*2632 The principal stockholder having purchased the corporate assets with four promissory notes, the corporation declared and paid a liquidating dividend, reserving however, to itself, an amount equal to the estimated corporate liabilities. Held, that the gain realized by the several stockholders is the difference between the March 1, 1913, fair market value of their stock and the amount of their liquidating dividend.
*232 The above proceedings were, upon motion of counsel, consolidated for hearing and redetermination, since the same question is raised by each case. For the year 1919, the respondent determined deficiencies in income taxes of $6,565.45 against Wallace C. Johns, $1,918.36 against Margaret K. Johns, and $68.30 plus a penalty of $145.07 *233 against Virginia Kelso. The question presented is the taxable gain realized by the three stockholders by virtue of the corporate distribution in liquidation.
FINDINGS OF FACT.
The Johns Undertaking Co., Inc., of Birmingham, Ala., was organized in 1911 under the laws of Alabama with an*2633 authorized capital stock of $10,000 fully paid up and outstanding. On the twenty-second of April, 1919, the officers and stockholders of the corporation were Wallace C. Johns, president, owning 55 per cent of the stock, Virginia Kelso, vice president, owning 15 per cent of the stock and Margaret K. Johns, secretary, owning 30 per cent. The stock holdings of the three stockholders had been acquired by them prior to March 1, 1913, and on that date had a fair market value of $15,344.55, $4,184.88, and $8,369.76, respectively.
On April 22, 1919, Wallace C. Johns, at a special stockholders' meeting offered to purchase all the assets of the company for $59,392.31. The minutes of this meeting are as follows:
A special meeting of the stockholders of the Johns Undertaking Company was held at the office of said Company, #2011 4th Avenue, Birmingham, Alabama, at 10 o'clock A.M. on the 22nd day of April, 1919, pursuant to call and notice duly given, and the following was had and done.
The meeting was called to order by Wallace C. Johns, President of the Company, Margaret K. Johns, the Secretary, acting as such.
The roll call showed that each and every stockholder was present in person*2634 and that each and every share of stock was represented.
The President stated that the object of the meeting was to consider further proper steps to be taken in the matter of the dissolution of the company's affairs, and the sale of the company's business.
The Secretary was then called upon for a report and statement of the company's affairs to date which she gave as follows:
| ASSETS | |
| Cash on hand | $4,132.91 |
| Unpaid accts. (1917 and 1918) | 22,083.50 |
| Unpaid accounts 1919 | 13,082.97 |
| Liberty Bonds | 7,000.00 |
| Ala. Home B. & L. Stock | 3,990.00 |
| Rolling Stock | 23,034.72 |
| Furniture & Fixtures | 3,775.67 |
| Real Estate | 150.00 |
| Inventory | 17,656.71 |
| $94,906.48 | |
| DEBTS | |
| Current bills | $15,544.26 |
| Income tax installments unpaid | 27,181.80 |
| Estimated income tax for 1919 | 600.00 |
| $43,326.06 |
The Secretary also stated that of the amount of cash on hand as shown above did not include the amount of $43,326.06 which had been set aside and reserved to take care of all the company's indebtedness as shown above.
*234 The Secretary then read to the stockholders a written offer from Wallace C. Johns to buy the entire business and assets of the Company, as set out*2635 above in the Secretary's report, for and at the following itemized figures: to wit
| Cash on hand | $4,132.91 |
| 1917 & 1918 Accts., at 33 1/3% of book value | 7,361.17 |
| 1919 Accts., at 66 2/3% of book value | 8,721.98 |
| Liberty Bonds at par | 7,000.00 |
| Ala. Home B. & L. Stock at par | 3,990.00 |
| Rolling Stock at 50% of book value | 11,517.36 |
| Furniture & Fixtures 40% of book value | 1,510.69 |
| Real Estate | 150.00 |
| Inventory 85% of book value | 15,008.20 |
| Total | $59,392.31 |
After some discussion concerning the above offer made by Wallace C. Johns, the following resolution was presented by Virginia Kelso, Vice President of the company, viz:
Whereas, the stockholders of the Johns Undertaking Company have heretofore authorized Wallace C. Johns to take necessary steps to dissolve the company, and whereas it is desirable to wind up the Company's affairs in full, and, whereas, the above offer of $59,392.31 made by Wallace C. Johns is a fair and reasonable price for the assets of this company as shown by the books thereof,
Now, therefore, be it resolved, that this company accept the offer of $59,392.31 made by Wallace C. Johns for the business and assets of this company, and transfer, *2636 sell and convey to the said Wallace C. Johns, the above said corporate assets as set out in the Secretary's report, reserving the amount of $43,326.06 which has been set aside to take care of the company's indebtedness.
Thereupon it was moved and seconded that the foregoing resolution be adopted, which motion upon being put to a vote was unanimously carried, each and every share of the capital stock being voted in the affirmative.
Wallace C. Johns thereupon delivered over to the Secretary of the company his four demand promissory notes in the amount of $59,392.31.
The following resolution was then presented, viz:
Whereas, the Johns Undertaking Company is capitalized at $10,000 and whereas, there is now outstanding said amount of capital stock, and whereas, said company now has on hand the sum of $49,392.31 over and above the amount set aside to take care of all the indebtedness of said company, and over and above the amount of outstanding stock.
Now, therefore, be it resolved, that a dividend of 493.9231% on the capital stock of the Johns Undertaking Company be hereby declared, payable out of the surplus earnings of the company to the stockholders according to their respective*2637 holdings, same to be paid on or before the 30th day of April, 1919.
It was thereupon moved and seconded that the foregoing resolution be adopted, which motion upon being put to a vote was unanimously carried, each and every share of stock voting in the affirmative.
Wallace C. Johns then stated that the proper papers for the dissolution of the company would be filed in the Office of the Judge of Probate of Jefferson County, Alabama, on the 30th day of April, 1919.
There being no further business to come before the meeting, the same, upon motion, was adjourned.
*235 The four demand promissory notes executed by Wallace C. Johns dated April 22, 1919, in favor of the corporation, were in the amounts as shown below:
| No. 1 | $30,000.00 |
| No. 2 | 16,165.77 |
| No. 3 | 8,817.69 |
| No. 4 | 4,408.85 |
The corporation thereupon transferred to Wallace C. Johns all its assets except the $43,326.06, as set out in the minutes of the meeting, to take care of the company's indebtedness.
Thereafter, the corporation as payee of the notes, endorsed the last three notes shown above in blank and distributed them among its stockholders. It retained the $30,000 note and distributed*2638 instead that amount of cash out of the $43,326.06 reserved to meet its liabilities. The reserve having been reduced by the cash so distributed, Wallace C. Johns obligated himself to meet the total corporate indebtedness which was outstanding on April 30, 1919, and in consideration therefor, the corporation canceled his note of $30,000.
The dividend of 493.9231 per cent which was declared on April 22, 1919, together with a liquidating dividend of $10,000 for the purpose of retiring the capital stock, was paid to the stockholders on April 30, 1919, as follows:
| Wallace C. Johns: | ||
| Cash | $16,500.00 | |
| Note No. 2 | 16,165.77 | |
| $32,665.77 | ||
| Margaret K. Johns: | ||
| Cash | 9,000.00 | |
| Note No. 3 | 8,817.69 | |
| 17,817.69 | ||
| Virginia Kelso: | ||
| Cash | 4,500.00 | |
| Note No. 4 | 4,408.85 | |
| 8,908.85 | ||
| 59,392.31 |
Endorsed on the face of each note distributed to the stockholders was the following: "Paid in full (signature) Owner." These endorsements were undated. The endorsement on the face of the $30,000 note which was canceled by the corporation was "4/29/19 Paid Johns Undertaking Co." This distribution of notes and cash made by the corporation on April 30, 1919, was the only distribution*2639 received by the stockholders on dissolution of the corporation; and this distribution was the only dividend declared by the corporation between January 1, 1919, and April 30, 1919.
The balance sheet of the corporation as determined by a revenue agent and as shown by the books on April 30, 1919, was stipulated to be as follows:
| ASSETS | |
| Cash | $17,656.02 |
| Merchandise | 17,656.71 |
| Accounts receivable | 32,952.81 |
| Domestic stock | 5,541.26 |
| Liberty bonds | 6,080.00 |
| Auto hearses and ambulances | 22,034.72 |
| Furniture and fixtures | 3,775.67 |
| Real estate | 203.40 |
| Total | 105,900.59 |
| LIABILITIES | |
| Notes payable | $6,160.00 |
| Accounts payable | 13,513.74 |
| Accrued wages | 125.52 |
| Reserve for income taxes | 16,914.01 |
| Capital stock | 10,000.00 |
| Surplus | 59,187.32 |
| Total | 105,900.59 |
*236 This balance sheet does not take into consideration the sale of the assets to Wallace C. Johns.
The revenue agent's analysis of the surplus account from January 1, 1919, to April 30, 1919, was stipulated as shown below:
| Surplus, December 31, 1918 | $94,397.97 | |
| Add: | ||
| Earnings during four months period 1919 | 20,273.17 | |
| Nontaxable interest | 107.49 | |
| Total | 115,318.63 | |
| Less: | ||
| Donations | $342.65 | |
| Income and excess profits taxes paid | 9,060.60 | |
| Reserve for income and excess profits taxes | 16,914.01 | |
| Dividend paid 4/30/19 | 30,000.00 | |
| 56,317.26 | ||
| Surplus, April 30, 1919 | 59,001.37 |
*2640 The corporation was formally dissolved on April 30, 1919. Thereafter, Wallace C. Johns continued to operate the business as the Johns Undertaking Co. The balance sheets as of the close of the corporate existence were not prepared, nor were the notes received in the sale of its assets set up on the books of the corporation. Instead, Wallace C. Johns continued to use the same books in his individual business apparently without closing them.
The total outstanding obligations of the corporation on April 30, 1919, which were subsequently satisfied by Wallace C. Johns, individually, were paid on the dates and in the amounts as shown below:
| Paid | ||
| TennesseeCoffin & Casket Co | $365.51 | May 20, 1919 |
| Westfield Plate Co | 996.35 | May 19, 1919 |
| Belmont Casket Co | 878.05 | May 20, 1919 |
| Southern Coffin & Casket Co | 1,024.88 | May 20, 1919 |
| Orleans Mfg. Co | 632.31 | May 30, 1919 |
| May 20, 1919 | ||
| Birmingham Casket Co | 2,691.40 | Sept. 4, 1919 |
| National Casket Co | 2,370.65 | June 10, 1919 |
| Independent Coffin Co | 374.79 | June 10, 1919 |
| Kraff Mfg. Co | 14.70 | June 10, 1919 |
| Jennings Mfg. Co | 927.10 | June 10, 1919 |
| Cincinnati Coffin Co | 1,769.45 | June 15, 1919 |
| Silverton Bros | 28.70 | June 18, 1919 |
| Sherrill Mfg. Co | 21.66 | June 23, 1919 |
| Frigid Fluid Co | 1,625.14 | Oct. , 1919 |
| St. Louis Coffin Co | 132.45 | Oct. 25, 1919 |
| EgyptianChemical Co | 420.00 | Nov. , 1919 |
| Original | ||
| Income and profits tax, 1918 | 9,060.60 | June 15, 1919 |
| 3,926.71 | Sept. 15, 1919 | |
| 3,926.70 | Dec. 16, 1919 | |
| 4,126.54 | Oct. 3, 1920 | |
| 96.81 | Apr. 24, 1923 | |
| Income and profits tax, 1919 | 839.16 | Mar. 17, 1920 |
| 839.16 | June 15, 1920 | |
| 839.16 | Sept. 17, 1920 | |
| 839.16 | Dec. 15, 1920 | |
| Additional | ||
| 2,478.64 | Apr. 24, 1923 | |
| Income and profits tax, 1917 | 3,724.48 | Apr. 24, 1923 |
| Notes payable | 6,160.00 | May/Oct. 1919 |
| 51,128.26 |
*2641 *237 The pro rata shares of the liquidating dividend received by the petitioners, Wallace C. Johns, Margaret K. Johns, and Virginia Kelso as determined by the Commissioner were $33,676.23, $18,368.85, and $9,184.42, which amounts he added to their net incomes.
OPINION.
MORRIS: The Commissioner in the determination of the deficiencies here in controversy not only increased the amounts of the liquidating dividends claimed by the petitioners, but included the full amount thereof in net income without the deduction therefrom of the March 1, 1913, value of the stock.
Section 201(c) of the Revenue Act of 1918 provides, inter alia:
Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits.
*238 It is clear from the above provision that only the gain realized by a stockholder upon liquidation of the corporation is to be included in net income. The gain in the instant cases is the excess of the amount received over the March 1, 1913, value of the stock. The Commissioner was therefore in error in including*2642 the full amount of the liquidating dividends in net income.
The fair market value on March 1, 1913, of the stock owned by Wallace C. Johns, Margaret K. Johns, and Virginia Kelso was $15,344.55, $8,369.76, and $4,184.88, respectively; the amount received in cash and notes on liquidation, as set out in the findings of fact was $32,665.77, $17,817.69, and $8,908.85, respectively. The gain realized by each therefore was Wallace C. Johns, $17,321.22, Margaret K. Johns, $9,447.93, and Virginia Kelso, $4,723.97.
Counsel in his brief contends that the gain of $17,321.22 realized by Wallace C. Johns upon the liquidation should be reduced by $7,802.20, the amount of corporate liabilities which he paid in excess of $43,326.06, the cash originally set aside for the payment of said liabilities. In our opinion said payment was made not by reason of his having been a stockholder in the corporation, who received part of its assets upon dissolution, but as a purchaser of the corporate assets, and merely increased the amount of his investment in them.
Judgment will be entered on 15 days' notice, under Rule 50.
Considered by TRAMMELL, MURDOCK, and SIEFKIN.