Boggs-Burnam & Co. v. Commissioner

*988 The deficiency notice from which this appeal is taken asserts income-tax deficiencies of $424.41 and $25,176.74 for the calendar years 1927 and 1928. Only the deficiency for 1928 is in controversy.

Petitioner assigns as error the Commissioner's determination that it realized taxable income in the amount of the net profit from the sale of certain property.

From the stipulation of facts and documents submitted in evidence, we make the following findings of fact.

FINDINGS OF FACT.

The petitioner was incorporated in April, 1919, under the laws of Kentucky. From that time to and including the taxable year it was engaged in the business of operating rock quarries near Richmond, Kentucky, where its principal*1211 office was located.

On May 3, 1928, a joint meeting was duly held upon call of petitioner's directors and stockholders owning and/or voting by proxy 580 shares out of the 600 shares outstanding. The remaining 20 shares were represented by a certificate issued to J. C. Williams, deceased, which had not been transferred to anyone else on the records of the corporation. At this meeting the following resolution was adopted by petitioner's board of directors and stockholders:

WHEREAS conditions have arisen that warrant the sale of the properties of the Company, and its dissolution, and

WHEREAS there are now negotiations pending for a sale of said properties of the Company,

Now in order to more effectually and simply carry out said negotiations and transfer the properties in case said sale is completed, BE IT RESOLVED, that the president and secretary of the corporation transfer to Joe S. Boggs, S. P. Burnam, and Paul Burnam, as trustees for all the stockholders, all the property of every kind and character belonging to said corporation, including its real estate, leasehold, machinery, equipment, supplies, money and all *989 intangible assets, to be held by said trustees*1212 for the stockholders upon the following terms and conditions:

Said trustees are hereby authorized to sell, transfer and convey all or any part of the property held by said corporation as above described, and when same is sold and the purchase price paid said trustees shall first pay all just debts of said corporation, and all costs of administering said trust, and the balance that may remain in their hands shall be distributed to each stockholder his or her just share of the net proceeds, according to the number of shares held by each stockholder.

BE IT FURTHER RESOLVED that in the event a sale is consummated that said corporation be dissolved, and shall remain in operation only for the purpose of winding up its business, but that until a transfer has been made and the properties actually conveyed, said corporation shall remain in existence and shall continue to operate its business upon the properties conveyed to the trustees aforesaid, and shall be entitled to the possession of same.

BE IT FURTHER RESOLVED that in the event a sale is not consummated within a reasonable time said trustees may in their discretion re-convey the properties of the corporation above described back*1213 to said corporation.

The officers and directors of petitioner were Joe S. Boggs, S. P. Burnam and Paul Burnam, who owned a total of 550 shares.

On the same day, May 3, 1928, Joe S. Boggs, S. P. Barnum, and Paul Burnam, trustees for the stockholders of Boggs, Burnam & Company, as parties of the first part, and Dunlap Wakefield, as party of the second part, entered into an agreement which provided in part:

That the parties of the first part for and in consideration of One Dollar ($1.00) cash in hand paid, and other good and valuable consideration, the receipt of which is hereby acknowledged, do hereby sell, transfer, convey and assign to the party of the second part a leasehold upon two tracts of seventy-five acres of land each in Lee County, Kentucky, said tracts of land and the terms of said leasehold being fully set out in a conveyance by the Boggs, Burnam & Company to the parties of the first part, dated May 3, 1928, and not having been lodged for record, but the original of which is attached hereto, and reference is made to said original conveyance for a particular description of the properties covered by said lease and the terms and conditions of said lease.

In addition*1214 to said leasehold the parties of the first part also transfer, sell and assign to the party of the second part all machinery, equipment, railroad switches and all other tangible property belonging to said trustees and described in the conveyance above referred to, except that it is expressly agreed that all intangible assets, accounts, notes, cash and bills receivable held by said trustees under said assignment as of May 1st, 1928, do not pass under this lease.

The conveyance of May 3, 1928, referred to and made a part of the above quoted agreement provides briefly, that "For and in consideration, and to carry out a resolution this day adopted by the stockholders and directors of the Boggs, Burnam & Company, and for the consideration therein set forth," the petitioner "does hereby sell, transfer and convey" to the said trustees its leasehold interest in certain land with full power and authority in the trustees to convey such property without the stockholders of petitioner uniting therein *990 and, in addition, petitioner "hereby sells, transfers and assigns, upon the terms and conditions set forth in the resolution above set out" all its tangible and intangible property, *1215 "to be held, use and disposed of as herein set forth."

On May 9, 1928, the trustees for petitioner's stockholders, as party of the first part, Dunlap Wakefield, purchaser of the second part and the Fidelity and Columbia Trust Company, escrow agent, as party of the third part, entered into an agreement which provided in part:

(1) Parties of the first part have this day deposited with the party of the third part the following rights and deeds to convey their title, right and interest in the properties therein mentioned:

(a) Consent of stockholders to dissolution of Boggs-Burnam & Company, Incorporated;

(b) An agreement, dated May 3, 1928, between Boggs-Burnam & Company, parties of the first part, and Joe S. Boggs, etc., assignees, parties of the second part;

(c) An affidavit of S. P. Burnam, Secretary and Treasurer of Boggs-Burnam & Company, that there are no chattel mortgages on the machinery, equipment or personal property of the Company;

* * *

(e) An executed agreement of May 3, 1928, between Joe S. Boggs, S. P. Burnam, Paul Burnam, Trustees for the stockholders of Boggs-Burnam & Company, parties of the first part, to Dunlap Wakefield, party of the second part, conveying*1216 and transferring, with the general warranty, certain described properties belonging to said Company;

(2) The above mentioned documents intended to transfer title are now placed in escrow under this agreement, viz, the parties of the first part have heretofore or contemporaneously herewith been paid an aggregate of Sixty Thousand ($60,000.00) Dollars, and the above mentioned documents convey and assign the properties described in the above mentioned documents, are to be delivered to the party of the second part, or his assigns, by the Escrow Agent upon further payment of One Hundred and Ninety Thousand ($190,000.00) Dollars, which sum is to be paid upon the completion of the examination of the titles by the Louisville Title Company * * *.

On July 5, 1928, the following deed was duly executed:

This DEED between BOGGS, BURNAM & COMPANY a corporation of the first part, and JOE S. BOGGS, S. P. BURNAM and PAUL BURNAM, Trustees, of the second part,

WITNESSETH: That in order to carry out a resolution adopted by the stockholders and directors of Boggs, Burnam & Company, dated May 3, 1928, and for the consideration therein set forth, the party of the first part does hereby convey, assign*1217 and transfer, with covenant of General Warranty, unto the parties of the second part, all of their leasehold interest in and to a tract of land in Lee County, Kentucky, bounded and further described as follows: * * *

TO HAVE AND TO HOLD all of said leaseholds unto the party of the second part.

The parties of the first part also transfer unto the party of the second part, all the machinery, equipment, railroad switches, and all other tangible property belonging to the parties of the first part, in or about said leased premises, *991 and all their interest in the above described tract, and in addition thereto, all its intangible property, contracts, rights, privileges, to be held, used and disposed of as herein set forth.

The first parties covenant that they have the right and power to make said transfers and said leasehold is free of all encumbrances except taxes for the years 1928 and 1929, and the encumbrances mentioned above.

The second parties, as Trustees, are hereby given full power and authority to convey said property without first party, or the stockholders of first party, uniting therein.

The resolution of the stockholders and Board of Directors above*1218 referred to and under which this deed is executed is in words and figures as follows: * * *

That deed was duly recorded on July 14, 1928.

On July 5, 1928, the following deed was duly executed, acknowledged and delivered to the Kentucky Consolidated Stone Company:

THIS DEED between JOE S. BOGGS, S. P. BURNAM and PAUL BURNAM, Trustees under a deed dated July 5th, 1928, recorded in the office of the Lee County Court in Deed Book 48, Page 448, from the Boggs, Burnam & Company, of the first part, and KENTUCKY CONSOLIDATED STONE COMPANY, a corporation, of the second part;

WITNESSETH: That under the power granted to them in the deed above mentioned, and for a valuable consideration, the receipt of which is hereby acknowledged, the parties of the first part, as Trustees, do hereby convey, assign, and transfer to the party of the second part, with covenant of General Warranty, all leaseholds on the following described tract of land, situated in Lee County, Kentucky, viz: * * *

This conveyance is made subject to all of the duties and restrictions imposed upon the lessees in the leases above mentioned, and all the exceptions contained in said leases,

TO HAVE AND TO HOLD all of said*1219 leaseholds unto the parties of the second part.

The party of the first part also transfers unto the parties of the second part, all the machinery, equipment, railroad switches, and all other tangible property belonging to the party of the first part, in or about said leased premises, and all their interest in the above described land. The first party covenants that it has the right and power to make the said transfers and said leasehold is free of all encumbrances except taxes for the years 1928 and 1929, and those encumbrances mentioned above. * * *

That deed was duly recorded on July 16, 1928.

Neither Dunlap Wakefield, party of the second part, nor the Fidelity and Columbia Trust Company, escrow agent, party of the third part, to the agreement dated May 9, 1928, made any written assignment of their interest in the said contract to the Kentucky Consolidated Stone Company.

The net taxable profit realized from the sale of the said assets in 1928 was $207,124.94.

On November 26, 1928, the petitioner was dissolved according to law and its assets were distributed to its stockholders. Petitioner's *992 stockholders, their stockholdings and the amounts distributed*1220 to each were as follows:

On January 14, 1929, the petitioner filed it corporation income-tax return, on Form 1120, on the accrual basis. Schedule K thereof*1221 indicates that the taxable period was January 1 to April 30, 1928. The return reported a gross income of $24,581.05 and a net income of $4,433.87, on which a tax of $172.06 was assessed. The profit derived from the sale of the assets, as set out hereinbefore, was reported in a fiduciary return on Form 1041, filed by J. S. Boggs, S. P. Burnam and Paul Burnam, trustees, apparently for the period May 1 to December 31, 1928. The return sets out, under the heading "Beneficiaries' Shares of Income and Credits," a list of the stockholders of petitioner and their interests in proportion to their stockholdings.

In auditing the petitioner's return for 1928 the Commissioner added, to the net income reported by it, profit of $207,124.94 on sale of assets and interest and sundry income reported by the trustees in the amounts of $1,958.33 and $1.66, respectively, and made certain adjustments as to deductions, resulting in the determination of a net income of $211,239.99 and a deficiency of $25,176.74.

OPINION.

LEECH: The only issue presented in this proceeding is whether the transactions detailed in our findings of fact, by which all of the assets of petitioner, except intangibles, cash, *1222 notes, accounts and bills receivable, were conveyed and transferred to the Kentucky Consolidated Stone Company, constituted a sale by the petitioner of its assets resulting in a taxable profit of $207,124.94 to it, as determined *993 by the Commissioner, or constituted a distribution in kind by petitioner to its stockholders, resulting in no taxable gain to petitioner.

No fraud is here alleged or proven and therefore it is immaterial, in determining the issue involved, that the method of effecting the transfer may have been used by petitioner for the purpose of avoiding taxes. Gould v. Gould,245 U.S. 151; Weeks v. Sibley,269 Fed. 155; Jemison et al., Trustees,3 B.T.A. 780.

Petitioner contends that it had divested itself of both legal and equitable title to the assets in question by the joint resolution of the directors and stockholders adopted May 3, 1928, and the trust instrument executed and delivered by the corporation to the three trustees on July 5, 1928, and that thereafter, when the conveyance from these trustees to the Kentucky Consolidated Stone Company was made, the corporation had no title to the*1223 assets conveyed, did not participate in the transfer, received nothing therefrom, no income resulted, and, a fortiori, no tax attached to the petitioner.

In Taylor Oil & Gas Co., 47 Fed.(2d) 108; certiorari denied, 283 U.S. 818, which affirms the Board's decision in Taylor Oil & Gas Co.,15 B.T.A. 609, the same issue was raised upon substantially similar facts, and the court held the sale to have been made by the corporation and not the stockholders. In that case, after holding article 547, of Treasury Regulations 45, which is identical with article 548, of Regulations 69, ¹ in effect during the year here involved, reasonable and effective, the court said:

It may be doubted that the contract of sale was merely executory. Except for executing the formal deed, there was nothing to be done. The price, the thing, and the effective time of delivery, December 15, 1919, had been agreed upon. But, if it was executory, it was still the contract of the company to be executed before there could be any liquidation of its affairs. Conceding for the purpose of argument that the legal title to the property vested in the trustees by the*1224 dissolution, no part of the title passed to the stockholders thereby. The real owner was still the company until such time as its affairs were liquidated, the debts paid, and the residue distributed to the stockholders. The profit on the transaction was earned by the corporation, and the assessment of the taxes based thereon was valid.

We believe the instant case presents a stronger situation for respondent than there*1225 before the court. Here, as distinguished from the Taylor case, petitioner corporation was entitled to possession and *994 control of the corporate assets until actual completion of the controverted conveyance. There was no change whatever in the beneficial ownership in the corporate property until the ultimate sale to the Kentucky Consolidated Company. The petitioner was functioning as an active corporation until after the sale in issue. The agreement of July 5 between the corporation and the three trustees was not executed for upwards of two months after the authorizing resolution and not until the proposed sale to the Kentucky Consolidated Company was absolutely assured. This was evidenced by the fact that both the agreement mentioned and the deed from the trustees therein named to the Kentucky Consolidated Company were executed and delivered on the same day.

In Hellebush et al., Trustees,24 B.T.A. 660, the Board followed the decision of the court and the Board in Taylor Oil & Gas Co., supra, holding that even though the prior conveyance in trust was for the specific benefit of the stockholders, nevertheless, the stockholders were not entitled*1226 to anything until after the corporate debts were paid, and that, therefore, until the actual distribution to the stockholders of the balance after payment of the corporate debts, the trustees were acting for the corporation and not the stockholders.

On brief the taxpayer relies principally on the Jemison case, supra, and Snead v. Elmore, 59 Fed.(2d) 312, both of which are clearly distinguishable on their facts from those giving rise to the present controversy. In the Jemison case, supra, the Board held not only that the taxpayer was nonexistent, except for winding up its business, when the controverted sale occurred, but that there had been an actual distribution of its assets in kind to the stockholders, who were entitled to possession of the same and who specifically assumed its obligations. In the Snead v. Elmore case, supra, there had been an actual and valid sale of the assets by the corporation to its stockholders in consideration of their assumption of the corporation's liabilities and assignment of all its capital stock, before the dissolution and liquidation of the corporation. In the instant case, there was neither*1227 a sale by the corporation, nor a distribution of its assets in kind before the transfer to the Kentucky Consolidated Company, since the stockholders assumed no corporate liabilities, did not assign their capital stock, and neither they nor their "trustees" were at any time entitled to possession of the corporate property.

We therefore hold that the transaction here involved was a sale by the corporation, the profit on the transaction was earned by it, and the assessment of the taxes based thereon was valid.

Judgment will be entered for the respondent.