*1617 Held, sale of the assets of the corporation involved in this proceeding was a sale in dissolution of the corporation and resulted in taxable gain to the corporation, and was not a sale of the property of individual stockholders. Taylor Oil & Gas Co.,15 B.T.A. 609">15 B.T.A. 609; affd., 47 Fed.(2d) 108; certiorari denied, 283 U.S. 862">283 U.S. 862, followed.
*660 The above styled and numbered cases were ordered consolidated for hearing. Respondent moved to dismiss Docket No. 37032 for lack of jurisdiction. All questions raised on the merits were either waived or admitted except one, which is whether there was a sale by the Blackburn Varnish Company of its assets to the Cook Paint and Varnish Company in the year 1927, resulting in a capital gain to the Blackburn Varnish Company, or whether the sale to the Cook Paint and Varnish Company was made by Fred A. Hellebush and John G. Lippelman as trustees for the stockholders of the Blackburn Varnish Company, and*1618 resulted in no gain to the corporation itself.
The respondent determined a deficiency of $12,303.42 for the period from January 1, 1927, to April 19, 1927, against the Blackburn Varnish Company, and is seeking to establish a liability against the petitioners as transferees under section 280. Petitioners admit they are transferees, but deny the deficiency determined against the transferor, except that which is based upon a disallowance of $5,000 attorney fees claimed as deduction by transferor corporation in its income-tax return filed for the period January 1, 1927, to April 19, *661 1927. Petitioners admit that the action of the Commissioner in disallowing this deduction was correct.
FINDINGS OF FACT.
The Blackburn Varnish Company was a corporation organized and existing under the laws of the State of Ohio for many years prior to the taxable year 1927. All of the petitioners were stockholders in the corporation and petitioners Fred A. Hellebush and J. G. Lippelman were respectively its president and secretary-treasurer. The corporation had been successful in its business and had built up a profitable trade, but in the spring of 1927 the stockholders of the corporation*1619 decided that they would sell out, quit business, and liquidate the corporation. One of the stockholders of the corporation was James A. Green, and he had a nephew, Joseph G. Morris, who was an official of the Cook Paint and Varnish Company, a corporation organized under the laws of the State of Missouri. About a month prior to the date when the sale involved in this proceeding was finally consummated, Green acquainted Morris with the fact that the plant and business of the Blackburn Varnish Company was for sale and asked him to see if the Cook Paint and Varnish Company would be interested as buyers. Morris thereupon took the subject up with his employers, the Cook Paint and Varnish Company, and those in charge of its affairs expressed a willingness to buy, if suitable terms could be arranged, and negotiations were started which finally culminated in the sale. These negotiations, after having been started by stockholder Green of the Blackburn Varnish Company, were carried on in behalf of that corporation by its president, F. A. Hellebush, and its secretary-treasurer, J. G. Lippelman, - principally by Hellebush. The negotiations finally resulted in Charles R. Cook, president of*1620 the Cook Paint and Varnish Company, coming to Cincinnati with his attorney, where the deal was closed April 20, 1927. No papers had been signed nor binding contract entered into prior thereto. The following steps were taken in consummation of the transaction: On April 20, 1927, at a special meeting of the stockholders held for that purpose and at which all stock was represented in person or by proxy, the following resolution was unanimously adopted:
Be it resolved, that the Blackburn Varnish Company be dissolved and liquidated, and that all the assets of the Company, whether real, personal, or mixed, and wheresoever situated, be transferred, assigned and conveyed to Fred A. Hellebush and John G. Lippelman, as Trustees, for the stockholders of The Blackburn Varnish Company, with full power and authority in said Trustees to liquidate said assets, and for the purpose thereof to sell, transfer and convey all or any part of said property, upon such terms, for such price, and at such time or times as in their judgment and discretion seems best. And/or to *662 distribute all or any part of said property in kind pro-rate to the said stockholders and upon final liquidation to distribute*1621 pro-rata to said stockholders whatever of said property or the proceeds of the sale thereof may then be in the custody or control of said Trustees, after deducting the expense incurred by such Trustees in the liquidation thereof; that said Trustees be and they are hereby authorized to grant the right to the use of the name The Blackburn Varnish Company, either as a trade name or as the name of a new corporation, and that they be and are authorized to execute and deliver any and all such instruments and to do any and all such things as in their judgment are proper to effectuate this resolution; that the officers of The Blackburn Varnish Company be and they are hereby authorized and directed to take such legal steps as may be necessary or proper to procure the dissolution of The Blackburn Varnish Company, to convey the property to the Trustees as herein provided, and to fully effectuate this resolution.
On the same day in order to carry out the above resolution and in pursuance thereof the officers of the corporation executed and delivered a bill of sale for all of the personal property of the corporation to Fred A. Hellebush and John G. Lippelman as trustees for the stockholders, *1622 as follows:
BILL OF SALE.
Blackburn Varnish Co. To Fred A. Hellebush et al.
KNOW ALL MEN BY THESE PRESENTS:
That The Blackburn Varnish Company, a corporation organized and existing under the laws of the State of Ohio, with its principal office in the City of Cincinnati, Hamilton County, in said State of Ohio, in consideration of the sum of One ($1.00) Dollar and other good and valuable considerations to it paid by Fred A. Hellebush and John G. Lippelman, Trustees for the stockholders of said The Blackburn Varnish Company, the receipt whereof is hereby acknowledged, do hereby sell, assign, transfer, grant, convey, set over, and deliver to the said Fred A. Hellebush and John G. Lippelman, as Trustees for said the stockholders of The Blackburn Varnish Company, their heirs and assigns, forever all of the machinery, tools, equipment, automobiles, furniture and fixtures, supplies and stocks of merchandise, good will, formulae, labels, trade marks, trade names, copyrights, patents, patented articles, licenses, privileges, permits of every kind or character, franchises, real estate conveyed by a separate instrument, cash, accounts and bills receivable, books of account, stock transfer*1623 book or books, minute book or books, and all other assets of said The Blackburn Varnish Company not specifically mentioned herein;
* * *
At or about the same time on the same day the corporation executed and delivered its deed to these trustees designating them as trustees for the stockholders, conveying in fee simple the real estate of the corporation, which deed is in the usual form, but not deemed necessary to set out here in full.
Following these conveyances by the corporation of all its assets to F. A. Hellebush and John G. Lippelman as trustees for the stockholders of Blackburn Varnish Company, an agreement was entered into between them, designating themselves as trustees for the stockholders of the Blackburn Varnish Company, the Cook Paint and *663 Varnish Company and the Southern Ohio Savings Bank and Trust Company, by which the trustees agreed to sell and the Cook Paint and Varnish Company agreed to buy the real estate and all personal property formerly belonging to the Blackburn Varnish Company, except cash and accounts and bills receivable. The agreement, omitting parts which are not regarded as material, is as follows:
This agreement executed in triplicate*1624 and entered into this 20th day of April, 1927, by and between F. A. Hellebush and J. G. Lippelman, Trustees for the stockholders of The Blackburn Varnish Company, a corporation organized under the laws of Ohio, hereinafter referred to for convenience as the trustees, and the Cook Paint and Varnish Company, a corporation organized under the laws of Missouri, hereinafter referred to for convenience as the buyer, and the Southern Ohio Savings Bank and Trust Company of Cincinnati, Onio, hereinafter referred to for convenience as Escrow Agent.
WITNESSETH the following agreements:
1. The trustees agree to sell, convey and transfer to the buyer, and the buyer agrees to buy all of the land, buildings, machinery, tools, equipment, automobiles, furniture and fixtures, supplies and stock of merchandise, good will, formulae, labels, trade marks, trade names, copyrights, patents, contracts for the purchase of merchandise and all other property of every kind and character to which the trustees have received title from The Blackburn Varnish Company, wherever said property is located, except only cash, accounts and bills receivable. The trustees hereby representing that they are duly and legally*1625 authorized to sell said property.
2. Concurrently herewith the trustees have executed and delivered to the Escrow Agent a deed to the real estate to be conveyed and also delivered to the Escrow Agent an instrument of conveyance of all of the balance of the property sold and the buyer concurrently with the execution hereof deposits with the Escrow Agent the sum of $100,000.00, to apply on the purchase price of the property sold, which instrument of conveyance and cash are to be delivered when and as hereinafter provided.
3. An inventory of the merchandise herein agreed to be sold has been taken by Ernst & Ernst, certified public accountants, and for such merchandise the buyer is to pay the amount fixed by Ernst & Ernst as the value of such merchandise, the inventory of raw material being based upon cost or market price at the time of taking such inventory, whichever is lower, and inventory of manufactured products, being based upon cost or market price of raw material at the time of taking such inventory, whichever is lower, plus 20%, such inventory shall include only salable merchandise.
For all of the balance of the property sold except merchandise, the buyer is to pay*1626 the sum of $172,799.19, which said sum together with the value fixed by Ernst & Ernst on the inventoried merchandise, shall constitute full purchase price of all property and rights of every kind herein sold by the trustees to the buyer.
4. The trustees represent and warrant as an inducement to the making of this sale the following:
(A) That there are no liens or incumbrances of any kind or character on said property sold; that there are no suits pending, the purpose of which is to establish or undertake or purport to establish, any liens or incumbrances upon said property and that there are no facts or circumstances existing at this time out of which any liens or incumbrances on said property may accrue.
(B) That all taxes of any kind or character on said property which can be paid at this time have been paid.
*664 (C) That the trustees have good title to all the property sold; that they have full authority to sell and convey the same to the buyer, free and clear of all incumbrances of any kind or character.
(D) That the net earnings of the business conducted by The Blackburn Varnish Company after deductions for depreciation as shown by the books of the said*1627 company and after the deduction of income tax of all kinds were for the year of 1924, the sum of $ ; for the year 1925, the sum of $ ; for the year of 1926, the sum of $ .
(5) The buyer assumes no liabilities of any kind or character of the Blackburn Varnish Company save and except the liabilities for certain contracts for the purchase of raw material and merchandise, a list of which contracts are hereto attached, marked Exhibit "A" and identified by the signatures of the trustees and the president of the buyer respectively.
(6) The buyer shall have the right to use the name of The Blackburn Varnish Company as a trade name or to incorporate or cause to be incorporated under said name or other similar name in the State of Ohio and the trustees will cause said, the Blackburn Varnish Company to execute such written consent as may be necessary, or in the opinion of the buyer, advisable for such purpose. The trustees further agree that The Blackburn Varnish Company will not hereafter engage in the varnish and paint business and as a part of the consideration hereof the trustees agree to procure a written agreement to that effect from said, The Blackburn Varnish Company if the buyer*1628 so desires.
(7) The trustees agreed to deliver immediately to the buyer all of the books, copies of invoices during the year 1926 from which customers ledgers were posted, and records showing the outstanding accounts, and bills receivable belonging to the Blackburn Varnish Company as of the date of this contract connected with the business heretofore conducted by that company and the buyer is to use reasonable diligence in the ordinary course of business to collect said accounts and bills receivable and to make weekly accounting to the trustees for all monies received for said bills and accounts. The buyer, however, is not required to institute suit on any of said accounts or bills receivable, nor to incur any expense nor to do anything in connection therewith except such things as may properly be done in its usual course of business in collecting such accounts or bills receivable without suit. The service rendered by the buyer in connection with collection of said accounts and bills shall be without compensation to it.
* * *
(10) When the balance of the purchase price hereunder shall be deposited by the buyer with the Escrow Agent, the Escrow Agent shall deliver to the trustees*1629 the purchase price and deliver to the buyer the deed and bill of sale which are deposited concurrently with the execution hereof.
(11) The trustees delivered to the buyer on April 20, 1927, possession of all of the property sold and pending the consummation of the sale by the delivery of the instruments of conveyance and the purchase price, as herein provided, the buyer shall have the right to conduct the business and use, handle and dispose of said property or any part of it at such time and in such way as it sees fit as the absolute owner thereof.
(12) F. A. Hellebush, R. N. Mitchell and J. G. Lippelman each being substantially interested in the properties sold, and as part of the inducement to the sale of said properties agree each for himself, not to engage for a period of four years from the date hereof in the United States of America, either directly *665 or indirectly, in the paint or varnish business, or in any allied business competing with the buyer, without the written consent of the buyer. Each of said persons agree to remain with the buyer until July 1, 1927, rendering to the buyer assistance of the character heretofore furnished respectively by them in the*1630 operation of the business of The Blackburn Varnish Company in the usual way, the compensation to be received by said persons to be agreed upon hereafter with the buyer. Each of said persons have signed this instrument as evidencing their agreement to the effect stated in this paragraph.
In witness whereof the respective parties have executed this instrument the date first above written.
[Signed] FRED A. HELLEBUSH
JOHN G. LIPPELMAN
Trustees for the stockholders of The Blackburn Varnish Company.
COOK PAINT AND VARNISH COMPANY
By CHAS. R. COOK
President.
SOUTHERN OHIO SAVINGS BANK & TRUST CO.
By [Signature illegible]
FRED A. HELLEBUSH
JOHN G. LIPPELMAN
R. N. MITCHELLIn accordance with the terms of the agreement on April 20, 1927, the trustees, designating themselves as trustees for the stockholders of the Blackburn Varnish Company, conveyed by bill of sale all the personal property except cash and accounts and bills receivable to the Cook Paint & Varnish Company, and on May 14, 1927, executed and delivered their deed, as trustees for the stockholders, conveying the fee simple title to the realty formerly belonging to the Blackburn Varnish*1631 Company to the purchaser, Cook Paint and Varnish Company.
The Blackburn Varnish Company was dissolved under the laws of Ohio on June 2, 1927. The entire consideration paid by the purchaser was $269,175.82, which was paid to the trustees. The trustees, having sold the assets to the Cook Paint and Varnish Company, distributed the net returns to the stockholders, and petitioner Hellebush received $126,210.04, which showed a capital net gain by him of $91,765.04 over and above the cost of the shares acquired by him from time to time of the Blackburn Varnish Company. Petitioner Hellebush for the year 1927 included in his income-tax return said gain and paid income tax thereon.
Nothing was paid to the corporation, Blackburn Varnish Company. About $9,000 of liabilities existed against the Blackburn Varnish Company at the time it ceased business, but they were paid by the trustees prior to dissolution. The accounts and bills receivable were collected by the Cook Paint and Varnish Company and turned over to the trustees, who used them in the payment of expenses and liabilities, or distributed them to the stockholders.
*666 The respondent held these transactions to be a*1632 sale by the Blackburn Varnish Company, resulting in a capital gain of $85,530.86, and computed the deficiency against the corporation as follows:
| Period January 1 to April 19, 1927. | |
| Net income reported | $6,186.99 |
| Additions: | |
| 1. Legal fees | 5,000.00 |
| 2. Gain on sale of assets | 85,530.86 |
| Net income corrected | 96,717.85 |
| Explanation of Adjustments. | |
| 1. The reduction for legal fees has been reduced by $5,000 reduction in the account of Lyon and Bradford. | |
| 2. Sale price | 269,175.82 |
| Book value of assets sold | 183,644.96 |
The gain on sale of assets by the trustees has been included in taxable income. (Article 548, Regulations 69.)
The deficiency was duly assessed against the corporation and remains unpaid.
OPINION.
BLACK: At the hearing a motion was made by respondent to dismiss proceeding Docket No. 37032 brought by Fred A. Hellebush and John G. Lippelman, designating themselves as trustees for the stockholders of the Blackburn Varnish Company, petitioners, on the ground that no deficiency had been determined against them as such trustees and that the Board was without jurisdiction.
The deficiency notice from which Fred A. Hellebush and*1633 John G. Lippelman appeal in Docket No. 37032 was not addressed to them as trustees, but was addressed to the Blackburn Varnish Company, in its corporate capacity. Their petition is captioned, "Appeal of Fred A. Hellebush and John G. Lippelman, Trustees for the stockholders of the Blackburn Varnish Co. (dissolved)." In their averment in the petition, seeking to show jurisdiction of the Board, petitioners say: "The petitioners are trustees for the stockholders of the Blackburn Varnish Company which was an Ohio corporation with its principal offices at Cincinnati, Ohio, and which was dissolved in June 1927." The deficiency notice was mailed to Blackburn Varnish Company on February 6, 1928, and the petition in Docket No. 37032 was filed with this Board April 5, 1928. The stockholders of a dissolved corporation can only be held liable for the tax of such corporation by reason of being transferees of its assets. Other dockets in this proceeding involve the liability of these stockholders, as transferees, but Docket No. 37032 has nothing *667 to do with the question of transferees. Docket No. 37032 should, accordingly, be dismissed for lack of jurisdiction, and an order will be*1634 entered to that effect. Coco-Cola Bottling Co.,22 B.T.A. 686">22 B.T.A. 686.
The Commissioner, in his deficiency letter to the corporation Blackburn Varnish Company, disallowed $5,000 of a deduction for legal fees which the corporation had taken on its return filed for the period January 1, 1927, to April 19, 1927. Petitioners admit that this action of the respondent was correct. Therefore, so much of the deficiency as results from respondent's disallowance of this item of $5,000 is no longer in controversy and petitioners admit their liability therefor, as transferees.
The remaining question for us to decide is whether the transactions by which all the assets of the Blackburn Varnish Company, except only cash and accounts and bills receivable, were conveyed to the Cook Paint and Varnish Company, amounted to a sale by the corporation of its assets and therefore the gain therefrom should be taxed to it, or whether the transactions amounted to a distribution in kind by the corporation to its stockholders, resulting in no taxable gain to the corporation.
Respondent in the deficiency notice mailed to Blackburn Varnish Company, cites in support of his action article 548 of*1635 Regulations 69, which reads:
ART. 548. 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 section 282 and articles 1293 and 1294.) 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 upon dissolution, however they may have appreciated or depreciated in value since their acquisition. (See further articles 622 and 1545.)
Article 547, Regulations 45 (Revenue Act of 1918), is identical with the avove quoted regulation and was approved by the court as a reasonable regulation and one which should be given effect, in Taylor Oil & Gas Co. v. Commissioner, 47 Fed.(2d) 108; certiorari denied, *1636 283 U.S. 862">283 U.S. 862; affirming the Board's decision in Taylor Oil & Gas Co.,15 B.T.A. 609">15 B.T.A. 609. Articles 548 of Regulations 62 (Revenue Act of 1921) and Regulations 65 (Revenue Act of 1924) are also identical with article 548 of Regulations 69. It seems to us that the facts in the instant case are so similar to the facts in Taylor Oil & Gas Co., supra, that we are controlled by the decision of the Board and the court in that case. There, as here, the petitioners contended that by appropriate proceedings the legal title to all the corporation's property had vested in trustees for the benefit of the *668 creditors and the stockholders of the corporation, and that thereafter when these trustees conveyed the property to the buyer upon payment of the consideration which had been agreed upon, the transaction was a sale by the stockholders and not the corporation and that no taxable gain resulted therefrom to the corporation. The court, in passing upon this contention, said:
* * * Conceding for the purpose of argument that the legal title to the property vested in the trustees by the dissolution, no part of the title passed to the stockholders thereby. The*1637 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 concur in the disposition of the case made by the Board of Tax Appeals.
A trustee derives his authority from the creator of his trust. This is as true of a trustee in liquidation appointed by the corporation as of any other trustee.
The petitioners in this proceeding admit that their authority as trustees was by reason of a corporate resolution adopted at a corporate meeting of the stockholders held on April 20, 1927. This resolution must have been a corporate act to effect a legal transfer of the corporate property to the trustees and this establishes the fact that the corporation was the creator of the trust. The action taken at the stockholders' meeting April 20, 1927, appointing Hellebush and Lippelman as trustees and conveying to them the corporate property, was a corporate action, and being the act of the corporation, the trustees would necessarily be responsible to and acting for the creator of the trust, *1638 even though the stockholders were beneficially interested in the property. The trust was closed when the property was sold, the debts owing the corporation were collected, the debts of the corporation paid, and the money distributed to the stockholders. It was then that the stockholders came into the possession of the proceeds of the property. It is true, of course, that if a corporation really makes distribution of its property in kind to its stockholders, no gain or loss therefrom results to the corporation. If, thereafter, the stockholders sell the property which they have received as a distribution in kind, any gain or loss resulting from such sale would be taxable to them and not to the corporation. But that, in our judgment, is not the situation which we have before us in this proceeding. On the authority of Taylor Oil & Gas Co. v. Commissioner, supra, we affirm the action of the Commissioner on this issue. Cf. Southern Ice & Fuel Co.,10 B.T.A. 1213">10 B.T.A. 1213; James Duggan,18 B.T.A. 608">18 B.T.A. 608; *1639 George M. Brady,22 B.T.A. 596">22 B.T.A. 596.
We are aware that the decision we have reached in this proceeding appears to be in conflict with our decision in Lexington Ice & Coal*669 Co.,23 B.T.A. 463">23 B.T.A. 463. We think our decision in that case was wrong and should not be followed in the future.
Reviewed by the Board.
In Docket No. 37032 an order of dismissal will be entered for lack of jurisdiction. In Docket Nos. 37823, 37824, 37825, 37826, and 37905, decision will be entered for the respondent.
TRAMMELL, dissenting: On the facts, I am unable to agree.
GOODRICH, dissenting: It must be recognized that there are legal and proper means by which the accrual of a tax liability upon the disposition of its assets by a corporation may be avoided. Attempts to adopt such devices must be adjudged strictly upon the facts in each case. I think the facts in this case disclose that petitioners successfully availed themselves of such a method and that, therefore, Taylor Oil & Gas Co., supra, need not control our decision here. And because of a divergence of the facts in the Taylor case, the case of Lexington Ice & Coal Co., supra, *1640 and the case at bar, it is my opinion that the Lexington case is not in conflict with these other cases, and need not be overruled.
SEAWELL agrees with this dissent.