Great Northern Invest., Inc. v. Commissioner of Tax., 38871

• Decision Date: 20 March 1964
• Docket Number: No. 38871,38871
• Citation: 127 N.W.2d 444,267 Minn. 447
• Parties: GREAT NORTHERN INVESTMENTS, INC., Respondent, v. COMMISSIONER OF TAXATION, Relator.
• Court: Minnesota Supreme Court

Page 444

127 N.W.2d 444

267 Minn. 447

GREAT NORTHERN INVESTMENTS, INC., Respondent, v. COMMISSIONER OF TAXATION, Relator.

No. 38871.

Supreme Court of Minnesota.

March 20, 1964.

Syllabus by the Court

1. The Board of Tax Appeals is the trier of fact in proceedings before it and it must determine the probative value of the testimony. Except when the board's action is arbitrary, oppressive, or unreasonable, this court in reviewing a decision of the board is not permitted to substitute its judgment on the facts for that of the board.

2. The evidence reasonably supports the board's finding that the corporate distributions in issue were made pursuant to a plan of liquidation.

3. The Board of Tax Appeals properly applied the 'business-contraction theory' to determine whether corporate distributions received by the taxpayer were 'essentially equivalent to a dividend' under Minn.St. 290.135, subd. 4(a) (2), and the evidence supports its finding on that issue.

4. Under the circumstances of the case the board could properly find that a reduction in par value of stock constituted a 'redemption' of stock under § 290.135, subd. 4(a)(2).

Walter F. Mondale, Atty. Gen., Jerome J. Sicora, Special Asst. Atty. Gen., St. Paul, for relator.

Dorsey, Owen, Marquart, Windhorst & West, and Paul G. Zerby, Minneapolis, for respondent.

NELSON, Justice.

Certiorari upon the relation of the commissioner of taxation to review a decision of the Board of Tax Appeals reversing an order of the commissioner which had denied a claim for refund of income taxes paid by Great Northern Investments, Inc. (hereinafter referred to as taxpayer or Great Northern). The board held that additional tax had been assessed erroneously because certain distributions made by Northwestern Fire and Marine Insurance Company (hereinafter referred to as Northwestern) to the taxpayer had been made in partial liquidation under Minn.St. 290.135, subd. 4(a)(2). If the distributions were in partial liquidation the parties agree that the amounts are treated 'as in part or full payment in exchange for the stock' by § 290.134, subd. 1(a)(2), and no gain or loss is recognized to the taxpayer under § 290.135, subd. 2. The question presented is whether the board erred in finding that the distributions were in partial liquidation of Northwestern.

The commissioner and Great Northern entered into a comprehensive stipulation as to the facts and the only testimony given at the hearing before the board was that of T. R. Anderson, the president of Great Northern.

The taxpayer, Great Northern, was a corporation organized under the laws of Delaware with its principal office in Wayzata, Minnesota. Since its incorporation in 1952 its business had been investments in securities. Northwestern was a Minnesota corporation with its principal offices in Minneapolis. It was licensed to operate in 49 states and the District of Columbia. Since 1915 its business had been managed entirely by Hartford Fire Insurance Company (hereinafter referred to as Hartford) under contracts whereby Hartford's personnel wrote all policies and a percentage of all premiums was paid to Northwestern. In addition the contracts allowed Hartford to terminate the arrangement upon 6 months' notice.

In 1958 such notice was given by Hartford, to take effect December 31, 1958. It was agreed that Hartford would assume all liability on the insurance contracts in force. Northwestern would then have no employees, office equipment, or facilities to continue the insurance business, but would own a sizeable portfolio of securities with a fair market value in excess of $6,000,000.

Aware of this situation, the taxpayer determined to acquire Northwestern's portfolio of securities by obtaining ownership of Northwestern's stock and then completely liquidating Northwestern. Between June 1958 and May 1959 the taxpayer purchased 110,218 of Northwestern's 113,766 shares of stock outstanding at a cost of $4,630,877.86. To make this purchase it was necessary for the taxpayer to sell practically its entire list of stocks and securities and also to take out a substantial bank loan. Ultimately over 95 percent of the taxpayer's assets were made up of Northwestern stock.

In 1958 the commissioner of insurance made it known that he would not approve the complete liquidation and dissolution of Northwestern. On January 5, 1959, the directors of the taxpayer adopted a plan to liquidate Great Northern completely as well as a plan whereby Northwestern would be liquidated--

'* * * either (a) through a reduction of the capital of Northwestern, a distribution by said corporation to its stockholders, including the Company (Great Northern), of all of its surplus, and the subsequent sale by the Company of its shares of Northwestern at a price to be determined by the directors of the Company, or (b) through the liquidation and dissolution of Northwestern in the manner provided by the statutes of the State of Minnesota.'

From the date of the adoption of this plan, T. R. Anderson, then president of both the taxpayer and Northwestern, devoted his entire time to effecting the complete liquidation of Northwestern. At the same time, however, alternative plan (a) was pursued. On January 29, 1959, a plan was submitted for ruling to the commissioner of internal revenue which proposed reduction of the stated capital of Northwestern from $1,250,000 to $100,000, distribution of all of Northwestern's assets exceeding $100,000 in redemption of 95 percent of Northwestern's outstanding stock, and sale of the remaining shares in Northwestern for $225,000 (the amount over $100,000 representing the value placed on Northwestern's insurance licenses). Efforts to find a purchaser were carried on, but chances of success appeared slight. As an alternative to the sale of Northwestern stock, negotiations were entered into with a small insurance company, Guaranty Security Insurance Company (hereinafter referred to as Guaranty), for a merger of the companies on the basis of a reduction of Northwestern's assets to $750,000 and an exchange of the stock in Northwestern for stock in the surviving corporation.

While these alternatives were being pursued, and as a step pursuant to each of them (regardless of which should finally be adopted), on April 13, 1959, Northwestern authorized a distribution of $50 per share under the general plan of liquidation. This distribution was out of earnings and profits accumulated by Northwestern since December 31, 1932, and resulted in the elimination of its surplus. The taxpayer received its distribution in the form of securities having a basis to Northwestern of $1,723,995.27. The market value on the date of payment, May 10, 1959, was $5,511,574.47.

By June 1959 it appeared that the only feasible course open to Northwestern was to merge with Guaranty, the contemplated merger requiring that Northwestern reduce its net worth to $750,000. To that end, and in accordance with alternative (a) of the plan of January 5, on June 12, 1959, Northwestern reduced its capital by changing the par value of its stock from $10 to $5. By so doing further distributions were made possible which would reduce Northwestern's net worth to $750,000 without impairing capital. On June 18, 1959, Northwestern authorized distribution of all its assets in excess of $750,000, as a result of which the taxpayer received $881,984 on that date and $17,342.67 on July 1, 1959. Under the merger agreement, which was executed on June 18, Northwestern was the surviving corporation but was to be operated under Guaranty's name. Each share of Northwestern stock was exchanged for .614489 of a share in the surviving corporation, the taxpayer receiving Guaranty stock having a total par and market value of $338,740.

Thereafter the taxpayer undertook complete liquidation. As of September 30, 1959, it had ceased operations and distributed to its shareholders the sum of $3,070,970 and 67,609 of its 67,748 shares in Guaranty, leaving its net worth $195,682.46 exclusive of contingent liabilities, including the tax here involved.

From the above transactions the taxpayer received a total sum of $6,749,641.14 on an investment of $4,630,877.86 for a gain of $2,118,763.28. This amount was reported as unrecognized gain under § 290.135, subd. 2, on the taxpayer's final Minnesota income tax return for the year ending September 30, 1959. By order dated July 11, 1960, the commissioner of taxation treated said amount as dividend income and assessed a tax of $134,642.16 with $3,081.82 interest. Great Northern paid the tax assessed but filed its claim for refund, which was rejected by the commissioner. His action was reversed by the Board of Tax Appeals, which found the distributions to have been made in partial liquidation.

When this matter was presented to the board, the taxpayer advanced several alternative arguments, only one of which was the claim that the distributions were made in partial liquidation. These same alternative positions have been taken by it in its argument before this court. At least at the outset, however, we need only concern ourselves with reviewing the ground upon which the board based its decision. Hence, the issue presented is whether the board erred in holding the distributions to have been made in partial liquidation. If the board correctly decided this issue, the taxpayer is relieved of recognizing any gain thereon since it is admitted that it adopted a 12-month liquidation plan pursuant to Minn.St. 290.135, subd. 2. Judging from the parties' oral arguments and briefs, the real dispute herein centers upon the $50-per-share distribution of April 13, 1959. This fact was also noted by the board in its memorandum:

'The only controversy that appears to the Board concerns itself with the distribution of $50 per share on April 13, 1959.'

Accordingly, it is to this distribution that we primarily direct our attention.

Section 290.135, subd. 4(a), provides in part:

'For...