The opinion
W. H. REISNER MANUFACTURING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
W. H. Reisner Mfg. Co. v. Commissioner
Docket No. 12436.
United States Board of Tax Appeals
13 B.T.A. 841 ; 1928 BTA LEXIS 3167 ;
October 9, 1928 , Promulgated
*3167 Upon the evidence, held that certain transactions constituted sales by stockholders of the petitioner of their stock and did not constitute a sale by the petitioner of certain of its assets.
Joseph Addison, Esq., and J. E. Slaybaugh, C.P.A., for the petitioner.
Shelby S. Faulkner, Esq., for the respondent.
SIEFKIN
*841 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar year 1920, in the amount of $22,705.68.
The error assigned is the holding of the respondent that a sale of capital assets of the petitioner for a nominal consideration of $5 in connection with the receipt by the stockholders of the petitioner of a substantial sum of money constitutes a "sale" by the petitioner for the whole amount involved.
FINDINGS OF FACT.
The petitioner is a Maryland corporation with its principal office at Hagerstown.
During 1920, it was the owner of a dial test indicator business and an electromagent business. There were three stockholders with stockholdings as follows: Shares
W. H. Reisner, secretary-treasurer 37
M. P. Moller, president 15
V. E. Middlekauff 8
*3168 The L. S. Starrett Co. of Athol, Mass., was also in the indicator business and was desirous of obtaining the Reisner indicator business. In July, 1920, W. H. Reisner called on L. S. Starrett at Athol, Mass., and discussed the matter with him. Reisner proposed to consult the minority stockholders of petitioner and try to obtain their consent to sell their stock. All the stock of the petitioner was then to be deposited with the Maryland Surety & Trust Co., which would pay each stockholder the agreed price, from an amount deposited by the L. S. Starrett Co. The stock would then be returned to W. H. Reisner after the Starrett Company had acquired all the interests in the indicator business. This was a condition required by Reisner.
Thereafter letters were exchanged between Reisner and Starrett and details of the transaction were arranged. The stockholders were to receive $400 per share for their stock. Reisner was to receive a bonus and Middlekauff was to receive a bonus and a salary from the *842 Starrett Company. On August 28, 1920, L. S. Starrett mailed a check for $25,000 to W. H. Reisner. This check was made payable to the order of W. H. Reisner Manufacturing *3169 Co., Hagerstown, Md.
In the latter part of August, 1920, Reisner turned over to the maryland Surety & Trust Co. the check for $25,000.
Each of the stockholders turned over their stock to the Maryland Surety & Trust Co., and on August 31, 1920, this company issued checks as follows: W. H. Reisner $14,800
V. E. Middlekauff 3,200
M. P. Moller 6,000
The company also credited the remaining $1,000 to W. H. Reisner's account. The Reisner Manufacturing Co. also had its bank account with this institution, but no part of the $25,000 was credited to its account. The stock was placed in the safe deposit box of the W. H. Reisner Manufacturing Co. at the Maryland Surety & Trust Co.
On August 31, 1920, V. Elmer Middlekauff entered into an agreement with L. S. Starrett Co. whereby he agreed to sell his 8 shares of stock in the petitioner to the Starrett Company for $3,200. Middlekauff agreed to superintend the production of a reserve stock of dial test indicators, the removal of all tools, machinery, materials and stock to the plant of the Starrett Company and the installation of such machinery, and to instruct the employees of the Starrett Company in the use of *3170 the same. For such service he was to receive a bonus of $2,000 and a salary of $50 per week as long as employed. By the terms of the agreement he was also to receive his transportation from Hagerstown to Athol and return.
In December, 1920, A. H. Starrett went to Hagerstown and Reisner turned the shares of stock over to him. Starrett returned them to Reisner. In addition to its indicator business the W. H. Reisner Manufacturing Co. conducted an electromagnet business which was small compared to the indicator business. This business was foreign to that of the L. S. Starrett Co. and was of no value to it, and as the Starrett Company wanted to reward Reisner for his services in putting through the deal, all the shares of stock were given to Reisner without consideration.
On June 8, 1921, the L. S. Starrett Co. drew a check payable to W. H. Reisner in the amount of $22,200. On March 31, 1921, it drew a check in the amount of $10,000 payable to W. H. Reisner Manufacturing Co., Hagerstown, Md. This check was indorsed "W. H. Reisner Manufacturing Company by W. H. Reisner." Both checks for $2,060 to Elmer Middlekauff. This amount was for bonus and wages or traveling expenses.
*3171 *843 In December, 1920, two new directors were elected to the board of the petitioner and were issued 3 shares of stock each.
The following are the minutes of a directors' meeting of petitioner held on December 20, 1920:
The regular meeting of the directors of the company was held at the principal office on Monday, December 20, 1920, at 7:00 P.M. Present, W. H. Reisner, J. D. Hankey, L. E. Wibberly. The minutes of the special meetings of the directors of December 10th and December 13th, 1920, respectively, were read and approved. Upon motion duly made, seconded and carried, it was resolved that, whereas, it is the desire of this company to give up the manufacture of dial test indicator, paper gauges and lense measures; and whereas, the L. S. Starrett Company has agreed to take over the machinery and equipment formerly used by this company in the manufacture of these articles; therefore, be it resolved that all of said material and patents be transferred and assigned to said L. S. Starrett Company upon the payment of it of the sum of $5.00 and other valuable considerations. And be it further resolved that the officers of the company are hereby authorized to make said *3172 transfer and assignment. Upon motion made, thereupon the meeting adjourned. (Signed) L. E. Wibberly, Secretary; and correct, W. H. Reisner, President.
The petitioner did not receive the $5 referred to. This was the only corporate action ever taken by the petitioner with regard to the disposition of the assets relating to the indicator business.
The books of account of the L. S. Starrett Co. show that a check for $25,000 was drawn in favor of W. H. Reisner Manufacturing Co. on August 28, 1920, on account of the dial indicator business. This payment was charged to manufacturing.
On November 1, 1920, by a journal entry this amount was transferred from the manufacturing account to a new account, "W. H. Reisner Manufacturing Co."
On March 31, 1921, a check for $10,000 was drawn in favor of W. H. Reisner Manufacturing Co.
On May 31, 1921, a check for $2,000 was drawn in favor of V. E. Middlekauff. Both of these amounts were charged to manufacturing.
On December 31, 1921, $12,000 was transferred by a journal entry from manufacturing account to W. H. Reisner Manufacturing account.
On June 8, 1921, a check for $22,200 was drawn in favor of W. H. Reisner, and the amount *3173 charged to W. H. Reisner Manufacturing Co. account. The total charges in this account amounted to $59,200. It was closed out on December 31, 1921, and the $59,200 distributed by journal entries as follows: To Material $412.95
Manufacturing 11,849.91
Machinery 2,806.08
Tools, jigs, and fixtures 1,645.10
Surplus [patents] 42,485.96
Total 59,200.00
*844 A detail of the W. H. Reisner Manufacturing Co. account as appears on the general ledger of the L. S. Starrett Co. is as follows: 1920
Nov. 1 J 52 $25,000.00
1921
June 8 J 208 22,200.00
Dec. 31 J 61 12,000.00
59,200.00
1921
Dec. 3 Sundries J 65 $59,200.00
59,200.00
On his income-tax return for 1920, W. H. Reisner returned $14,800 as received from sale of his stock to the L. S. Starrett Co. The balance which he received he returned as a bonus from the L. S. Starrett Co.
OPINION.
SIEFKIN: The question to be decided is whether the transactions between the petitioner or its stockholders and the L. S. Starrett Co. resulted in a sale by the petitioner of its assets pertaining to the indicator business as contended by the respondent, or the sale of stock by the stockholders *3174 as contended by the petitioner.
The L. S. Starrett Co. desired to obtain the indicator business conducted by the petitioner. To accomplish this it negotiated with W. H. Reisner, secretary of the petitioner. Reisner, the holder of 37 shares of stock, obtained the promises of Moller and Middlekauff to sell their shares of stock to the Starrett Company $400for per share. A check for $25,000 was drawn by the L. S. Starrett Co. in favor of the W. H. Reisner Manufacturing Co. and it was sent to W. H. Reisner. Reisner deposited this check with the Maryland Surety & Trust Co. with instructions to pay each of the stockholders of the petitioner the amount due them when they delivered their stock. On August 31, 1920, each of the stockholders turned over their stock to the L. S. Starrett Co. and received checks therefor in the following amounts: W. H. Reisner $14,800
V. E. Middlekauff 3,200
M. P. Moller 6,000
The remaining $1,000 of the amount deposited by the Starrett Company was credited to the account of W. H. Reisner.
Sometime in December, 1920, A. H. Starrett turned over all of the stock to Reisner in compliance with an understanding previously had.
Sometime *3175 in December, 1920, two new directors were elected to the board of directors of petitioner and on December 20, 1920, a directors' meeting was held at which a resolution was passed providing that all the material and patents pertaining to the dial test indicator business should be transferred to the L. S. Starrett Co. for a consideration of $5. The petitioner did not receive the consideration of $5.
*845 On May 13, 1921, the Starrett Company issued a check for $2,060 to Elmer Middlekauff. This amount was paid as a bonus for services rendered and as a salary or for expenses.
On June 8, 1921, the L. S. Starrett Co. drew a check payable to Reisner in the amount of $22,200. Previous to this on March 31, 1921, it drew a check in the amount of $10,000 payable to W. H. Reisner Manufacturing Co. Both of these checks were cashed by Reisner.
On his income-tax return for 1920, Reisner included $14,800 as income from the sale of his stock to the L. S. Starrett Co. The balance which he received was entered in his return as a bonus from the Starrett Company.
The L. S. Starrett Co., on its books of account, treated these transactions as being with the petitioner.
There is *3176 evidence in the case which is consistent with either theory of the question except for the fact that there was a change in ownership of the stock. The three checks issued by the Maryland Surety & Trust Co. on August 31, 1921, were in consideration of the transfer of the stock. The check for $2,060 received by Middlekauff was solely for services and expenses. Likewise, the two checks which Reisner received in the amounts of $22,200 and $10,000, as well as the amount of $1,000 which the Maryland Surety & Trust Co. credited to Reisner's account constituted a bonus or compensation to Reisner for his services to the Starrett Company.
In the case of , the court construed a contract entered into by all of the stockholders of the Dixie Motor Car Co., a Kentucky corporation and the Kentucky Wagon Manufacturing Co., whereby the stockholders contracted to transfer to the Wagon Company all of the assets of the Dixie Motor Car Co. and also the stock held by each stockholder. The court in holding that this was a transfer of stock by the stockholders and not a transfer of assets by the corporation stated:
*3177 * * * If the court were forced to construe this contract upon its face alone, there would be some difficulty in determining just what the parties were attempting to do, as on its face it contains many features of a sale of stock by the stockholders, as well as provisions which ordinarily would be found only in a contract selling the assets of a corporation. In such a situation, even as between the parties to the contract, the court would be justified in resorting to extraneous evidence to determine what the real intention of the parties was.
* * *
There is another cardinal rule in the construction of contracts which are susceptible of two meanings, viz., that the construction should be given, if the facts justify it, which would render the contract enforceable, rather than to adopt a construction which would render it unenforceable.
With these principles in mind, it is difficult to reach any other conclusion than that this contract was a sale of stock by the stockholders. To construe the contract as one of sale of assets of the corporation would, in effect, be to declare *846 it an unenforceable contract, because it is well settled that stockholders, as such, under *3178 the Kentucky law, cannot sell the assets of a corporation.
In the instant proceeding the only agreements to which the L. S. Starrett Co. was a party were the agreements with W. H. Reisner and E. V. Middlekauff. The contract with Middlekauff did not purport to cover the transfer of any property except the stock which Middlekauff owned. The agreement with Reisner provided for the acquisition by the Starrett Company of both stock and corporate assets. Under the reasoning of the cited case, we hold that the contracts entered into by the stockholders passed title to the stock only and that the amounts paid by the Starrett Company were to the stockholders of the petitioner for their stockholdings. The respondent has erred in holding that the petitioner was a party to the sale
Judgment will be entered under Rule 50.