Gallagher v. Butler

• Decision Date: 08 April 1964
• Citation: Gallagher v. Butler, 214 Tenn. 129, 378 S.W.2d 161, 18 McCanless 129 (Tenn. 1964)
• Parties: , 214 Tenn. 129 J. M. GALLAGHER, Sr., Appellee, v. G. Hilton BUTLER, Commissioner of Revenue, State of Tennessee, Appellant. FIRST AMERICAN NATIONAL BANK, Executor of the Estate of John Oman, III, deceased, Appellees, v. G. Hilton BUTLER, Commissioner of Revenue, State of Tennessee, Appellant. R. N. COOLIDGE, Appellee, v. Alfred T. MacFARLAND, Commissioner of Revenue, State of Tennessee, Appellant. J. B. FRENCH, Appellee, v. Donald R. KING, Commissioner of Revenue, State of Tennessee, Appellant. Edward Y. CHAPIN, Jr., et ux., Appellees, v. G. Hilton BUTLER, Commissioner of Revenue, State of Tennessee, Appellant.
• Court: Tennessee Supreme Court

Page 161

378 S.W.2d 161

18 McCanless 129, 214 Tenn. 129

J. M. GALLAGHER, Sr., Appellee, v. G. Hilton BUTLER, Commissioner of Revenue, State of

Tennessee, Appellant.

FIRST AMERICAN NATIONAL BANK, Executor of the Estate of John

Oman, III, deceased, Appellees, v. G. Hilton BUTLER, Commissioner of Revenue, State of

Tennessee, Appellant.

R. N. COOLIDGE, Appellee, v. Alfred T. MacFARLAND, Commissioner of Revenue, State of

Tennessee, Appellant.

J. B. FRENCH, Appellee, v. Donald R. KING, Commissioner of Revenue, State of Tennessee,

Appellant.

Edward Y. CHAPIN, Jr., et ux., Appellees, v. G. Hilton BUTLER, Commissioner of Revenue, State of

Tennessee, Appellant.

Supreme Court of Tennessee.

April 8, 1964.

George F. McCanless, Atty. Gen., Milton P. Rice, Walker T. Tipton, Asst. Attys. Gen., Nashville, for appellants.

William Waller, Waller, Landsen & Dortch, Nashville, Kenneth L. Roberts, Nashville, of counsel, for appellees Coolidge, Gallagher, First American Nat. Bank and others.

W. W. Davis, Knoxville, Egerton, McAfee, Armistead & Davis, Knoxville, for appellee French.

Wm. L. Taylor, Jr., Swafford, Jahn & Taylor, Chattanooga, for appellees Chapin and wife.

WHITE, Justice.

The Commissioner has appealed from the final decrees of the chancellors in sustaining the bills to recover taxes paid under protest and assigns error.

All of these cases have been consolidated here by consent and it is agreed that one opinion may be rendered disposing of all matters. Since the facts in each case are slightly different, we find it necessary to set them out, but only in brief form.

1. Complainant Gallagher sold all of his common stock in J. M. Gallagher Company, a Tennessee corporation, a going and continuing concern, to the corporation and realized a substantial monetary gain. The Commissioner determined that the excess of the sale price of said stock over the costs thereof to Gallagher represented a distribution of earned surplus of the corporation and, therefore, taxable to Gallagher under the Hall Income Tax Law, and assessed him accordingly. The chancellor found in favor of Gallagher and with his holding we agree.

2. First American National Bank and Mrs. John Oman, III are co-executors of Mr. Oman's estate. Mr. Oman was fatally injured in an airplane accident occurring in March, 1960. At his death he owned common stock in Oman Construction Company and Southeast Tractor and Equipment Company, Tennessee corporations. Oman Construction Company collected the proceeds of life insurance policies carried on Mr. Oman's life for the purpose of providing funds to purchase his stock in the event of his death. By agreement the co-executors sold the said stock to the corporations and realized substantial profits thereon. The Commissioner claimed that the profits came from the earned surplus of the corporations and were, therefore, distributions of such earned surplus within the meaning of T.C.A. § 67-2609. The chancellor held that the profits realized amounted to capital gains and were not taxable under the Act. We agree with the chancellor.

3. Mr. Coolidge owned stock in Sewanee Silica Sand Company, Inc., a Tennessee corporation. Upon liquidation of the corporation assets thereof were delivered over to Coolidge resulting in a gain to him over and above his original investment, commonly referred to as a capital gain. In the main the surplus of the Sewanee Silica Sand Company, Inc. resulted from a gain on the sale of its properties. This sale was not made by the corporation as a going concern, but only as a part of the process of liquidation.

The chancellor sustained the bill of Coolidge in part, but found the amount received by him in liquidation from the earned surplus of the corporation taxable. The bill should have been sustained in its entirety.

4. J. B. French owned stock in a Tennessee corporation. By appropriate action of its directors and stockholders the charter was surrendered and its assets turned over to French, the sole stockholder. The value of the assets was in excess of the amount paid for the stock when purchased as reflected in the earned surplus account.

The chancellor held that the surrender by French of the stock to the corporation 'was simply an exchange of his stock for the assets and constitutes a sale', and '* * * in no way constitutes a dividend derived from the stock.' We agree.

The chancellor in disposing of the French case quoted from Shields v. Williams, 159 Tenn. 349, 364, 19 S.W.2d 261 (1929):

'The owner of a share of stock in a corporation whose corporate property is assessed is entitled, besides dividends, to his part of the corporate property when the corporation is wound up. Meanwhile, the corporate property coming to him is being taxed.

'The essence of the corporation tax cases cited is that taxation of the basic property justifies release from taxation of the ultimate right to receive such property.'

5. Chapin and wife owned thirty-seven shares of the capital stock of Star Realty Company, Inc., a Tennessee corporation, ten shares of which he received as a gift from his father in July, 1934. The remaining twenty-seven shares were received by him as an inheritance from his father, who died in March, 1954. The shares received as a gift had a cost or basis to the complainant of $100.00 per share. The shares received by inheritance had a cost or basis to the complainant of $448.00 per share, as determined in an Inheritance Tax Return filed by the estate of complainant's father and accepted as correct by the then Commissioner.

In November, 1958 this corporation, by proper resolution, adopted a plan of liquidation and in execution thereof proceeded to turn over its assets to the shareholders according to their stock ownership. The par value of the stock was $100.00 per share. The value of the assets turned over to Chapin in exchange for his stock on liquidation was in excess of the par value. Therefore, it is this excess which the Commissioner contends is taxable.

The chancellor held that under these circumstances the complainant received a capital gain and not a dividend. The memorandum of the chancellor says:

'The Court concludes that the only dividends taxable are those declared in the regular course of business of a going concern and paid either from current profits or earned surplus. Distribution to stockholders pursuant to a bona fide liquidation of the corporation are not taxable as 'dividends', but are merely the return to the stockholders of their 'capital'. Hellmich v. Hellman, 276 U.S. 233, 48 S.Ct. 244, 72 L.Ed. 544, 56 A.L.R. 379.'

We also agree with the chancellor in this case.

The Commissioner says in his brief that the real question to be resolved in all these cases is whether, upon the liquidation of a corporation and resultant distribution of the corporate assets to shareholders thereof, or upon redemption for the purpose of retiring stock held by shareholders, the shareholder is liable for Tennessee taxation with respect to that portion of the amount distributed to him, which is in excess of his original investment in such corporation.

In considering the applicability of the tax to the facts in the several cases, we look first to the authority for the imposition of the tax.

Article 2, Section 28 of the Constitution of Tennessee provides: 'The Legislature shall have power to levy a tax upon incomes derived from stocks and bonds that are not taxed ad valorem.' (Emphasis supplied).

Pursuant to this provision the General Assembly enacted Chapter 20, Acts of 1931, Extra Session, now T.C.A. § 67-2601 et seq.

Section 67-2602 provides for the general rate to be '* * * levied and collected on incomes derived by way of dividends from stocks * * *.' (Emphasis supplied).

Section 67-2609, which the State contends is applicable herein, provides that 'No distribution of capital by stock dividend, or liquidation or otherwise, shall be taxed as income; * * *.' It also provides that '* * * earned surplus shall not be considered as capital, and shall be taxed as income when and in whatever manner it may be distributed * * *.'

These two sections are a part of said Chapter 20, and it becomes necessary to construe them in pari materia in order to arrive at an intelligent understanding of the purpose and intent of the Legislature as therein expressed.

As a general proposition Code provisions in pari materia, as here, must be construed together, and the construction of one, if doubtful, may be aided by the consideration of the words of and the legislative intent indicated by the others. Hickson v. State, 196 Tenn. 659, 663, 270 S.W.2d 313 (1954).

It is the duty of this Court in construing an Act to reconcile different portions giving them a consistent meaning rather than otherwise. Scales v. State, 181 Tenn. 440, 181 S.W.2d 621 (1944). In so construing an Act, words may be modified, altered or supplied for the sake of consistency in order that the intent of the Legislature may be made clear.

Section 67-2609 states in plain language that distribution of capital by stock dividends, liquidation or otherwise, shall not be taxed as income. The understanding of this sentence is plain and presents no problem. As a matter of fact, if it provided otherwise it would be in conflict with T.C.A. § 48-211, which states that dividends may be paid to stockholders from a corporation's net earnings or from the surplus of its assets over its liabilities, including capital but not otherwise. The directors of a corporation may issue either common or preferred stock as dividends provided it has a surplus equal in vlaue.

The real problem lies in the interpretation of the words 'earned surplus shall not be considered as capital, and shall be taxed as income when and in whatever manner it may be distributed.'

In Lawrence v. MacFarland, 209 Tenn. 376, 354 S.W.2d 78 (1962), we said that T.C.A. § 67-2602 is the levying statute and that T.C.A. § 67-2609 is an exception to the levy. We also said that...