Tate v. Commissioner of Internal Revenue

• Decision Date: 05 July 1938
• Docket Number: 11109.,No. 11110,11110
• Citation: 97 F.2d 658
• Parties: TATE v. COMMISSIONER OF INTERNAL REVENUE (two cases).
• Court: U.S. Court of Appeals — Eighth Circuit

97 F.2d 658 (1938)

TATE v. COMMISSIONER OF INTERNAL REVENUE (two cases).^*

Nos. 11110, 11109.

Circuit Court of Appeals, Eighth Circuit.

July 5, 1938.

George T. Priest, of St. Louis, Mo. (Robert E. Moloney and Boyle & Priest, all of St. Louis, Mo., on the brief), for petitioner.

Harry Marselli, Sp. Asst. to Atty. Gen. (James W. Morris, Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for respondent.

Before GARDNER, SANBORN, and THOMAS, Circuit Judges.

THOMAS, Circuit Judge.

These are petitions to review two decisions of the Board of Tax Appeals redetermining deficiencies in the income taxes of Mrs. Jennie E. Tate and her deceased husband, Frank R. Tate, for the year 1928. The cases were heard together below, and are presented upon a single record in this court, the facts in each case being identical.

The taxpayers each owned 750 shares in the Middleton Theatre Company, a corporation. In 1928 the corporation distributed to its stockholders the sum of $731,250 of which each of the taxpayers received $121,875, which they failed to report in their income tax returns for that year. The Commissioner of Internal Revenue added the amount of those dividends to their incomes and determined that the taxpayers were liable for additional taxes. The Board sustained the Commissioner.

Petitioner contends that the 1928 dividend was not taxable income to the stockholders, first, because it was a liquidating dividend and, second, because it was out of the profits of the company accrued prior to March 1, 1913. Counsel for petitioner, in his brief, declares that the principal question involved is: Is there any evidence to support the finding of the Board that the 1928 distributions were ordinary dividends? This does not fully state the issue. The Commissioner's determination was prima facie correct, and the burden was on the taxpayer to prove that it was wrong. Helvering v. Taylor, 293 U.S. 507, 515, 55 S. Ct. 287, 79 L.Ed. 623; Wiese v. Commissioner, 8 Cir., 93 F.2d 921; Whitlow v. Commissioner, 8 Cir., 82 F.2d 569. Therefore, the decision of the Board may be affirmed either because there is evidence to support it or because there is no evidence to sustain the taxpayer's burden.

First. The Revenue Act of 1928, c. 852, 45 Stat. 791, 822, 823, Section 115, 26 U.S.C.A. § 115 provides:

"(c) Distributions in liquidation. Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. * * *

* * * * * * * * *

"(h) Definition of partial liquidation. As used in this section the term `amounts distributed in partial liquidation' means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock."

Whether a dividend is a "distribution in liquidation" is a question of fact, and depends upon the intent of the directors of the corporation. Tootle v. Commissioner, 8 Cir., 58 F.2d 576; Kennemer v. Commissioner, 5 Cir., 96 F.2d 177; Holmby Corp. v. Commissioner, 9 Cir., 83 F.2d 548; Commissioner v. Straub, 3 Cir., 76 F.2d 388; Canal-Commercial Trust & Savings Bank v. Commissioner, 5 Cir., 63 F.2d 619; Gossett v. Commissioner, 4 Cir., 59 F.2d 365, rehearing denied 60 F.2d 484. It is therefore pertinent to examine the circumstances as disclosed in the record.

The Middleton Theatre Company was incorporated in 1899 with a capital of $25,000, fully paid. Mr. and Mrs. Tate each owned one-sixth of this stock, and their proportional interest in the company remained unchanged through 1928. In May, 1913, the common stock was increased to $100,000, when $60,000 new capital was received and a $15,000 stock dividend was declared. At that time $150,000 of preferred stock was created. In 1922 the capital was again increased by a $350,000 common stock dividend which was charged against surplus. In 1910 the company acquired a lease running until the year 2011 upon a parcel of land in St. Louis, and on this property it operated a theater. In 1913 the company erected a hotel on a part of the leased property not occupied by the theater. This building was leased for a ten year term to the Delmar Hotel Company. In 1920 the company sold the theater, together with its booking franchise, to the Orpheum Circuit, Inc., for 16,422 shares of the common stock of that company. In 1923 the Theatre Company bought additional shares of the stock of the Orpheum Circuit, Inc., bringing its total holding to 19,347 shares. In the latter part of 1927 or early in 1928 the company exchanged this stock for a like number of shares of the stock of Keith-Albee-Orpheum Corporation. Prior to November 15, 1928, it sold 9345 shares of this stock and exchanged the balance for the same number of shares of Radio-Keith-Orpheum stock. On November 22, 1928, the president of the Middleton Theatre Company reported to its board of directors that the proceeds from these sales of stock were not needed for its business and recommended that they be distributed to common shareholders. The directors did, therefore, on that day declare a "liquidating dividend" of $162.50 per share, or a total of $731,250 "out of the capital surplus of this company existing on and before March 1, 1913."

Obviously this dividend was not a complete liquidation of the corporation. It could be a partial liquidation only if one of a series of distributions in complete redemption of stock. The only evidence in the record that this distribution was of such a nature is (1) the designation given it by the board of directors and (2) the unusual size of the dividend. The largest previous dividend on the common stock had amounted to $24,000, in 1927. What a corporation may call a distribution of profits or surplus is not necessarily controlling. Kennemer v. Commissioner, supra; Gossett v. Commissioner, supra; Sanborn v. Commissioner, 8 Cir., 88 F.2d 134. So far as the record shows the Theatre Company had done nothing since 1920 except serve as a holding company, and after the dividend of 1928 it continued to serve the same function, since at that time it still held a substantial amount of stock as well as the hotel. What the company did with the hotel property after the expiration of the 10-year lease is undisclosed. An important circumstance shown by the record is that there were outstanding at the time of the alleged distribution $150,000 of preferred stock which was entitled, in case of liquidation, to payment in full at face value before any payment was made on common stock. Yet no liquidating dividend to preferred stockholders had been or was declared at that time; but on December 31st of the same year a regular $12,000 dividend was paid on the preferred stock. It has been held that the fact that the corporation is not immediately dissolved and the fact that the dividend is out of surplus do not prevent a finding that the distribution was a liquidation for tax purposes. Tootle v. Commissioner, supra; Holmby Corp. v. Commissioner, supra; Commissioner v. Straub, supra; Canal-Commercial Trust & Savings Bank v. Commissioner, supra. Nevertheless, in view of all of the circumstances, we can not say as a matter of law that the Board of Tax Appeals should have found that the 1928 dividend was a distribution in liquidation. The Board found that "petitioner's evidence fails to indicate that the Middleton Company...