*557 1. Where a corporation, owning shares of stock of another corporation fails to accept the terms of a proposal to sell those shares, but instead distributes them to its stockholders, who in turn accept the proposal to consummate the sale, the profit derived is not taxable to the corporation and, consequently, there is no transferee liability in respect thereto.
2. Where a corporation, owning shares of capital stock of another corporation, fully consummates the sale of those shares, in its own behalf, and everything is done to bind the bargain prior to its dissolution except the actual physical receipt of the consideration, which, however, was postponed only a few days after dissolution, the income derived therefrom is taxable to the corporation and should have been included in its final return.
*141 The respondent having determined deficiencies in income tax of $203,326.03 for the period January 1 to January 25, 1926, and $510,774.34 for the period January 1 to January 8, 19268 against H. & W. Pierce, *558 Inc., and Wm. Pierce Johnson, Inc., respectively, and having proposed the liability for payment of such deficiencies against the petitioners in Docket Nos. 53637, 53636, and 53634, and in Docket Nos. 54083, 54092, and 57890, as the direct or indirect transferees *142 of the assets of these two companies, respectively, under the provisions of section 280 of the Revenue Act of 1926, we have for consideration two major questions: (1) Whether those corporations derived a taxable profit during the taxable periods from the sale of certain common capital stock of the Crown Willamette Paper Co., a Maine corporation, and, if so, (2) whether the petitioners are liable for the tax thereon.
FINDINGS OF FACT.
H. & W. Pierce, Inc. (hereinafter referred to as Pierce, Inc.), and Wm. Pierce Johnson, Inc. (hereinafter referred to as Johnson, Inc.), both dissolved, were incorporated under the laws of the State of California prior to January 1, 1925.
H. & W. Pierce, Inc., and Wm. Pierce Johnson, Inc., were stockholders of the Crown Willamette Paper Co., a corporation, organized October 1, 1914, under the laws of the State of Maine, hereinafter referred to as the Maine corporation.
*559 On January 6, 1926, a new corporation, Crown Willamette Paper Co., was organized under the laws of the State of Delaware, hereinafter referred to as the Delaware corporation. The Delaware corporation was organized with an authorized capitalization of 200,000 shares of first preferred, 41,000 shares of second preferred, and 1,000,000 shares of common stock, all classes of stock having no par value. Permission to issue these shares was granted by the State Corporation Department of the State of California on February 1, 1926. On February 4, 1926, the Delaware corporation, pursuant to the plan of reorganization finally adopted by all parties in interest, issued to Blyth Witter & Co. and the Continental & Commercial Securities Co., hereinafter referred to as the bankers, $20,000,000 aggregate principal amount of twenty-five year first mortgage sinkin fund 6% gold bonds, dated as of January 1, 1926, 200,000 shares of the aforesaid first preferred stock, and 490,000 shares of the aforesaid common stock, in consideration of $36,700,000, plus $228,248.33 for accrued bond interest and dividends on preferred stock of the Maine corporation.
On February 4, 1926, the Delaware corporation, *560 pursuant to the aforesaid plan, also issued the remaining common stock of 510,000 shares, and 41,000 shares of second preferred stock, plus $30,340,000 in cash, to the holders of common stock of the Maine corporation, in exchange for the outstanding common stock of the said Maine corporation. Under the plan, provision was also made whereunder the holders of common stock of said Maine corporation were permitted to acquire an aggregate of 51,000 shares of the first preferred stock of the Delaware corporation for a price of $90 a share. The said *143 51,000 shares were a part of the 200,000 shares of Delaweare corporation first preferred stock which were issued to the bankers.
Simultaneously with the acquisition of the Maine corporation common stock, as aforesaid, the Delaware corporation acquired all of the Maine corporation's assets, subject to existing liabilities.
On February 4, 1926, each holder of common stock of the Maine corporation received in exchange for each share of said stock owned by him, after adjustment for cash withheld by the bankers to pay additional income tax of the Maine corporation and transfer charges, cash, and stocks as follows:
| Cash | $143.9463 |
| (Subject to diminution on account of Delaware corporation first | |
| preferred stock subscription) | |
| 2/10 share of second preferred stock Delaware corporation. | |
| (Value per share $70) | 14.00 |
| 2 1/2 shares common stock Delaware corporation. | |
| (Value per share $7) | 17.50 |
| Total | 175.4463 |
*561 Negotiations looking toward the organization of the Delaware corporation and the acquisition by said corporation of the common stock of the Maine corporation were begun some time during the year 1925. On November 21, 1925, Louis Bloch, then president and one of the principal stockholders of the Maine corporation, received a proposal from the aforesaid bankers, subject to its acceptance by the holders of not less than 80 percent of the common stock of the Maine corporation, which provided for the organization of a new corporation. That proposal, after specifying the capital structure of both the existing and the proposed corporation, provided that "the new corporation shall purchase from you or from the stockholders" of the Maine corporation "not less than 80% and up to all of the outstanding common stock" of said Maine corporation, paying cash and stock of the Delaware corporation therefor, in a stated amount, "all of which common stock shall be deposited in a voting trust under a voting trust agreement." It was further provided that acceptance of the terms and provisions of that proposal on or before January 1, 1926, should constitute a binding agreement subject to the terms and*562 conditions thereof.
On November 30, 1925, Pierce, Inc., and Johnson, Inc., listed as the respective holders of 10,000 and 29,946 shares of the common stock of the Maine corporation - together with various other stockholders of said Maine corporation - gave Bloch a power of attorney to accept the proposal of November 21, 1925, aforesaid, for the purchase of their shares of common stock of the Maine corporation.
The directors and stockholders of Johnson, Inc., met on December 4, 1925, and decided to file an application for dissolution. Said *144 application was duly filed in the Superior Court of State of California, which handed down its decree of dissolution on January 8, 1926, appointing the members of the directorate "trustees for the stockholders of said dissolved corporation." In addition to the said 29,952 shares of stock which it owned at the time of its dissolution, it owned other assets, including cash, in excess of the amount of all of its indebtedness. The books of Johnson, Inc., were closed and ruled on that date.
Pursuant to the action of its directors, and finally its stockholders, at a meeting on December 22, 1925, voluntary dissolution of Pierce, Inc. *563 , was authorized and it was dissolved by court order on January 25, 1926. In addition to the 10,000 shares of common stock and 637 shares of first preferred, series A, stock of the Maine corporation, owned by that company at dissolution, it owned other assets, including cash, in excess of the amount of all of its indebtedness. Its books of account were then closed and ruled.
On December 10, 1925, Bloch issued a circular letter to the common stockholders of the Maine corporation, including Johnson, Inc., and Pierce, Inc., stating that he had received authority from 99 percent of such stockholders to accept the proposal of November 21, 1925, and urging them that in order "to close the transaction" they should deliver their common share trust certificates, duly endorsed, to the Anglo California Trust Co. Johnson, Inc., deposited its shares. In that letter Bloch stated that "in the event that the terms of said proposal are not carried out by the proposed purchasers", such certificate would be returned. He also directed another circular letter to such stockholders on December 11, 1925, seeking to determine the number of shares, if any, they wished to purchase of the 51,000 allotted. *564 Johnson, Inc., responded to this circular on December 16, 1926, ordering its allotment.
On December 16, 1925, Bloch communicated conditional acceptance of the proposal of November 21, 1925, the conditions being (a) that the proposed guarantee by the stockholders, pertaining to the quantity of timber, be waived; (b) the time for notice for the purchase by the stockholders of preferred stock should expire January 15, 1926, etc., and (c) that no change in the financial condition which will affect the marketing of the stocks and bonds of the new corporation occurring after January 15, 1926, shall relieve the purchasers of liability under their proposal.
On January 2, 1926, Bloch directed another communication to said Maine corporation stockholders, including Johnson, Inc., and Pierce, Inc., seeking approval of a modification of the original proposal to permit the withholding of a certain sum of cash to provide for the payment of probable taxes pursuant to the demands of the bankers. *145 By communications to Bloch, dated January 4, 1926, Johnson, Inc., and Pierce, Inc., gave their approval.
William Pierce Johnson, one of the appointed trustees in dissolution of Johnson, *565 Inc., wrote a letter to the Maine corporation on January 8, 1926, enclosing certificates of stock of that corporation aggregating 29,952 shares, which had been "retrieved" from escrow, duly endorsed by the trustees of William Pierce Johnson, Inc., a dissolved corporation, in whose name such shares then stood, instructing it to transfer such shares to the individual stockholders of Johnson, Inc., therein named. Such certificates were issued by the Maine corporation on January 8, 1926. On that same date the said trustees, conveyed certain tracts of its realty to Johnson, as the owner of 47,000 of the total of 50,000 shares of its capital stock, in dissolution.
The individuals - with one exception - who were the stockholders of Johnson, Inc., at the time of its dissolution, as the owners of 29,946 shares of stock of the Maine corporation, on said date, gave a power of attorney to Bloch to accept, in their behalf, the said proposal of November 21, 1925, giving him "full power to agree to such modifications in the other terms and conditions of said proposal as our said attorney in fact may deem reasonable and proper."
On January 9, 1926, the bankers wrote Bloch that the new Delaware*566 corporation had been organized, referred to his letter of December 16, 1925, hereinabove, noting certain exceptions to the terms already set forth in the proposal of November 21, 1925, and informed him of their satisfaction with such exceptions, provided it be understood that the new corporation would take over the assets of the Maine corporation as January 1, 1926. Pursuant to the request in that letter, Bloch, on the same date, January 9, 1926, noted his acceptance thereon.
The total number of issued and outstanding shares of the capital stock of William Pierce Johnson, Inc., on January 8, 1926, was 50,000. The stockholders then and the number of shares held by them, were as follows:
| Wm. Pierce Johnson | 47,000 |
| Florence Lindsay Johnson | 1,200 |
| (Wife of Wm. Pierce Johnson) | |
| Josephine Johnson Milton | 825 |
| (Daughter of Wm. Pierce Johnson) | |
| Estate of Arline Johnson Towne | 775 |
| (Daughter of Wm. Pierce Johnson) | |
| George S. Towne | 100 |
| (Son-in-law of Wm. Pierce Johnson) | |
| Maxwell C. Milton | 100 |
| (Son-in-law of Wm. Pierce Johnson) |
*146 Wm. Pierce Johnson and the other stockholders of Johnson, Inc., wrote Bloch on January 8, described themselves as the owners of*567 certain shares of stock of the Maine corporation, and made application for their allotments of first preferred stock of the Delaware corporation, as provided in letter of December 11, 1925, hereinabove.
The certificates evidencing ownership of the aforesaid 29,952 shares of common stock of the Maine corporation by Johnson, Inc., were canceled on January 8, 1926, and new certificates of the Maine corporation were issued in the individual names of the stockholders of Johnson, Inc., on the same date. Such new certificates, with one exception (Johnson having disposed of 160 shares of his 28,155 allotment to one Whitney) were canceled by transfer to the Delaware corporation on February 4, 1926.
Under date of January 9, 1926, the bankers addressed a communication to the Delaware corporation, relating to the organization of that company and to the acquisition by it of the property and assets of the Maine corporation and the acquisition from said Delaware corporation of 200,000 shares of first preferred stock, 490,000 shares of common stock, and $20,000,000 aggregate principal of first mortgage bonds. The terms of that communication were accepted by notation thereon, dated January 11, 1926, over*568 the signature of Bloch and one Goldsmith, president and secretary, respectively, of the Delaware corporation, such acceptance being pursuant to resolution of the Delaware corporation dated January 9, 1926, authorizing the officers of the Delaware corporation to accept -
* * * and that said proposition when so signed by Continental & Commercial Securities Company and Blyth Witter & Company [bankers] and a written acceptance thereof, signed by the president or vice-president and the secretary or assistant secretary of this company, shall be deemed to constitute a valid and binding agreement upon this company, and that the officers of this company shall take such action as may be necessary or proper to carry out such agreement.
On February 4, 1926, Bloch, acting as attorney in fact for the stockholders of the Maine corporation, after receiving the necessary funds from the Delaware corporation, issued checks payable to the individual stockholders of Johnson, Inc., and said Whitney, and certificates of stock of the new Delaware corporation was issued in the names of the stockholders of Johnson, Inc., and Whitney in payment for the 29,952 shares of common stock of the Maine corporation*569 which were owned by Johnson, Inc., and which were transferred on the books of the Maine corporation on January 8, 1926, to the stockholders of Johnson, Inc., as hereinbefore set forth.
The board of directors of Pierce, Inc., passed a resolution on December 9, 1925, authorizing the sale of its 10,000 shares of common stock of the Maine corporation. Certificates evidencing ownership of *147 those 10,000 shares were deposited with Anglo California Trust Co. on December 14.
Wm. Pierce Johnson, Josephine Johnson Milton, and Florence Lindsay Johnson, among others, were stockholders of Johnson, Inc., at dissolution, when they received assets having fair market values of $8,988,927.36, $157,784.36, and $229,504.52. Johnson died in August 1926, and the assets of his estate have been fully distributed, of which Florence Lindsay Johnson, his widow, and Josephine Johnson Milton, his daughter, each received assets in excess of the fair market value of $750,000.
Wm. Pierce Johnson, Sally McKee Spens Black, and Sophia Gleason Pierce were stockholders of Pierce, Inc., at dissolution and they received assets therefrom in the respective fair market values of $2,751,213.35, $413,371.48, *570 and $416,055.72.
Both Pierce, Inc., and Johnson, Inc., indicated in their returns, filed for years immediately preceding the period under consideration, that such returns were prepared upon the "accrual" basis of accounting. Notwithstanding permission appears not to have been granted by the respondent to change that basis, they filed their respective returns for the period under consideration, indicating therein that such returns were prepared upon the "cash" basis of accounting.
In addition to the above and foregoing, the parties have stipulated the following:
The Commissioner of Internal Revenue, on March 8, 1930, assessed a deficiency against said Wm. Pierce Johnson, Inc., in the amount of $510,774.34, for the period January 1 to January 8, 1926, together with interest in the sum of $91,148.73.
The Commissioner of Internal Revenue, on March 8, 1930, assessed a deficiency in tax against H. & W. Pierce, Incorporated, in the amount of $85,902.60 for the period January 1 to January 25, 1926, together with interest in the sum of $15,329.49.
The aforesaid deficiencies, together with interest, assessed against the said corporations, have not been paid corporations ever since*571 their dissolution have been and are without assets to pay said assessments. It is admitted by the Commissioner of Internal Revenue that in these proceedings, under his theory of the case, there remains unpaid from Wm. Pierce Johnson, Inc., the sum of $435,524.28, plus interest, and from H. & W. Pierce, Incorporated, the sum of $56,440.37, plus interest.
It is also stipulated that "If the decision of the Board is that Wm. Pierce Johnson, Inc., so sold said stock, it is agreed that the deficiency in the case of Wm. Pierce Johnson, Inc., is $435,542.28 [$436,524.28], and if the decision of the Board is that H. & W. Pierce, Incorporated, so sold said stock, it is agreed that the deficiency in the case of H. & W. Pierce, Inc., is $56,440.37."
In Sophia Gleason Pierce Brownell, Docket No. 53637, it is alleged in the petition and admitted in the answer that the controversy *148 is petitioner's liability for the income tax of H. & W. Pierce, Inc., a dissolved corporation, as a transferee of the assets of the estate of Sophia Gleason Pierce, a transferee of the assets of said corporation.
In George S. Towne and Josephine Johnson Milton, executors of the will of William Pierce*572 Johnson, deceased, Docket No. 53634, the notice of deficiency was addressed to the estate of William Pierce Johnson, deceased, the first paragraph of which reads as follows:
You are advised that the determination of your tax liability for the period 1/1/26 to 1/25/26 discloses a deficiency of $203,326.03 as shown in the statement attached, as transferee of H. and W. Pierce, Incorporated, San Francisco, California, under section 280 of the said act.
OPINION.
MORRIS: We must first determine whether the sale of the Maine corporation stock under the proposal of November 21, 1925, in so far as these petitioners are concerned, was made by Johnson, Inc., and Pierce, Inc., as the holders and owners of 29,946 and 10,000 shares, respectively, or whether what transpired constituted a sale of those shares to the said Delaware corporation by the individual stockholders of Johnson, Inc., and Pierce, Inc.
One factor is clear and that is that the proposal of November 21, 1925, was originally made to Johnson, Inc., as the stockholder of the Maine corporation and not to its stockholders, and that it continued a party to the proposal until January 8, 1926. In fact there was no time prior*573 to dissolution and distribution of such stock by Johnson, Inc., on January 8 when its stockholders had any power to negotiate the sale or exchange of that stock. Our inquiry, therefore, is whether what transpired between November 21, 1925, the date of the proposal, and January 8, 1926, when Johnson, Inc., dissolved and distributed the stock of the Maine corporation to its stockholders, was sufficient to constitute an executed sale of the Maine corporation stock under that proposal.
Johnson, Inc., and Pierce, Inc., joined in a power of attorney to Bloch on November 30, 1925, to accept the proposal for the purchase of their shares of common stock of the Maine corporation. On December 10, 1925, Bloch notified the stockholders of the Maine corporation that 99 percent of such stockholders had authorized him to accept the proposal. Indicative of the fact that the transaction was still in an executory state he said, in that communication, that if the proposal should not be carried out by the purchasers the certificates of the stockholders would be returned to them. On December 16, 1925, Bloch advised the bankers that the proposal was acceptable, with three noted exceptions of, what*574 appears to have been, a substantive nature. Again, on January 2, 1926, Bloch sought the approval *149 of a further modification of the original proposal. Johnson, Inc., gave its approval of this modification on January 4, 1926, but what action other stockholders took respecting that we do not know.
Then came the dissolution of Johnson, Inc., on January 8, 1926, which had been in contemplation since December 4, 1925 - application for voluntary dissolution having been filed at or about that time - and the appointment of its directorate as "trustees for the stockholders of said dissolved corporation." Although the record does not entirely clear up a dispute between the parties about the matter of the transfer of the Maine corporation shares owned by Johnson, Inc., on January 8 to its stockholders, it seems reasonably clear that the shares, which had been placed in escrow, were "retrived" therefrom and that the cancellation of those shares and the issuance of new shares actually took place on January 8, 1926.
On the same date that dissolution of Johnson, Inc., took place the individual stockholders, according to their then respective shareholdings in the Maine corporation, *575 empowered Bloch to accept the proposal of November 21, 1925, in their behalf, and they extended him full power to agree to all modifications of the original proposal as he should deem reasonable and proper. After the dissolution and on January 9, 1926, the bankers notified Bloch that the Delaware corporation had been organized; referred him to his letter of December 16, 1925, noting three exceptions to the original proposal, and informed him of their satisfaction therewith, at the same time making a further slight proviso that the new corporation take over the assets of the Maine corporation "as of" January 1, 1926. Bloch noted his acceptance to this further proviso on the same date. On January 11, 1926, the proposal, in response to a communication from the bankers, was accepted by the Delaware corporation pursuant to resolution on that same day.
On February 4, 1926, Bloch, acting as attorney for the stockholders of the Maine corporation, having received funds from the Delaware corporation, issued checks payable to the individual stockholders of Johnson, Inc., and the certificates of stock of the new Delaware corporation were issued in their names in payment for the 29,952 shares*576 of stock of the Maine corporation formerly owned by Johnson, Inc.
The respondent argues that "where the sale of corporate assets has been agreed upon before dissolution of the corporation and before the creation of a trust, a sale by the trustee is a sale by the corporation", citing ; Fred A. Hellebush et al., Trustees, 24 T.B.A. 660; affd., ; ; affd., ; ; . The answer to this argument is twofold - first, in our opinion. *150 the sale of these shares had not been agreed upon before the dissolution of Johnson, Inc., and, secondly, the trustees, after dissolution, in so far as we are informed, had nothing to do with the sale of the shares distributed to stockholders of Johnson, Inc., on January 8, 1926. The transaction, in so far as those shares were concerned, was carried on by Bloch, a third party, under power of attorney running directly from the individual stockholders of Johnson, Inc. For those*577 reasons we are not here concerned with the statutes of California governing the period during which the trustees may act either for the corporation or for the stockholders themselves. Therefore, , has no application.
Furthermore, even if we were convinced that Johnson, Inc., and Pierce, Inc., were, for tax purposes, upon the accrual basis of accounting, we, nevertheless, would hold that sufficient had not been done prior to the dissolution of Johnson, Inc., to constitute a sale which would result in a taxable profit to that company during the period January 1 to January 8, 1926.
Respecting Pierce, Inc., however, a different conclusion must be reached for the reason, in our opinion, that sufficient had been accomplished in its behalf prior to dissolutiion on January 25, 1926, to render the profit derived from the sale of its 10,000 shares taxable to it. If it should be assumed that the company's return for the final period of its existence was properly prepared and filed on the cash receipts and disbursements basis we would, nevertheless, be of the same opinion - believing as we do that a binding contract was entered*578 into prior to its dissolution to sell the 10,000 shares of stock of the Maine corporation, which it then owned - for the reason that a return purporting to be final, in order to be valid, must include in such final period all known items of income. A corporation may not effect a transaction on one day, out of which a known profit has resulted, and by reason of the fact that actual payment will not be forthcoming until after such dissolution takes place, a day or so later, exclude that income from its said final return, notwithstanding its basis of accounting may be cash receipts and disbursements. In our opinion, as to Pierce, Inc., everything necessary had been done prior to its dissolution in order to compel the payment of the consideration.
Having found that the deficiency asserted against Johnson, Inc., was erroneous there is, of course, no transferee liability against those alleged transferees. As to the liability of the alleged transferees of Pierce, Inc., the respondent, having the burden of proof, has failed to show the transfer of any assets to the petitioner in Docket No. 53637 from the estate of Sophia Gleason Pierce, who was a stockholder and received assets upon*579 the liquidation of that company. *151 Therefore the proposed liability against her can not be sustained. The same conclusion must be reached in Docket No. 53634 on the authority of ; affd., . As to the petitioner in Docket No. 53636, the evidence shows that Pierce, Inc., was dissolved, its assets distributed; it was left without funds to pay the asserted deficiency; and, since she received $413,371.48, she is liable therefor under section 280 of the Revenue Act of 1926. .
Reviewed by the Board.
Judgment will be entered for the petitioners in Docket Nos. 54083, 54092, 57890, 53637, and 53634, and for the respondent in Docket No. 53636.