Williamson v. United States

• Decision Date: 19 July 1961
• Docket Number: No. 86-59.,86-59.
• Citation: 292 F.2d 524
• Parties: J. C. WILLIAMSON, Transferee of Williamson Well Service, Inc., a Dissolved Corporation v. UNITED STATES.
• Court: U.S. Claims Court

292 F.2d 524 (1961)

J. C. WILLIAMSON, Transferee of Williamson Well Service, Inc., a Dissolved Corporation v. UNITED STATES.

No. 86-59.

United States Court of Claims.

July 19, 1961.

Edward L. Wilson, Dallas, Tex., for plaintiff.

Eugene Emerson, Washington, D. C., with whom was Louis F. Oberdorfer, Asst. Atty. Gen., for defendant. James P. Garland and Lyle M. Turner, Washington, D. C., were on the brief.

JONES, Chief Judge.

This is an action brought to recover a sum which was paid under protest as an assessed deficiency in Federal income taxes for the period November 1, 1954, to August 22, 1955. The deficiency was assessed against the plaintiff as transferee of the assets of the Williamson Well Service, Inc. The parties are agreed on the facts. The plaintiff has moved for judgment on the pleadings; the defendant has filed a cross motion to dismiss. The question presented is whether a cash method corporation which is presently entitled to receive income for services rendered can escape taxation through liquidation whereby in advance of payment it gives away to its stockholders the right to receive this income.

The plaintiff, J. C. Williamson, organized the corporation, Williamson Well Service, Inc., under the laws of the State of Texas on January 2, 1953. The corporation was engaged in the business of servicing oil and gas wells. Its services were performed on a contract basis; it derived all of its income from these services, and it did not engage in any other business. The corporation maintained no inventories and leased most of the fixed assets used in the business.

The corporation kept its books on the cash receipts and disbursements method of accounting and reported its income and expenses on that basis for Federal income tax purposes. Except for the corporation's failure to include in its final return as taxable income certain accounts receivable of $192,052.08 the Commissioner of Internal Revenue never objected to the corporation's method of accounting or method of reporting its income for Federal income tax purposes.

On July 25, 1955, the plaintiff, as sole stockholder, duly authorized the liquidation and dissolution of the corporation. Under the terms of the liquidation, the plaintiff received all of the corporate properties, including accounts receivable of $192,052.08, in consideration for all of the corporate stock held by him. The accounts receivable of $192,052.08 evidenced amounts due the corporation, but not paid, for services rendered by the corporation in full performance of various well-servicing contracts prior to the date of distribution. The corporation was dissolved on August 22, 1955.

Following the dissolution, the plaintiff collected all but $2,089.47 of the accounts receivable assigned to him. The plaintiff did not perform any services individually for the debtors who paid the distributed accounts.

In the corporation's final income tax return none of the accounts receivable was reported as income, although undoubtedly the expenses of performing the contracts from which the accounts receivable arose were taken as deductions. Upon audit of the corporation's final tax return covering the period November 1, 1954, to August 22, 1955, the Commissioner increased the corporation's income for the final period by the amount of $192,052.08. In making his ruling, the Commissioner relied upon § 446 of the Internal Revenue Code of 1954, 26 U.S.C. (I.R.C.1954) § 446, which provides that if the taxpayer's method of accounting "does not clearly reflect income, the computation of taxable income shall be made under such method as, in the opinion of the Secretary or his delegate, does clearly reflect income." Plaintiff paid the Commissioner's asserted deficiency plus interest thereon as transferee of the corporation.

In the individual income tax return filed by the plaintiff and his wife for the calendar year 1955 showing his gain on the liquidation and dissolution of the corporation, the plaintiff included the accounts receivable of $192,052.08 at face value among the assets he received in exchange for his capital stock.

On June 24, 1958, the plaintiff, as transferee of the corporation, filed a timely claim for refund with the Commissioner. The claim was disallowed in full and this suit was filed.

Through the years, transfers of money and property between related corporations or between corporations and individual stockholders have produced an entire series of tax problems for the courts and the Congress. When these transfers take the form of dividends in kind and when subsequent to distribution the property is sold or otherwise converted into money by the stockholders the problems and the solutions become highly complex. Twice in recent years the Supreme Court has addressed itself to one aspect of the general problem in determining whether sales of corporate assets following distribution should realistically be attributed to the stockholders or to the corporation. Commissioner of Internal Revenue v. Court Holding Co., 1945, 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed. 981; United States v. Cumberland Public Service Co., 1950, 338 U.S. 451, 70 S.Ct. 280, 94 L.Ed. 251 affirming 1949, 83 F.Supp. 843, 113 Ct.Cl. 460. Other courts have tested completed dividend transactions under the "business purpose" doctrine of Gregory v. Helvering, 1935, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596, when it appeared that distributions of property were sham transactions made only to avoid taxes. Commissioner of Internal Revenue v. Transport Trading & Terminal Corp., 2 Cir., 1949, 176 F.2d 570. This court has decided related problems. American Telegraph & Cable Co. v. United States, 1925, 61 Ct.Cl. 326, certiorari denied, 1926, 271 U.S. 660, 46 S.Ct. 473, 70 L. Ed. 1137; Guinness v. United States, 1947, 73 F.Supp. 119, 109 Ct.Cl. 84; Rudco Oil & Gas Co. v. United States, 1929, 82 F.Supp. 746, 113 Ct.Cl. 206; Cumberland Public Service Co. v. United States, supra; Telephone Directory Advertising Co. v. United States, 1956, 142 F.Supp. 884, 135 Ct.Cl. 670.

The question presented by the case at bar is yet another aspect of the over-all problem, the question being whether the fact of liquidation prior to the actual collection of the accounts receivable prevents their being realized by and taxed to the corporation even though the corporation itself earned the money and fully perfected its right to receive the money prior to liquidation.

The resolution of this problem must start with the decision of the Supreme Court in General Utilities & Operating Co. v. United States, 1935, 296 U.S. 200, 56 S.Ct. 185, 80 L.Ed. 154, a case which concerned the distribution by a corporation of appreciated stock as a dividend in kind to its stockholders. Relying on United States v. Kirby Lumber Co., 1931, 284 U.S. 1, 52 S.Ct. 4, 76 L.Ed. 131, the Commissioner declared a taxable gain to the utility corporation upon the distribution of the stock in payment of a dividend. The Commissioner's theory was that the declaration of the dividend created an indebtedness of the corporation to its stockholders and the discharge of that liability by the delivery of property costing less than the amount of the debt constituted income to the corporation. The Board of Tax Appeals and the Court of Appeals upheld the Commissioner. The Supreme Court reversed, stating that the corporation had neither sold assets, discharged an indebtedness, nor realized taxable gain on the distribution among its stockholders of the appreciated stock as a dividend. The case was generally thought to stand for the proposition that no gain or loss is realized by a corporation on the distribution of property as a dividend.

Thereafter, in Helvering v. Horst, 1940, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75, the Supreme Court was confronted with the situation where an individual had detached interest coupons from some negotiable bonds shortly before their due date and had given them to his son. The donee in the same year collected the coupons at maturity. The Commissioner ruled that the interest coupons were taxable to the donor in the year when paid even though the donor kept his books on the cash receipts basis and had never received the interest payments in cash. The Supreme Court upheld the Commissioner and reiterated the famous horticultural aphorism of Justice Holmes from Lucas v. Earl, 1930, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731, to the effect that "the fruit is not to be attributed to a different tree from that on which it grew." The Court in Horst said that the "power to dispose of income is the equivalent of ownership of it. The exercise of that power to procure the payment of income to another is the enjoyment and hence the realization of the income by him who exercises it." Furthermore, the "dominant purpose of the revenue laws is the taxation of income to those who earn or otherwise create the right to receive it" and this purpose cannot "be escaped by `anticipatory arrangements * * * however skilfully devised' to prevent the income from vesting even for a second in the donor." Emphasis supplied. 311 U.S. at pages 118, 119, 120, 61 S.Ct. at page 147.

The Commissioner seized upon the Horst doctrine as a means of limiting the application of the General Utilities rule. In Commissioner of Internal Revenue v. First State Bank of Stratford, 5 Cir., 1948, 168 F.2d 1004, 7 A.L.R.2d 738, a bank, prior to 1942, had charged off certain notes as worthless, the deductions producing a tax benefit. When it appeared in 1942 that the notes would be paid, the bank declared a dividend in kind of the notes and assigned them to its stockholders. The Commissioner successfully included in the bank's income for 1942 the amounts collected by the stockholders during the year on the notes. The court held that the dividend, in effect, represented an anticipatory assignment of potential income since the notes when collected would have been ordinary income to the bank. The court said:

"The

...