*60 Decisions will be entered under Rule 50.
Held, an agreement entered into by petitioner corporation to sell substantially all of its assets to a new corporation provided for the sale of its entire work-in-process inventory to the new corporation, thereby satisfying the requirements of section 337(b)(2) in respect of the work-in-process and bringing into play the nonrecognition provisions of section 337(a), I.R.C. 1954.
*533 The Commissioner determined deficiencies in income tax against the Luff Co. and against the remaining petitioners as transferees of the assets of the Luff Co. for the years 1957 and 1958 in the amounts of $ 2,277.04 and $ 8,960.98, respectively. A portion of the deficiency asserted for 1957 was due to the recomputation by the Commissioner of the net operating loss to be carried back from the year 1960. The only issue remaining for decision is whether there was a sale by the Luff Co. of its entire work-in-process inventory to one person in 1960 within section 337(b)(2), I.R.C. 1954, so as to bring into play the provisions for nonrecognition of gain on a sale by a liquidating corporation contained in section 337(a).
FINDINGS OF FACT
The stipulation of facts*62 filed by the parties together with the exhibits attached thereto is incorporated herein by this reference.
The Luff Co. (hereinafter referred to as petitioner) 2 was a corporation organized under the laws of Pennsylvania with its principal place of business at 401 North Broad Street, Philadelphia. It was formally dissolved on October 26, 1962. Petitioner kept books of account and prepared its income tax returns on a calendar year basis using an accrual method of accounting. Its income tax returns for the years 1957 through 1960 and the short period ended June 26, 1961, were filed with the district director of internal revenue in Philadelphia.
Petitioner was engaged*63 in the business of fabricating and selling to order small tools, jigs, and dies, primarily to companies in aircraft and related industries. On June 27, 1960, petitioner, then named Template Reproduction & Engineering Co., adopted a plan of complete liquidation to be completed within 1 year. At that time petitioner's officers were as follows:
| Chief executive | Ralph G. Luff |
| President | Martin J. Luff |
| Treasurer | Ralph G. Luff, Jr. |
| Assistant treasurer | August P. Schulz |
| Vice president | Thomas A. Luff |
*534 Ralph G. Luff and Martin J. Luff were brothers. Ralph G Luff, Jr., was Ralph's son. Thomas A. Luff (hereinafter called Thomas) was Ralph's nephew and Martin's son. Thomas was petitioner's general manager.
All of petitioner's stock was owned by Luff Associates, a partnership. Neither Thomas nor his father was a member of Luff Associates. Its members were:
Ralph G. Luff (managing partner)
John H. Luff
Ralph G. Luff, Jr.
Willam G. Luff
Samuel B. Fortenbaugh, Jr. (a limited partner)
Ralph G. Luff died on September 3, 1961.On July 2, 1960, pursuant to the June 27, 1960, plan of complete liquidation, a written agreement was entered into between petitioner and Luff Associates, *64 and Thomas, acting as a promoter in behalf of a proposed corporation, providing for a sale of substantially all of the assets of petitioner to the proposed corporation. On or about the same date, petitioner amended its articles of incorporation to change its corporate name to the Luff Co., so that the proposed corporation would be able to incorporate under petitioner's prior corporate name, Template Reproduction & Engineering Co. Thomas was to be the principal stockholder (more than two-thirds of the voting shares) of the proposed corporation.
In setting forth the purpose of the agreement it was stated therein that the petitioner was desirous of selling all of its physical assets including its goodwill and its corporate name, and that the proposed corporation was desirous of purchasing the same. Certain relevant portions of the agreement are as follows: 3
IV. SELLER agrees to sell and BUYER agrees to purchase as at the close of business on the 2nd day of July, 1960 the following:(a) All of the physical assets of COMPANY including but not limited to the physical assets listed in a written appraisal of the assets of COMPANY prepared by the Federal Appraisal Company under date of*65 May 31, 1960, a copy of which has been furnished BUYER;
(b) The name "Template Reproduction and Engineering Company";
(c) The goodwill of COMPANY, if any, and all rights to the business of COMPANY including all customer's accounts, records and files, purchase order files and records, sales records, manufacturing records and all other books, records and documents in any way pertaining to purchases and sales and the manufacture of products, and all patents, patent rights, trademarks, trade names, copyrights, grants or rights, patterns, designs, licenses, license agreements, franchises and the like.
(d) Office supplies and equipment, expendable tools and all other equipment, whether listed in the appraisal referred to in sub-paragraph (a) hereof or not.
*535 V. (a) This sale includes only the assets herein referred to and does not include the manufacturing inventory of COMPANY. It is expressly understood and agreed that SELLER is not selling and BUYER IS NOT PURCHASING or assuming any liabilities, debts or obligations of SELLER except as set forth in paragraph X (d) hereof.
* * * *
VI. The purchase price shall be $ 120,000.00 which BUYER agrees shall be paid in the following manner:
*66 (a) Two thousand dollars shall be paid in cash at closing. Thereafter, on the first day of each month beginning August 1, 1960 and continuing for a period of three months, PROPOSED CORPORATION shall pay to PRINCIPALS the sum of $ 1,000.00. Thereafter, on the first day of each month beginning November 1, 1960 and continuing for a period of fifty seven months, PROPOSED CORPORATION SHALL PAY TO PRINCIPALS the sum of $ 2,000.00, and on the first day of the fifty eighth month shall pay the sum of $ 1,000.00 which shall be the final payment.
(b) The parties agree that the physical assets of COMPANY herein sold have a value of $ 119,900.00 and that the corporate name and goodwill as referred to in paragraph IV (b) and (c) have a value of $ 100.00.
* * * *
VII. As collateral security for the payment of the monthly purchase installments referred to in paragraph VI, PROPOSED CORPORATION will, at closing, execute and deliver to SELLER a Security Agreement in the form attached hereto on the property described in paragraph IV(a), title to which shall remain in SELLER until all payments herein required have been made. A financing statement shall be filed evidencing the interest of the parties*67 in said property. PROPOSED CORPORATION covenants that it will, so long as it is indebted to SELLER at the request of SELLER, execute and deliver any other instruments necessary, in the opinion of counsel for SELLER, to complete or perfect the lien for the unpaid purchase price referred to in this paragraph.
* * * *
IX. At the closing SELLER shall deliver to BUYER, the following:(a) Bills of Sale, and all other necessary documents denoting and evidencing the transfer to PROPOSED CORPORATION of all of the assets being purchased hereunder with the usual affidavits of title, free and clear of all claims, liens, mortgages and encumbrances, except that legal title shall remain in SELLER to secure payment of the purchase money as set forth in the SECURITY AGREEMENT referred to in Paragraph I [VII] hereof.
* * * *
(g) A schedule of the work in process, as of the close of business on the date of closing, containing a description of each contract, all costs incurred to that point as reflected on COMPANY'S cost cards and the selling price of each such contract. Said schedule is to be approved and signed by representatives of both SELLER and BUYER.
(h) An inventory of all material on hand *68 as of closing date approved and signed by representatives of SELLER and BUYER.
* * * *
X. Effective at the close of business on closing date as herein provided:* * * *
(b) All inventory then on hand, as reflected by the written inventory referred to in paragraph IX (h) will remain on the premises but same is not being purchased *536 hereunder by BUYER; however, it is the intention of the parties that BUYER will purchase said inventory as needed at its original purchase price.
(c) Accounts receivable shall be collected by BUYER, and the funds shall be forthwith paid to SELLER except that on contracts which are in process but which have not been completed as of closing date the funds shall be divided and paid to SELLER by BUYER as soon as practicable upon receipt thereof in accordance with the provisions of Paragraph X (d) hereof.
(d) All work then in process on contracts undertaken by COMPANY prior to closing date will be completed by BUYER. As of the closing date the cost cards of COMPANY will be marked to indicate the costs already incurred by SELLER up to that date. Further costs incurred on such contracts shall be borne by BUYER and entered accordingly on the said cost cards. *69 When the proceeds of each such contract are received by BUYER such proceeds shall be divided between SELLER and BUYER in proportion to the costs incurred by each as reflected on said cards. For the purpose of establishing costs for this work in process, BUYER shall use the same standard cost method as now employed by SELLER with respect to all costs. A schedule shall be prepared as of closing date of all such contracts, and such schedule shall contain, among other information, the costs incurred by SELLER up to that date. The said schedule shall be approved and signed by representatives of both SELLER and BUYER.
* * * *
XV. All controversies arising under or in connection with, or relating to any alleged breach of this Agreement shall be settled in accordance with the law of the Commonwealth of Pennsylvania.
*70 The written appraisal of petitioner's physical assets prepared by the Federal Appraisal Co. as of May 31, 1960, referred to in paragraph IV(a) above, included machinery and its installation and purchases, tooling equipment, furniture and fixtures, tenement improvements, and, in fact, all capital plant items. It did not include real estate, "current assets," or intangible assets. The term "physical assets," as used in the agreement, was not intended to include either raw material or work-in-process. The phrase "manufacturing inventory," as used in paragraph V (a) of the above agreement, refers only to the inventory of raw material. It does not include work-in-process.
On July 2, 1960, the work-in-process consisted of 75 different items being fabricated to specific manufacturing orders. Of these items, there were 10 on which no work had been done and to which no costs had been allocated. The remaining items were in various stages of manufacture, some being in little more than the raw material stage, and others being almost completed. Each item was a specialty item involving extreme precision in grinding and conformance to specified tolerances. Each item was fabricated under *71 a written contract consisting of a written purchase order submitted by the customer, and in most cases, an acknowledgment of that order represented by a copy of the purchase order signed by petitioner and returned to the customer. Many of these contracts were based upon oral or written quotations as to price furnished by petitioner at a customer's request. All of the terms and conditions of each contract were contained in the *537 written purchase order. There were 16 customers involved in the purchase of 1 or more of the 75 items included in work-in-process. The new corporation, in taking over the premises and equipment of the Luff Co. on July 2, 1960, as hereinafter set forth, took possession of the work-in-process items together with the materials relating thereto, cost cards, etc., and proceeded to complete such items. It took 4 or 5 months on an average to complete each work-in-process item, and the longest time it took to complete any of these items was less than 9 months.
Most, if not all, of these 75 contracts provided in substance that neither the contract, payments to be made under the contract, work to be performed under the contract, nor any other rights or obligations*72 under the contract were assignable or transferable without the consent of the parties thereto. There is no record that petitioner advised the aforesaid customers in writing that it was assigning or transferring any of the 75 contracts, nor any of its rights or obligations under them. Most, if not all, of the contracts provided in substance that the customer had the right to inspect the work-in-process items after completion and delivery to it, and if not accepted by the customer could be rejected by it for nonconformance to the specifications provided for in the contract. Furthermore, many of these contracts required that the customer consent before petitioner would be permitted to replace an item refused by the customer after its inspection.
On July 2, 1960, the new corporation, Template Reproduction & Engineering Co., took over the premises and equipment formerly maintained by petitioner, and continued to employ all of petitioner's former employees other than its officers. At that time the new corporation could not have afforded to pay a large amount of cash for petitioner's assets. The new corporation completed the 75 contracts and received from the customers moneys in payment*73 under such contracts. The same employees who had worked on the work-in-process items for petitioner before July 2, 1960, continued to work on them thereafter as employees of the new corporation. The moneys received for these items by the new corporation were apportioned between it and petitioner, as specified in part X (d) of the agreement, and the new corporation made payments to petitioner by means of 32 separate checks between July 28, 1960, and March 10, 1961. Thirty of these payments, totaling $ 34,099.46, were received by petitioner on various dates from July 28, 1960, to December 27, 1960. The remaining two payments were received on February 5, 1961, in an amount of $ 5,069.54 and on March 10, 1961, in an amount of $ 668.18. The total payments to petitioner, the Luff Co., were therefore in the total sum of $ 39,837.18, against which it had costs, excluding selling and administrative overhead, aggregating $ 20,410.18, resulting in a net profit of $ 19,427.
*538 OPINION
The sole issue before us is whether the Luff Co. is entitled, under section 337 of the 1954 Code, 4*76 to nonrecognition of the $ 19,427 profit realized by it in respect of the work-in-process items which*74 the new corporation completed. Section 337(a) provides in substance that where a corporation distributes all of its assets within a 12-month period beginning with the adoption of a plan of complete liquidation, no gain or loss shall be recognized in respect of any sales of property by it during that 12-month period. There is no dispute that the various requirements of section 337(a) have been met here. However, section 337(b)(1)(A) makes subsection (a) inapplicable in the case of stock in trade or property which would properly be included in closing annual inventory, as well as property held primarily for sale to customers in the ordinary course of business. And here, too, there is no dispute between the parties that the work-in-process items are covered by the terms of subsection (b) (1) (A). But the pivotal provisions in this case are contained in subsection (b) (2), which in turn spells out an exception to (b) (1), and provides in substance that notwithstanding (b) (1), if substantially all of the property described in (b) (1) (A) is "sold * * * to one person in one transaction," then the term "property" in subsection (a) includes the property so sold. The crucial question*75 that is thus presented to us for decision is whether the work-in-process items were "sold" by the Luff Co. to the new corporation pursuant to the agreement of July 2, 1960, thus satisfying (b) (2), and rendering the (b) (1) (A) exception inapplicable, with the consequence that the nonrecognition provision of (a) would be brought into play. 5
*539 The agreement of sale, made pursuant to a plan of liquidation, involved in the present case clearly provided that all of the machinery and equipment, furniture and fixtures, name and goodwill of petitioner were being sold to the new corporation. It provided with equal clarity that the inventory of raw materials was not being sold. However, the treatment in the agreement of petitioner's work-in-process inventory was ambiguous. The matter is not free from doubt, but after a careful consideration of all of the evidence presented, we have concluded that the scales tip in petitioner's *77 favor and we find that petitioner's entire work-in-process inventory was sold to the new corporation on July 2, 1960, with the consequence that the gain from that sale comes within the nonrecognition provisions of section 337.
Paragraph V (a) of the agreement states that "Seller is not selling and Buyer is not Purchasing or assuming any liabilities, debts or obligations of Seller except as set forth in paragraph X (d) hereof." The exception to this statement of things which were not being sold contained in paragraph X (d) provides for the completion of the work-in-process items and the division of the proceeds therefrom between the buyer and the seller. Although these provisions are crudely drafted in this respect, we think that the most logical explanation for this exception is that the work-in-process was sold.
Although the work-in-process items were to be treated separately, they were sold on July 2, 1960, along with most of petitioner's other assets. The need for different treatment of the sale of the work-in-process items from the sale of petitioner's other assets was due not only to the new corporation's lack of funds, but also to difficulty in valuation of such items and the*78 possibility that any particular item might not be accepted by the ultimate purchaser. The formula adopted in the contract provided a simple and equitable means for the new corporation to finance its purchase of the work-in-process items.
In addition, it is emphasized in paragraphs V (a) and X (b) that the raw material inventory was not being sold at that time. If the work-in-process also was not being sold it would have been simple enough to so state. However, there is no such provision regarding the work-in-process.
The Government contends that only the assets classified under paragraph IV, which does not include work-in-process, were sold under the terms of the agreement. However, the agreement is divisible into two parts. First, there was the sale of petitioner's "physical assets," name, goodwill, and office supplies and equipment, under the terms *540 of paragraph IV, with payment therefor provided in paragraph VI. And second, there was a sale of the work-in-process under paragraph V(a), although crudely and inartistically drafted, with payment therefor provided in paragraph X (d). The reasons for this division have been previously stated.
The Government accepts*79 this division of the agreement, but argues that in regard to the work-in-process the agreement was not a sale but was in the nature of a joint venture. A joint venture is a combination of persons in a single enterprise in which a profit is sought without an actual partnership or corporate designation. Ray S. Robinson, 44 T.C. 20">44 T.C. 20, 34; Beck Chemical Equipment Corporation, 27 T.C. 840">27 T.C. 840, 848-849; Estate of L. O. Koen, 14 T.C. 1406">14 T.C. 1406, 1409. Whether a joint venture was formed is a question of fact to be determined in each case upon the evidence presented. "[While] all circumstances are to be considered, the essential question is whether the parties intended to, and did in fact, join together for the present conduct of an undertaking or enterprise." Hubert M. Luna, 42 T.C. 1067">42 T.C. 1067, 1077. The Court in that case, at pages 1077-1078, pointed out the following factors which are pertinent in answering that question:
The agreement of the parties and their conduct in executing its terms; the contributions, if any, which each party has made to the venture; the parties' control*80 over income and capital and the right of each to make withdrawals; whether each party was a principal and coproprietor, sharing a mutual proprietary interest in the net profits and having an obligation to share losses, or whether one party was the agent or employee of the other, receiving for his services contingent compensation in the form of a percentage of income; whether business was conducted in the joint names of the parties; whether the parties filed Federal partnership returns or otherwise represented to respondent or to persons with whom they dealt that they were joint venturers; whether separate books of account were maintained for the venture; and whether the parties exercised mutual control over and assumed mutual responsibilities for the enterprise.
In the present case both petitioner and the new corporation contributed to the production of 65 of the 75 work-in-process items. However, they did so individually and consecutively rather than collectively or concurrently. This is more indicative of a sale than a joint venture.
The Government relies upon the fact that the agreement provided for a division between the parties of the proceeds from sales of the items. *81 While such an arrangement might ordinarily be evidence of the presence of a joint venture we do not find it to be persuasive here. Clearly, it would not evidence a joint venture as to the 10 items on which petitioner had done no work and incurred no costs. An agreement calling for the division of unascertained future proceeds may be a sale of goods, services, or an entire business rather than a joint venture. See Ayrton Metal Co. v. Commissioner, 299 F. 2d 741, 748-749 (C.A. 2), and cases cited therein. Cf. Ray S. Robinson, supra at 35.
*541 None of the other above-mentioned factors weigh in favor of the Government's position. In the circumstances of the present case the method of computation provided for in the agreement was the most reasonable and equitable means of establishing the amount to be paid by the new corporation for the work-in-process.
The Government places a great deal of emphasis on the failure of petitioner to notify its customers of the sale of the work-in-process, if such a sale took place. While there was no written notice of an assignment of the contracts which petitioner had with its *82 customers, there is some indication that there may have been oral notification and aquiescence by the 16 customers whose orders made up the work-in-process. And in any event, there was at most a violation of the contractual requirements calling for the consent of the customers which did not, however, preclude the existence of a sale.
As previously indicated, the matter is not free from doubt. Yet we are satisfied on the whole that petitioner intended to and in fact did transfer its entire business, including work-in-process, to the new corporation, and that, apart from the manufacturing inventory which is not involved herein, such transfer occurred in a single transaction pursuant to the agreement of July 2, 1960.
Decision will be entered under Rule 50.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Samuel B. Fortenbaugh, Jr., Executor of the Estate of Ralph G. Luff, Deceased, Transferee, docket No. 3250-64; Samuel B. Fortenbaugh, Jr., Transferee, docket No. 3251-64; Ralph G. Luff, Jr., Transferee, docket No. 3252-64; John H. Luff, Transferee, docket No. 3253-64; and William G. Luff, Transferee, docket No. 3254-64.↩
2. Each of the remaining petitioners has agreed to liability as a transferee for income tax deficiencies of the Luff Co. for the taxable years 1957 and 1958 in the amount finally determined by this Court, together with interest thereon as provided by law. However, it is stipulated that the liability of each transferee shall not be more than $ 15,667.99.↩
3. Petitioner is referred to in the agreement as "Company." "Seller" refers to both petitioner and Luff Associates. Thomas A. Luff is the "Promoter" of the "Proposed Corporation." Thomas and the proposed corporation are referred to collectively as "Buyer."↩
4. SEC. 337. GAIN OR LOSS ON SALES OR EXCHANGES IN CONNECTION WITH CERTAIN LIQUIDATIONS.
(a) General Rule. -- If --
(1) a corporation adopts a plan of complete liquidation on or after June 22, 1954, and
(2) within the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete liquidation, less assets retained to meet claims,
then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within such 12-month period.(b) Property Defined. --
(1) In General. -- For purposes of subsection (a), the term "property" does not include --
(A) stock in trade of the corporation, or other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year, and property held by the corporation primarily for sale to customers in the ordinary course of its trade or business,
* * * *
(2) Nonrecognition with respect to inventory in certain cases. -- Notwithstanding paragraph (1) of this subsection, if substantially all of the property described in subparagraph (A) of such paragraph (1) which is attributable to a trade or business of the corporation is, in accordance with this section, sold or exchanged to one person in one transaction, then for purposes of subsection (a) the term "property" includes --
(A) such property so sold or exchanged, and↩
5. Assuming that the work-in-process items were "sold" to the new corporation, there is no dispute between the parties that "substantially all" of the pertinent (b) (1) (A) property was sold in one transaction. Conceivably, the argument might have been made that the manufacturing inventory was also pertinent (b) (1) (A) property and the failure to sell the manufacturing inventory in the same transaction made these provisions inapplicable, but no such argument has been made here, and we do not pass upon it.↩