Madding v. Indiana Dept. of State Revenue, Gross Income Tax Division, 1269A226

• Citation: 149 Ind.App. 74,270 N.E.2d 771
• Decision Date: 21 June 1971
• Docket Number: No. 1,No. 1269A226,1269A226,1
• Parties: Ellis C. MADDING, also known as E. C. Madding, et al., Appellants, v. INDIANA DEPARTMENT OF STATE REVENUE, GROSS INCOME TAX DIVISION, William L. Fortune, Commissioner, State of Indiana, Appellees
• Court: Court of Appeals of Indiana

Page 771

270 N.E.2d 771

149 Ind.App. 74

Ellis C. MADDING, also known as E. C. Madding, et al., Appellants, v. INDIANA DEPARTMENT OF STATE REVENUE, GROSS INCOME TAX DIVISION, William L. Fortune, Commissioner, State of Indiana, Appellees.

No. 1269A226.

Appellate Court of Indiana, Division No. 1.

June 21, 1971.

James J. Lewis, Robert V. Kixmiller, Shake, Lewis, Lewis & Kixmiller, Vincennes, Elmer F. Marchino, Indianapolis, for appellants

Theodore L. Sendak, Atty. Gen., Hugh R. Couch, Larry J. McKinney, Deputy Attys. Gen., for appellees.

BUCHANAN, Judge.

STATEMENT OF THE CASE AND FACTS By this action, Plaintiffs-Appellants seek a refund of Indiana gross income taxes claimed to have been illegally and erroneously levied for the year 1964 in the amount of $57,809.17 on the theory that a nontaxable reorganization was effected rather than gross income received.

Appellants Ellis C. Madding, Elmo R. Madding and Richard H. Schaffer were the sole shareholders, officers and directors of the Appellant eight Indiana corporations.

On December 17, 1964, each of these eight corporations as Seller (the Corporations) and the three stockholders individually (the Individuals) entered into an identical plan and Agreement of Reorganization with Tennessee Corporation (Tennessee), a Delaware corporation and wholly owned subsidiary of Cities Service Company, whereby substantially all the assets of the Corporations were to be transferred to Tennessee in return for Common Stock of Cities Service Company (Common Stock) to be transferred to the Individuals. Pertinent parts of a prototype Plan and Agreement (the Agreement) are as follows:

'PLAN OF REORGANIZATION dated December 17, 1964, between TENNESSEE CORPORATION, a Delaware corporation (hereinafter called 'Tennessee') and LIQUILIZER CORPORATION, an Indiana corporation (hereinafter called the 'Seller').

'WITNESSETH:

'The reorganization will comprise the transfer to Tennessee, or to a wholly-owned subsidiary of Tennessee as designated by Tennessee, of substantially all the assets, properties, business and goodwill of Seller (and the assumption by Tennessee of the Seller's liabilities as hereinafter specified) in exchange solely for shares of Common Stock $10.00 Par Value of Cities Service Company (hereinafter called 'Common Stock'), the parent controlling Tennessee through 100% stock ownership therein, the prompt dissolution of Seller, and the distribution of Common

Stock to the stockholders of Seller according to their respective interests, all upon and subject to the terms and conditions of the Agreement hereinafter set forth. In the course of the reorganization the stockholders of Seller will receive Common Stock in exchange for their stock in Seller.

'AGREEMENT

'Agreement dated December 17, 1964, between TENNESSEE CORPORATION, a Delaware corporation (hereinafter called 'Tennessee'), LIQUILIZER CORPORATION, an Indiana corporation (hereinafter called the 'Seller'), and E. C. MADDING, of 1413 Kimmell Road, Vincennes, Indiana, ELMO R. MADDING, of 2801 Elberta Drive, Vincennes, Indiana, and RICHARD H. SCHAFFER, of 2130 Ridge Road, Vincennes, Indiana (which three last named parties are hereinafter referred to as the 'Individuals').

'WITNESSETH:

'In order to consummate the foregoing Plan of Reorganization, and in consideration of the mutual benefits to be derived therefrom, and of the mutual agreements hereinafter contained, the parties hereto do hereby agree as follows:

'1. Seller and the Individuals and each of them jointly and severally represent and agree that:

'(a) Seller is a corporation duly organized, validly existing, and in good standing under the laws of the State of Indiana. * * *

'* * *

'3. Subject to and in reliance upon the representations and agreements of the Seller, the Individuals and Tennessee, and subject to the terms and conditions herein stated:

'(a) Seller agrees to convey, assign and transfer to Tennessee, and Tennessee agrees to acquire from the Seller, on the Closing Date, all of the properties and assets of the Seller of every kind and description, and its business as a going concern, together with, but not limited to, cash, moneys on deposit, the goodwill of the business carried on by the Seller, including the right to the use of its name, trade names, brand names and trademarks, and all of its customers lists, credit and sales records, and all other interests, including choses in action to which it has any right by ownership, use or otherwise, which the Seller may own or in which it has a conveyable or assignable interest on the Closing Date, in exchange for (1) 4,071 shares of Common Stock and (2) the assumption by Tennessee of any and all debts, contracts and other agreements, leases, licenses and other arrangements and all obligations and liabilities of whatsoever kind or nature of the Seller set forth on the balance sheet referred to in paragraph 1(c) hereof. * * *

'* * *

'(c) The closing of the exchange of Common Stock and the assumption of liabilities for the properties and assets to be conveyed, assigned and transferred hereunder shall be made at the office of Tennessee, * * * on December 30, 1964, * * * (herein called the Closing Date) by the delivery of (i) certificates in such denominations as the Seller may request for the total number of shares of Common Stock to be delivered pursuant to paragraph 3(a), (ii) a written assumption of Seller's liabilities in the form set forth in Exhibit 1 hereto, and (iii) the guarantee of such assumption provided for in paragraph 7 hereof if deliverable at the closing hereunder, against delivery by Seller of appropriate deeds, assignments, bills of sale and other documents of title * * *.

'* * *

'4. Tennessee, Seller and the Individuals further agree:

'* * *

'(g) Seller represents that it is acquiring the shares of Common Stock '* * *

only for distribution in liquidation to the Individuals as its stockholders, and agrees that it will use said shares only for such purpose.

'6. The obligations of Seller to make the abovementioned conveyances and transfers of properties and assets to Tennessee is subject to the satisfaction or the waiver, thereof by the Seller at or prior to the Closing Date of the following conditions:

'* * *

'(c) Tennessee shall have furnished Seller with (i) certified copies of resolutions duly adopted by the Board of Directors of Tennessee approving the execution and delivery to Seller of this Agreement, authorizing the acquisition from Seller of all the properties and assets of Seller in exchange for Common Stock and the assumption by Tennessee of Seller's liabilities. * * *

'* * *

'8. (a) The Individuals, and each of them, agree as stockholders of Seller, and as individuals, to take all action and to vote all shares of stock of Seller held by them in such manner that this Agreement shall be carried out and consummated in accordance with its terms.

'* * *

'9. (a) The Individuals and each of them represent that they are acquiring the shares of Common Stock distributable to them upon the liquidation of Seller for investment and with no present intention of selling any of such shares.

'* * *

'(c) The Certificates representing the shares of Common Stock to be delivered to the Individuals at or after the Closing * * *.'

Section 3(a) of the Agreement indicates that each corporation as Seller agrees to transfer all of its assets, tangible and intangible, to Tennessee in exchange for Common Stock of Cities Service Company, parent of Tennessee, and the assumption by Tennessee of all liabilities, debts, obligations, etc. of each corporation. Subsequently, at section 4(g) each Seller corporation represents that it is acquiring stock only for distribution in liquidation to the Individuals as its stockholders, and section 9(c) contemplates the same procedure.

Common Stock of Cities Service Company was in fact transferred and delivered to the Individuals in their individual names at the time of closing and prior to dissolution of each Seller corporation and prior to publication of notice of dissolution. The assets were transferred and liabilities assumed also as contemplated by the Agreement. Tennessee received no shares of stock of the Corporations either from the Corporations or from the Individuals.

The signatories to each Agreement were one of the eight corporations (referred to as 'Seller' therein), Tennessee, and the Individuals.

The Individuals, pursuant to the Agreement requiring them to take all action and to vote all shares of stock held by them in accordance with the terms of the Agreement, began proceedings shortly after December 30, 1964 to effect legal dissolution of the Corporations. They were finally dissolved on September 7, 1966.

While the Agreement contemplated that the stock held by the stockholders in each of the Seller Corporations would be exchanged for the specified number of shares of Common Stock of Cities Service Company, this did not occur. The stock owned by the stockholders in each of the Seller Corporations was never assigned or transferred to Tennessee or to Cities Service Company.

There is no evidence in the record which indicates that the assets of the Corporations were ever distributed to the Individuals prior to their transfer to Tennessee. The record is also devoid of any reference or In order to dissolve, the Corporations sought certificates of clearance from the Gross Income Tax Division. Gross income tax was then assessed against them and the tax paid. The Corporations petitioned the Indiana Department of State Revenue for a refund, which was denied, and after exhausting all other administrative remedies this action was subsequently filed.

proof of the ultimate economic effect to the parties of the transactions here involved.

The Appellants assign as error that the decision of the trial court is contrary to law, and further specify error in the striking and omission of certain testimony during the trial.

ISSUES--Two questions...