Suter v. Comm'r of Internal Revenue (In re Estate of Suter), Docket Nos. 56785

• Citation: 29 T.C. 244
• Decision Date: 18 November 1957
• Docket Number: Docket Nos. 56785,56789,56790,56791.
• Parties: ESTATE OF JAMES F. SUTER, DECEASED, FREDERICK F. SUTER AND SHIRLEY CUTAIA, ADMINISTRATORS, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: United States Tax Court

29 T.C. 244

ESTATE OF JAMES F. SUTER, DECEASED, FREDERICK F. SUTER AND SHIRLEY CUTAIA, ADMINISTRATORS, ET AL.,1 PETITIONERS,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 56785

56789

56790

56791.

Tax Court of the United States.

Filed November 18, 1957.

[29 T.C. 244]

Charles Wilson, Esq., and Albert R. Dworkin, Esq., for the petitioners.

John F. Walsh, Esq., for the respondent.

1. The individual petitioners first sought to purchase the assets, primarily a paper mill, of Rondout 1935, which corporation possessed no value to purchasers other than the assets. Kelly, the owner of all of the capital stock of Rondout 1935, refused to sell the assets but agreed to sell his stock. Petitioners, pursuant to a plan, purchased Kelly's stock; dissolved Rondout 1935 and distributed its assets to themselves; and then transferred the assets to a new corporation, Rondout 1945, whose stock was solely owned by them. Rondout 1945 in consideration thereof assumed the liabilities for the purchase price of the stock. Held, that the series of steps constitutes one transaction, viz, the purchase by Rondout 1945 of the assets of Rondout 1935. Therefore, the basis of the assets in the hands of Rondout 1945 is the purchase price of the stock. Held, further, the individual petitioners did not receive a dividend when Rondout 1945 assumed liabilities for the purchase price of the stock.

2. Under our holding in headnote 1 above, none of the individual petitioners omitted from his gross income an amount properly includible therein which is in excess of 25 per cent of the gross income stated in his return which was filed for the taxable year 1945. Held, the 5-year period of limitation provided in section 275(c), I.R.C. 1939, is not applicable. The individual petitioners are sustained in their plea of the statute of limitations.

The respondent has determined deficiencies in income tax as follows:

+---------------------------------------------------+
                ¦Docket No.¦Petitioner ¦Year¦Deficiency¦
                +----------+------------------------+----+----------¦
                ¦56785 ¦Estate of James F. Suter¦1945¦$15,740.16¦
                +----------+------------------------+----+----------¦
                ¦56789 ¦Helen M. Aal ¦1945¦12,990.85 ¦
                +----------+------------------------+----+----------¦
                ¦56790 ¦Morris Hartman ¦1945¦17,534.59 ¦
                +----------+------------------------+----+----------¦
                ¦56791 ¦Rondout Paper Mills, Inc¦1946¦4,760.00 ¦
                +---------------------------------------------------+
                

[29 T.C. 245]

The deficiency in Docket No. 56791, involving the corporate petitioner, is due in part to respondent's partial disallowance of the depreciation claimed, which disallowance is based on his determination that the basis of its assets is the same as in the hands of a prior corporation. One other adjustment of $2,000 is not in issue. Petitioner concedes that the Commissioner was correct in making the latter adjustment.

The deficiencies in the dockets involving the individual petitioners, who, at all times relevant, were the sole shareholders of the corporate petitioner, are due to respondent's determination that they each received a dividend of $29,427.57 when the corporate petitioner assumed their liabilities. The Commissioner explained this adjustment in his deficiency notice as follows:

(a) It has been determined that a dividend has been received from Rondout Paper Mills, Inc. in the amount of $29,427.57.

The issues involved are dependent upon the tax effect of a series of transactions whereby the individual petitioners purchased the stock of a prior corporation, dissolved it and distributed its assets to themselves, and then transferred the assets to the corporate petitioner. It is petitioners' contention that the sole and only purpose of the purchase by the said individuals of the capital stock of Rondout 1935 was one of the steps used to acquire the physical properties of the said corporation, which properties could not otherwise be acquired, and that all the transactions should be viewed together as a purchase of assets by the new corporation.

The individual petitioners have pleaded the 3-year period of limitations under section 275(a), I.R.C. 1939.² The respondent alleges that the 5-year period of limitations, as provided in section 275(c), is applicable.

FINDINGS OF FACT.

A stipulation of facts has been filed and is incorporated herein by this reference.

Petitioners Frederick F. Suter and Shirley Cutaia are the duly qualified and acting administrators of the estate of James F. Suter, who was an individual residing at Ellenville, New York. The decedent, James F. Suter, hereinafter sometimes referred to as Suter, filed his Federal income tax return for the calendar year 1945 with the then collector of internal revenue for the fourteenth district of New York.

Petitioner Helen M. Aal, hereinafter sometimes referred to as Aal, an individual residing in New York City, filed her income tax

[29 T.C. 246]

return for the calendar year 1945 with the then collector of internal revenue for the third district of New York.

Petitioner Morris Hartman, hereinafter sometimes referred to as Hartman, an individual residing in New York City, filed his income tax return for the calendar year 1945 with the then collector of internal revenue for the third district of New York.

Suter, Aal, and Hartman are hereinafter sometimes referred to as the individual petitioners.

The petitioner Rondout Paper Mills, Inc., hereinafter sometimes referred to as Rondout 1945, is a corporation organized and existing under the laws of the State of New York with its principal place of business at Ellenville, New York. Rondout 1945 filed its corporation income tax returns for the period July 1 to December 31, 1945, and for the calendar year 1946 with the then collector of internal revenue for the fourteenth district of New York.

A prior corporation bearing the name of Rondout Paper Mills, Inc., hereinafter sometimes referred to as Rondout 1935, had been organized under the laws of the State of New York in 1935. During 1945, Rondout 1935 had a capitalization consisting of 1,000 shares of $100-par-value capital stock, all of which were outstanding and owned (prior to his sale of them) by William P. Kelly, hereinafter sometimes referred to as Kelly.

Rondout 1935 owned and operated a paper mill, which was located on Rondout Creek near Ellenville, New York.

Suter was employed by Rondout 1935 as manager of its mill. Prior to Kelly's ownership of the mill Bernard Aal, husband of petitioner Helen Aal, had been one of the owners of the mill and was acquainted with its facilities and capabilities. Hartman and Aal had been engaged in the paper products jobbing business for many years prior to 1945. During the war years 1941-1945, and in the period immediately following the war, the demand for paper products generally exceeded the supply and many large users of, and dealers in, paper acquired control of paper mills in order to insure their continued supply.

During a period commencing some time prior to, and through the early part of, 1945, Hartman and Aal were dominant interests in a paper-jobbing business in New York City which purchased some (not a substantial percentage) of its paper requirements from the mill owned by Rondout 1935. Mutual Paper Co. of New York, a competitor of the jobbing business of Hartman and Aal, was at this time receiving almost half of the production of the mill owned by Rondout 1935.

About February 1945, Suter, who wished to promote a purchasing group in which he would be a participant, advised Hartman and

[29 T.C. 247]

Aal that the competitor, Mutual Paper Co., was negotiating for the purchase of the Rondout mill. Hartman and Aal believed that they would no longer receive paper from the Rondout mill if control passed to this competitor.

Suter, Hartman, and Aal agreed to attempt to purchase the Rondout mill under an arrangement by which Suter would acquire a one-third stock interest in a new corporation to be formed but 50 per cent of the voting power, and Hartman and Aal would handle the distribution and sales of the mill and acquire a two-thirds stock interest in the new corporation to be formed but collectively 50 per cent of the voting power, and Hartman and Aal would advance substantially all the cash required in the purchase, but such advances were to be repaid to them from the venture. Suter had no money.

Hartman and Aal then sent with Suter to Kelly in February 1945, to negotiate for the purchase of the operating assets of the mill. Bernard Aal represented petitioner Helen M. Aal in the negotiations. After several weeks of negotiations a tentative agreement was reached in March 1945, upon a purchase price of $500,000 for the mill. Hartman, Aal, and Suter then notified their attorneys to work out the legal arrangements and details, and Kelly did likewise with respect to his attorney.

About the end of March 1945, after the tentative agreement had been reached, Kelly permitted Hartman, Aal, and Suter to take over direction of the mill's operation and sales policies. They proceeded to carry out changes in products and in customers and thereafter only customers of Hartman's and Aal's jobbing business received any of the mill's output, except for unfulfilled prior commitments. Kelly allowed them to take over the mill's operations prior to entering into a contract of sale and prior to the consummation of the sale because he had confidence in the prospective purchasers, having employed Suter for about 22 years and having known Bernard Aal for about 37 years.

Early in April 1945, Kelly's attorney and accountant advised him that his tax situation required him to sell the capital stock of Rondout 1935 rather than the mill, i.e., the specific assets, for which Hartman, Aal, and Suter were negotiating. Kelly informed the purchasers that he would only sell the capital stock of Rondout 1935. The purchasers consulted with their attorneys, who strongly advised them not to purchase the stock for the reason, inter alia, that Rondout...