Liddon v. Comm'r of Internal Revenue, Docket Nos. 41495
| Decision Date | 21 September 1954 |
| Docket Number | Docket Nos. 41495,41497. |
| Citation | 22 T.C. 1220 |
| Parties | WILLIAM M. LIDDON, Petitioner,v.COMMISSIONER OF INTERNAL REVENUE, Respondent.MARIA PROTHRO LIDDON, Petitioner,v.COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
REORGANIZATION—DISTRIBUTION IN LIQUIDATION—SEC. 112(c)(2)—SEC. 115(c), I. R. C. OF 1939.—An old corporation in liquidation sold some of its assets to a new corporation. At the time petitioners held more than 80 per cent of the stock in both corporations. Shortly thereafter petitioners acquired the remaining assets of the old corporation in exchange for their stock. Held, that the liquidation of the old corporation was under a plan of reorganization, and the gain resulting from the liquidation of the old corporation was taxable to petitioners under section 112(c)(2). John J. Hooker, Esq., and Albert B. Maloney, C. P. A., for the petitioners.
Homer F. Benson, Esq., for the respondent.
Respondent determined the following deficiencies in income tax for 1948:
+------------------------------------------+
¦Docket No.¦Petitioner ¦Deficiency¦
+----------+--------------------+----------¦
¦41495 ¦William M. Liddon ¦$26,598.77¦
+----------+--------------------+----------¦
¦41497 ¦Maria Prothro Liddon¦22,058.15 ¦
+------------------------------------------+
The issue is whether the gain resulting from the liquidation of a closely held corporation is taxable as ordinary income, section 112(c)(2), Internal Revenue Code of 1939, or as capital gain, section 115(c), section 111, section 112, and section 117.
William M. Liddon and Maria Prothro Liddon, husband and wife in 1948, were residents of Nashville, Tennessee. They filed their separate tax returns for 1948 with the collector of internal revenue for the district of Tennessee. William M. Liddon will be hereinafter referred to as the petitioner.
Petitioner had been in the automobile business as a distributor of automobiles in Nashville from 1936 to the time of the hearing. During some of these years his business was operated as a closely held corporation, while in other years as a partnership. Prior to August 1, 1946, the business was a partnership composed of petitioner, his wife, and R. H. Davis. On August 1, 1946, certain assets of the partnership were transferred to a corporation known as Liddon Motors, Inc., hereinafter referred to as the old corporation.
The old corporation, with an authorized capital stock of 10,000 shares with a par value of $10 per share, was organized under the laws of Tennessee to carry on an automobile business. As a result of the initial stock distribution petitioner held 680 shares, his wife 680 shares, and Davis 340 shares. Later there were stock dividends so that on April 26, 1948, petitioner held 4,000 shares, his wife 4,000 shares, and Davis 2,000 shares.
Davis was the general manager of the old corporation. However, sometime in April 1948, because of ill health, he tendered his resignation as general manager. He also notified the stockholders and directors that he had decided to sell or liquidate his interest in the corporation as soon as possible.
The minutes of a special meeting of the stockholders on April 26, 1948, stated that Davis offered to sell his stock to the other stockholders, that is, petitioner and his wife, but they did not accept. The minutes related that after further discussion the stockholders decided to liquidate the old corporation and surrender the corporate charter. At this meeting Oscar Sanders was elected to the board to fill the vacancy caused by Davis's resignation.
The old corporation had an agreement with the Pontiac Motor Division of the General Motors Corporation, hereinafter referred to as Pontiac. In general this agreement was a form contract between Pontiac and one of its dealers, and the dealer might be an individual, a partnership, or a corporation. However, one of the paragraphs in the contract, designated paragraph ‘THIRD,’ contained a blank space so that individual names could be inserted. This paragraph attempted to make the agreement a personal contract even though a corporation or a partnership was denominated elsewhere in the contract as the dealer authorized to buy and resell cars. For the agreement in effect on April 26, 1948, Liddon Motors, Inc., was named the dealer. Paragraph ‘THIRD’ without the inserts was as follows:
THIRD: This Agreement constitutes a personal contract, having been entered into in reliance upon and recognition of ________ (jointly), the Dealer, or partner(s) in the dealership, or representative(s) of the Dealer who actively and substantially participate(s) in the ownership and/or operation of the dealership. Dealer shall not transfer nor assign this Agreement or any part thereof, nor make nor suffer to be made any substantial change in the ownership, financial interests or active management of Dealer.
Another part of this agreement also provided that Pontiac could terminate the agreement upon ‘Death, incapacity, or the removal, resignation, withdrawal, or elimination from the dealership for any reason of Dealer or any person named in Paragraph Third of this Agreement.’ In the agreement between the old corporation and Pontiac the names of petitioner and Davis were entered on the third paragraph.
On May 1, 1948, a certificate of incorporation for Liddon Pontiac, Inc., hereinafter referred to as the new corporation, was filed with the secretary of state of Tennessee. This new corporation was authorized to issue 30,000 shares of common stock with a par value of $10. The initial capital contributions were $3,000 for 300 shares by petitioner, $2,000 for 200 shares by his wife, and $10 for 1 share by Sanders. The new corporation was authorized to do a general merchandising business. On the same date the new corporation entered into an agreement with Pontiac to buy and resell its automobiles. Only petitioner's name was entered in paragraph ‘THIRD’ of the new agreement. Except for this change in paragraph ‘THIRD,’ the agreement between Pontiac and the old corporation was essentially the same as the agreement between Pontiac and the new corporation.
On May 6, 1948, at a special meeting of the board of directors the old corporation was directed to sell some of its assets to the new corporation at book value. The minutes of the meeting contain the following statement:
it was the consensus of opinion of the Board of Directors that in view of the fact that Liddon Pontiac, Inc. was the only logical prospective purchaser of the remaining assets of this Corporation, and that would entail untold expenses and many months of processing the liquidation to attempt to sell these other assets out individually, and under the terms of the franchise, Liddon Pontiac, Inc. has a right to purchase these, that it was agreeable for Liddon Pontiac, Inc. to utilize the use of these other assets without charge during the period of inventory, negotiation, etc.
Prior to May 21, 1948, petitioner and his wife invested an additional $20,000 in the capital stock of the new corporation.
On June 4, 1948, it was explained to the board of directors of the old corporation that Davis would accept $11 per share from the corporation for his 2,000 shares. The board voted to call Davis's stock and pay him $11 per share. Davis was given a check dated June 4, 1948, for $22,000. This was paid by the drawee bank on June 5, 1948.
Among the assets of the old corporation, on or about July 13, 1948, was a $60,000 note receivable. At a special meeting of the stockholders and directors on July 13, 1948, the following was authorized:
W. M. Liddon and Maria P. Liddon, being holders of all the outstanding stock at this time in equal shares, agreed to accept from Liddon White Truck Co., Inc. two notes of $30,000.00 each payable to W. M. Liddon and Maria P. Liddon as partial settlement of Liddon Motors, Inc. as liquidating dividend to be payable to them.
In addition to this, the President was authorized to issue the Shareholders final liquidating dividend of the corporation which represented $90,000.00, in addition to the above note, to liquidate the entire outstanding stock.
The money and property petitioner and his wife each received in final liquidation of the old corporation was $75,618.64 for 4,000 shares of stock, or approximately $18.90 a share.
On July 17, 1948, an instrument entitled ‘State of Tennessee Surrender of Charter of Incorporation,’ was filed with the secretary of state. By virtue of this instrument the corporate charter of the old corporation was surrendered and the corporation dissolved.
The old corporation filed a corporation income tax return for the period from January 1, 1948, to September 30, 1948. A summary of the balance sheets for the beginning and end of the period is as follows:
+----------------------------------------------+
¦ ¦Jan. 1, 1948¦Sept. 30, 1948¦
+------------------+------------+--------------¦
¦Cash ¦$66,431.76 ¦$18,498.41 ¦
+------------------+------------+--------------¦
¦Notes receivable ¦88,719.87 ¦100,000.00 ¦
+------------------+------------+--------------¦
¦Inventory ¦29,859.68 ¦ ¦
+------------------+------------+--------------¦
¦Depreciable assets¦13,762.21 ¦ ¦
+------------------+------------+--------------¦
¦Other ¦11,512.92 ¦ ¦
+------------------+------------+--------------¦
¦Total ¦$210,286.44 ¦$118,498.41 ¦
+------------------+------------+--------------¦
¦ ¦ ¦ ¦
+------------------+------------+--------------¦
¦Accounts payable ¦$15,750.77 ¦ ¦
+------------------+------------+--------------¦
¦Other liabilities ¦61,735.15 ¦$57,162.42 ¦
+------------------+------------+--------------¦
¦Capital stock ¦34,000.00 ¦ ¦
+------------------+------------+--------------¦
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