Jones v. Dawson

• Decision Date: 05 March 1945
• Docket Number: No. 3049.,3049.
• Citation: 148 F.2d 87
• Parties: JONES, Collector of Internal Revenue, v. DAWSON.
• Court: U.S. Court of Appeals — Tenth Circuit

148 F.2d 87 (1945)

JONES, Collector of Internal Revenue, v. DAWSON.

No. 3049.

Circuit Court of Appeals, Tenth Circuit.

March 5, 1945.

Warren F. Wattles, of Washington, D. C. (Samuel O. Clark, Jr., Sewall Key, Helen R. Carloss, and S. Dee Hanson, all of Washington, D. C., and Charles E. Dierker, of Oklahoma City, Okl., on the brief), for appellant.

Charles H. Garnett, of Oklahoma City, Okl., for appellee.

Before PHILLIPS, HUXMAN, and MURRAH, Circuit Judges.

MURRAH, Circuit Judge.

The question presented by this appeal is whether distributions made to the taxpayer during the taxable year 1936 as a stockholder of the Dawson Produce Company, in pursuance of a plan of liquidation, duly adopted but never fully consummated, should be treated as liquidating dividends under Section 115(c) of the Revenue Act of 1936, c. 690, 49 Stat. 1648, 26 U.S.C.A. Int.Rev.Acts, page 868, and therefore taxable under Section 111, as held by the trial court, and if not, whether such distributions were nonetheless a nontaxable return of a capital investment. If they are not liquidating dividends within the meaning of Section 115(c), or represent a return of capital investment, they are ordinary dividends and taxable as such in accordance with the determination of the Commissioner.

By a resolution of its Board of Directors on January 11, 1936, the Dawson Produce Company authorized, and on the same date the Board of Directors declared, a 10 per cent dividend in the total sum of $32,650 "payable from the profits and surplus account to stockholders on record December 31, 1935," to be paid on or before February 1, 1936. At the same meeting, the stockholders adopted a resolution to appoint a committee to "conduct and conclude the legal and financial steps and arrange for sale or transfer of property needful to conclude and end the corporation, Dawson Produce Company, on or before June 30, 1936," the date on which its corporate charter would expire. During the month of January 1936, the taxpayer as owner of approximately 32 per cent of all the stock of the Corporation received a dividend check dated December 31, 1935, in the amount of $10,510. After the distribution of this 10 per cent dividend in the amount of $32,650 from the 1935 earnings, there remained in the surplus account as of December 31, 1935, the sum of $11,057.52.

On the following April 20th, the Board of Directors, acting on the recommendation of the liquidating committee, authorized its officers to transfer to the stockholders of record April 1, 1936 their proportional part of a certain oil and gas royalty and "in-oil" payment belonging to the corporation. The agreed value of the oil royalty for income tax purposes was $13,675.78, and of the "in-oil" payment interest $11,871.33. During the calendar year 1936, the taxpayer received his distributive share of the royalty interest in kind having an agreed market value of $4,402.22, and of the "in-oil" payment in kind having an agreed market value of $3,821.37. At a meeting on June 17, 1936, the stockholders authorized the distribution of "taxable surplus and undivided profits on which Federal tax has been paid, as a liquidating dividend to stockholders of record as of June 1, 1936," and by separate resolution on the same date authorized the distribution as dividends the "accumulated profits to June 1, 1936 * * * less Federal tax * * * equivalent to approximately seven or eight per cent." Accordingly the Board of Directors declared a 10 per cent dividend in the total sum of $32,650 from the undivided surplus and profits as authorized by the stockholders, and a 7 per cent dividend in the total sum of $22,855, to all stockholders of record on June 1, 1936, to be paid on or before the 15th of July as also authorized by the stockholders. Pursuant to this action by the Board of Directors, the taxpayer received during 1936 a dividend check in the sum of $10,510 representing his distributive share of the 10 per cent dividend, and a check for $7,357 representing his distributive share of the 7 per cent dividend, making a total of $17,867 in cash dividends, and $8,223.59 dividends in kind distributed to the taxpayer during 1936 (exclusive of the $10,510 representing the 10 per cent dividend from 1935 earnings).

On June 29, 1936, the liquidating committee reported that: "Your committee appointed to conduct and conclude the legal and financial steps and arrange for sale or transfer of property needful to conclude and end the corporation, Dawson Produce Company, on or before June 30, 1936, reports that it is unable to reach an agreement as to further steps to accomplish the above object. The majority of the committee agreed upon an equitable plan but does not care to force it upon the minority." Thereupon a resolution was adopted authorizing a renewal of the charter for another twenty years, and on the same date the taxpayer sold all of his stock in the Corporation to A. Schuler, and the name of the Corporation was changed to the Schuler Fruit Company.

In his income tax return for 1936, the taxpayer treated the cash distributions as liquidating dividends under Section 115(c), and as such applicable to the cost of his stock under Section 111, and the "in kind" distributions consisting of the oil royalty and "in-oil" payment as having no market value at the time of the distribution, hence no taxable gain thereon. Although the record does not conclusively so reflect, it is apparent that the Commissioner determined that all of the distributions were ordinary dividends and assessed a deficiency accordingly. K. W. Dawson, the taxpayer, died on December 16, 1938, and Arthur Kaye Dawson, as executor of his estate, filed claim for refund, contending that the "in kind" distributions from the oil royalty and "in-oil" payment had no market value, and were not subject to valuation at the time they were distributed as a dividend; that the Commissioner had erroneously treated the estimated value of the respective dividends as taxable income to the taxpayer; that the cash distributions received from the Dawson Produce Company were liquidating dividends and therefore applicable to the cost of his stock in determining net gain. When the claim for refund was denied, this suit was brought by the executor to collect the deficiency on the same theory.

Upon the stipulated facts, the trial court held (1) that the "in-kind" royalty and "in-oil" payment distributions in the total sum of $8,223.59, when distributed to the taxpayer, were includable in his gross income for the taxable year; (2) that on January 11, 1936, the Dawson Produce Company in good faith adopted a plan for its liquidation; (3) that the "in kind" dividends in the sum of $8,223.59, and the 7 per cent cash dividend of $7,357 declared on June 17, 1936, were liquidating dividends made in partial liquidation of all of the stock of the Corporation, and that the said distributions in the total amount of $15,580.59 should be applied in reduction of the taxpayer's cost of his stock in the determination of taxable gain. The court made no specific findings in respect to the two 10 per cent dividends in the amount of $21,020 other than to hold that all other claims except those allowed as liquidating dividends were "barred from refund by limitations when the plaintiff's claim for refund" was filed with the Commissioner.

With immaterial exceptions, the term "dividend" as used in the Revenue Act of 1936, Section 115(a), means any distribution by a corporation to its shareholders out of its earnings or profits accumulated after February 28, 1913, without regard to the amount of the...