Smith v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 12 October 1932 |
| Docket Number | Docket No. 43300-43302,43305,43306. |
| Parties | MRS. GRANT SMITH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. W. E. HAUSER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Russell D. Morrill, Esq., and Josiah Willard, Esq., for the petitioners.
J. G. Gibbs, Esq., for the respondent.
These five cases were consolidated for hearing by order of the Board. Docket Nos. 43301 and 43305 involve the income-tax liability of the petitioners as transferees of the assets of the Smith Securities Company, a Washington corporation, for the calendar year 1924 in the sum of $83,021.52 and for the period January 1 to January 12, 1925, in the sum of $5,173.75. Docket No. 43300 involves a deficiency of $3,369.43 against petitioner Mrs. Grant Smith for the period January 1, 1925, to December 7, 1925, as transferee of the assets of the estate of Grant Smith, deceased. Docket No. 43302 involves a deficiency of $35,200 for the year 1925 against petitioner W. E. Hauser, and Docket No. 43306 involves a deficiency of $1,669.77 determined against Mrs. Grant Smith for 1925. The two issues which we have to decide will be stated in the opinion. At the hearing depositions of several witnesses were introduced in evidence and certain stipulations were filed, from which we make the following findings of fact.
FINDINGS OF FACT.
Petitioners are individuals, residing in Seattle, Washington, with their business address at 827 Henry Building in that city.
The Smith Securities Company was a corporation of the State of Washington. At the time of its dissolution on January 12, 1925, all of its stock, except directors' qualifying shares, was held in equal parts by W. E. Hauser and the estate of Grant Smith, who died on September 23, 1923. The administrators of the estate of Grant Smith were Harry H. Hunt and the decedent's widow and sole heir, Mrs. Grant Smith, who has since remarried and is now Mrs. Charles Stuart, but who will be referred to hereafter as Mrs. Grant Smith. The trustees of the company at the time of its dissolution were W. E. Hauser, Mrs. Grant Smith, and P. E. Colman.
Late in 1924 the trustees discussed among themselves, and with the administrators of the estate of Grant Smith, the desirability of dissolving the Smith Securities Company and liquidating its assets. The liquidation of the corporation presented a difficult problem, since over half of its assets consisted of real estate, stock in corporations holding real estate and accounts receivable from close corporations, and other assets which could not be easily sold or divided. The trustees, therefore, decided that the corporation should be dissolved and that the liquid assets should be immediately divided among the stockholders and the remaining assets held and liquidated over a period of time as advantageously as possible. The three trustees were not, however, in a position to administer these assets personally, since Mr. Hauser's interests were largely centered in Louisiana and kept him away from Seattle for a greater part of the time, while Mrs. Smith had not had much business experience and did not wish to be burdened by details of administration.
It, therefore, was decided by the trustees that it would be desirable to have these assets administered by someone on their behalf, and, accordingly, they approached J. T. McVay and G. C. Morrill, the president and vice president, respectively, of the Metropolitan National Bank of Seattle, Washington, and asked them if the bank would be willing to act as the agent of the trustees in the liquidation of the slow assets of the Smith Securities Company. These officers expressed their willingness to have the bank act for the trustees. Accordingly, the trustees proceeded to cause the dissolution of the corporation and on January 12, 1925, the Superior Court of the State of Washington entered decree dissolving the corporation and appointing, as trustees in dissolution, W. E. Hauser, P. E. Colman, and Mrs. Grant Smith. Immediately on the dissolution of the corporation, the trustees divided and turned over to the two stockholders, W. E. Hauser and the estate of Grant Smith, cash and marketable securities having a value of about $2,150,000, each of the two stockholders receiving, therefore, a little over $1,000,000. Since the stock of the Smith Securities Company held by Hauser had a cost to him of $2,215,642.50 and the stock of the Smith Securities Company held by the estate of Grant Smith had a cost to it of $2,274,337.67, neither of the stockholders received any profit on the distribution of these liquid assets.
At the same time, the remaining assets, consisting of real estate, notes, stocks, etc., were turned over to the Metropolitan National Bank to be held in accordance with the terms of a written trust agreement, the detailed provisions of which will be hereinafter stated.
During the course of the preparation of this trust agreement, the question arose as to whether it should effect a distribution of the assets in question to the two stockholders and a transfer by them of the assets so received to the Metropolitan National Bank to be administered for them, or whether it should effect a transfer by the trustees in dissolution to the Metropolitan National Bank as agent for the trustees to administer and liquidate the assets for them and turn over the proceeds of the liquidation to the two stockholders. In the course of a conference on this question on or about May 14, 1925, Hauser, who owned 50 per cent of the stock in Smith Securities Corporation, expressly instructed Morrill, president of the Metropolitan National Bank, who in turn instructed Thorgrimson, an attorney who was preparing the trust agreement, that the bank was to act as agent for the trustees and that there was to be no distribution of these assets to the stockholders in the first instance.
After the transfer of the assets in question to it, the Metropolitan National Bank sought and received instructions from the trustees in dissolution as to the disposition and administration of the assets that had been transferred to it, and referred to the trustees all except minor routine matters that arose in the handling of the assets. Many written communications were introduced in evidence to prove this was the course of dealing between the parties.
The trustees filed an income-tax return for the period January 12 to December 31, 1925, on Form 1120, in which they treated the income from the assets held by the Metropolitan National Bank as income to the Smith Securities Company in dissolution.
The bank took over the assets at the values as they stood on the books of the Smith Securities Company. The bank did not credit either of the two stockholders with any of the current income from the properties, but treated that income as income to the trustees in dissolution and as part of the assets which were available for distribution. During the year 1925, $57,500 was distributed to petitioner Hauser and the same amount was distributed to the estate of Grant Smith, so that unless the assets transferred to the bank and administered by it are held to have been received by the stockholders, the total distribution which petitioners received from the Smith Securities Company during 1925 was only about $1,100,000 each and fell short of the cost basis of their stock.
Upon the audit of the income-tax returns involved in this proceeding for 1925, the respondent took the position that the Smith Securities Company was completely liquidated January 12, 1925, and credited each of the stockholders with the receipt of one-half of all its assets on January 12, 1925. Although the value of the assets on that date was not susceptible of exact computation, the respondent determined and the parties have stipulated that their total value was $4,961,691.72, less income-tax liability then outstanding. The respondent accordingly determined a profit to each petitioner of the difference between the value of one-half of the assets and the cost to each of the stockholders of their stock. The respondent also treated the Metropolitan National Bank as trustee for the stockholders and credited the stockholders with their distributive share of the income which the bank received from the assets in question.
In auditing the return of the Smith Securities Company for the calendar year 1924 and for the 12-day period in 1925 prior to its dissolution, the respondent determined a deficiency for the year 1924, and also determined that the Smith Securities Company was liable for a tax on its income for the period January 1 to January 12, 1925, and on January 25, 1929, sent notices of deficiency pursuant to section 274(a) of the Revenue Act of 1926 to W. E. Hauser and Mrs. Grant Smith as transferees of the assets of the Smith Securities Company pursuant to section 280 of the Revenue Act of 1926.
The trust agreement referred to in the foregoing findings of fact shows the Metropolitan National Bank of Seattle as party of the first part, and W. E. Hauser, Mrs. Grant Smith and P. E. Colman, sole surviving trustees of the Securities Company, as parties of the second part. The agreement was executed in June, 1925. This instrument recites by way of introduction under the prefatory "whereas" as follows:
(a) The fact that the death of Grant Smith occurred on September 27, 1923.
(b) The fact that his widow was his sole surviving heir.
(c) The fact that Mrs. Smith and one H. H. Hunt were administrators of the estate.
(d) The fact that one-half of the stock of the Securities Company was owned by the said estate and the other half by W. E. Hauser.
(e) The fact that the parties of the second part were the sole surviving trustees of the Securities Company holding title as such to all of its assets.
(f) The fact that, "in order to conserve, care for, liquidate and divide said property, the said trustees of the Smith Securities...
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