Tomlinson v. Commissioner

7 B.T.A. 961, 1927 BTA LEXIS 3072

• Court: United States Board of Tax Appeals
• Decided: August 1, 1927
• Docket: Docket No. 7068.
• Status: Published

Opinion

OPINION.

Sternhagen:

The petitioner assigns the following errors on the part of the respondent in determining the deficiencies here involved:

1. That for 1919 he disallowed the deduction of $2,809.51 expended for fertilizer, and $830.65 expended for repairs.

2. That for 1920 he failed to include in income rents of $3,535, and also failed to allow the deduction of $8,547.26 expended for fertilizer.

3. That he incorrectly determined the gain realized in 1920 on liquidating dividends received from the Capelsie Cotton Mills by reason of using an incorrect value as of March 1, 1913.

4. That he erroneously determined that petitioner received income in 1920 from the Troy Garment Manufacturing Co., a partnership.

5. That he refused to reduce the amount of a liquidating dividend received in 1920 from the Capelsie Cotton Mills by amounts subsequently repaid to the corporation to enable it to pay Federal income tax.

6. That he refused to reduce the amount of liquidating dividends received in 1920 from the Francis Cotton Mills, Inc., by an amount subsequently repaid to the corporation to enable it to pay Federal income tax.

With regard to the first assignment of error, the parties have agreed that the petitioner is entitled to a deduction of $1,777.50 for expenditures for fertilizer and repairs in 1919. This amount shall be allowed as a deduction in computing the deficiency for that year.

With regard to the second assignment of error, the parties have agreed that the rents of $3,535 shall be added to the petitioner’s income for 1920, and that he is entitled to a deduction of $3,207.94 on account of expenditures for fertilizer, instead of $8,547.26 as alleged.

The third and fourth assignments of error were withdrawn, and the action of the respondent complained of in these assignments of error is sustained.

The only matter remaining for consideration is the question whether the income derived from liquidating dividends in 1920 should be reduced by the amounts repaid in subsequent years. The question has already been decided. In O. B. Barker, 3 B. T. A. 1180, it was held that stockholders receive liquidating dividends impressed with a trust to the extent that the amounts received encroach upon the equity of the corporation’s creditors, and it was held that in computing tax on such dividends they should be reduced by the amount the stockholder returns to the corporation to satisfy claims against the corporation. This was followed in E. F. Cremin, 5 B. T. A. 1164, and E. M. F. Leflang, 6 B. T. A. 4.

This petitioner received $12,660 from the Francis Cotton Mills, Inc., as liquidating dividends in 1920, and no further dividends were received thereafter. In 1924 he was required to and did repay $1,650. These facts are clearly within the principle laid down in the Barker and other cases supra, and in recomputing the deficiency for 1920 the liquidating dividends should be reduced to $11,010.

The conclusion in respect of the liquidating dividends received in 1920 from the Capelsie Cotton Mills mu'st be for the respondent. The petitioner received three liquidating dividends, $49,492.80 in 1920, $2,592 in 1921, and $2,513.16 in 1922. He repaid $261.65 in 1924, and $152.25 in 1926, to enable the corporation to pay its Federal taxes. He now seeks to apply these two payments, aggregating $419.90, against the first dividend of 1920. It will be readily seen that this can not be. There is no trust impressed upon the first liquidating dividend since it did not impair the equity of creditors. Clarence LeBus, 1 B. T. A. 733. In O. B. Barker, supra, it was held consistently with this that the amount returned is to be set off against the last distribution received.

Judgment will be entered on 15 days’ notice, under Rule 50.

Considered by Green and Arundell.