Harrison v. Comm'r of Internal Revenue
| Decision Date | 20 April 1955 |
| Docket Number | 47963.,Docket Nos. 47962 |
| Citation | 24 T.C. 46 |
| Parties | JOHN W. HARRISON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.CLIFFORD F. HARRISON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Martin A. Rosenberg, Esq., for the petitioners.
Urban C. Bergbauer, Esq., for the respondent.
EXCHANGE OF PROPERTY FOR STOCK AND SECURITIES— RECOGNITION OF GAIN— SEC. 112(b)(5)— SEC. 112(c)(1), I.R.C. 1939.— Partnership assets were exchanged for stock and drawing accounts in a new corporation. Held that the drawing accounts were not securities under section 112(b)(5) and were taxable as ‘other property’ under section 112(c)(1).
Respondent determined deficiencies in petitioners' income tax for the year 1947 as follows:
+----------------------------------------------+
¦Docket No. ¦Petitioner ¦Deficiency ¦
+------------+--------------------+------------¦
¦ ¦ ¦ ¦
+------------+--------------------+------------¦
¦47962 ¦John W. Harrison ¦$11,004.98 ¦
+------------+--------------------+------------¦
¦47963 ¦Clifford F. Harrison¦12,130.89 ¦
+----------------------------------------------+
The following issues are presented:
(1) Did the exchange of partnership assets for stock and drawing accounts take place in 1946 or 1947?
(2) Was the exchange of partnership assets for stock and drawing accounts in the newly formed corporation an exchange where no gain or loss should be recognized under section 112(b)(5) of the 1939 Code?
(3) Are the deficiencies properly determined under section 112(c)(1) of the 1939 Code?
Some of the facts are stipulated and are incorporated herein by this reference.
Petitioners are brothers and are residents of St. Louis, Missouri; they filed their 1947 individual income tax returns with the collector of internal revenue for the first district of Missouri. During 1946, as partners, they operated the Harrison Lumber & Hardware Company, hereinafter referred to as the partnership. A partnership return for this business was filed with the collector of internal revenue for the first district of Missouri for the year 1946.
On December 23, 1946, petitioners and Clifford Greve, their attorney, executed articles of incorporation to incorporate their partnership business. The corporation was known as the ‘Harrison Lumber & Hardware Company,‘ hereinafter referred to as the corporation. The Corporation filed a 1947 return with the collector of internal revenue for the first district of Missouri but did not file one for 1946.
The articles of incorporation authorized 1,050 shares of stock. Under date of January 3, 1947, 659 shares were issued to John W. Harrison, 390 shares to Clifford F. Harrison, and 1 share to Clifford Greve. The articles of incorporation also stated that the following assets were transferred from the partnership:
+-------------------------------------------------+
¦Cash ¦$10,000 ¦
+----------------------------------------+--------¦
¦Accounts receivable ¦150,000 ¦
+----------------------------------------+--------¦
¦Inventory of lumber and millwork on hand¦250,000 ¦
+----------------------------------------+--------¦
¦Equipment, office furniture and fixtures¦1,500 ¦
+----------------------------------------+--------¦
¦Automotive equipment ¦20,500 ¦
+----------------------------------------+--------¦
¦Mill equipment ¦12,000 ¦
+----------------------------------------+--------¦
¦Yard wagons and equipment ¦11,000 ¦
+----------------------------------------+--------¦
¦Total ¦$455,000¦
+-------------------------------------------------+
This property is subject to liabilities in the amount of $305,000 leaving net value of $150,000.
On December 28, 1946, the Missouri secretary of state issued a certificate of incorporation for the corporation. A copy of this certificate and the articles of incorporation were filed for record on January 2, 1947. The corporation received a certificate of authority to commence business on January 16, 1947.
The partnership books were closed as of December 31, 1946; at this time the books reflected a partnership net worth of $242,400.62. The books of the corporation were opened on January 2, 1947. Journal entry No. 1, dated January 2, 1947, recorded the transfer of the partnership assets to the corporation; journal entry No. 2 recorded the transfer of partnership liabilities to the corporation.
As of January 2, 1947, the following opening entry appears on the books of the corporation:
+----------------------------------------------------+
¦Cash ¦$15,246.00¦ ¦
+-----------------------------+----------+-----------¦
¦Accounts receivable ¦159,780.64¦ ¦
+-----------------------------+----------+-----------¦
¦Clifford Greve ¦142.86 ¦ ¦
+-----------------------------+----------+-----------¦
¦Deferred charges ¦7,583.81 ¦ ¦
+-----------------------------+----------+-----------¦
¦Inventory ¦313,178.79¦ ¦
+-----------------------------+----------+-----------¦
¦Fixed assets ¦49,498.84 ¦ ¦
+-----------------------------+----------+-----------¦
¦Improvements ¦2,995.65 ¦ ¦
+-----------------------------+----------+-----------¦
¦Vouchers payable ¦ ¦$122,846.46¦
+-----------------------------+----------+-----------¦
¦Accrued wages payable ¦ ¦3,036.65 ¦
+-----------------------------+----------+-----------¦
¦Notes payable to bankers ¦ ¦180,000.00 ¦
+-----------------------------+----------+-----------¦
¦John W. Harrison, drawing ¦ ¦44,019.92 ¦
+-----------------------------+----------+-----------¦
¦Clifford F. Harrison, drawing¦ ¦48,523.56 ¦
+-----------------------------+----------+-----------¦
¦Capital stock ¦ ¦150,000.00 ¦
+----------------------------------------------------+
The above entries represent all assets and all liabilities of the partnership as shown on its books as of December 31, 1946.
It was stipulated that the partnership goodwill as of January 1, 1947, was $255,317.20.
The intention of the petitioners was to have the corporate charter issued by the secretary of state as of December 31, 1946, and that the new corporation would commence business as of January 1, 1947.
The parties have stipulated, if the transfer of the partnership assets was effected in 1947 rather than in 1946, that the recognized gain to John W. Harrison is limited to ‘other property received in the amount of $44,019.92,’ and to Clifford F. Harrison that the recognized gain is ‘limited to other property received in the amount of $48,523.56.’
In the statement with the deficiency notice respondent explained the adjustment to John W. Harrison's 1947 income as follows:
(a) It has been determined that you realized taxable income under the provisions of Section 112(b)(5) of the Internal Revenue Code to the extent of ‘other property’ received upon the transfer of assets of The Harrison Lumber & Hardware Co., a partnership, to a corporation of the same name, recognized in the total amount of the ‘other property’ received, or $44,019.92, taxable as a long-term capital gain at 50%, or $22,009.96.
A similar adjustment was made for Clifford F. Harrison.
The partnership property was exchanged for corporate stock and drawing accounts in 1947.
The first issue we must consider is whether the exchange of partnership assets for corporate stock and drawing accounts occurred in 1946 or 1947. The petitioners contend that the exchange occurred in 1946 and under section 275(c) 1 of the 1939 Code the statute of limitations would have run against respondent's determination. It is respondent's contention that the exchange occurred in 1947.
Under Missouri law the existence of a corporation dates from the time of the filing of the articles of incorporation with the secretary of state. The certificate given by the secretary of state is evidence in the State courts of the existence of the corporation. However, a corporation may not commence business until certain requirements are met, and a certificate authorizing it to commence business has been issued by the secretary of state. See secs. 351.070 and 351.075, R.S. Mo. 1949.
Also, under State law the filing of the articles of incorporation by the secretary of state constitutes acceptance by the corporation of all existing subscriptions to its shares, and thereupon subscribers for shares of their assignees shall be deemed to be stockholders of the corporation. Sec. 351.175, R.S. Mo. 1949.
Since the corporation filed its articles of incorporation in 1946, and since a certificate was issued by the secretary of state in 1946, the corporation did exist in 1946. In addition, the articles of incorporation stated that petitioners and Greve subscribed to all the authorized capital stock; therefore, the corporation had bona fide shareholders in 1946. However, according to the jurisprudence of Missouri, the articles of incorporation are not proof conclusively that the stock was fully paid. Raleigh Investment Co. v. Bunker, 285 Mo. 440, 227 S.W. 121; Yardley v. Caruthersville Motor Co., 225 Mo.App. 321, 35 S.W.2d 971. Therefore, the articles of incorporation are not proof conclusively that the partnership assets were transferred to the corporation in 1946.
Let us briefly review the facts. There was a partnership that closed its books as of December 31, 1946. Also in 1946 there was a corporation with bona fide stockholders, but the corporate books show no record of any corporate property ownership until January 2, 1947. No corporate tax return was filed for 1946.
The articles of...
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