Republic Natural Gas Co. v. Axe

Decision Date11 June 1966
Docket NumberNo. 44475,44475
Citation415 P.2d 406,197 Kan. 91
PartiesREPUBLIC NATURAL GAS COMPANY, a Dissolved Corporation, Appellant, v. Leonard H. AXE, Director of Revenue of the Department of Revenue, State of Kansas, Substituted for Wayne E. McCoy, Appellee.
CourtKansas Supreme Court

Syllabus by the Court

1. Income tax laws are within the authority of the legislature of a state. The amendment by congress of the federal income tax law by adding Section 337 to the Internal Revenue Code does not effect a like change in the state income tax law without proper enabling legislation by the state legislature.

2. When a statute of one jurisdiction has been judicially construed before adoption, it will be assumed that the statute as judicially construed was adopted.

3. Neither the director of revenue nor the courts can grant an exemption from a tax which has not been specifically granted by the legislature.

4. A dissolved corporation acting under authority of K.S.A. 17-3606 which sells its assets and distributes the proceeds of sale proportionately to its stockholders is subject to income tax on the net gain as required by G.S.1961 Supp. 79-3203(b) and 79-3212.

Robert J. Roth, Wichita, argued the cause, and A. W. Hershberger, Richard Jones, Wm. P. Thompson, H. E. Jones, Jerome E. Jones, William R. Smith and Robert J. O'Connor, Wichita, were with him on the brief, for appellant.

Dean Burkhead, Topeka, argued the cause, and C. A. Arterburn, Jr., Topeka, was with him on the brief, for appellee.

FROMME, Justice.

This is an action for refund of income tax paid to the State of Kansas on a gain realized from a sale of assets by Republic Natural Gas Company, a dissolved corporation, in their fiscal year ending June 30, 1962.

The Republic Natural Gas Company will be referred to as the corporation. Leonard H. Axe, Director of Revenue of the Department of Revenue, State of Kansas, will be referred to as the director.

The corporation was incorporated under the laws of Delaware, and was one of the developers of the natural gas industry in the Hugoton Field in Kansas. It filed its Kansas income tax return on June 27, 1962, and paid a tax of $1,844,079.20, which amount included tax on a capital gain of $51,117,426.00 resulting from the sale of assets in liquidation.

A claim for refund by the corporation in the amount of $1,789,109.91 was filed with the director. The director refused to take action on this claim. Action was filed in the District Court of Shawnee County pursuant to the provisions of G.S.1961 Supp. 79-3230. The director filed answer. The case was submitted on the following Stipulation of Facts:

'1. The plaintiff was incorporated pursuant to the laws of the State of Delaware on November 24, 1934, and was dissolved pursuant to the laws of that state on November 23, 1962; F. M. Mayer was appointed Trustee in Dissolution for plaintiff; and the corporate entity of the plaintiff is continued for the purposes of this action pursuant to K.S.A. 17-3606.

'2. The defendant, Wayne F. McCoy, is the duly appointed, qualified and acting Director of Revenue of the Department of Revenue of the State of Kansas and is the proper party defendant herein.

'3. At the time of dissolution, the plaintiff had outstanding 3,005,107 shares of capital stock owned by 4,512 stockholders. Some of these stockholders were residents of the state of Kansas but most were nonresidents. Prior to the dissolution, the plaintiff's principal source of income was from its oil and gas operations conducted within the state of Kansas, and the plaintiff has for many years paid income tax to the state of Kansas upon its earnings in this state.

'4. On December 28, 1961, the stockholders of plaintiff adopted a plan of complete liquidation of plaintiff's assets which said plan qualified for the application of the provisions of Section 337 of the United States Internal Revenue Code of 1954; the assets were not distributed in kind to the individual stockholders but such assets were sold by the corporation and the proceeds of said sale were then distributed proportionately to the individual stockholders.

'5. A capital gain of $51,117,426.00 was realized on this sale but said gain was not recognized by the Federal Government since the liquidation was completed within the purview of Section 337.

'6. The plaintiff on June 27, 1962, filed its Kansas income tax return for the tax period from July 1, 1961, to December 31, 1961, and paid to the State of Kansas a total income tax of $1,844,079.20. The tax was computed on a net income of $52,687,977.00. This net income included the capital gain of $51,117,426.00 resulting from the sale of the assets in liquidation.

'7. The plaintiff contends that the capital gain realized is not taxable by the State of Kansas and that the plaintiff should have been taxed by Kansas on a net income come of $1,570,551.00 instead of on a net income of $52,687,977.00 and a tax of $54,969.29 should have been paid instead of $1,844,079.20.

'8. The plaintiff on November 29, 1962, filed a claim with the defendant Director or Revenue for refund of the amount of $1,789,109.91; the defendant refused to refund said amount and refused to take action on said claim for refund.

'9. The plaintiff filed a petition herein praying for judgment against the defendant for the sum of $1,789,109.91 plus interest thereon from June 27, 1962, until paid and for its costs herein. * * * The defendant Wayne E. McCoy, Director of Revenue, has filed his answer.

'10. The Board of Tax Appeals of the State of Kansas, determined in the cases of Sprague Oil Service, Inc., and the Keas Pipeline Company, Inc., that Kansas should follow and apply Section 337. The Board later reversed its position and held the gain taxable in the cases of Keystone Construction Company, Docket No. 20, McPherson Terminal Elevator Company, Inc., Docket No. 29, Western Development, Inc., Docket No. 30, Southwest Car Rentals, Inc., Docket No. 38, Donalson Building Company, Inc., Docket No. 50, and Voight Oil Company, Inc., Docket No. 51.'

Upon oral motion of the defendant, Leonard H. Axe, who succeeded to the position of Director of Revenue, was substituted as the proper party defendant in place of Wayne E. McCoy. The trial court entered judgment in favor of the director. Plaintiff has appealed.

The appellant herein contends: (1) That no taxable capital gain was realized by the corporation and the court erred in finding the sale of assets was made by the corporation and not by the stockholders; (2) That the State of Kansas is committed to a policy requiring application of Section 337 of the Internal Revenue Code of 1954 to the Kansas tax laws.

The court below found that the assets were not distributed in kind to the individual stockholders but such assets were sold by the corporation and the proceeds of said sale were then distributed proportionately to the individual stockholders. The corporation contends that the plan of complete liquidation and distribution which qualified under Section 337 of the U. S. Internal Revenue Code in effect constituted the corporation the agent of of the stockholders to whom a physical distribution could not be made, and the only taxable gain was realized by the individual stockholders. This theory does not appear to be supported by the evidence in this case.

The provisions of the Delaware corporation law are similar to the Kansas law governing dissolution of a corporation. Both provide three years for continuation of the corporation after dissolution for purposes of suit and winding up affairs of the corporation. (K.S.A. 17-3606.)

The law of Delaware provides that corporations shall be continued bodies corporate for a term of three years after dissolution for the purpose of enabling them gradually to settle and close their business, to dispose of and convey their property and to divide their capital stock. (8 Del.C. § 278.) In such case they remain intact as corporations. Their acts are those of a corporation and binding upon the stockholders.

The stipulated facts include a statement that the assets were not distributed in kind to the individual stockholders but such assets were sold by the corporation and the proceeds of said sale distributed proportionately to the individual stockholders.

The Kansas statutes relating to income tax in this case are as follows:

G.S.1961 Supplement, 79-3203(b):

'Corporations shall pay annually a tax with respect to carrying on or doing business of three and one-half percent (3 1/2%) on the entire net income, as herein defined, derived from property located and business transacted within this state during the taxable year.'

G.S.1961 Supplement, 79-3205(a)(1):

"Gross income' includes gains, profits, and income derived from * * * sales or dealings in property, growing out of the ownership or use of or interest in such property; also from * * * gains or profits and income derived from any source whatever, * * *.'

G.S.1961 Supplement, 79-3212:

'(a) The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 79-3213(b) as amended herein, for determining gain * * * (b) Upon the sale or exchange of the property the entire amount of the gain or loss, determined under subsection (a), shall be recognized except * * *' (Listed here are a number of exceptions, none of which apply to the case at bar.'

G.S.1961 Supplement, 79-3216:

'(a) In the case of the taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income: One hundred percent (100%) if the capital asset has been held for not more than six (6) months; fifty percent (50%) if the capital asset has been held for more than six (6) months. (b) For the purposes of this act, 'capital assets' means property held by the taxpayer (whether or not connected...

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