Docket Nos. 22047 22375.
David H. W. Dohan, Esq., and George P. Orr, Esq., for the petitioners. William H. Best, Jr., Esq., for the respondent.
CAPITAL GAIN— SALE OF CORPORATE ASSETS.— Where there was a genuine liquidation of the petitioner corporation followed by a sale negotiated and consummated wholly by the stockholders, the capital gain realized may not be imputed to the corporation. United States v. Cumberland Public Service Co., 338 U.S. 451, followed; Commissioner v. Court Holding Co., 324 U.S. 331, distinguished. David H. W. Dohan, Esq., and George P. Orr, Esq., for the petitioners. William H. Best, Jr., Esq., for the respondent.
Respondent has determined against Doyle Hosiery Corporation, Docket No. 22047, deficiencies in the amounts of $48,841.32 income tax, $4,318.55 declared values excess-profits tax, and $2,869.71 excess profits tax, for the taxable year beginning January 1, 1945, and ending June 30, 1945. Respondent has determined against John J. Doyle, Docket No. 22375, a deficiency of $1,006.16 income tax for the calendar year 1945.
The primary issue is whether respondent erred in determining that a sale of certain land, buildings, and machinery was made by the Doyle Hosiery Corporation with a resulting capital gain of $201,478.96 to it during the taxable year January 1 to June 30, 1945, instead of a sale made by the former stockholders of that corporation following a distribution in liquidation. If respondent is sustained on the primary issue, an alternative issue is presented as to whether respondent erred in failing to allow the petitioner corporation an additional deduction for Pennsylvania net income tax based on the added capital gain.
In the proceeding of John J. Doyle the issue presented involves the amount of capital gain realized by petitioner during 1945 and is dependent upon the decision on the primary issue.
In both proceedings, certain adjustments made by respondent are not in controversy.
These proceedings were submitted upon testimony, documentary evidence, and a stipulation of facts embracing numerous exhibits.
FINDINGS OF FACT.
The stipulated facts are so found.
The Petitioner Doyle Hosiery Corporation (sometimes hereinafter referred to as Hosiery) was a Delaware corporation having its principal office and place of business in Doylestown, Bucks County, Pennsylvania. Its present address if c/o John J. Doyle, 2200 Belvedere Avenue, Charlotte, North Carolina. On June 18, 1945, Doyle Hosiery Corporation was liquidated and on July 12, 1945, it was issued a certificate of dissolution by the Secretary of State of Delaware. By decree of the Court of Chancery in and for New Castle County, State of Delaware, dated February 28, 1949, John J. Doyle, Lestha S. Doyle, and Margaret M. Doyle were appointed trustees of Doyle Hosiery Corporation, a dissolved corporation, with power to prosecute or defend the corporation in its name or otherwise.
The petitioner John J. Doyle is an individual who resided at New Britain, Bucks County, Pennsylvania, during 1945 and now resides at Charlotte, North Carolina.
Hosiery's income, declared value excess-profits and excess profits tax returns for the taxable year January 1 to June 30, 1945, and, also, John J. Doyle's individual income tax return for the taxable year 1945 were filed with the collector of internal revenue for the first collection district of Pennsylvania at Philadelphia.
At all times material herein, John J. Doyle, his wife, Lestha S. Doyle, and their daughter, Margaret M. Doyle, constituted the entire board of directors and owned all of the outstanding shares of stock of Doyle Hosiery Corporation, as follows:
+-----------------------------------------------------------+ ¦ ¦Preferred ¦Common ¦ +--------------------------------------+-----------+--------¦ ¦John J. Doyle, President and treasurer¦100 ¦3900 ¦ +--------------------------------------+-----------+--------¦ ¦Lestha S. Doyle, Secretary ¦0 ¦50 ¦ +--------------------------------------+-----------+--------¦ ¦Margaret M. Doyle, Vice president ¦0 ¦50 ¦ +--------------------------------------+-----------+--------¦ ¦Total ¦100 ¦4000 ¦ +-----------------------------------------------------------+
Prior to the liquidation and dissolution of Hosiery, as more particularly hereinafter set out, it was engaged in the business of manufacturing ladies full-fashioned hosiery of 45 and 51 gauge and 150 to 50 denier, including nylon and rayon. Its plant consisted of a concrete brick veneer mill building and the ground on which situated. Its hosiery machinery consisted of fifteen 45-gauge Reading knitting machines ranging from 24, 26, 28, and 30 sections each, 11 Sotco Steady Dial looping machines ranging from 26, 28, and 30 point each, 23 Union Special new and old style seaming machines, together with various related equipment. In addition it leased two 32-section 51-gauge Karl Lieberknecht hosiery knitting machines owned by John J. Doyle, individually.
John J. Doyle worked as a hosiery knitter for 12 years before he became a manufacturer more than 15 years ago. In 1939, on advice of its largest customer, Hosiery contracted to purchase two 51-gauge knitting machines, but its source of credit objected to the transaction. Thereupon, Doyle purchased the machines individually in the latter part of 1939 and leased them to Hosiery at an annual rental of $9,600, the amount of his installment payments thereon. Subsequently, the Bureau of Internal Revenue questioned the propriety of Hosiery's deducting the full amount of that rental. In April or May 1945 and solely in an effort to justify the claimed rental by establishing the value of the machines, Doyle let it be known in the hosiery industry that his 51-gauge knitting machines were available for lease.
Early in May 1945, Joseph Haines, Jr., a broker of hosiery machinery and hosiery businesses, inquired of Doyle whether Hosiery's plant was for sale. At that time Doyle had not considered selling the business, but gave Haines permission to show the plant to interested parties. Haines brought a group of prospective purchasers to inspect the plant and upon inquiry Doyle indicated he would sell the Hosiery stock and the two 51-gauge machines for $500,000, which offer was not accepted. In the latter part of May, Haines introduced representatives of the Miller Hosiery Co., Inc. (hereinafter referred to as Miller), as a prospective purchaser and while no definite offer was made by either party, Doyle again suggested a price of $500,000 for the Hosiery stock and the 51-gauge machines. At that time Doyle had not decided to sell, but felt that he might if offered a good price. Accordingly, on June 7, he sought the advice of his attorney as to the proper way to handle the transaction and also as to the tax consequences, if a sale were made, and he was advised to sell the Hosiery stock and his two knitting machines.
Acting on his attorney's advice, Doyle communicated to Miller his willingness to sell the Hosiery stock and two knitting machines if the price could be agreed upon, but Miller replied that it was only interested in acquiring some, but not all, of Hosiery's assets. Upon consultation with his attorney and being advised to liquidate Hosiery, Doyle indicated to Miller that he would sell the assets after he was in a position to do so. On June 9, the officers and company counsel of Miller met and decided that acquisition of the Hosiery plant and equipment would be advantageous and instructed the company counsel to proceed in negotiating a purchase agreement with Doyle, his wife, and daughter. At that time there was no commitment by either party to buy or sell. On June 12, counsel for Miller and counsel for the Doyles discussed the form and terms of the proposed transaction and sometime between Saturday, June 16, and Monday, June 18, they completed a draft of the proposed agreement. However, that draft was changed in some respects just before it was executed by the parties thereto.
At a special meeting of the board of directors of Hosiery, consisting of Doyle, Lestha, and Margaret, held at 1 p.m. on June 18, a resolution was unanimously adopted authorizing dissolution of the corporation. Thereupon and in complete liquidation of Hosiery, its assets were conveyed to Doyle, his wife, and daughter by deed and bill of sale, except that Hosiery temporarily retained accounts receivable and certain cash and government bonds to meet existing corporate obligations, and all of Hosiery's outstanding shares of stock were surrendered and cancelled.
Subsequent to the transactions related in the next preceding paragraph and during the afternoon of June 18, Doyle, his wife, and daughter, as individuals, signed an agreement with Miller whereby they agreed to sell to the latter certain land, buildings, machinery, equipment, mill supplies, and raw materials formerly owned by Hosiery and also the two knitting machines at all times owned by Doyle. The sale did not include finished merchandise on hand or the trade name ‘Doyle‘ or the right to use the name ‘Doyle Hosiery Corporation.‘ As of June 18 the purchaser commenced operating the plant as the owner thereof.
The agreed purchase price was $410,000, of which $50,000 was paid upon the signing of the agreement and the balance was deposited in escrow with the Land Title Bank and Trust Company of Philadelphia. The $50,000 payment on June 18 was made by a certified check, dated June 16, payable to John J. Doyle and was delivered to the latter subject to Miller's inspection of the inventory. Doyle deposited the check in his personal bank account and at the time was authorized by Lestha and Margaret to receive their shares of the proceeds for and on their behalf.
By agreement dated July 3, 1945, Miller assigned all its rights, title, and interest in the agreement of sale dated June 18, 1945, to the M. H. Hosiery Co., Inc. Final settlement under the June 18 agreement was made on July 3, 1945, at the Land Title Bank and Trust Company, at which time Doyle, his wife, and daughter conveyed by deed and bill of sale to the M. H. Hosiery Co., Inc., all the assets made subject to the agreed sale. At the same time Doyle was paid the net proceeds of the sale amounting to $344,636.26 which he deposited in his personal bank account for and on behalf of himself, his wife, and daughter.
In connection with the July 3 settlement and out of the proceeds of the sale a $3,000 mortgage on the real estate transferred was paid off and, also, a $15,000 commission was paid to the broker Haines pursuant to agreement between him and Doyle, individually.
Doyle's attorney billed him individually and he paid out of his own funds the fee for legal services in connection with the sale.
Prior to the adoption of the resolution to dissolve the Doyle Hosiery Corporation and the distribution of its assets to its stockholders, in liquidation, on June 18, 1945, that corporation did not consider, authorize, negotiate, or enter into any agreement for a sale of its assets. The sale of properties here in question was negotiated by Doyle for and on behalf of himself, his wife, and his daughter, on the basis of making a sale when in a position to do so, as individuals; no binding agreement of sale was entered into by those individuals until after the liquidating distribution by Hosiery; and the purchaser dealt with and paid the proceeds of the sale to the three Doyle as the individual owners of the properties transferred.
On its returns for the taxable year, January 1 to June 30, 1945, Doyle Hosiery Corporation did not report any gain derived from the above described transaction, but, on his individual 1945 income tax return, John J. Doyle reported a capital net gain of $206,749.95 derived therefrom. With respect to the Doyle Hosiery Corporation's tax liability for the taxable year, January 1 to June 30, 1945, respondent determined that the corporation made a sale of land, buildings, and machinery resulting in additional income consisting of a capital gain of $201,478.96. With respect to John J. Doyle's individual 1945 income tax liability, respondent increased the reported capital gain by $933.07 resulting from his determination of the amount of gain realized from liquidation of the Doyle Hosiery Corporation stock and from a sale of two knitting machines.
Briefly stated, the respondent argues that the whole transaction shows a sale by the corporation with its stockholders acting merely as a conduit through which passed title to the properties transferred and that thus the case is controlled by Commissioner v. Court Holding Co., 324 U.S. 331. On the other hand, petitioners argue that the facts herein clearly distinguish the instant case from Court Holding Co., supra, and bring it within the ambit of United States v. Cumberland Public Service Co., 338 U.S. 451. We agree with petitioners.
In Court Holding Co., supra, the corporation conducted negotiations resulting in an oral agreement as to the terms and conditions of the sale of its sole asset, an apartment house, and received a payment on account from the purchaser; the sale was not consummated in the name of the corporation because of the tax consequences to it; instead, the sale was held in abeyance until the corporation declared a liquidating dividend, whereupon its former stockholders, as individual vendors, made the sale on substantially the same terms and conditions previously agreed upon by the corporation and the prior payment to the corporation was applied in part payment of the purchase price. The Supreme Court concluded that despite the conflicting evidence the record supported the findings and conclusion of the Tax Court that the transfers of legal title were mere formalities, that the whole transaction showed a sale by the corporation rather than by the stockholders, and that the gain derived was attributable to the corporation under section 22(a), Internal Revenue Code. On the facts, that case is clearly distinguished from the instant case.
In Cumberland Public Service Co., supra, the taxpayer corporation at no time planned to make the sale itself; the stockholders first offered to sell the corporate stock which was refused by the prospective purchaser; the stockholders then offered to acquire certain corporate assets and thereafter sell, which offer was accepted by the prospective purchaser; there was a distribution in liquidation of the corporation; and there followed a sale of properties consummated by the stockholders rather than by the corporation. In holding that the corporation realized no gain under that state of facts, the Supreme Court discussed the Court holding Co. case, supra, and said, inter alia, that the language therein as to the incidence of taxation being dependent upon the substance of a transaction regardless of mere form by using the shareholders as a conduit through which to pass title, ‘does not mean that a corporation can be taxed even when the sale has been made by its stockholders following a genuine liquidation and dissolution.‘
The Cumberland Public Service Co. case holds that the issue there presented was one of fact to be determined from the evidence of record. In the instant case the record clearly establishes, and we have found as facts, that prior to its liquidation the petitioner corporation did not consider, authorize, negotiate, or enter into any agreement for a sale of its assets and, further, that although some of the negotiations by the stockholders preceded liquidation, the sale of the properties involved was made by the corporation's former stockholders as the individual owners thereof following liquidation. Accordingly, the decision in the Cumberland Public Service Co. case is controlling here. Cf. West Coast Securities Co., 14 T.C. 947; and Frank E. Gilman, 14 T.C. 833.
We conclude that respondent erred with respect to the primary issue involved herein. This conclusion disposes of both of these consolidated proceedings.
Reviewed by the Court.
Decision in each proceeding will be entered under Rule 50. TURNER, J., dissenting: In my opinion the evidentiary facts, or, as termed by the Supreme Court in United States v. Cumberland Public Service Co., supra, the subsidiary facts show that the sale was made by petitioner and all that was done by the stockholders in their individual capacities was to indulge in carefully clocked ritualistic formalities. The Supreme Court decision in the above case lays down no new rule, but adheres to what had already been said in Commissioner v. Court Holding Co., supra, namely, that the question to be determined was one of fact. It supplies no formula for transforming ritual into reality by a lip service recitation of fundamental principles.