*1807 Where petitioner, under contract, receives certain assets of another corporation and in consideration therefor issues its entire capital stock to said corporation and assumes liability for and pays certain state income taxes assessed against said other corporation, held that petitioner is not entitled to deduct the amount of such taxes under section 234(a)(3) of the Revenue Act of 1921.
*883 This is a proceeding for the redetermination of an asserted deficiency in income taxes for the calendar year 1923 in the amount of $24,944.22, only a portion of which is in controversy.
It is alleged that the respondent erred in disallowing a deduction of $152,202.51, taken by the petitioner as a result of income and surtaxes paid to the State of Wisconsin on behalf of The Falk Company, predecessor to the petitioner, for the years 1915 to 1921, inclusive.
The parties have filed a stipulation of facts and from this stipulation we set forth only such facts as are essential to the determination of the issue in controversy.
*1808 FINDINGS OF FACT.
The petitioner, a Wisconsin corporation, with its principal place of business in Milwaukee, Wis., was organized April 28, 1921.
The Falk Company, a Wisconsin corporation, was organized May 25, 1895, and from the time of its organization to the time of the transfer of its assets and dissolution was engaged in business at Milwaukee, Wis.
On or about April 28, 1921, the Falk Investment Company, a Wisconsin corporation, was organized.
On May 16, 1921, pursuant to a resolution adopted by the stockholders of The Falk Company, certain of the assets of The Falk Company were transferred and assigned to petitioner in consideration of the issuance of its entire authorized capital stock by the petitioner to The Falk Company and, in further consideration of the assumption by the petitioner of the liabilities of The Falk Company, including the state income tax in the amount of $152,202.51, in controversy herein.
The offer of The Falk Company to The Falk Corporation provides in part as follows:
* * *
*884 WHEREAS it is the understanding of the undersigned that your corporation was organized for the purpose among others of acquiring and taking over, and*1809 thereafter continuing the business of The Falk Company;
NOW, THEREFORE, The Falk Company does hereby offer to pay in full for the said 35,000 shares common, and 25,000 shares preferred, stock subscribed for as aforesaid, by deeding and conveying to you [Description of real and personal property conveyed, transferred and assigned follows].
All of said real and personal property shall be taken over at the book value to The Falk Company as of the date of transfer, to-wit: December 31, 1920;
In consideration of said conveyances and transfers you shall assume and agree to pay all debts and obligations of every kind and nature existing against The Falk Company either on the 16th day of May, 1921, or December 31, 1920, which are or may be incident to the normal operation of the business in which The Falk Company is now engaged, including the payment of any and all taxes levied or assessed against said The Falk Company prior to January 1, 1921, and up to May 16, 1921.
Your company will also assume and agree to carry out all of the contracts of The Falk Company now existing for sales, purchases, employes, etc., in any way incident to the operation of the business of the said The*1810 Falk Company.
The acceptance of said offer is as follows:
* * *
This is to advise you that, pursuant to authority granted to the undersigned by the stockholders of THE FALK CORPORATION said corporation does hereby accept the offer of The Falk Company dated May 16, 1921, in payment of 35,000 shares common, and 25,000 shares preferred stock of this company.
Dated May 16, 1921.
* * *
The Falk Company also caused to be transferred to The Falk Investment Company certain of its remaining assets in consideration of all of the capital stock of The Falk Investment Company.
The following tabulation shows the book assets and liabilities after transfer (1) of The Falk Company, (2) of the petitioner, and (3) of The Falk Investment Company:
| Book assets and liabilities May 17, 1921 (after transfer) | |||
| ASSETS | The Falk Company | The Falk Corporation | The Falk Investment Company |
| Cash on hand and in banks | $166,499.11 | ||
| Accounts receivable | 1,646,409.62 | ||
| Notes receivable | 122,704.96 | $250,000.00 | |
| Inventories | 726,363.05 | ||
| Life insurance | 42,693.50 | ||
| Liberty bonds | $2,488,453.61 | 1,835,475.62 | |
| Stocks and bons | 4,793.46 | ||
| Timber holdings | 624,726.01 | ||
| Experimental oil engine | 35,400.28 | ||
| Improvements in process | 45,749.86 | ||
| Fixed assets | 3,311,975.39 | ||
| Patents | 1,088,000.00 | ||
| The Falk Corporation (stock) | 6,000,000.00 | ||
| The Falk Investment company (stock) | 2,700,000.00 | ||
| Total | 11,193,247.07 | 7,105,795.77 | 2,710,201.63 |
| LIABILITIES AND CAPITAL | |||
| Capital stock - common | $1,000,000.00 | $3,500,000.00 | $2,700,000.00 |
| Capital stock - preferred | 250,000.00 | 2,500,000.00 | |
| Bills payable | 6,743.90 | ||
| Accounts payable | 181,079.04 | ||
| Bethlehem sales reserves | 671,300.00 | ||
| Surplus (reserve for contingencies) * | 9,943,247.07 | * 246,672.83 | 10,201.63 |
| Total | 11,193,247.07 | 7,105,795.77 | 2,710,201.63 |
*1811 *885 On May 16, 1921, the stockholders of The Falk Company adopted a resolution of dissolution and all steps were taken by the corporation to complete the dissolution and the surrender of its charter. Thereafter, The Falk Company continued for three years as a body corporate in liquidation under the supervision of its last board of directors acting as statutory trustees in liquidation, with the limited powers provided by
During the three years, the trustees in liquidation liquidated and wound up the affairs of The Falk Company, and the shares of stock received from the petitioner and from The Falk Investment Company were distributed in liquidation to the stockholders of The Falk Company on or about December 27, 1923.
At and immediately prior to May 16, 1921, and at the time of the distribution of the stock of the petitioner in December, 1923, the entire outstanding common stock of The Falk Company (the preferred stock of said company having been called for redemption in cash at par plus accrued dividends on May 16, 1921) was owned and held by the same group of stockholders, except that one of the stockholders, Otto H. Falk, *1812 on December 24, 1921, transferred 192 shares to his wife, Elizabeth V. Falk, as a gift, and on the same date transferred to himself as trustee 200 shares for E. L. Falk and 200 shares for Otto H. Falk, Jr., both as gifts, and except that on January 2, 1923, Herman W. Falk caused to be organized and transferred to the Hope Investment Company, a Wisconsin corporation, 5,335 shares. Said Hope Investment Company was a private investment company in which Herman W. Falk held 100 per cent of the outstanding stock.
On December 26, 1922, the State of Wisconsin assessed against The Falk Company additional income and surtaxes for the years 1915 to 1921, inclusive, as follows:
| Additional income tax for years 1915 to 1921 | $93,252.53 |
| Additional soldiers' bonus surtax, 1918 | 46,414.38 |
| Additional soldiers' additional surtax, 1918 to 1921 | 9,577.52 |
| Additional teachers' retirement fund surtax, 1920 and 1921 | 2,958.08 |
| Total | 152,202.51 |
*886 Pursuant to the terms of the contract between The Falk Company and Falk Corporation, petitioner paid to the State of Wisconsin in the calendar year 1923 said assessment of $152,202.51. Petitioner claimed said amount as a deduction*1813 on its Federal income-tax return for 1923. In determining the deficiency for the year 1923, the Commissioner disallowed the deduction of said amount of $152,202.51.
In the deficiency letter dated December 26, 1928, respondent, in explanation of the addition of the amount of tax in controversy to net income, stated as follows:
It is held by this office that the payment of additional Wisconsin income and surtaxes for the years 1915 to 1921, inclusive, constituted performance of an obligation undertaken as partial consideration for the transfer of certain assets of the Falk Company and as such does not constitute an allowable deduction in 1923 under section 234(a)(3) of the Revenue Act of 1921.
At all times material hereto, both The Falk Company and the petitioner employed the accrual method of accounting in keeping their books of account and in making their Federal income-tax returns.
As to all other facts we find them to be as set forth in the stipulation, which is on file in this proceeding and is incorporated herein by reference as if set forth fully.
OPINION.
MCMAHON: The respondent contends that the payment of additional Wisconsin income and surtaxes for the years*1814 1915 to 1921, inclusive, constituted consideration for the transfer of certain assets of The Falk Company and as such does not constitute an allowable deduction in 1923 under section 234(a)(3) of the Revenue Act of 1921.
We have here a situation where the old company transfers all its manufacturing and operating assets and business to a newly organized corporation, The Falk Corporation, and certain notes receivable, bonds and timber holdings to another newly organized corporation, The Falk Investment Company, the entire capital stock of both new corporations being turned over to the old company.
Referring to the tabulation set forth in our findings of fact showing the transfer of assets to the old company by The Falk Corporation, it will be noted that The Falk Corporation received assets in the amount of $7,105,795.77; and that its total capital stock was of the par value of $6,000,000, leaving a difference as between the value of assets received by The Falk Corporation and the par value of the stock transferred to The Falk Company of $1,105,795.77. The books of both companies were kept on the accrual basis and *887 the additional taxes apparently were not accrued and*1815 among the book liabilities as shown by the tabulation. It is apparent therefore that the assumption of the taxes and payment thereof was a part of the consideration for the transfer of the assets. The additional taxes paid by the petitioner constituted a payment of a contractual liability assumed by the petitioner as part consideration for a transfer of assets and are not deductible from gross income.
The petitioner, in the stipulation of facts and in its brief, admits that certain assets of The Falk Company were transferred and assigned to petitioner in consideration of the issuance by the petitioner to The Falk Company of petitioner's total authorized capital stock and in further consideration of the assumption by petitioner of all liabilities of The Falk Company, including the taxes in controversy herein. It is petitioner's contention, however, that the facts in this case show a reorganization of The Falk Company; that the taxes*1816 finally paid by The Falk Corporation to the State of Wisconsin came from the same beneficial interest as though they had been paid by the Falk Company; and that therefore the taxes as paid are deductible by the party paying the same, either as a business expense or as a deduction of a tax. In other words, petitioner contends that under the reorganization section of the income-tax act, The Falk Company and The Falk Corporation are one and the same taxpayer.
On May 16, 1921, the stockholders of The Falk Company adopted a resolution of dissolution and thereafter The Falk Company continued for three years as a body corporate. The shares of stock received from petitioner were not distributed in liquidation until on or about December 27, 1923. On April 28, 1921, the petitioner was organized and the old company and the new company were, up to and after the assessment of additional Wisconsin income and surtaxes against The Falk Company, to wit, December 26, 1922, two*1817 separate bodies corporate and not one and the same corporate body or entity. Two corporations may have the same officers, directors and stockholders, but nevertheless, while each has corporate existence, are two separate and distinct entities. The Falk Company, upon which the taxes were imposed, was still in existence as a body corporate at the time the taxes were imposed and at the time the taxes were paid. Taxes are deductible as such only by those *888 upon whom they are imposed.
We have examined the cases cited in petitioner's brief and are satisfied that they are distinguishable.
We can not agree with petitioner's contention.
Judgment will be entered for the respondent.