Verito v. Comm'r of Internal Revenue, Docket Nos. 4303-63
| Citation | 43 T.C. 429 |
| Decision Date | 14 January 1965 |
| Docket Number | Docket Nos. 4303-63,4304-63. |
| Parties | FRANK W. VERITO, TRANSFEREE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTWILLIAM J. VERITO, TRANSFEREE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Arthur L. Birkholz, for the petitioners.
Melvin E. Pearl, for the respondent.
Forty-five corporations adopted plans of complete liquidation on September 16, 1960. On September 10, 1960, the corporations made an offer to sell all of their assets. Their offer was accepted on September 16, 1960, by National Food Stores, Inc. On October 17, 1960, the closing of the sale took place and the corporations received the sales proceeds. Nineteen of these corporations, while awaiting the distribution of their assets, made temporary investments in various , resulting in the realization of gain. The 45 corporations liquidated on May 31, 1961, distributing all of their assets to their stockholders. Held, on these facts, the gain realized on the sales of the securities is not recognized at the corporate level by virtue of section 337, I.R.C. 1954.
The commissioner determined deficiencies in income tax for the taxable period ended June 2, 1961, against 19 transferor corporations, in the aggregate amount of $22,296.54. These proceedings involve the liability of the petitioners as transferees of the assets of the aforementioned transferor corporations.1 The only issue to be decided is whether gain realized on certain sales of securities by the aforementioned transferor corporations should go unrecognized at the corporate level by virtue of section 337 of the Internal Revenue Code of 1954.2
All of the facts have been stipulated, are so found, and the stipulation of facts together with the exhibits attached thereto is incorporated herein by this reference. Those necessary to an understanding of our inquiry are recited below.
Petitioner Frank W. Verito (hereinafter referred to as Frank) and Amelia V. Verito are husband and wife residing in Milwaukee, Wis. They filed their joint Federal income tax return for the taxable year 1961 with the district director of internal revenue, Milwaukee, Wis.
Petitioner William J. Verito (hereinafter referred to as William) and Mona C. Verito are husband and wife residing in Milwaukee, Wis. They filed their joint Federal income tax return for the taxable year 1961 with the district director of internal revenue, Milwaukee, wis.
Frank and William were the major stockholders and principal officers of 45 separate corporations all organized under the laws of the State of Wisconsin. The corporations were engaged in the bakery business in Milwaukee. On or before October 17, 1960, the 45 corporations, which were formerly known as Wm. H. Heinemann Bakeries, Inc., changed their corporate names to Verito Investment Corp. (hereafter referred to as Verito). The 19 corporations involved in these proceedings will hereafter be referred to as the transferor corporations.
The transferor corporations filed their Federal corporate income tax returns for the taxable period ended June 2, 1961, with the district director of internal revenue, Milwaukee, Wis.
The fiscal year of Verito commenced on September 1. On September 16, 1960, at special meetings of the stockholders, the following resolutions were unanimously adopted:
RESOLVED: That the Board of Directors is hereby authorized to sell or exchange all or any part of this corporation's property and assets upon such terms and conditions and for such consideration, which may be in whole or in part shares of stock in any other corporation as the Board of Directors shall deem expedient and for the best interests of the corporation. assets but within a period not to exceed twelve months from the date of adoption hereof that this corporation be dissolved and that the officers of this corporation be directed to file a statement of intent to dissolve with the Secretary of State of the State of Wisconsin.3
On September 20, 1960, an offer for the sale of the assets of Verito was made to National Food Stores, Inc. The offer included the sale of all of the assets of Verito. It was part of the offer that Verito, then known as Wm. H. Heinemann Bakeries, Inc., would change the name of each corporation to one not conflicting with the name of Wm. H. Heinemann Bakeries, Inc., and that the names relinquished would be made available as corporate names to the nominee of National Food Stores, Inc. It was for this sole reason that the names of the transferor corporations were changed. The aggregate sales price was to be $778,000 payable in 25,000 shares of common stock of National Tea Co. and the balance in cash. This price did not include the inventory on hand, which was to be valued at cost at the date of closing. The offer of sale was accepted by National Food Stores, Inc., on September 16, 1960. Closing of the sale was effected October 17, 1960. Verito, including the transferor corporations, as of October 17, 1960, had received the proceeds from the sale of assets to National Food Stores, Inc. The aggregate proceeds received on the sale were 25,000 shares of common stock of National Tea Co. and $477,562.92 in cash.
Subsequent to the sale of the operating assets of Verito, but prior to the liquidations, the transferor corporations made temporary investments in various listed stocks, which were sold4 during the period and resulted in an aggregate long-term gain of $13,354.61 and short-term gain of $64,071.77.
The stock market transactions of the 19 transferor corporations between October 17, 1960, and May 31, 1961, the date of distribution to the shareholders, are set forth below:
Section 337 originated in the Internal Revenue Code of 1954. Prior to that time, a corporation wishing to liquidate would do so in one of two ways. It could sell its assets, report any gain or loss recognized on the sale, and then distribute the proceeds from the sale to its stockholders. In the alternative, the corporation could distribute the assets in kind to its stockholders and the latter could sell the assets. The advantage of this latter approach was that there would be no gain (or loss) recognized at the corporate lever. 6 Since the two ways of approaching liquidations resulted in different tax consequences, numerous cases concerned themselves with the sole question of, Who made the sale? It the sale were made by the corporation, it was taxable on any gain derived therefrom. Commissioner v. Court Holding Co., 324 u. s. 331 (1945). If the stockholder made the sale, then the corporation would not be subjected to any tax resulting from gain derived from the sale. United States v. Cumberland Pub. Serv. Co., 338 U.S. 451 (1950). It was with this background that the present section 337 had its birth.
Present section 337 was introduced originally as section 333 of H.R. 8300, 83d Cong., 2d Sess., Union Calendar No. 498. It provided, in part, as follows:
(a) NONRECOGNITION OF GAIN TO LIQUIDATING CORPORATIONS.— No gain shall be recognized to a corporation upon a sale of an asset after the adoption of the plan of partial or complete liquidation if such sale is incident to such liquidation and the distribution in liquidation of all the assets of the corporation * * * is completed within the taxable year in which such sale occurs or within the succeeding taxable year, except with respect to any sale which is—
(1) a sale in the ordinary course of business, or
(2) a sale of an inventory asset * * *
(b) ATTRIBUTION OF SALE OF EXCHANGE.— The sale or exchange of an asset after such asset has been distributed in partial or complete liquidation to the shareholder shall not be attributed to the corporation. (Emphasis supplied.)
The purpose of the legislation as proposed by the House is explained in the committee report as follows:
Your committee's bill eliminates questions arising as a result of the necessity of determining whether a corporation in process of liquidating made a sale of assets or whether the shareholder receiving the assets made the sale. Compare Commissioner v. Court Holding Company (324 U.S. 451) * * *. In order to eliminate questions resulting only from formalities, your committee has provided that if a corporation in process of liquidation sells assets there will be no tax at the corporate level * * *. (H. Rept. No. 1337, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., pp. 38, 39 (1954).)
The detailed discussion of the technical provisions of the House bill provides this further explanation of the section's purpose:
Accordingly, under present law, the tax consequences arising from sales made in the course of liquidation depend primarily upon the formal manner in which transactions are arranged. The possibility that double taxation may occur in such cases results in causing the problem to be a trap for the unwary.
Your committee intends in section 333 to provide a definitive rule which will eliminate any uncertainty. (H.Rept.No.1337, supra at 106.)
When section 333 as contained in H. Rept. No. 8300 reached the Senate, it was rewritten and emerged as section 337 of the Code. The Senate Finance Committee report had this to say regarding the change of language:
While the purpose intended to be served by section 337 is similar...
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