Georday Enterprises v. Commissioner of Internal Rev.

• Decision Date: 09 March 1942
• Docket Number: No. 4818,4819.,4818
• Citation: 126 F.2d 384
• Parties: GEORDAY ENTERPRISES, Limited, v. COMMISSIONER OF INTERNAL REVENUE. HELVERING, Commissioner of Internal Revenue, v. GEORDAY ENTERPRISES, Limited.
• Court: U.S. Court of Appeals — Fourth Circuit

126 F.2d 384 (1942)

GEORDAY ENTERPRISES, Limited, v. COMMISSIONER OF INTERNAL REVENUE.

HELVERING, Commissioner of Internal Revenue, v. GEORDAY ENTERPRISES, Limited.

Nos. 4818, 4819.

Circuit Court of Appeals, Fourth Circuit.

March 9, 1942.

Richard H. Wilmer, of Washington, D. C. (Joseph C. White and Thomas F. Boyle, both of New York City, on the brief), for Georday Enterprises.

Hubert L. Will, Sp. Asst. to the Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and J. Louis Monarch and Lee A. Jackson, Sp. Assts. to the Atty. Gen., on the brief), for Commissioner of Internal Revenue.

Before PARKER, SOPER and DOBIE, Circuit Judges.

DOBIE, Circuit Judge.

This is a petition for the review of a decision of the United States Board of Tax Appeals determining a deficiency in the income tax liability of Georday Enterprises, Limited (hereinafter called Georday), for the calendar year 1932 in the sum of $50,875, and a 25% penalty in the sum of $12,718.75 for the same year. The memorandum opinion of the Board, entered on December 3, 1940, is unreported.

The factual pattern of this case is complicated but admits of no dispute. Georday is a Canadian corporation, organized on October 21, 1931, with its principal office located at Charlottetown, Prince Edward Island, Canada. Its corporate purposes were to hold, buy and sell investment securities. Power Securities Corporation (hereinafter referred to as Power) was a corporation organized on August 30, 1922, under the laws of Delaware. On that date, Lady Cunard, a nonresident alien, paid $3,000 for 300 shares of the voting common stock of Power. These were the only shares ever issued by Power. No distributions were ever made on this stock other than the distribution of the stock of Blenheim Company, Ltd. (hereinafter referred to as Blenheim), which will be subsequently described.

On or about August 31, 1922, Lady Cunard transferred to Power certain securities, and in payment therefor Power agreed to pay her, over a period of time, the sum of $361,000. By June 12, 1928, Power had repaid to Lady Cunard the $361,000, together with $22,872.46 which it had borrowed from her in October, 1925.

From August 31, 1922, to January 22, 1932, Power was engaged in the business of holding, buying, selling and otherwise dealing in investment securities and collecting the income therefrom. During this period, Lord & Widli, of New York City acted as brokers for Power, and Power had accumulated earnings and profits of $728,586.20. In the period from July 2, 1928, to and including October 2, 1931, Lady Cunard had, from time to time, borrowed money from Power, and on October 26, 1931, she was indebted to Power in the principal sum of $338,575.21, together with accrued interest of $25,991.05.

On October 26, 1931, five days after Georday's incorporation, Lady Cunard, through August E. Widli, subscribed for the entire capital stock of Georday consisting of 300 shares with a par value of $10 per share. Widli paid the requisite $3,000 and charged this amount to Lady Cunard's account with Lord & Widli. On the same day, October 26, 1931, Georday acquired the entire capital stock of Power from Lady Cunard for $365,000 in cash, which Georday had borrowed from Lord & Widli, and $350,000 in 10 year bonds of Georday. Lady Cunard, in turn, paid the cash thus received to Power in payment of the loans previously made to her.

On November 27, 1931, Lady Cunard caused Blenheim Company, Ltd., to be incorporated under the laws of the Colony of Newfoundland, with an authorized capital stock of 500 shares of a par value of $10 each. Blenheim was organized for the purpose of holding, buying, selling and otherwise dealing in investment securities and collecting income therefrom. At the time of its formation, it was intended that Blenheim (a foreign corporation) should take over the assets and assume the liabilities of Power (a domestic corporation). Prior to January 22, 1932, Blenheim had no gross income from any source whatsoever and its only outstanding stock consisted of three shares issued to qualify directors.

On January 22, 1932, Power and Blenheim entered into a "Plan and Agreement of Reorganization". Pursuant to this arrangement, Power agreed to transfer to Blenheim all of its assets and Blenheim agreed to issue to Power, or its nominee, in exchange for the assets of Power, the entire authorized and then unissued shares of capital stock of Blenheim, consisting of 497 shares of the par value of $10 each. Power agreed to distribute the stock of Blenheim, when received, to its sole stockholder (Georday) without the surrender by the latter of the stock of Power.

This agreement was duly performed on January 22, 1932, in accordance with its terms. Blenheim acquired all the property and assets, and assumed all the liabilities of Power, while Power received the 497 shares of Blenheim stock and distributed them to Georday. Power was thereafter dissolved on August 25, 1932. No other shares of stock or securities were at any time issued by Blenheim. The fair market value of the Blenheim shares received by Georday on January 22, 1932, was $699,887.16.

On January 22, 1932, the stockholders of Blenheim passed the following resolution: "Resolved that a distribution of $740 per share on each outstanding share of the Company be made on January 23, 1932, to shareholders of record at the close of business on January 22, 1932, and that the amount of the above distribution be charged to the paid-in surplus account of the Company."

Pursuant to the terms of this resolution, Blenheim, on January 22, 1932, made a distribution of $740 per share, aggregating $370,000, to Georday as its sole stockholder. Since this date, Blenheim has continued in existence with substantial assets and has continued to hold, buy, sell and otherwise deal in investment securities and to collect the income therefrom. The gross income of Blenheim for the calendar year 1932 was reported as $16,737 in a return made to the Collector of Internal Revenue in Baltimore, on May 9, 1933. From January 22, 1932, until December 7, 1935, the business, securities and investments of Blenheim were managed in the same manner as were the business, securities and investments of Power before January 22, 1932.

On June 22, 1935, an Internal Revenue Agent completed an examination and investigation of the books and records of Georday at the office of Lord & Widli in New York City. On July 9, 1935, Georday was duly notified that a tax liability and penalty were proposed to be assessed against it for the calendar year 1932. The reason for asserting the penalty was that Georday had not filed a federal income tax return. Thereafter, and prior to the commencement of this proceeding before the Board of Tax Appeals, a conference was held between representatives of Georday and the Commissioner with reference to the asserted liability. However, Georday was adamant and still failed to filed a return. Accordingly, the Commissioner, on or about April 2, 1938, prepared a federal income tax return for Georday for the calendar year 1932. This was done pursuant to the authority granted in Section 3176 of the Revised Statutes, as amended, 26 U.S.C.A. Int.Rev.Code, § 3612.

The return so filed by the Commissioner had entered under gross income, profit from the sale of real estate, stocks, bonds and other capital assets, the amount of $712,013.16. In Schedule "B" of the return, this amount was computed as being the difference between $715,013.16, the net value of the Power assets as determined by the Commissioner, and the sum of $3,000 which was the original cost of the Power stock to Lady Cunard, and which the Commissioner determined was the basis of that stock in the hands of Georday. The return indicated no deductions. On April 2, 1938, the Commissioner sent Georday a notice of the deficiency in income taxes for the year 1932, resulting from the Commissioner's determination that Georday had realized a profit of $712,013.16 from the liquidation of Power.

The deficiency determination was based on the holding of the Commissioner that the alleged plan of reorganization of January 22, 1932, did not qualify as a non-taxable reorganization within the meaning of Section 112 of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev.Acts, page 511, and the holding that the transfer by Lady Cunard of the Power stock to Georday on October 26, 1931, was a non-taxable exchange within the purview of Section 112 (b) (5) of the Revenue Act of 1928, 26 U. S.C.A. Int.Rev.Acts, page 377. If the several transactions had occurred six months later, that is, subsequent to the passage of the Revenue Act of 1932, they clearly would not have resulted in a non-taxable reorganization. See Section 112(k), Revenue Act of 1932, H. Rep. No. 708, 72nd Cong., 1st Sess. p. 20 (1931-1 Cum.Bull. (Part 2) 457, 471); S.Rep. No. 665, 72nd Cong., 1st Sess., pp. 26-27 (1931-1 Cum. Bull. (Part 2) 496, 515).

On June 29, 1938, Georday filed a petition with the Board of Tax Appeals in which it alleged, inter alia, that the transfer of the Power assets to Blenheim for the Blenheim stock constituted a nontaxable reorganization and that the receipt by Georday of the Blenheim stock pursuant to the plan was also nontaxable. It is not without importance that up to this time Georday had filed no income tax return whatever for 1932.

Finally, on September 13, 1938, Georday filed with the Collector of Internal Revenue at Baltimore, Maryland, a federal income tax return for its calendar year 1932, in which it set forth as gross income the amount of $370,000 as a dividend received. On the face of the return, opposite the entry of this item, appeared the following statement: "The taxpayer contends that the dividends shown above are not income from sources within the United States." However, it should be noted that more than 50% of the gross income of Power for the three year period ending with the close of its taxable year preceding January 22,...