporation had resulted in building up good will for the corporation and causing it to prosper.
The corporation had pursued the policy of largely leaving the earnings of the business in the corporation, enabling it to operate principally on its own capital rather than on borrowed money. Despite this policy, considerable cash dividends had been paid to the stockholders from year to year. From the date of the organization of the corporation up to and including the year 1936, cash dividends aggregating $584,961.85 had been paid to the stockholders. Tables are in the record covering the years 1923 to 1938, inclusive, showing gross assets, net income, taxable income, officers' salaries, surplus, capital stock, cash dividends, and stock dividends, but we deem it unnecessary to incorporate these tables in these findings.
The success of the corporation during the years preceding the readjustment hereinafter described was attributable to the cooperation, loyalty, and hard work of the petitioner, Henry Fischer, and the stockholding employees selected and trained by him.
Prior to the readjustment here involved, the greater part of the estate of Henry Fischer consisted of the common stock of the corporation. It was apparent to him that in the event of his death, exclusive of the corporation stock, he would not leave enough property of a liquid character to pay estate and inheritance taxes, and his son Carl was not in a position to pay the taxes and thus avoid a sale of the corporation stock in event of his father's death.
Because of the success of the corporation under the management of Henry Fischer and his associates, he and the other stockholders were desirous that that management should be continued after his death. However, inasmuch as the articles of incorporation made no provision with respect to the dissolution of the corporation, under section 561 of the Kentucky Statutes it could be dissolved at any time upon the written consent of the owners of the majority of the stock. Hence it was apparent to all the stockholders that a change in the ownership of the stock of Henry Fischer would not only imperil the continuation of the management, but the very existence of the corporation. The matter apparently had not been given much consideration until about 1934, in which year one Wood Axton, who was a friend and associate of Henry Fischer and was the dominant influence in the Axton-Fisher Tobacco Co. (of which Henry Fischer had been a stockholder), died and it became necessary to sell his stock in order to satisfy inheritance and estate taxes, with the resultant loss by the Axton...
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