Langstaff v. Lucas
| Decision Date | 22 December 1925 |
| Docket Number | No. 1910.,1910. |
| Citation | 9 F.2d 691 |
| Parties | LANGSTAFF v. LUCAS, Collector of Internal Revenue. |
| Court | U.S. District Court — Western District of Kentucky |
Wheeler & Hughes, of Paducah, Ky., for Langstaff.
W. S. Ball, U. S. Atty., and Claude Hudgins, Asst. U. S. Atty., both of Louisville, Ky., for Lucas.
Langstaff-Orm Manufacturing Company, prior to the 1st day of March, 1913, and from that date up to and including the 1st day of December, 1919, was a Kentucky corporation. The plaintiff, George Langstaff, and Augusta Langstaff, owned all the stock of this corporation, but for the purpose of complying with the law of Kentucky, which requires at least three persons to constitute a corporation, a small number of their shares stood in the names of the two other persons.
Between the 1st day of March, 1913, and December 1, 1919, this corporation had accumulated a surplus of $42,782.24, which it used in its business as a part of its capital assets. Shortly before the 1st of December, 1919, it was determined to liquidate the corporation and to transfer all of its assets, including the surplus, to a partnership, to be known as "Langstaff-Orm Lumber Company," the members of said partnership to be George Langstaff and Augusta Langstaff. It was agreed between these two owners of the stock of the corporation that the business of the corporation, after dissolution, should be continued in the name of the partnership, and that all the assets belonging to the corporation at the date of its dissolution, including the assets constituting the surplus, should be continued in use by said partnership; it being specifically agreed that no part of said surplus should be distributed in money or any other property to any of the stockholders in said corporation, or to either of the members of the proposed partnership, and that no member of the firm as an individual should exercise any dominion or control over said assets, nor should they be set aside on the books of the partnership to the credit of the individual members thereof, such agreement to continue until the firm should be dissolved. This agreement was afterwards reduced to writing. About December 1, 1919, the corporation was regularly dissolved, and the partnership thereafter took possession of and continued to use as such the assets, including the surplus referred to, formerly belonging to the corporation.
The Commissioner of Internal Revenue took the view that this transaction, notwithstanding its form, was in fact a distribution of the assets of the corporation, including its surplus, to the stockholders, and to the extent of the surplus so distributed created taxable income for the year 1919. There was therefore assessed against the plaintiff, on account of his own half of said surplus, both a normal tax and a surtax, aggregating $3,886.68. This amount the plaintiff paid under protest, and thereafter, in regular course, applied to the Commissioner of Internal Revenue for a refund of same as taxes erroneously collected. His application was denied, and this suit was instituted against the collector of internal revenue for the district of Kentucky to recover said sum of $3,886.68, with interest from the 13th day of May, 1924, the date of said payment.
By an amended petition the plaintiff asserts that, even if the one-half of the surplus assignable to his stock in the corporation should be treated as taxable income accruing to him in the year 1919, yet it was income in the nature of a dividend, and therefore was not subject to the normal tax for that year, which amounted to $1,711.21 of the total of $3,886.68 assessed against him, and that therefore in any event he is entitled to recover against the collector the sum of $1,711.21, with interest from the date of its payment. The case is submitted on demurrer to the petition as amended.
Plaintiff rests his contention that no tax was due upon said surplus upon the theory that upon the dissolution of the corporation in December, 1919, and the transfer of its assets, including its surplus, to the partnership, there was no such distribution to the individual stockholders, including the plaintiff, as would create taxable income. It is argued that the transfer from the corporation to the partnership was accomplished in such a way that the stockholders of the corporation had no more right to individually use the assets of the corporation after they had been transferred to the partnership than they had before; that the only result of the transaction was to exchange an indirect interest, which they held as stockholders, for a direct interest, which they held as partners.
In support of that contention the plaintiff relies upon article 1566 of Regulations 45, of the Treasury Department of the United States, contained in the 1919 edition of those regulations, which provides: "Where a corporation dissolves and distributes its assets in kind and not in cash, no taxable income is received from the transaction by its stockholders, because they merely exchange an indirect interest for a direct interest" — and upon article 53 of Regulations 45, 1919 edition, reading as follows:
The plaintiff pleads that he and the other stockholders of the corporation knew of these regulations at the time they entered into the agreement to dissolve the corporation and transfer its assets to the partnership, and that the dissolution of the corporation and the transfer of its assets to the partnership was made in reliance upon these regulations, and would not have been made, but for them. It is insisted by the plaintiff that the Treasury Department had the power, under the law, to promulgate these two regulations, and that, even if such regulations were beyond the power of the Treasury Department to make, as insisted by the defense, in view of the fact that he was misled to his prejudice by them, the government is estopped to collect taxes on property exposed for taxation as the result of relying upon them.
In dealing with the regulations relied upon by the plaintiff, it must be borne in mind that the Treasury Department was not and could not be authorized, by the Revenue Act of 1918 (Comp. St. Ann. Supp. 1919, § 6336 1/8a et seq.), under which...
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