*1238 On the facts, held, that the transaction in controversy constituted a sale by the corporation of its business and assets from which it derived a taxable profit, and not a sale by the stockholders of their shares of stock.
*89 These are consolidated proceedings for the redetermination of a deficiency in income tax in the case of the petitioner, Forest Glen Creamery Co., in the amount of $22,312.40 for the year 1927, and for the redetermination of the liability of the other petitioners as transferees of the corporation's assets, under the provisions of section 280 of the Revenue Act of 1926. The following issues were raised by the pleadings: (1) Whether the notice of deficiency in the case of the profit therefrom, or whether the transaction constituted a sale by the stockholders of their stock; (3) whether the individual petitioners are liable as transferees for a deficiency in tax of the corporation for the calendar year 1927; and (4) whether the taxes in controversy are barred by limitations.
*1239 *90 Issue (1) above was considered by the Board in a report promulgated November 26, 1935, appearing at , wherein it was held that the Board was without jurisdiction to redetermine the corporation's tax liability for the calendar year 1927, since respondent's notice of deficiency sent by registered mail to the taxpayer stated it was "for the taxable year 1926 and the period ended June 30, 1927." It was further held that there was no deficiency for the "period ended June 30, 1927", and it was therefore unnecessary to consider the other issues referred to above.
Upon review, the United States Circuit Court of Appeals for the Seventh Circuit reversed the Board's decision and remanded the proceedings "for a hearing on the merits." See . The only issue remaining for decision is whether the petitioner corporation sold its assets in 1927 and thereby realized a taxable profit, or whether the stockholders sold their stock. The facts so far as material here were stipulated by the parties.
FINDINGS OF FACT.
An escrow agreement, dated July 20, 1927, was executed by the National Milk Co., Forest Glen Creamery Co., Northwestern*1240 Securities Co., and Frank Bobrytzke, and deposited with the Chicago Title & Trust Co., as escrow agent, which agreement recited that the Forest Glen Creamery Co., an Illinois corporation, pursuant to resolutions of its board of directors and more than two-thirds of its stockholders in number and amount, had wxecuted and delivered deeds to certain parcels of real estate numbered 1, 2, 3, and 4 therein described, conveying such property to the Forest Glen National Milk Co., an Illinois corporation, which deeds were deposited with the Chicago Title & Trust Co., as escrow agent, subject to the terms and conditions of the agreement. The Forest Glen Creamery Co. also deposited with the escrow agent "bills of sale, assignments, conveyances, muniments of title and proper instruments" for the effectual transfer to the Forest Glen National Milk Co. of the full legal and equitable title to all its property, real, personal or mixed, and all issued and outstanding certificates of its capital stock, common and preferred, duly endorsed in blank, accompanied by a certificate of its secretary certifying to the identity of such stockholders in the number of shares of each of the classes of stock held*1241 by them.
Pursuant to the escrow agreement, the National Milk Co. deposited with the escrow agent deeds conveying to the Forest Glen National Milk Co. title to all of its property, real, personal, or mixed, and all certificates of stock evidencing its entire capitalization, duly endorsed in blank.
*91 The Forest Glen Creamery Co. and National Milk Co. agreed to deposit with the escrow agent all resolutions of their boards of directors and stockholders required in the opinion of the title guarantee department of the Chicago Title & Trust Co. for the purposes of owners and mortgage policies to be issued on the real estate so transferred; and in addition thereto the resignations of the boards of directors of both companies and all officers thereof.
Pursuant to the escrow agreement, the Northwestern Securities Co. deposited with the escrow agent the sum of $295,000 as part of the proceeds of a loan on all of the properties of both companies above mentioned.
Frank Bobrytzke deposited with the escrow agent under the escrow agreement a certain indenture of trust dated July 1, 1927, executed by the Forest Glen National Milk Co., conveying, pledging, mortgaging, and transferring*1242 to the Northwestern Trust & Savings Bank and Edward J. Prebis, as trustees, all of the property, real, personal, and mixed, enumerated and contained in the deeds, bills of sale, and other instruments (except stock certificates) theretofore required to be deposited by the Forest Glen Creamery Co. and the National Milk Co.
Frank Bobrytzke further agreed to deposit with the escrow agent on demand certain definitive coupon bonds issued and secured by the indenture of trust aggregating the principal sum of $350,000, or in lieu thereof a temporary bond for such amount provided for in the trust indenture, or in lieu of both, the receipt of the trustees evidencing the deposit of such bonds with them. Frank Bobrytzke also deposited with the escrow agent, pursuant to the escrow agreement, a certain second mortgage on the property covered by the trust indenture in the form of a trust deed to the Forest Park State Bank securing a note for $175,000, payable in monthly installments of $6,000 and interest on the unpaid balance.
The escrow agreement further provided in material part as follows:
When all the deposits hereinabove enumerated have been made and all the requirements hereof have*1243 been duly observed and performed by the respective parties from whom such observation and performance is [sic] due, and when the title guarantee department of the Chicago Title & Trust Company has signified its readiness to guarantee the title of the Forest Glen National Milk Company in and to parcels 1 to 4 both inclusive, hereinabove described, subject only to the first mortgage of Three Hundred Fifty Thousand ($350,000.00) Dollars and the lien of the junior mortgage of One Hundred Seventy-five Thousand ($175,000.00) Dollars, above referred to, * * * then said escrow agent is hereby directed and authorized to disburse said sum of Two Hundred Ninety-five Thousand ($295,000.00) Dollars as follows:
1: Said escrow agent shall first reserve out of said sum of Two Hundred Ninety-five Thousand ($295,000.00) Dollars the sum of Forty Thousand ($40,000.00) Dollars to cover the amount of the indebtedness of the Forest Glen Creamery Company as of June 30th, 1927, as referred to or intended to be *92 covered by Section A of Paragraph Third of the agreement between the Forest Glen Creamery Company and the National Milk Company under date of May 24th, 1927, a copy of which is hereby*1244 annexed and made a part hereof, and when such sum has been ascertained and certified by all parties hereto as correct to the escrow agent, said escrow agent shall pay an amount necessary to obtain releases of existing encumbrances on any of the properties herein referred to as parcels 1 to 4 both inclusive, and to record the same so that the lien thereof shall be fully discharged, and shall further pay to the Forest Glen National Milk Company a sum sufficient to discharge all other obligations of the Forest Glen Creamery Company, as shown by said audit, and if there shall remain any balance of said Forty Thousand ($40,000.00) Dollars, over and above the total aggregate of such payments so fixed by the audit, such balance shall be paid over to or on the written direction of the Forest Park Creamery Company, or at the option of the escrow agent to the Forest Park State Bank, as Trustee, in connection with the delivery of the second mortgage of One Hundred Seventy-five Thousand ($175,000.00) Dollars as is hereinafter provided.
2: Said escrow agent shall deduct from the balance of the cash in its possession one-half of its escrow fee * * * and out of the remaining moneys in its hands*1245 it shall pay an amount sufficient to redeem and recall and cancel all preferred stock of the Forest Glen Creamery Company issued and outstanding according to the terms thereof, * * * and on condition that before any such payments shall be made all of the capital stock issued and outstanding of said Forest Glen Creamery Company, shall at such time be in the hands of the escrow agent, endorsed in blank, with instructions to deliver the same upon the close of the escrow to the Forest Glen National Milk Company.
3: The escrow agent shall thereupon, upon being furnished with an order to that effect by the Forest Glen Creamery Company, indicating names and amounts, pay all necessary costs and expenses of bringing down the titles to the real estate hereinbefore referred to as Parcels 1 to 4 both inclusive, recording fees, attorney's fees and other expenses * * * incident to the consummation of the deal.
4: The balance of said Two Hundred Ninety-five Thousand ($295,000.00) Dollars still remaining at such time in the hands of the escrow agent, together with said second mortgage of One Hundred Seventy-five Thousand ($175,000.00) Dollars, shall be paid over to the Forest Park State Bank, *1246 as Trustee, to be by it distributed among the holders of the Common stock * * *
The contract of May 24, 1927, between the Forest Glen Creamery Co., as party of the first part, and the National Milk Co., as party of the second part, annexed to and made a part of the foregoing escrow agreement, recited that the party of the first part was the owner of an extensive creamery and milk business which the party of the second part desired to purchase and take over in its entirety, including all of the real estate, goods, chattels, property, and equipment of the first party. The contract then further provided in pertinent part as follows:
FIRST: For and in consideration of the payment to the parties of the first part, and the Stockholders of said Corporation, of the sum of FOUR HUNDERED SEVENTY-FIVE THOUSAND DOLLARS ($475,000.00) by the party of the second part, at the times and in the manner following, the party of the first part hereby agrees to cause to be transferred, assigned or delivered all outstanding capital *93 stock of said Forest Glen Creamery Company, * * * and agrees to sell, assign, transfer and convey, by appropriate and valid bills of sale, assignment of personal*1247 property, and proper deeds of conveyance of all real estate, goods, of personal property, and proper deeds of conveyance of all real estate, goods, both common and preferred, as well as deeds of conveyance, title papers, abstracts, guarantee policies, etc., to be deposited under proper escrow agreement with the Chicago Title & Trust Company.
SECOND: Said party of the second part has paid FIVE THOUSAND DOLLARS ($5,000.00) in Cash as earnest money, to be applied to the purchase price when consummated, and agrees to pay on or before August 1st, 1927, the further sum of TWO HUNDRED NINETY-FIVE THOUSAND DOLLARS ($295,000.00) in Cash, to be likewise deposited in escrow with said Chicago Title & Trust Co., when said capital stock is ready for delivery and transfer, together with its judgment note or notes, endorsed by two parties acceptable to sellers, for the aggregate sum of ONE HUNDRED SEVENTY-FIVE THOUSAND DOLLARS ($175,000.00) for the balance of said purchase price and given as part purchase money, to be payable in monthly installements of SIX THOUSAND DOLLARS ($6,000.00) each, with 6% interest payable monthly, and secured by trust deed on all of the real estate, goods, chattels and*1248 property of both Corporations, subject only to a prior bond issue of not to exceed THREE HUNDRED FIFTY THOUSAND DOLLARS ($350,000.00).
THIRD: It is mutually understood and agreed that under the provisions of said escrow agreement hereinbefore referred to, when all titles have been examined and approved by said second party, the said monies so deposited shall be paid out as follows:
(a) A sum of approximately THIRTY-FIVE THOUSAND DOLLARS ($35,000.00) to be allowed said second party, who hereby agrees to assume all of the obligations of said Forest Glen Creamery Company, to be definitely ascertained and fixed by the difference between the sum stated as Liabilities or Bills Payable and the sum stated as Bills Receivable or Cash Assets, as shown by the books of said Forest Glen Creamery Company on April 30th, A.D. 1927.
(b) The sum of approximately $76,230.00 to be paid to the holders of the preferred stock of said Corporation, being 693 shares callable at $110.00 per share.
(c) The payment of all expenses necessary in bringing down abstracts of title, title guarantee policies, one half of escrow fees, recording fees, if any, and attorney's fees, and other legal expenses incident*1249 to the consummation of said deal.
(d) The balance, together with the said mortgage notes, given as part purchase money, for the aggregate sum of ONE HUNDRED SEVENTY-FIVE THOUSAND DOLLARS ($175,000.00) hereinbefore referred to, to be paid and turned over to the holders of the common stock of said Corporation * * * to be equitably pro-rated amongst the holders of such common stock, according to their holdings in said Corporation.
On July 14, 1927, the board of directors of the Forest Glen Creamery Co. adopted a resolution authorizing the president and secretary of the corporation to enter into and execute a supplemental contract dated July 12, 1927, with the Forest Glen National Milk Co., which contract was thereafter duly executed. Such supplemental contract referred to the agreement of May 24, 1927, whereby the Forest Glen Creamery Co. agreed to sell to the National Milk Co. its entire business, "including its real estate, goods, chattels, property, equipment, good will, *94 bills or accounts receivable and all other assets * * * at a price or consideration of Four Hundred Seventy-five Thousand ($475,000.00 Dollars", and further recited the fact that the Forest Glen National*1250 Milk Co. had succeeded to all rights, benefits, and privileges inuring under such contract to the National Milk Co. The purpose of the supplemental contract of July 12, 1927, was to alter and amend the agreement of May 24, 1927, in certain particulars set out therein but not material here.
On July 22, 1927, the stockholders of the Forest Glen Creamery Co. at a special meeting adopted a resolution ratifying and confirming the execution of the contract of May 24, 1927, as modified by the supplemental agreement of July 12, 1927. The stockholders further authorized the officers and directors of the corporation to do all things necessary to carry out the agreements, and for themselves specifically agreed "to look solely to said purchase price for their distributive shares thereof in payment for the surrender of all said capital stock of this corporation.
Upon the execution of the provisions of the escrow agreement hereinbefore referred to, all of the stockholders of the Forest Glen Creamery Co. caused all of their stock (except three shares), endorsed in blank, to be deposited with the escrow agent upon the condition precedent that the certificates of stock should be delivered upon*1251 payment to the stockholders directly, according to their respective number of shares, of the money as provided in the escrow agreement. Pursuant to the terms of the escrow agreement, good and sufficient deeds and bills of sale were executed by the Forest Glen Creamery Co. and delivered in escrow, conveying the property and premises provided in the agreement to be conveyed by that company, and thereupon the sum of $295,000 was paid to the escrow agent. The escrow agent distributed such sum to the payment of expenses and obligations of the Forest Glen Creamery Co. and in full payment of the preferred stock of the company, and transmitted the balance thereof by two checks to the Forest Park State Bank, namely, one check for $185,159.11 and one for $1,006.61.
On August 8, 1927, the Forest Park State Bank received from the escrow agent the two checks above mentioned and on that date distributed such checks to the then common stockholders of the Forest Glen Creamery Co. as follows: To Peter J. Wilson, George L. Meyer, Claus Junge, Thomas J. Riley, I. T. Czajke, and E. W. Iwicki, each, the sum of $28,742.65; the balance of the amounts represented by the checks mentioned, to other stockholders*1252 not involved herein. The sum of $5,000 earnest money originally deposited was ultimately distributed by the depositary to the stockholders of the Forest Glen Creamery Co.
*95 The junior mortgage of $175,000 referred to in the escrow agreement was executed and delivered to the escrow agent and by it transmitted in accordance with the escrow agreement to the Forest Park State Bank, which bank distributed directly to the common stockholders of the Forest Glen Creamery Co. the amounts as and when collected under the mortgage.
At or before the performance of the conditions of the escrow agreement, the Forest Glen Creamery Co. ceased operations, had no other assets, and its charter was forfeited in 1928 for nonpayment of state franchise tax.
On March 10, 1928, the Forest Glen Creamery Co. filed its income tax return for the calendar year 1927, showing no tax due.
On November 10, 1930, respondent mailed a notice of deficiency to the Forest Glen Creamery Co., advising that in accordance with section 279(a), Revenue Act of 1926 (jeopardy assessment provisions), there had been assessed against it an income tax for the year 1927 in the amount of $22,312.40, computed on the*1253 basis of a taxable net income of $165,277.07.
Under date of February 17, 1932, respondent advised each of the individual petitioners herein that he proposed to assess the alleged deficiency of $22,312.40, plus interest, against them as transferees of the Forest Glen Creamery Co.
The parties have stipulated that the net income alleged to be taxable herein in the sum of $165,277.07 should be decreased by $30,000 by reason of petitioners' allegations respecting the market value of the second mortgage of $175,000. No part of the alleged deficiency has been paid.
OPINION.
HILL: The Board held in an opinion appearing at , that it was without jurisdiction in this case to redetermine the tax liability of the Forest Glen Creamery Co., hereinafter sometimes referred to as the corporation, for the calendar year 1927, since the deficiency notice stated that in accordance with section 279(a), Revenue Act of 1926, respondent had assessed against the corporation an income tax for the "period ended June 30, 1927." The United States Circuit Court of Appeals reversed the Board's decision and remanded the cause for a hearing on the merits, holding that respondent*1254 in fact determined the controverted deficiency for the calendar year 1927, and that the Board had jurisdiction to redetermine the tax liability for that year. See . The court's decree is now the law of the case, and we are bound thereby. ; ; affd., ; certiorari denied, . *96 Our further discussion herein will, therefore, proceed on the premise that the deficiency involved is for the calendar year 1927.
The individual petitioners herein, who are charged with liability as transferees of the corporation's assets, have alleged in their pleadings, (1) that limitations had run prior to mailing of the notices to petitioners; (2) that petitioners are not liable as transferees; and (3) that there is no deficiency in the tax liability of the alleged transferor corporation.
The issues arising out of allegations (1) and (2) apparently have been abandoned by petitioners, but, if not, they must be decided adversely to their contentions. Assessment of transferee liability was not barred*1255 by limitations when the notices were mailed to petitioners on February 17, 1932. The corporate taxpayer filed its return on March 10, 1928; hence the period of limitations for assessment against it did not expire prior to March 1931 (section 277(a)(1), Revenue Act of 1926), and the period for assessment of transferee liability provided in section 280(b)(1) did not expire until March 1932.
Likewise, it seems clear that petitioners are liable as transferees for whatever tax, if any, is due from the corporation, since respondent now concedes that the deficiency is less than $22,312.40, and the parties have stipulated that each of the individual petitioners herein received proceeds of sale of the corporation's assets in excess of that amount, if it should be held that the corporation sold its assets. Thus, the sole issue for decision here is whether or not the transaction consummated in 1927, under the facts and circumstances set out in our findings of fact above, constituted a sale by the corporation of its business and assets, or a sale by the stockholders of their shares of stock in the corporation.
Petitioners contend that respondent's determination of the deficiency in controversy*1256 was based solely upon a revenue agent's report, in which it was held that the transaction involved was sale of assets by the corporation and not a sale of stock by the stockholders; that the revenue agent's conclusion was arbitrary and erroneous because it was based upon his construction of the contract of May 24, 1927, which it is alleged was not carried out but was superseded by a new agreement dated July 20, 1927, called the escrow agreement, under which latter agreement petitioners say they sold their shares of stock and received the consideration paid therefor. Petitioners argue that, since the revenue agent construed the wrong contract, respondent's determination predicated thereon is so obviously arbitrary and without out foundation that it must be disapproved, citing in support thereof ; ; ; .
*97 The Supreme Court in its opinion in the Taylor case stated that "The fact that the Commissioner's determination of a deficiency was arbitrarily made may reasonably be*1257 deemed sufficient to require the Board to set it aside", citing the three decisions of the Board above mentioned. However, in the Taylor case, the evidence affirmatively disclosed that the Commissioner's determination was arbitary and excessive, and the Court therefore held it invalid, saying that the taxpayer should not be bound to pay a tax that confessedly he did not owe because his evidence was not sufficient also to establish the correct amount that lawfully might be charged against him. The dectrine applied in that case, as well as in the cited desisions of the Board, has no application here, because petitioners have not shown that respondent's determination in the instant case is without rational foundation or excessive.
The burden of proof in the first instance is upon the taxpayer to show that the Commissioner's determination is invalid. ;; .
Petitioners here have not discharged their burden merely by showing that the revenue agent construed the wrong contract, if indeed such*1258 was the case. It might well be that the subject matter of the first contract dated May 24, 1927, was the same as in the latter agreement dated July 20, 1927. If both instruments were in fact contracts by the corporation to sell its business and assets rather than agreements by the stockholders to sell their stock, then the conclusion reached by respondent is correct, and it is immaterial that it was based solely upon a construction of the earlier contract. If the record before us establishes that the deficiency determined by respondent is correct, it is our duty to approve it even though his reasoning is not sound or based upon the correct principle. .
The ultimate issue for decision here is whether or not the deficiency asserted by respondent is lawfully due from the Creamery Corporation; and the primary question, the answer to which disposes of the former, is whether that corporation sold its assets or the stockholders sold their stock.
In order to determine the intention of the contracting parties in so far as it affects the question presented here, we think we may properly look to the terms of both agreements, *1259 as we as the attendant circumstances, so far as disclosed. While it may be true that, technically at least, the escrow agreement of July 20 was a new contract, superseding the instrument dated May 24, yet the two contracts must, be construed together for the reason that a copy of the earlier contract was annexed to and made a part of the escrow agreement. However, *98 so far as concerns the subject matter of the two agreements, that is to say, the thing agreed to be sold by the one party and purchased by the other, we find no conflict in the provisions of the two instruments. The escrow agreement, broadly speaking, merely amended and supplemented the provisions of the first contract; the essential nature of the agreement, the thing sold, and the consideration agreed to be paid therefor, remain unchanged.
From a careful consideration of the terms of the contracts themselves, we think it is clear that it was the intention of the Creamery Corporation to sell its business and assets for the consideration stated, and that there was no sale intended to be made by the stockholders of their shares of stock, nor was any such sale in fact consummated. The nature of the transaction*1260 is not altered by the fact that the stockholders of the corporation, for reasons satisfactory to themselves, provided in the agreements for the proceeds of sale to be distributed directly to them instead of causing the consideration to be paid to the Creamery Corporation and by it distributed to them in liquidation. This merely constituted a cutting of corners, and was probably occasioned by the desire of the purchaser to acquire full and unrestricted control of the selling corporation prior to or at least at the time of the payment of the consideration for the transfer of the business and assets.
The terms of the instruments, we think, are not fairly susceptible of any other construction, and in the light of the plain and unambiguous language used can not be held to constitute agreements for the sale and purchase of stock. The contract of May 24, 1927, recited that the Forest Glen Creamery Co. was the owner of an extensive creamery and milk business, which the other party desired to purchase and take over in its entirety, including all of its real estate, goods, chattels, property, and equipment. Thus, the original intention of the parties was to effect a sale and purchase of*1261 the business and assets rather than of shares of stock, the transfer of which by the stockholders appears to have been only incidental to the sale by the corporation of its assets.
We find nothing in the record to indicate that the purchaser desired primarily to acquire control of the Creamery Corporation through purchase of its stock instead of a direct acquisition of its business and assets. The purchaser apparently took over the stock in order to insure that, through dissolution of the Creamery Corporation, the purchaser would derive the full benefit of its good will. At any rate, the shares of stock were worthless at the time of actual transfer, since the Creamery Corporation then had no assets, and it was never thereafter used by the purchaser to carry on any business operations; its charter was permitted to be forfeited in the following year for nonpayment of state franchise tax.
*99 That the payment directly to the stockholders of the proceeds of sale of the Creamery Corporation's assets constituted a liquidating distribution is indicated by the resolution adopted at a meeting of the stockholders on July 22, 1927, ratifying the contract of May 24, as modified*1262 by the supplemental agreement of July 12, in which resolution the stockholders specifically agreed to look solely to the purchase price for their distributive shares in payment of the surrender of all the capital stock of the corporation.
For the reasons indicated, we hold that the transaction in controversy constituted a sale by the Forest Glen Creamery Co. of its business and assets, and not a sale by the stockholders of their shares of stock. The amount of the deficiency due from the taxpayer corporation will be recomputed in accordance with the stipulation of the parties that the taxable net income as determined by respondent should be decreased in the sum of $30,000. We further hold that each of the individual petitioners herein is liable for such deficiency, so redetermined, as a transferee of the assets of the taxpayer corporation.
Decisions will be entered under Rule 50.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Claus Junge; Thomas J. Riley; I. T. Czajke; E. W. Iwicki; George L. Meyer; and Peter J. Wilson. ↩