Wilson v. South Carolina Tax Com'n

• Decision Date: 17 September 1951
• Docket Number: No. 16540,16540
• Citation: Wilson v. South Carolina Tax Com'n, 66 S.E.2d 698, 220 S.C. 171 (S.C. 1951)
• Parties: WILSON v. SOUTH CAROLINA TAX COMMISSION (two cases).
• Court: South Carolina Supreme Court

Page 698

66 S.E.2d 698

220 S.C. 171

WILSON v. SOUTH CAROLINA TAX COMMISSION (two cases).

No. 16540.

Supreme Court of South Carolina.

Sept. 17, 1951.

Williams & Parler, Lancaster, for appellants.

Claude K. Wingate, Asst. Atty. Gen., for respondent.

STUKES, Justice.

J. S. Wilson and E. C. Wilson, father and son, are the owners in equal amounts of the shares of Wilson Gas & Oil Company, a corporation, which is engaged in the wholesale and retail sale and distribution of petroleum products. It owned considerable real estate which consisted of filling stations and sites, etc. In order to insulate this property from liability for damages incurred in the operation of the business, the Wilsons formed another corporation, 'Wilson's, Incorporated.' The old corporation conveyed to the new the most or all of the real estate and the shares of the new corporation were issued to the individual Wilsons separately and in the same, equal proportions and without consideration.

The Tax Commission assessed additional personal income taxes against them upon the conception that the shares of stock in the new corporation which were issued to represent the value of the transferred real estate amounted to dividends from the old corporation. The individuals paid the additional income taxes under protest and separately brought the actions at bar for recovery, pursuant to the terms of section 2469 of the 1942 Code. This judgment will dispose of both cases.

The Tax Commission demurred to the complaints and the demurrers were sustained, whence the appeals. The ground of the decision of the lower court was that the value of the transferred real estate represented surplus of the old corporation and the issuance to the stockholders, without consideration, of shares in the new corporation was the equivalent of the payment of taxable dividends by the old corporation. The taxpayers vainly contended in the lower court that the organization of the new corporation and the conveyance, without consideration, of the real estate assets of the old to the new and the issuance of the shares of the latter to the taxpayers, who are the owners of all of the shares of both corporations, was a reorganization and falls within the proviso of section 2447 of the Code, which follows: 'provided, however, that in a reorganization, consolidation or merger the exchange of stock or property for stock of a corporation a party to the reorganization, consolidation or merger shall not be deemed to result in gain or loss.'

In addition to the facts first stated above, the complaints contain excerpts from the books of the old and new corporations from which it appears that the real estate which was transferred to Wilson's, Inc., constituted the book surplus of the old corporation in the amount of $55,288.97 which was arrived at from the cost of the properties, aggregating $111,093.87, less outstanding debts thereon of $23,199.32 and less reserve for depreciation of the buildings, $32,605.58. Apparently the net amount of this surplus is the sum assessed by the Commission against the Wilsons individually in separate, equal amounts as additional personal income. The appeals do not question the amount of the assessments but claim the invalidity of the whole.

Appellants assert in the brief that the issuance of the new stock to them is not taxable under the Federal income tax law, which is not challenged by respondent. However, the Federal and State income tax statutes are vitally different in this respect. The Federal Act expressly exempts gain derived from corporate reorganization and goes on to define 'reorganization' in the Internal Revenue Code, sec. 112(g)(1), 26 U.S.C.A. § 112(g)(1), under which, or its equivalent, the Federal decisions which are relied upon by appellants appears to have been decided. Subsection (D) seems to expressly cover the situation of this case and to provide for exemption from tax liability of, quoting, 'a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its shareholders or both are in control of the corporation to which the assets are transferred.' See footnote, 173 A.L.R. 943.

The State law, here applicable, is quite different because it contains no such definition of 'reorganization' as does the Federal; and we are confined to the ordinary meaning of the proviso to our Code sec. 2447 quoted above and relied upon by appellants. Its other terms certainly do not encompass the transaction under review because it was not a consolidation or merger, nor did it involve the exchange by the stockholders of stock or property for stock of another corporation. The personal recipients of the stock gave nothing in exchange for the stock in the new corporation, which they received. The fair and ordinary meaning of the word 'reorganization' cannot, we think, include the formation of a new, separate and distinct corporation, without impairment of the corporate existence of function of the old corporation.

Appellants ingeniously argue to the fallacious conclusion that they are individually no better off financially than before; but they are, because they now personally own valuable shares of stock in the new corporation which they did not before. They now, in effect, own the former surplus of the old corporation which before was the property of it. Of course, the book (and real) value of appellants' shares in the old corporation has been reduced but that is the inevitable result of every payment of corporate dividends. The transaction under review amounted to a distribution of the accumulated profits or surplus of the old corporation, which is equivalent to the payment of dividends to the stockholders. It follows that the...