Wilson v. Comm'r of Internal Revenue
| Decision Date | 13 June 1966 |
| Docket Number | Docket Nos. 684-62,686-62. |
| Citation | 46 T.C. 334 |
| Parties | RALPH C. WILSON, SR., AND TENNA K. WILSON, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTRALPH C. WILSON, JR., AND JANET M. WILSON, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
John H. Fildew, for the petitioners.
Ralph W. Eisnaugle, Jr., for the respondent.
Petitioners, father and son, each owned 50 percent of the stock of two corporations, A company and B company. A company conducted a group insurance agency business; B company conducted a general insurance agency business. On November 1, 1957, A company transferred its group insurance business to B company in exchange for cash. Thereafter, A company collected its receivables and sold part of some stock it had bought as an investment. Prior to the end of 1957, A company distributed its assets, consisting of cash and the balance of the investment stock, to petitioners in exchange for their stock in A company. A company then dissolved. By June 1959, one of the petitioners, the father, had disposed of his stock in B company. Held:
1. The transfer of the group insurance business from A company to B company constituted a reorganization within the meaning of section 368(a)(1)(D).
2. Each petitioner's receipt of A company's assets must be treated as a dividend under section 356(a)(2), to extent provided by that section. A company's earnings and profits determined.
Respondent has determined deficiencies in petitioners' income taxes for the calendar year 1957 in the respective amounts set forth after their names:
+----------------------------------------------------+
¦Ralph C. Wilson, Sr., and Tenna K. Wilson¦$69,539.28¦
+-----------------------------------------+----------¦
¦Ralph C. Wilson, Jr., and Janet M. Wilson¦76,409.59 ¦
+----------------------------------------------------+
After certain concessions made by the parties, the following issues remain to be decided:
(1) Did the transfer of certain assets from Ralph C. Wilson Associates, Inc., to Ralph C. Wilson Agency, Inc., in exchange for cash, and the subsequent dissolution of Ralph C. Wilson Associates, Inc., constitute a corporate reorganization within the meaning of section 368(a)(1)(D) of the 1954 Code? 1
(2) If there was a reorganization, is the gain realized by petitioners on the liquidation of Ralph C. Wilson Associates, Inc., taxable as a dividend under section 356 to the extent of that corporation's undistributed earnings and profits?
(3) If there was a reorganization, and if the gain on liquidation is taxable as a dividend under section 356, were the earnings and profits of Ralph C. Wilson Associates, Inc., increased by the gain realized upon the sale of certain investment stock?
Some of the facts have been stipulated and are found accordingly.
Ralph C. Wilson, Sr. (hereinafter referred to as Wilson), and Tenna K. Wilson are husband and wife residing in Grosse Pointe Park, Mich. Ralph C. Wilson, Jr. (hereinafter referred to as Wilson, Jr.), and Janet M. Wilson are husband and wife residing in Grosse Pointe Woods, Mich. Each couple filed a joint Federal income tax return for the calendar year 1957 with the district director of internal revenue, Detroit, Mich. Wilson, Jr., is the son of Wilson. Wilson and Wilson, Jr., will sometimes be referred to as petitioners.
Ralph C. Wilson Agency, Inc. (hereinafter referred to as Agency), was incorporated under the laws of the State of Michigan in 1939 for the purpose of engaging in the general insurance business. From the date of incorporation of Agency until June 1959 petitioners each owned 50 percent of its issued and outstanding stock. At the time of trial, all of such stock was owned by Wilson, Jr. From 1950 until at least 1960, Agency's registered office and principal place of business was at 1550 Guardian Building, Detroit, Mich. During 1957 and 1958, Wilson and Wilson, Jr., served as Agency's principal officers.
Sometime prior to April 12, 1949, a group of individuals unrelated to petitioners approached Wilson with the idea of organizing a corporation to sell large group insurance contracts. These individuals claimed to have the contracts necessary to sell such contracts, and they knew Wilson had an insurance license. Ultimately, on April 12, 1949, Ralph C. Wilson Associates, Inc. (hereinafter referred to as Associates), was incorporated under the laws of the State of Michigan. Petitioners each owned one-sixth (1/6) of the issued and outstanding stock of Associates; the rest of the stock was owned by six unrelated individuals.
From the date of its incorporation, Associates engaged in the business of selling large group insurance contracts to a limited number of clients. Large group insurance policies are policies covering a large number of persons (usually employees) affiliated with an insurable group. Provisions such as coverage, benefits, and rates are negotiated and drafted to meet the requirements of each group covered. Ordinary group insurance policies, on the other hand, usually cover smaller numbers of assureds and are ‘standard’ contracts, the principal terms of which usually are not modified according to the requirements of the insured groups.
Initially Associates wrote hospitalization insurance and/or accidental death and dismemberment insurance for the following groups, the coverage for each group having begun on the respective date indicated:
+-------------------------------------------------------------+
¦ ¦Commencement ¦
+----------------------------------------------+--------------¦
¦Group ¦date ¦
+----------------------------------------------+--------------¦
¦Michigan Conference of Teamsters Welfare Fund ¦June 1, 1949 ¦
+----------------------------------------------+--------------¦
¦National Truckaway and Driveaway Conference2 ¦May 1, 1950 ¦
+----------------------------------------------+--------------¦
¦National Automobile Transporters Employers ¦ ¦
+----------------------------------------------+--------------¦
¦Conference ¦Sept. 1, 1950 ¦
+-------------------------------------------------------------+
The Teamsters' policy expired April 30, 1951. The policies on the other groups were renewed continuously until 1957 and thereafter. In 1955 and 1956, Associates sold policies similar to those previously described to three additional groups, Stainless Ware Co. of America, Schafer's Detroit Bakery, and City Bank. These latter three groups renewed their policies until 1957 and thereafter. Associates had to make continuing efforts in order to secure renewals of the various policies sold by it.
Continental Assurance Co. of Chicago, Ill., was the insurer under all the policies sold by Associates. All business and commission agreements relating to the five group policies still in effect on November 1, 1957, were on that date transferred to Agency as part of a transaction hereinafter more fully described. Petitioners had no important financial interests in Continental Assurance Co., the insurer under the large group policies sold by Associates, nor in the groups to which such policies were sold.
During the year 1951, Associates redeemed all of its stock except the shares held by Wilson and Wilson, Jr., who each continued to own 50 percent of its outstanding stock until its dissolution in 1957. They also were its principal salesmen. From 1950 through 1957, Associates rented office space and equipment from Agency at 1550 Guardian Building, Detroit.
In April 1953, Associates purchased, as an investment, three shares of Complete Auto Transit, Inc., stock on an installment basis and paid therefor $54,500 in 1953, $7,500 in 1954, and $79,500 in 1955 for a total cost of $141,500. As the result of stock splits or stock dividends, Associates owned 1,200 shares of such stock by 1957.
In 1957, petitioners each owned 50 percent of the stock of two corporations besides Agency and Associates, namely, Ralson Equipment Co., Inc., and Cole & Brown Agency, Inc. Sometime during the summer of 1957 Wilson, then age 74, asked Richard O. Morrison, the treasurer of both Agency and Associates, to study all four companies with a view towards completely liquidating Wilson's interest in them. Morrison did so and, as the result of his study, concluded that the process of liquidating Wilson's interests should begin with the fact that Associates had only three principal classes of assets (cash and receivables, stock of Complete Auto Transit, Inc., and insurance commission agreements), all of which could easily be disposed of by sale or by distribution to the shareholders, i.e., petitioners.
Morrison discussed the results of his study with petitioners and with Clarence J. Alandt. Alandt, an attorney and certified public accountant, had acted as independent certified public accountant for petitioners since 1954. The four men agreed upon a plan whereby Associates would (1) transfer its insurance commission agreements and related business, together with an automobile used by Wilson, Jr., to Agency in exchange for cash; (2) collect its notes and accounts receivable; (3) sell a portion of the Complete Auto Transit stock for cash to Ralph C. Wilson Foundation; (4) distribute its assets, consisting of cash and the balance of the Complete Auto Transit stock, to its shareholders in exchange for its stock; and (5) terminate its corporate existence.
On October 7, 1957, the stockholders of Associates adopted a plan of dissolution. The plan provided that the corporation would try to sell all its assets before December 20, 1957. The articles of incorporation were amended to provide that the corporate existence of Associates would expire on December 31, 1957. From October 7, 1957, until November 1, 1957, Associates continued to conduct its business in the usual...
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