Gehring Publ'g Co. v. Comm'r of Internal Revenue
| Decision Date | 22 December 1942 |
| Docket Number | 107047,Docket Nos. 107046,107048. |
| Citation | 1 T.C. 345 |
| Parties | GEHRING PUBLISHING COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.AHRENS PUBLISHING COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.RESTAURANT PUBLICATIONS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Petitioners are a parent corporation and two subsidiaries. During 1933 because of financial difficulties the stockholders of the parent corporation agreed to turn the management of all three corporations over to three voting trustees, two of whom were large creditors of the parent company. On April 1, 1933, the parent company entered into a four-party agreement, the substance of which was that in consideration for for an extension by the creditors of payment of liabilities the parent company would within thirty days ‘After the close of each calendar year‘ determine the net profits of the parent company and pay over 60 percent of such net profits proportionately to the creditors. On May 12, 1933, the three voting trustees agreed among themselves not to pay any dividend ‘except with the unanimous consent‘ of all three voting trustees. Held, in computing the surtax on undistributed profits under section 14 of the Revenue Act of 1936, section 501 of the Revenue Act of 1942, petitioners are not entitled to any credit under either section 26(c)(1) or section 26(c)(2) of the same act as amended by Section 501 of the Revenue Act of 1942.
2. In 1928 petitioner (Ahrens Publishing Co.) purchased at the top of the market the stock of another corporation, partly on credit. Thereafter the purchased stock continuously depreciated in value. In 1933 petitioner sought a reduction of the purchase stock of the stock, but failed. It then gave a note for the unpaid balance. In 1937 the seller agreed to accept $6,200 less than the balance due on the note in full settlement thereof. Petitioner was solvent at the time. Held, petitioner did not realize any taxable income from the settlement in 1937. Hirsch v. Commissioner, 115 Fed.(2d) 656, and Helvering v. Killian Co., 128 Fed.(2d) 433, followed. D. B. Chase, Esq., for the petitioners.
Ellyne E. Strickland, Esq., for the respondent.
These proceedings, duly consolidated for hearing, involve deficiencies in income tax determined by the respondent against petitioners for the years 1936 and 1937, as follows:
+----------------------------------------------------------+
¦Deficiency ¦ ¦ ¦ ¦
+----------------------------+----------+---------+--------¦
¦Petitioner ¦Docket No.¦1936 ¦1937 ¦
+----------------------------+----------+---------+--------¦
¦Gehring Publishing Co ¦107046 ¦$1,306.17¦$207.59 ¦
+----------------------------+----------+---------+--------¦
¦Ahrens Publishing Co ¦107047 ¦5,511.22 ¦8,979.51¦
+----------------------------+----------+---------+--------¦
¦Restaurant Publications, Inc¦107048 ¦912.01 ¦206.07 ¦
+----------------------------------------------------------+
In a statement attached to each deficiency notice each petitioner was advised that, under section 26 of the Revenue Act of 1936, for the years 1936 and 1937: ‘It is held that no credit is allowable under the provisions of section 26(c)(1) and (2) in computing the surtax on undistributed profits.‘ By appropriate assignments of error each petitioner has contested that holding.
In the statements attached to the respective deficiency notices the respondent also made adjustments to the net income of petitioners for one or both years, respectively, which adjustments, except one, are not contested. The contested adjustments occurs in the statement attached to the deficiency notice addressed to the Ahrens Publishing Co., for the year 1937, wherein the respondent determined ‘additional income‘ in the nature of ‘Gain realized from settlement of a debt for less than its full amount‘ of $6,200 explained as follows: ‘It is held that the gain of $6,200.00 was realized in the year 1937 in settlement of a debt of $26,000.00 due the Bohn Estate for $19,800.00.‘ By an appropriate assignment of error petitioner Ahrens Publishing Co. contests that adjustment.
Each petitioner also alleges that the respondent erred in not finding an overpayment of tax for the years 1936 and 1937, respectively.
The petitioners, Gehring Publishing Co., Ahrens Publishing Co., and Restaurant Publications, Inc., are corporations organized under the laws of the State of New York and are engaged in the business of publishing trade periodicals. (These petitioners will sometimes hereinafter be referred to as Gehring, Ahrens, and Restaurant, respectively.) Petitioners filed their corporate income and excess profits tax returns for the calendar years 1936 and 1937 with the collector of internal revenue for the third collection district of New York.
Ahrens is, and was during each of the taxable years 1936 and 1937, the parent company of Gehring and Restaurant, owning all of the outstanding common stock of Gehring and all of the outstanding voting common stock of Restaurant.
Ahrens and its subsidiaries, Gehring and Restaurant, filed consolidated income tax returns for the year 1933 and for several years prior thereto, as permitted by the applicable law then in effect.
In the early part of 1933, after the financial position of Ahrens had become insecure by reason of operating losses and its inability to meet its obligations when due, it became apparent that some arrangement would have to be worked out with the creditors whereby it could be permitted to continue in business.
On April 1, 1933, a voting trust agreement was entered into between E. H. Ahrens and certain other individuals holding a majority of the outstanding voting stock of the Ahrens Publishing Co., who were referred to therein as the ‘Stockholders,‘ and A. M. Adams, E. H. Ahrens, and W. C. Gehring as Trustees. ‘ The substance of this agreement was that the majority stockholders of Ahrens agreed to surrender their stock in Ahrens to the trustees for a period of ten years or until the then present indebtedness of Ahrens would be paid, and to amend the bylaws of Ahrens so as to reduce the number of directors of Ahrens and any of its subsidiaries to three and to cause to be elected as directors thereof the said three trustees. Each stockholder who thus surrendered his stock was given a certificate issued by the trustees for the number of shares thus surrendered. The certificate, among other things, provided that upon the expiration of the voting trust agreement the shares would be returned to the stockholder ‘and in the meantime‘ the stockholder ‘shall be entitled to receive payments equal to any dividends that may be collected by the undersigned trustees upon a like number of such shares held by him under the terms of the trust agreement aforesaid.‘
On the same day, April 1, 1933, a written agreement was entered into between Ahrens, referred to therein as the ‘Publisher,‘ party of the first part, the Gehring estate, party of the second part, other creditors of the publisher, including the Bohn estate, parties of the third part, and the three voting trustees, parties of the fourth part. This agreement provided, in part, as follows:
WHEREAS, the Publisher, although solvent, is unable to pay its indebtedness to its creditors at this time, or as it falls due, and desires an extension of time in which to pay such indebtedness in full and with interest as herein provided; and WHEREAS, a majority of the stockholders of the Publisher, entitled to vote, have entered into a voting trust agreement, selecting as voting trustees the parties of the fourth part, with a view to reducing expenses and protecting all creditors;
NOW, THEREFORE, in consideration of the mutual promises hereinafter contained and other valuable considerations, the parties hereto agree as follows:
1. The Publisher will deliver to each of the parties of the third part a promissory note * * * .
2. The Publisher agrees to pay, and the parties of the third part agree to accept payment of the principal amount of the said notes on the following basis:
After the close of each calendar year, the net profits of the Publisher will be determined within thirty (30) days. The Publisher will then pay over to each holder of the said notes, upon presentation thereof for endorsement, his pro rata share in an aggregate of sixty per cent of the said net profits; and the Publisher will continue so to do until each note has been satisfied in full with interest, at which time this agreement shall terminate as to such note holder.
On May 12, 1933, a special meeting of the stockholders of Ahrens was held, at which it was agreed that the corporation's affairs would be entrusted to the voting trustees and a resolution was passed authorizing the interchange of funds in the bank accounts of Ahrens and its subsidiaries and vice versa for financial purposes.
Under date of May 12, 1933, it was agreed by the three voting trustees that as directors and voting trustees of Ahrens they would not declare, or cause to be declared, or permit it to be declared any dividend upon any of the outstanding stock of Ahrens, or any of its subsidiaries, except with the unanimous consent of all three of the voting trustees. This agreement was in the form of a letter addressed to William C. Gehring by E. H. Ahrens and A. M. Adams, and William C. Gehring affixed his signature thereto as evidence of his acceptance.
Payments of principal were made to the principal creditors of Ahrens as follows:
+--------------------------------------------------------------+
¦ ¦Gehring ¦Bohn ¦Trade ¦
+----------------------------+-----------+----------+----------¦
¦ ¦estate ¦estate ¦creditors ¦...To continue reading
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