Phipps v. Comm'r of Internal Revenue

• Decision Date: 28 January 1947
• Docket Number: Docket No. 8854.
• Citation: 8 T.C. 190
• Parties: MARGARET R. PHIPPS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

8 T.C. 190

MARGARET R. PHIPPS, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 8854.

Tax Court of the United States.

Promulgated January 28, 1947.

A parent corporation in a nontaxable reorganization liquidated five wholly owned subsidiaries, one of which had earnings and profits accumulated since March 1, 1913, in a comparatively small amount. The other four had deficits in such earnings and profits in an aggregate amount much greater than the earnings and profits of the parent accumulated since March 1, 1913. Held, that a later distribution by the parent to its stockholders, including the petitioner, was, above the amount distributed from current earnings, distributed from capital. Commissioner v. Sansome, 60 Fed.(2d) 931; and Harter v. Helvering, 79 Fed.(2d) 12, followed. Ralph B. Mayo, C.P.A., for the petitioner.

Loyal E. Keir, Esq., and Thomas A. Steele, Jr., Esq., for the respondent.

This case involves income tax for the calendar year 1937. Deficiency was determined in the amount of $2,268.37, all of which is contested. In addition, the petitioner asserts an overpayment of $142.48. The sole issue presented is whether the petitioner is taxable upon the entire amount, or only upon a part, of a distribution made to her as stockholder of a corporation. All facts were stipulated, and we adopt the stipulation by reference and find the facts therein set forth. They may be summarized, so far as material to examination of the issue, as follows:

FINDINGS OF FACT.

The petitioner at all times pertinent was a resident of Colorado, and filed her return for the taxable year with the collector at Denver, Colorado. The return showed a net income of $41,200.82 and income tax due of $6,654.45, which was paid in 1938.

During 1937 petitioner owned 2,640 shares of preferred stock of the Nevada-California Electric Corporation, and in that year she received and reported for income tax purposes $18,480 distributions thereon. Her basis in the stock was more than the amount received in 1937. On or before March 11, 1941, she filed a claim for refund for the year 1937 in the amount of $3,882.74 on the ground that the $18,480 did not constitute taxable dividends. The deficiency notice issued May 3, 1945, held that the dividends referred to in the claim for refund constituted taxable income in their entirety. The petitioner concedes that they were taxable so far as paid out of current earnings or profits of the corporation.

The earnings or profits of the corporation for 1937 were $390,387.01. The cash distributions to stockholders during 1937 were $801,284, being distributions only to holders of preferred stock. It is stipulated that the cash distributions payable out of current earnings or profits were 48.6595 per cent and the portion of cash distributions not paid out of current earnings or profits was 51.3405 per cent, or $411,896.98. Of the $18,480 received by the petitioner 48.6595 percent, or $8,992.28, was distributed out of current earnings or profits for 1937, and the remainder, 51.3405 per cent, amounting to $9,487.72, was not paid by the corporation out of current earnings or profits for 1937.

On and prior to December 1, 1936, the Nevada-California Electric Corporation owned all of the issued and outstanding capital stock of five corporations which were about that date liquidated by the distribution of all assets, subject to liabilities, to the sole stockholder, the Nevada-California Electric Corporation, in complete cancellation and redemption of all its outstanding capital stock, whereupon each of the subsidiaries ceased to transact business and was dissolved. No gain or loss was recognized for Federal income tax purposes on the liquidation of the five subsidiary corporations, under section 112(b)(6) of the Revenue Act of 1936, and the Nevada-California Electric Corporation reported no gain or loss from such liquidation.

One of the liquidated corporations had a December 1, 1936, earnings or profits accumulated prior to March 1, 1913, in the total amount of $937,465.97, and accumulated earnings after February 28, 1913, of $90,362.77. The other four corporations had no accumulated earnings or profits, but had deficits totaling $3,147,803.62.

As of December 31, 1936, the Nevada-California Electric Corporation had (without including the deficits of the four liquidated corporations or the earnings or profits of the one liquidated corporation) earnings or profits accumulated since February 28, 1913, in the amount of $2,129,957.81, and had earnings or profits accumulated prior to March 1, 1913, in the amount of $18,060.94. It and its subsidiary corporations filed consolidated returns for the years 1918 to 1933, inclusive. The earned surplus account on its books did not reflect the deficits, surpluses, earnings, or losses of the five liquidated subsidiary corporations.

OPINION.

DISNEY, Judge:

The portion of the corporate distributions by the Nevada-California Electric Corporation in 1937 not paid from current earnings or profits was $411,896.98. The sole question here is whether that amount was paid from earnings or profits accumulated since February 28, 1913. The respondent contends, in short, that it was so paid, because Nevada Electric had at the beginning of 1937 earnings and profits accumulated since February 28, 1913, in the amount of $2,129,957.81; while, equally simply, the petitioner argues that the $2,129,957.81 was more than offset by the fact that in the liquidation of its have subsidiaries about December 1, 1936, Nevada Electric had taken over the deficits totaling $3,147,803.62, and had taken over only $90,362.77 earnings accumulated after February 28, 1913, by the one subsidiary having any earnings, leaving Nevada Electric to absorb deficits far greater than its own post-February 28, 1913, earnings, and therefore with no accumulated earnings, on January 1, 1937, out of which to distribute the $411,896.98— so that it was distributed out of capital, tax-free.

The issue revolves around the construction to be placed upon Commissioner V. Sansome, 60 Fed.(2d) 931; certiorari denied, 287 U.S. 667. The respondent contends that case to be authority for adding to the earnings and profits of Nevada Electric the accumulated earnings and profits of the one liquidated subsidiary having such. To this the petitioner agrees, but adds that it is also authority for passing to the parent corporation the deficits of the other four liquidated subsidiaries. To this the respondent objects, contending that earnings or profits of a liquidated corporation, if available for dividends, ‘remain available for dividends in the hands of the emerging corporation in a tax-free reorganization regardless of the operating deficits of certain of the constituent companies.‘ Careful examination of the Sansome case is required. In that case the Court, after pointing out the nonrecognition features of the statute involved, providing that such ‘corporate transactions should not break the continuity of the corporate life,‘ goes on:

* * * Hence we hold that a corporate reorganization which results in no ‘gain or loss‘ under Sec. 202(c)(2), does not toll the company's life as a continued venture under Sec. 201, and that what were ‘earnings or profits‘ of the original, or subsidiary, company remain, for purposes of distribution, ‘earnings or profits‘ of the successor, or parent, in liquidation. . . .

Earlier in the opinion we find the thought: ‘Thus, there was income to tax as much as though the company continued its life.‘

In United States v. Kauffmann, 62 Fed.(2d) 1045, the court construed the Sansome case as holding that a nontaxable reorganization ‘was not such a change in corporate identity as prevented the new company from being considered as a continuing venture under Sec. 201 of the Revenue Act of 1921 and that whatever were earnings of the original corporation continued to be such in the hands of the new corporation.‘

Baker v. Commissioner, 80 Fed.(2d) 813, involved five subsidiary corporations taken over by another in a nontaxable reorganization, and referring to the new corporation and the amount later distributed, the court said: ‘It had not in fact earned all of this amount itself, but the combined taxable earnings of itself and of the five predecessor companies made up that amount.‘ Harter v. Helvering, 79 Fed.(2d) 12, was by the same Court, and the same judges, as the earlier Sansome case, and presents the identical question here at hand. There was in that case a nontaxable reorganization wherein two former corporations were merged into ‘New Company,‘ which later was consolidated with Boxboard Co., the latter liquidating ‘New Company‘ and taking over substantially all of its assets. The court held that no gain was recognized in the reorganization between the two former companies and ‘New,‘ and said:

* * * A consequence of this is that for purposes of allocating dividends under Sec. 201(b) of the Act of 1926, against earnings before and after March 1, 1913, the surplus is regarded as unchanged. . . .

Citing the Sansome case, the court proceeded:

* * * Thus the surplus of the New Company was the difference between the assets of both the old companies and the capital shares of both, $4,307,134.34 of which only $2,085,587.78 was earned after February 28, 1913. Again when in April, 1926, the New Company consolidated with the Boxboard Company the same result ensued; for purposes of allocation the capital was $516,945 and the surplus, $4,289,745.39 of which $2,068,198.83 had been earned after February 28, 1913. * * *

Later on, referring to a distribution by Boxboard Co., it is said:

* * * What was left was capital or earlier earnings; when the Boxboard Company took it over, it...