J.T.S. Brown's Son Co.
v.
Comm'r of Internal Revenue

Tax Court of the United States.May 17, 1948
10 T.C. 840 (U.S.T.C. 1948)

Docket Nos. 10999 12426 12427 12428.

1948-05-17

J. T. S. BROWN'S SON COMPANY, PETITIONER, ET AL.,1 v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Robert S. Marx, Esq., Frank E. Wood, Jr., Esq., Timothy Hogan, Esq., and Frank E. Wood, Esq., for the petitioners. W. W. Kerr, Esq., for the respondent.


1. In 1942 the sole stockholder of J. T. S. Brown's Son Co., a Kentucky corporation engaged in the distillery business, decided to liquidate the corporation, and a plan for the complete liquidation of the corporation was duly adopted. In pursuance of this plan, warehouse certificates for its barrel whiskey were distributed in this sole stockholder in 1942. The Commissioner determined that the corporation realized a gain of $530,635.98 from this distribution in liquidation. Held, a corporation does not realize gain from the distribution of its assets in kind to stockholders in liquidation and the Commissioner's determination is reversed.

2. The Commissioner for the taxable year 1943 determined a gain of the same amount as stated in headnote 1 against the corporation, allegedly resulting from the sale by the corporation of the warehouse certificates in question. Held, no sale of the warehouse certificates was made by the corporation. The sales of the certificates which were made in 1943 were negotiated and made by the sole stockholder of the corporation after he had received the warehouse receipts in liquidation. The corporation in no way participated in these sales and had no gain therefrom. The Commissioner is reversed.

3. Petitioner Creel Brown, Jr., is not liable as a transferee of the corporation. He sold his stock outright for cash to James R. Favret and never received in liquidation or otherwise any of the assets of the corporation. Petitioner James R. Favret is liable as a transferee for whatever deficiencies result against the corporation from certain uncontested adjustments. He received all the assets of the corporation in liquidation and these assets had a value much greater than all the liabilities of the corporation, including its liabilities for Federal taxes. Robert S. Marx, Esq., Frank E. Wood, Jr., Esq., Timothy Hogan, Esq., and Frank E. Wood, Esq., for the petitioners. W. W. Kerr, Esq., for the respondent.

These proceedings have been consolidated. Docket No. 10999, in which J. T. S. Brown's Son Co. is petitioner, involves a deficiency in petitioner's declared value excess profits tax of $69,985.43 and a deficiency in excess profits tax of $340,787.33, all for the calendar year 1942. These deficiencies were based upon the following adjustments made by the Commissioner to the net income as disclosed on the return filed by petitioner:

+-------------------------------------------------+ ¦(a) Depreciation ¦$955.64 ¦ +--------------------------------------+----------¦ ¦(b) General expense ¦2,500.00 ¦ +--------------------------------------+----------¦ ¦(c) Advertising ¦10.00 ¦ +--------------------------------------+----------¦ ¦(d) Compensation of officers ¦3,000.00 ¦ +--------------------------------------+----------¦ ¦(e) Storage income ¦3,023.15 ¦ +--------------------------------------+----------¦ ¦(f) Gain from distribution of property¦530,635.98¦ +--------------------------------------+----------¦ ¦ ¦540,124.77¦ +-------------------------------------------------+

Petitioner contests only adjustment (f) above. Adjustment (f) is explained in the deficiency notice as follows:

(f) It is held that you realized income in the year 1942 under the provisions of section 22(a) of the Internal Revenue Code, of $530,635.98 from the distribution of whiskey and/or whiskey certificates to your stockholders computed as follows:

+--------------------------------------------------------------------+ ¦Fair market value of whiskey distributed to stockholders¦$735,098.62¦ +--------------------------------------------------------+-----------¦ ¦Cost of whiskey distributed ¦204,462.64 ¦ +--------------------------------------------------------+-----------¦ ¦Profit realized ¦530,635.98 ¦ +--------------------------------------------------------------------+

Docket No. 12426, in which J. T. S. Brown's Son Co. is also the petitioner, involves deficiencies and penalties in petitioner's declared value excess profits tax of $66,850.10 and delinquency penalty of $3,342.51; income tax of $785.33 and penalty of $44.62; and excess profits tax of $333,701.74 and penalty of $83,425.44, all for the taxable year January 1 to April 30, 1943. These deficiencies are based upon two adjustments made by the Commissioner to the net income as disclosed by petitioner's return as follows: (a) Gain on sale of whiskey, $530,635.98; and (b) depreciation, $376.19.

The petitioner assigns error as to adjustment (a), but does not contest adjustment (b). Adjustment (a) is explained in the deficiency notice as follows:

(a) It is held that sales of whiskey made ostensibly by your stockholder or stockholders in the year 1943, were in substance made by you, and that the gain of $530,635.98 realized thereon is includible in your gross income under section 22(a) of the Internal Revenue Code.

Docket No. 12427, in which James R. Favret is petitioner, involves transferee liability determined against Favret as the transferee of J. T. S. Brown's Son Co. for the deficiencies and penalties determined against the company for the years 1942 and 1943 hereinbefore described. The petition of Favret alleges that the Commissioner erred in his determination of the deficiencies and penalties in question, but does not deny transferee liability on his part for whatever deficiencies and penalties are determined against the company.

Docket No. 12428, in which Creel Brown, Jr., is petitioner involves transferee liability determined against Brown as the transferee of the assets of the company for the deficiencies and penalties determined against the company for the years 1942 and 1943 hereinbefore described. The petitioner Brown denies all liability as a transferee and alleges that, although the company was liquidated and dissolved, he never received any of its assets in the liquidation or otherwise.

FINDINGS OF FACT

The J. T. S. Brown's Son Co., sometimes herein referred to as the company, was during all of 1942 and until its dissolution was formally completed on August 16, 1943, a validly existing Kentucky corporation.

James R. Favret is an individual residing in Cincinnati, Ohio.

Creel Brown, Jr., is an individual residing in Bardstown, Kentucky.

The return of the company for the periods here involved was filed in the district of Kentucky in Louisville.

The company distilled, warehoused, and bottled whiskey. When the whiskey which it had distilled was placed in barrels and stored in one of its warehouses, the company issued negotiable warehouse receipts covering those barrels. During the life of the company it had sold outright certain of the warehouse receipts. It had sold certain of the receipts subject to an option or options owned by the company to buy them back. Certain of the warehouse receipts were retained in the ownership and inventory of the company.

During November 1942 and up until late in December 1942, the company owned on its own account and in its own inventory warehouse receipts covering 6,264 barrels of bulk whiskey which the company had distilled and which was in barrels in the warehouse of the company in Nelson County, Kentucky. In addition, the company owned an option under which it had the right to buy back 1,908 barrels of its whiskey, and/or the warehouse receipts representing the same, from R. L. Buse of Cincinnati, Ohio. In addition, the company also had an option to buy back warehouse receipts representing 2,004 barrels of its whiskey, which receipts were then owned by Thomas E. Wood of Cincinnati, Ohio.

In November and December of 1942 the company owned several acres of ground near Bardstown, a modern distillery, two large warehouse buildings, a bottling plant, distilling and warehouse machinery, equipment and supplies, automobiles, trucks, labels, trade names, and a substantial good will.

The J. T. S. Brown's Son Co. was a stock company and had outstanding in November and December 1942 a total of 52,600 shares of common stock, of which 52,448 1/2 shares were owned by, and certificates were outstanding in the name of, Creel Brown, Jr., 150 shares were owned by the latter's wife, Lelia Brown, and the remaining 1 1/2 shares were owned by Creel Brown, Jr.'s, sister, Catherine Allen Brown Hopfer.

The production of whiskey for ordinary beverage purposes was prohibited by the Government in the cause of the war effort on and after October 1, 1942.

The Brown Distillery had been founded in 1855 by Creel Brown's grandfather and at the time of World War I it was operated by Creel Brown, Jr.'s, father. As a result of prohibition which followed World War I and the curtailment of liquor production in World War I, Creel Brown's father was wiped out financially.

In November 1942 the company was engaged, not in the production of whiskey for beverage purposes, but in the production of high wines under a long term Government contract in aid of the war effort.

In November 1942 Creek Brown, Jr., was the president and a director of the company. His wife Lelia was the secretary and treasurer and also a director. There was one other director, but there were no other officers. Creel Brown, Jr., was the manager and operator of the business and he alone had major authority with respect thereto.

In November 1942 Creel Brown, Jr., decided to get out of the whiskey business and determined that he would not get out in any other way than by a sale of his shares of stock. As the operating head of the company, he decided that the company would not sell either its bulk whiskey or any other of its assets. Creel Brown, Jr., negotiated in November and December with James R. Favret of Cincinnati, Ohio, with respect to the sale by Brown and the purchase by Favret of his, Brown's stock, and that of his wife.

At the time these negotiations were under way the company was indebted to the First National Bank of Cincinnati, Ohio, for approximately $167,000, which indebtedness was evidenced by a promissory note from the company to the bank and was secured by warehouse receipts representing 6,195 barrels of whiskey owned by the company.

On December 29, 1942, Favret and Brown came to a final agreement with respect to the purchase and sale of the stock owned by Brown and his wife. On that date, at Cincinnati, Ohio, Brown delivered to Favret, properly endorsed, stock certificates covering 52,448 1/2 shares standing in the name of Brown and 150 shares standing in the name of Brown's wife, and Favret accepted delivery of the stock and paid to Brown as the purchase price of the stock $601,059.80, and in addition Favret paid to Brown's wife the sum of $1,719 as the purchase price for her stock.

The amounts paid by Favret to Brown and his wife were paid by Favret, individually. He obtained the funds from the proceeds of a loan which he had made with the First National Bank of Cincinnati, Ohio, and for which he executed his note to the bank for approximately $603,000. The proceeds of this note were deposited in Favret's individual account and disbursed by him as an individual, and the note was finally paid by him as an individual on January 20, 1943.

On December 30, 1942, Favret purchased, paid for, and acquired possession of the certificate for one and one-half shares previously owned by Mrs. Hopfer and Favret was then the owner of the entire outstanding capital stock of the company.

On December 29, 1942, the company exercised its option to repurchase the warehouse receipts for 1,908 barrels owned by R. L. Buse.

On December 30, 1942, Brown and his wife Lelia and the third director resigned from all officerships and directorates in the company theretofore filled by them.

Prior to December 30, 1942, neither the company nor any of its officers had negotiated or contemplated or made any agreement, formal or informal, binding or otherwise, with any person, firm or corporation, looking forward to, or having as its purpose or binding the company in any way in respect of the sale, exchange, or other disposition of all or any part of the warehouse receipts for bulk whiskey then owned by it (6,264 barrels), and/or the warehouse receipts with respect to which the company had options to buy, exercised or unexercised.

On December 30, 1942, directors' and stockholders' meetings of the company were held after Favret was the complete owner of all of the stock. New officers and directors were chosen. Although Favret was the owner of all the stock, three shares each were issued to Timothy S. Hogan and Clarence H. Duesing as qualifying shares. The directors chosen at this meeting were Favret, Hogan, and Duesing. The directors took the steps necessary under Kentucky law to initiate the dissolution of the company pursuant to the consent for dissolution of the sole stockholder filed at the meeting. The officers were directed by the directors to proceed to effect the complete dissolution.

At the stockholders' meeting held on December 30, 1942, the action of the directors was approved and the steps under Kentucky law to be taken by the stockholders to effectively initiate a dissolution were taken. A plan of complete liquidation was adopted, under which all of the assets of the company were to be distributed to the stockholders in kind, in exchange for and in cancellation of all of the outstanding stock of the company. The resolution providing for the complete liquidation of the company reads as follows:

RESOLVED, that the following plan of complete liquidation of the J. T. S. Brown's Son Company, Inc. be and it hereby is adopted:

(1) The corporation shall transfer to the stockholders of the company in cancellation, redemption and retirement of their shares of stock all of the assets of the company and the shareholders shall assume and pay all of the liabilities of the company; said transfer and liquidation in kind of the entire assets of the company shall be made and completed as soon as practicable, not later than ninety (90) days from the date hereof.

(2) Pursuant to said plan the company immediately transfer and deliver to its stockholders all of the bulk and barrel whiskey or warehouse receipts representing the same, now owned by it or in its possession, and assign and transfer to the stockholders all of the insurance upon said bulk and barrel whiskey.

(3) The balance of the assets of the company other than bulk and barrel whiskey and/or warehouse receipts, shall be transferred and distributed in kind to the stockholders as soon as may be practicable without interfering with or causing the stoppage or termination of the distillation of high wines by the distillery which would be detrimental in any way to the Government's war program.

(4) The stockholders assume and agree to pay all of the outstanding debts and liabilities of the corporation.

(5) The officers of the company be instructed and authorized to take all steps to sign all papers and documents and do all things that may be necessary, desirable or convenient in order to effectuate and carry out this plan of liquidation of the assets of the corporation, which plan is hereby declared to be operative and in effect immediately.

At no time prior to the adoption of the plan of liquidation did the company, or any of its officers, negotiate with any person, firm or corporation having to do or in any way connected with a sale or exchange, or other disposition of the warehouse receipts for bulk whiskey owned by the company on December 30, 1942, and/or on which the company had options.

On December 30, 1942, the company executed and delivered to Favret, as owner of all its shares of stock, an assignment under which there was immediately transferred to Favret all of the company's right, title, and interest in and to the bulk and barreled whiskey ‘now‘ owned and held by it and all of the warehouse receipts representing said whiskey. On December 30, 1942, pursuant to a validly adopted plan of complete liquidation, Favret, as an individual, and in exchange for the surrender of all his stock to the company for cancellation, became the owner by way of distribution in kind from the company to its sole stockholder of all of the warehouse receipts for bulk whiskey theretofore owned by the company.

On December 30, 1942, insurance theretofore carried by the company on its interest in warehouse receipts for bulk whiskey was assigned to the new owner of the bulk whiskey, to wit, James R. Favret, an individual, and the entire insurance was made payable to Favret, as an individual.

On December 30, 1942, the stock certificates which Favret had purchased were surrendered to the company upon the release thereof for transfer purposes by the First National Bank, which was holding the certificates as collateral on the $603,000 Favret loan. New certificates were issued by the company in the name of Favret (with six shares in the name of two nominees of Favret, duesing and Hogan) and these new certificates were immediately endorsed in blank and pledged by Favret with the First National Bank in substitution of the old certificates, where the certificates remained until the $603,000 note was paid off on January 20, 1943, at which time they were redelivered to the company in pursuance of the liquidation plan and canceled and placed by the company in its stock book, in which book the canceled certificates appear today.

The sum of $601,000 received by Creel Brown for his stock and the sum of $1,700 received by his wife for her stock and the money received by Mrs. Hopfer for her stock were retained by them, respectively, for their own account and benefit. In March 1943 Creek Brown, Jr., reported a capital gain in his income tax return for the year 1942 on the sale of his stock certificates and paid a tax of approximately $140,000 thereon. His wife also reported a taxable capital gain based on the sale of her stock and paid the tax thereon.

On December 31, 1942, James R. Favret borrowed, as an individual, the sum of $167,512 from the First National Bank and with the proceeds thereof paid off the note of the company to the bank for $167,000, and, pursuant to instructions by the company to the bank, the warehouse receipts for 6,195 barrels which had been pledged on the company's note were delivered to Favret, as an individual, and pledged by him on his personal note.

On January 6, 1943, Favret, as an individual, negotiated with the Union League Club of Chicago and sold to that club 158 barrels of whiskey. On January 8, 1943, Favret, as an individual, negotiated with the Joseph Seagram Co., and as a result of that negotiation he sold to Seagram 3,718 barrels of the whiskey represented by warehouse receipts which had been distributed to Favret by the company. On January 8, 1943, Favret, as an individual, negotiated with R. L. Buse and sold to Buse 2,388 barrels of the whiskey represented by warehouse receipts theretofore distributed in the liquidation to Favret. On January 14, 1943, the warehouse receipts for the 1,908 barrels in the hands of R. L. Buse, with respect to which the company's option had been exercised on December 29, were delivered to the First National Bank, attached to a draft on the company for the option purchase price. This draft was paid by James R. Favret, as an individual, and the receipts were received by him. On January 16, 1943, Favret, as an individual, sold to Seagram the warehouse receipts for the 1,908 barrels.

The above described negotiations and sales were all instituted by James R. Favret, or the buyer, after title to the bulk whiskey had passed to Favret in the liquidation and none of the above sales were in furtherance of any contemplation or plan or agreement for sale by the company.

The company continued its distilling operations after the plan of liquidation was adopted, in that the production of high wines for the war effort under the Government contract was carried forward. This operation was continued only as long as was reasonably required to set up the transfer of the Federal and state distillery licenses to James R. Favret, as an individual, so that on the completion of the distribution in kind there would be no lapse in war production.

In January 1943 Favret paid off in full his two individual loans to the First National Bank, the one for $603,000 and the other for $167,000.

In April 1943 the company completed the distribution in kind of all of its remaining assets to James R. Favret, as an individual, and by August 1943 the J. T. S. Brown's Son Co. was completely and legally dissolved under the laws of Kentucky. Since April 1943 the distillery, warehouse, and bottling plant, etc., of the company have been individually owned and operated by James R. Favret, and they are still operated by him as an individual proprietorship.

Creek Brown, Jr., after he sold his stock to James Favret, remained as operating manager of the distillery at a salary of $7,800 per annum. He resigned in September 1945 and is no longer connected with the company in any way. Mrs. Brown was bookkeeper for the company at a salary, but after she and her husband sold their stock to Favret in December 1942 she no longer worked for the company in any capacity. Favret had his own accountant, whom he placed in charge of the books, and Mrs. Brown's services were no longer required.

James R. Favret made a profit in 1943 on the transactions above described, which he reported on his income tax return for 1943. He paid the tax thereon and it is not in controversy here.

The economic status and conditions of all the principals in the transaction, to wit, the J. T. S. Brown's Son Co., Creek Brown, Jr., Lelia Brown, and James R. Favret, were substantially changed as the result of the foregoing transactions, which we find were in every respect bona fide and were what they purported to be.

OPINION.

BLACK, Judge:

We have endeavored to make full and complete findings of fact based on the extensive evidence in these proceedings, and in our decision of the issues raised by the pleadings we have endeavored not to unnecessarily repeat the facts.

We first take up the issue raised as to the correctness of the Commissioner's determination that the J. T. S. Brown's Son Co. realized a gain in 1942 of $530,635.98 from the distribution of ‘whiskey and/or whiskey certificates to your stockholders,‘ as set out in his deficiency notice. We do not quite understand the argument made by respondent in his brief respecting this issue. He does not seriously argue that a corporation realizes income when it distributes its assets in kind to its stockholders in liquidation. Yet he does not concede the error of his determination in this respect.

It is clear that a corporation does not realize income from the distribution of its property in kind in liquidation to its stockholders. Treasury regulations so provide. No sales of whiskey certificates or barrel whiskey occurred in 1942. All that occurred with respect to that particular class of property was the distribution of it by the company on December 30, 1942, in liquidation to its sole stockholder, James R. Favret. Manifestly, that distribution to him by the company did not give rise to any taxable income to the corporation. On this issue we reverse the Commissioner.

SEC. 29.22(a)-20 (Regulations 111). GROSS INCOME OF CORPORATION IN LIQUIDATION.— When a corporation is dissolved, its affairs are usually wound up by a receiver or trustees in dissolution. The corporate existence is continued for the purpose of liquidating the assets and paying the debts, and such receiver or trustees stand in the stead of the corporation for such purposes. (See sections 274 and 298.) Any sales of property by them are to be treated as if made by the corporation for the purpose of ascertaining the gain or loss. No gain or loss is realized by a corporation from the mere distribution of its assets in kind in partial or complete liquidation, however they may have appreciated or depreciated in value since their acquisition. * * *

The next issue is raised by petitioners' assignment of error to the determination of the Commissioner that for the taxable year January 1 to April 30, 1943, the company realized ‘gain on sale of whiskey of $530,635.98.‘ This alleged gain is the same amount determined by the Commissioner against the company for the year 1942. He realizes the inconsistency of his position and does not contend that it would be possible for the company to have this same gain in both years, and he concedes that one or the other of his determinations is wrong. We think both were wrong. We have already stated our reasons for holding that his determination for 1942 was wrong. We shall now state briefly why we think his determination for 1943 was wrong. In explaining that adjustment in his deficiency notice the Commissioner said:

(a) It is held that sales of whiskey made ostensibly by your stockholder or stockholders in the year 1943, were in substance made by you, and that the gain of $530,635.98 realized thereon is includible in your gross income under section 22(a) of the Internal Revenue Code.

We think the evidence at the hearing establishes conclusively that the sales in question were not made by the corporation. These sales were negotiated and made by petitioner James R. Favret after he had received the whiskey certificates in pursuance of a plan for the complete liquidation and cancellation of all his stock in the J. T. S. Brown's Son Co. and whatever gain there was following these sales was taxable to him. This gain he returned for taxation, and he paid tax on it and it is not involved here.

The facts clearly show, we think, that Creek Brown, Jr., and his wife Lelia sold their stock outright late in December 1942 to Favret. They owned all the shares of the corporation except one and one-half shares owned by Brown's sister, Mrs. Hopfer. These latter shares were immediately acquired by Favret. There were no strings of any kind tied to these sales of stock to Favret. They were outright, for cash, which was immediately paid by him to the sellers of the stock. There had been no negotiations with any one for the sale of the whiskey warehouse certificates. Creek Brown, Jr., president of the corporation, knew, of course, that these whiskey certificates were readily salable at a good price because the United States Government had stopped the distilling of whiskey on account of the war and there was a great demand for barrel whiskey. But he testified at the hearing that he had not negotiated with any one to sell the company's barrel whiskey prior to the sale of his stock; that what he did make up his mind to do was to get out of the whiskey business while the time to do so was favorable and that the only method which he considered at any time was to sell his stock, and this he succeeded in accomplishing at a satisfactory price after a few weeks of negotiation with Favret.

The circumstances of this sale are fully detailed in our findings of fact and need not be repeated here. After Favret acquired all the stock of the company he immediately set out to liquidate the company and operate the distillery as a sole proprietorship. In the process of this liquidation all the whiskey warehouse certificates were distributed to Favret as one of a series of distributions in complete liquidation and cancellation of his stock. Three shares of the stock were in the name of Clarence H. Duesing and three shares were in the name of Timothy S. Hogan, but these shares were qualifying shares and were beneficially owned by Favret. After the whiskey warehouse certificates were distributed to Favret in liquidation and were in his complete possession and control as an individual, subject only to the lien held by the bank for its loan, he negotiated for their sale as an individual and sold them to the several purchasers named in our findings of fact and for the amounts named in our findings. The money received by Favret from these sales was used by him in paying off his loans from the First National Bank of Cincinnati, Ohio.

None of the foregoing facts are contradicted in the record which we have before us. Respondent offered no testimony at the hearing except the testimony of E. Trimble Smith, vice president of the First National Bank of Cincinnati and its chief loan officer. His testimony was, so far as we can see, of no benefit to respondent, but in all essential respects was corroborative of the testimony introduced by petitioners. Therefore, under the facts found by us in our findings of fact, we hold that the J. T. S. Brown's Son Co. sold no barrel whiskey or whiskey warehouse certificates in 1943 and the ‘gain on sale of whiskey, $530,635.98,‘ which the Commissioner determined against the company in his deficiency notice is not sustained. See Falcon Co., 41 B.T.A. 1128; affd., 121 Fed.(2d) 277; Acampo Winery & Distilleries, Inc., 7 T.C. 629; United States v. Cummins Distilleries Corporation (C.C.A., 6th Cir.), 166 Fed.(2d) 17.

In the Acampo Winery & Distilleries, Inc., case, the Commissioner was contending that the sale was made by the trustees while acting for the corporation and that therefore, the gains from the sale were taxable to the corporation. In deciding against the Commissioner on this contention we said:

The negotiations which led to the sale in the present case were begun after the liquidating distribution, were carried on by trustees elected and representing only stockholders, were not participated in by the corporation in any way, and had no important connection with any prior negotiations. These facts distinguish this case from Mrs. Grant Smith, supra; Fairfield Steamship Corporation, 5 T.C. 566; affd., 157 Fed.(2d) 321; Meurer Steel Barrel Co. v. Commissioner, 144 Fed.(2d) 282; * * * and Court Holding Co. v. Commissioner, 324 U.S. 331, cited and relied upon by the Commissioner, in which the negotiations leading to the sale were instituted and pushed to an advanced stage by representatives of the corporation. The case of Howell Turpentine Co., 6 T.C. 364, is similarly distinguishable.

The Commissioner in his brief in the instant case relies pretty much upon the same cases as we distinguished in the Acampo Winery & Distilleries, Inc., case. For the same reasons that we there distinguished those cases, we also distinguish them here.

In United States v. Cummins Distilleries Corporation, supra, the Circuit Court held that proceeds of sales of whiskey warehouse receipts in 1943 by a stockholders' committee subsequent to distribution in liquidation of the stockholders' equity in the receipts were not income to the corporation when, although the committee liquidated the corporation's equity in the receipts, the corporation had not negotiated for their sale.

The facts in the instant case are certainly as strong for the taxpayers as they were in the Cummins Distilleries Corporation case. In fact, we think they are stronger because here there was no intervening stockholders' committee to complicate the situation. Favret was the sole stockholder and the warehouse certificates were distributed to him in liquidation, and after he had received them he negotiated as an individual for their sale and sold them. For reasons already stated we sustain petitioners on this issue and reverse the Commissioner's determination.

There remains the question of penalties. In Docket No. 12426 the Commissioner stated in regard to the period January 1 to April 30, 1943:

It is held that you are liable for a penalty of 5 per cent in respect to your income and declared value excess-profits tax deficiencies, and a penalty of 25 per cent in respect to your excess profits tax deficiency, under section 291 of the Internal Revenue Code, for the year 1943.

It is clear from our holding on the main issue that there will be no excess profits tax for the period in question. However, there was one small adjustment of $376.19 for the period in question relating to depreciation which petitioner did not contest. This adjustment will probably result in a small deficiency in petitioner J. T. S. Brown's Son Co.'s income tax for the period January 1 to April 30, 1943.

No evidence whatever was offered as to the penalties determined by the Commissioner and petitioners do not mention them in their brief. This being the state of the record, we must affirm the Commissioner in his determination of 5 per cent penalty on whatever deficiency results from the inclusion of the $376.19 depreciation item in the J. T. S. Brown's Son Co.'s income.

We next come to a decision of the transferee liabilities of petitioners Brown and Favret. If the only adjustment which the Commissioner made to the net income as reported by the J. T. S. Brown's Son Co. on its return was the $530,635.98 item in question, then, of course, there would be no deficiencies and therefore could be no transferee liability. However, the Commissioner made some other minor adjustments in each of the taxable years which the petitioners did not contest. Therefore it appears that in a recomputation under Rule 50 there will be some deficiencies. For this reason we must decide the issue of transferee liability. It is clear from the facts as found by us that petitioner Creek Brown, Jr., is not liable as a transferee. He simply sold his shares of stock to a willing buyer and received cash for them. He received none of the assets of the company in liquidation. Under these circumstances he is not liable as a transferee. On the other hand, it is clear to us that petitioner James R. Favret is liable as a transferee for whatever deficiencies and penalties are determined against the company in a recomputation under Rule 50. The company was completely liquidated and left with no assets, and Favret received all of its assets, which had a value considerably in excess of all the liabilities of the company, including the liability for Federal taxes. Petitioners in their brief do not argue the question of Favret's liability as a transferee. Favret, in his petition in Docket No. 12427, does not assign any error as to the Commissioner's determination that he was a transferee of the company's assets. He assigns as error only the determination of the Commissioner as to both years that petitioner J. T. S. Brown's Son Co. had realized a gain in each year of $530,635.98 from the transactions in whiskey warehouse receipts and barreled whiskey. We hold that petitioner Favret is liable as a transferee for whatever deficiencies and penalties are determined against the company in a recomputation under Rule 50.

Decisions will be entered under Rule 50.