*227 Decisions will be entered under Rule 50.
In 1945 a trustee which owned 151 shares of stock of a corporation acquired the remaining 1,849 shares in consideration of its promise to pay a total of $ 11,131,000 for the shares when funds became available. The corporation then filed a certificate of dissolution and assigned its assets to the trustee. Among the assets were claims for past infringement and royalties due on certain patents. Due to various orders in certain suits brought by the United States, moneys subsequently paid on these claims were paid into court. In 1949 the above suits were terminated and the moneys were paid over to the trustee. A part of the moneys, representing a portion of the payments on infringement claims arising prior to the assignment to the trustee, were used to pay interest on a contested deficiency determined against the corporation for the year 1945. The corporation was a claimant in a number of other suits which were pending or filed in 1949. Held, the assets were not assigned to the trustee as a trustee in liquidation. Held, further, the corporation was in existence during 1949 for Federal tax purposes.
*1334 Respondent determined a deficiency in income tax of the Cold Metal Process Company (hereinafter referred to as Cold Metal) for the year 1949 in the amount of $ 5,550,140.33 and determined that the Leon Beeghly Fund, the Union National Bank of Youngstown, *230 Ohio, Trustee (hereinafter referred to as Trustee), is liable as transferee for the full amount of the deficiency. (Cold Metal and the Trustee are hereinafter referred to collectively as petitioners.) Respondent also determined a deficiency in the personal holding company surtax of Cold Metal for the year 1949 and determined that the Trustee is liable therefor as transferee; but in his answer respondent admitted error in that respect, and this Court entered appropriate orders and decisions holding that neither of the petitioners was liable for personal holding company surtax for the year 1949.
The questions for decision are whether the Commissioner correctly determined (1) that Cold Metal was a corporation in existence for tax purposes in the year 1949; (2) that $ 15,438,220.71 received by the Trustee in 1949 was taxable income of Cold Metal; (3) that Cold Metal was not entitled to a deduction for interest paid in the amount of $ 1,247,572.72; and (4) that the Trustee is liable as a transferee for the full amount of the deficiency. Cold Metal has apparently abandoned its claim to a net operating loss carryover from 1948 and to an additional deduction for attorney fees paid in 1949.
*231 FINDINGS OF FACT.
The stipulated facts are so found.
Cold Metal, an Ohio corporation, was incorporated in 1926 with 2,000 shares of outstanding common stock. An income tax return *1335 for the year 1949 was filed on its behalf with the collector of internal revenue for the eighteenth district of Ohio. It kept its books on an accrual basis of accounting.
Cold Metal's principal assets consisted of
In one of the first suits for infringement the Court of Appeals for the Third Circuit held both patents valid and infringed*232 (
In 1943 the United States started a suit (hereinafter referred to as the cancellation suit) in the United States District Court for the Northern District of Ohio, Eastern Division, against Cold Metal and the inventor of the process covered by
*1336 Final judgment was entered for Cold Metal by the District Court in the above action on September 20, 1945, and the complaint of the United States was dismissed in its entirety. The impounding order was restored, however, pending the determination of the Government's appeal to the Circuit Court of Appeals or further order of the latter court.
In 1942 and 1943 Cold Metal had brought suit for alleged infringement against a number of other steel companies. *234 Several of those steel companies were represented by the same attorneys. These attorneys suggested that the way to settle the controversy was for the stockholders of Cold Metal to sell their stock to the steel companies or to an unnamed banker. This plan appealed to Cold Metal's stockholders, particularly after the impounding order resulted in the cessation of income to Cold Metal and the discontinuance of dividends to its stockholders. Also, Cold Metal became pressed for money to continue prosecution of its claims. However, neither the steel companies nor the unnamed banker would have been willing to purchase the stock until the termination of the cancellation suit. Further, the steel companies wished to settle within the taxable year 1945 as the excess profits tax was due to expire at the end of 1945. Therefore, negotiations for the sale of the stock to the steel companies or to an unnamed banker failed in December 1945 when the United States refused to dismiss its appeal in the cancellation suit.
Prior to the failure of the above plan, an alternative plan had been contemplated. In 1940 Leon A. Beeghly (hereinafter referred to as Beeghly), who was one of Cold Metal's stockholders*235 and the chairman of its board of directors, had irrevocably transferred 150 shares of Cold Metal stock to the Union National Bank of Youngstown, Ohio, in trust for certain charitable purposes. In 1944 he had transferred 1 additional share to said trust. Under the alternative plan the stockholders of Cold Metal would sell all of their shares to the Trustee of said trust, Cold Metal would be liquidated, and the infringement claims would then be settled with the steel companies.
During December 1945 the steel companies continued to negotiate with the attorneys representing Cold Metal in the infringement actions and with Beeghly. As a direct settlement of the claims was contemplated, the steel companies were not concerned with whom they settled as long as the settlement was binding. The directors and principal stockholders of Cold Metal thought that the settlement would be made in accordance with the above-outlined alternative plan. By December 28, 1945, six of the steel companies had agreed to settle the claims for past infringement for a total of $ 9,000,000, and the terms of license agreements for future rights under the patents had been resolved. The proposed agreements *1337 *236 were signed by the six steel companies on December 28, 1945. Each of the agreements was to be signed by both Cold Metal and the Trustee as contracting parties. The agreements were all dated December 29, 1945, and were substantially identical, except for the amounts and the names of the companies. In each agreement the particular company undertook to pay the amount applicable to it to the clerk of the District Court of the United States for the Northern District of Ohio, pursuant to the impounding order which was then in effect in the cancellation suit. The amount applicable to each was as follows:
| American Rolling Mill Co | $ 2,407,500 |
| Bethlehem Steel Co | 2,132,100 |
| Crown Cork & Seal Co | 200,700 |
| Jones & Laughlin Steel Corporation | 1,380,600 |
| Wheeling Steel Corporation | 1,643,400 |
| Youngstown Sheet and Tube Co | 1,235,700 |
| Total | $ 9,000,000 |
Each of the above agreements, as well as the agreement with Inland Steel Company hereinafter described, contained the following provision:
In consideration of the releases and licenses granted and covenants made by Cold Metal and the Trustee herein, the Manufacturer hereby agrees that the payment made by it to the Clerk of the Court*237 * * * is and shall be unconditional and the Manufacturer hereby waives all claim to the return of the sum so paid or any part thereof under any condition whatsoever.
While the negotiations were being conducted with the steel companies, negotiations were also taking place among the stockholders of Cold Metal with respect to the sale of their shares. The Trustee had been approached with the plan of purchasing the shares of the other stockholders. It had indicated a willingness to make the purchase if it could acquire all of the outstanding shares. However, before assenting to the purchase it would have to know the total price it would be required to pay for the other 1,849 shares and the amount it could realize on the stock of the Cold Metal Products Company (hereinafter referred to as Products Company), an operating company which was the wholly owned subsidiary of Cold Metal. Another important consideration was the probable amount it could realize on the settlement of the infringement claims, including the claims against the six steel companies which agreed to settle for $ 9,000,000. The Trustee was not concerned with the amount each individual stockholder would receive for his, *238 her, or its shares but only with the total amount which would be paid for all of the shares. Nor was it concerned with the order in which the stockholders would be paid. These were considerations which were important only to *1338 the other stockholders, and represented matters which the other stockholders settled among themselves.
On December 28, 1945, the Trustee entered into a separate agreement with each of the other stockholders whereby it purchased all of their shares in Cold Metal, or 1,849 shares, for a total of $ 11,131,000. The agreements were identical except as to the name of the stockholder, the number of shares to be sold, and the purchase price, which varied from $ 4,250 to $ 7,500 per share. The agreements provided, inter alia, as follows:
The several shareholders in said The Cold Metal Process Company who have agreed to sell their respective holdings therein to said Trustee are for the purposes, and in consummation, of said sales classified as follows:
Class A. All shareholders who have stipulated to sell their said holdings for less than $ 6000.00 per share; and
Class B. All shareholders who have stipulated to sell their said holdings for more than*239 $ 6000.00 per share.
is the owner of shares in said The Cold Metal Process Company which he is willing to sell on the terms herein set forth.
Now, THEREFORE, THE PARTIES HERETO AGREE, EACH IN CONSIDERATION OF THE SEVERAL PROMISES AND AGREEMENTS OF THE OTHER, AS FOLLOWS:
(1) The Trustee agrees to purchase, and the Shareholder agrees to sell, shares of the common capital stock of The Cold Metal Process Company.
(2) The Trustee agrees to pay, and the Shareholder agrees to accept therefor, the sum of $ per share, payable as follows:
(a) Two Hundred Dollars ($ 200.00) per share in cash upon delivery of certificate or certificates covering said shares duly endorsed by the Shareholder, or accompanied by assignment thereof by separate instrument properly executed.
(b) The balance of $ per share as set forth in Item (3) hereof. In no event shall interest be payable on deferred payments.
(3) In the event of the acquisition by the Trustee of all of the capital shares in, and dissolution of, said Corporation and subject to the payment to the Trustee, as Trustee, by the Clerk of the United States District Court for the Northern District of Ohio, Eastern*240 Division, of the funds in the registry of said Court as hereinbefore mentioned, and the payment to the Trustee, as Trustee, by sundry licensees of royalties under patents formerly owned by The Cold Metal Process Company following appropriate modification or rescission of the certain order of the "Royalty Adjustment Board for The Cold Metal Process Company" heretofore created under Public Law #768 of the laws of the United States, and after the Trustee has paid, or has on hand sufficient funds to pay, all taxes and other liabilities of said Corporation necessarily incident to the dissolution thereof, the Trustee will pay:
First: To each shareholder in Class A the sum of Eighteen Hundred Dollars ($ 1,800.00) per share, to apply upon the stipulated purchase price of his said holdings in said Corporation.
Second: To each shareholder in Class B the sum of Eight Hundred Dollars ($ 800.00) per share, to apply on the stipulated purchase price for his holdings in said Corporation.
Third: To each shareholder in Class A the balance due on the stipulated purchase price for his holdings.
*1339 Fourth: To each shareholder in Class B the balance of the stipulated purchase price for his holdings.
*241 At the time these agreements were executed the Trustee had $ 19.58 in cash.On the morning of December 29, 1945, certificates for the entire 1,849 shares were delivered duly endorsed to the Trustee. In accordance with a prearranged plan certain former stockholders of Cold Metal borrowed $ 375,000 from the Union National Bank of Youngstown and entered into a contract with the Trustee to purchase the stock of the Products Company for $ 1,250,000, of which $ 375,000 was paid in cash. The group purchasing the Products Company stock had owned or controlled less than half of the Cold Metal stock. Out of the $ 375,000 so received, the Trustee issued and delivered checks for $ 200 per share, or a total of $ 369,800, to the transferring stockholders of Cold Metal pursuant to the agreements dated December 28, 1945.
While the above transactions were taking place, a meeting of the stockholders of Cold Metal was called and a resolution to dissolve the corporation was adopted.
A further resolution was adopted directing the distribution of all of the assets to the Trustee and providing in part as follows:
Whereas, all of the Shareholders in said Corporation have sold all of their shares therein*242 to The Union National Bank of Youngstown, Ohio, as Trustee for The Leon A. Beeghly Fund, a charitable trust, which thus has become the sole shareholder therein; and
Whereas, said The Union National Bank of Youngstown, Ohio, as such Trustee, is able and willing to carry on and complete liquidation of the assets of said Corporation, except as it may be necessary or advisable for the Directors as such to exercise the powers given them by the statutes of Ohio in connection with pending litigation or otherwise; now therefore be it
Resolved that, subject to proper provisions for full satisfaction and discharge of unpaid taxes and all other debts and obligations of said Corporation and subject also to such continuing participation by the Directors in pending litigation as may be necessary or advisable for the proper prosecution or defense thereof, as well as in other matters, the Directors and Officers be authorized and directed, by suitable instrument, or instruments, to assign, transfer and distribute in kind to said Trustee as sole shareholder all Letters Patent, applications for Letters Patent, License Agreements and royalties, or claims for royalties, due thereunder, all claims for *243 infringement, all judgments and pending causes of action, and all other assets of whatsoever kind * * *
The resolution also stated that the action called for was subject to the impounding order in the cancellation suit.
After the Trustee had delivered the certificates covering the 1,849 shares acquired to Cold Metal for transfer on the records of the corporation, it approved in writing the above resolutions. Three certificates covering the 1,849 shares were delivered to the Trustee making it the record owner of all 2,000 shares of outstanding stock. Its stock certificates have never been canceled.
*1340 On December 29, 1945, following the stockholders' meeting, a certificate of dissolution of Cold Metal was filed with the secretary of state for the State of Ohio, and the officers of Cold Metal executed an instrument entitled "Assignment and Distribution in Kind" transferring to the Trustee all of the assets of Cold Metal, subject, however, to the impounding order in the cancellation suit. The transfer of the assets was made "in consideration of the assumption and payment therefrom of all taxes and liabilities of said Corporation" and further provided:
This assignment, transfer*244 and distribution in kind is expressly made subject to all unpaid taxes and other outstanding liabilities of every kind of said Corporation which said Trustee in accepting the same assumes and agrees to pay or otherwise discharge.
The Trustee signed an addendum to the above instrument which provides that the Trustee accepts the assignment and the above obligations.
The board of directors of Cold Metal then met and authorized certain officers of Cold Metal to sign on its behalf the agreements settling the claims for past infringement against the six steel companies for a total of $ 9,000,000. They also authorized the executive officers of Cold Metal to do all things necessary to the consummation of certain agreements which had been made settling all claims for past infringement against Allegheny-Ludlum Steel Corporation and its subsidiary, Wallingford Steel Company (hereinafter referred to as Allegheny and Wallingford), for $ 700,000 and $ 300,000, respectively.
Following the directors' meeting the 6 agreements with the 6 steel companies settling the infringement claims against them for a total of $ 9,000,000 were signed by the duly authorized officers of Cold Metal and the Trustee. *245 On December 29, 1945, following the signing of the agreements, the steel companies paid a total of $ 9,000,000 to the clerk of the District Court in the cancellation suit.
On December 31, 1945, a settlement agreement on substantially identical terms was reached with Inland Steel Company (hereinafter referred to as Inland), whereby the latter agreed to pay $ 600,000 for the release of the claims against it. The agreement was signed on that day by Inland, Cold Metal, and the Trustee. On the same day Inland paid $ 600,000 to the clerk of the District Court in the cancellation suit in accordance with the impounding order.
The aforementioned agreements with Allegheny and its subsidiary, Wallingford, settling the infringement claims against them for $ 700,000 and $ 300,000, respectively, were executed by said corporations, Cold Metal, and the Trustee on December 29, 1945. These agreements provided that the settlement amounts would be paid to the clerk of the District Court or to the Trustee upon modification or revocation of the impounding order, and further provided that if paid to the clerk and
*1341 if the said Clerk should for any reason be ordered by an appropriate Court*246 to return to Allegheny [or Wallingford] all or any part thereof, Allegheny [or Wallingford] agrees that the same may be paid to the Trustee and hereby irrevocably assigns the same to the Trustee, it being the intent of the parties hereto, insofar as any moneys payable hereunder are concerned, to settle all issues between the parties as to all patents referred to in Article 1 hereof.
The aggregate settlement amount of $ 1,000,000 was paid into the District Court on July 9, 1947, in another suit, United States v. Thomas Steel Corporation, et al., which is described more fully hereinafter.
On March 19, 1946, the Trustee and certain officers of Cold Metal entered into an agreement settling claims for past infringement against Signode Steel Strapping Company (hereinafter referred to as Signode) for $ 39,000 and granting Signode a license under certain patents. The $ 39,000 was paid to the clerk of the District Court pursuant to the impounding order in the cancellation suit.
On April 6, 1946, the board of directors of Cold Metal met and elected officers to act on behalf of Cold Metal in liquidation of that corporation. They also ratified the acts of the officers who had entered into*247 the agreements with Inland and Signode and approved a proposed license agreement with Olin Industries, Inc.
An order was entered by the District Court in the cancellation suit on May 31, 1946, modifying the impounding order so as to allow Cold Metal to transfer to the Trustee
On February 21, 1946, an assignment of all the patents of Cold Metal, other than
By an agreement dated September 30, 1946, between the Trustee and Crucible Steel Company of America the latter settled the claims against it for past infringement for $ 110,000 which it paid to the clerk of the District Court pursuant to the impounding order in the cancellation suit.
The Court of Appeals for the Sixth Circuit affirmed the judgment of the District Court in*248 the cancellation suit in an order and opinion dated December 12, 1947, and reported at
*1342 In 1943 notices had been issued by various agencies of the United States under the Royalty Adjustment Act (
On June 25, 1947, additional notices were sent pursuant to the Royalty Adjustment Act to Cold Metal, the Trustee, and the 11 steel companies which had entered into settlement agreements with respect to past infringement claims with Cold Metal and/or the Trustee on or after December 29, 1945. The notices directed the steel companies not to pay past or prospective royalties attributable to production for the United States to Cold Metal or the Trustee pending an order fixing a fair rate. An order was issued to the same*250 parties on June 11, 1948, fixing the fair rate at zero and directing the deposit of said royalties with the United States Treasury. On June 23, 1948, the United States filed a third suit in the same District Court entitled United States v. Youngstown Sheet and Tube Company, et al. (hereinafter referred to as the Youngstown royalty suit). The defendants were Cold Metal, the Trustee, and the 11 steel companies to which the royalty order of June 11, 1948, was directed. The Government alleged, inter alia, that the funds impounded in the cancellation suit which could be withdrawn by the Trustee on June 25, 1948, were subject to the royalty notices and order, and the court was requested to retain these funds pending a determination of the rights of the parties.
The District Court, while entering a temporary restraining order preventing the distribution of the impounded funds, denied the Government's motion for a preliminary injunction impounding these funds for a further period. The court ruled that the Royalty Adjustment Act applied only to royalties, and not to moneys paid in settlement of infringement claims (
On December 6, 1948, the Court of Appeals affirmed the District Court's denial of a preliminary injunction (
Prior to the withdrawal of the funds from the Federal Reserve Bank, said bank*252 was served by the collector of internal revenue for the eighteenth district of Ohio with notices of levy, asserting that taxes for 1945 and interest were due and owing from Cold Metal and that the Trustee was liable therefor as transferee. The Federal Reserve Bank was also served with warrants of distraint and a notice of tax lien. On January 14, 1949, the Commissioner issued a notice of deficiency to Cold Metal asserting deficiencies of $ 7,212,796.65 for the year 1945 and also issued a statutory notice of transferee liability to the Trustee. On January 28, 1949, by using part of the funds on deposit with the Federal Reserve Bank, the deficiencies plus interest in the amount of $ 1,237,176.68 were paid simultaneously with the turning over of said $ 9,749,000 on deposit plus interest on said sum in the amount of $ 52,611.08 to the Trustee or to others on its order. On March 5, 1949, the Trustee paid to the said collector of internal revenue an additional amount of $ 10,396.04 as interest on a deficiency of income tax in the amount of $ 69,216.33 assessed against Cold Metal for the year 1943.
Following the filing of the Thomas Steel royalty suit, $ 6,964,695.92 was paid into court*253 in that case as royalties under licenses granted by Cold Metal. Said amount was in addition to the $ 1,000,000 paid into court by Allegheny and Wallingford for past infringement. On August 25, 1949, the District Court entered a pretrial consent order in that case providing that a part of the royalties was outside the operation of the Royalty Adjustment Act and accordingly the clerk of the court paid to the Trustee the sum of $ 3,424,278.58. Of this amount $ 516,362.86 represented royalties accruing prior to September 1, 1945, *1344 and $ 2,907,915.72 represented royalties accruing during the period commencing September 1, 1945, and ending January 14, 1947.
In 1940 Cold Metal had brought suit against McLouth Steel Corporation (hereinafter referred to as McLouth) to recover royalties allegedly due under a 1934 license agreement with Cold Metal. On February 1, 1949, a judgment was rendered against McLouth in the amount of $ 297,013.25, representing royalties accruing prior to April 1, 1942, in the amount of $ 224,734.78 and interest from February 14, 1940, in the amount of $ 72,278.47. Of this amount $ 271,729.47 had been paid into court on December 13, 1946, and the balance*254 was paid into court on February 2, 1949. On April 5, 1949, the clerk of the court in the McLouth case turned over $ 207,909.27 to the Trustee and paid the balance, or $ 89,103.98, to the clerk of the District Court in the Thomas Steel royalty suit. Thereafter counsel for the parties agreed that there was due under the 1934 license agreement with Cold Metal the further sum of $ 320,767.18 consisting of royalties accruing during the period April 1, 1942, to January 14, 1947, in the amount of $ 272,836.03 and interest at 5 per cent to August 4, 1949, in the amount of $ 47,931.15. On August 4, 1949, McLouth paid $ 128,306.91 ($ 109,134.45 as royalties and $ 19,172.46 as interest) to the Trustee and on the following day paid the balance, or $ 192,460.27 ($ 163,701.62 as royalties and $ 28,758.65 as interest), to the clerk of the District Court in the Thomas Steel royalty suit. Pursuant to an order of the court in the Thomas Steel royalty suit, said clerk paid $ 87,515.43 of the $ 192,460.27 to the Trustee on October 4, 1949.
During the year 1949 four of the steel companies which had entered into license agreements with Cold Metal and the Trustee on December 29, 1945, paid into court*255 in the Youngstown royalty suit amounts representing royalties accruing from January 1, 1946, to January 14, 1947. On August 23, 1949, the court in that case entered an order providing that 90 per cent of the royalties accruing after August 31, 1945, were not subject to the Royalty Adjustment Act, and pursuant to that order the clerk paid $ 745,404.13 to the Trustee during 1949 out of the funds deposited with the court by said four steel companies. Said clerk also paid to the Trustee in that year an additional $ 14,095.77, being 90 per cent of the amount paid into court by the Crucible Steel Company as royalties accruing during the period from October 1, 1946, to January 14, 1947.
During 1949 the Trustee also received $ 1,631.03 as royalties for 1948 and 1949 production by Broken Hills Proprietary Company; $ 8,700 pursuant to a license agreement entered into by Cold Metal and the Trustee with Olin Industries, Inc., as licensee, on February 27, 1946; $ 200 as a dividend on the Products Company stock; $ 4,713.56 interest on treasury bills bought and sold by the Trustee during *1345 the year; $ 13,854.95 as interest paid by the purchasers of the Products Company stock. The Trustee*256 received a total of $ 15,438,220.71 during the year 1949. Cold Metal acquired no other assets after December 29, 1945, and before January 1, 1950, and therefore was insolvent throughout the year 1949.
In 1950 the Trustee paid the Products Company $ 343,598.23 to reimburse the latter for certain laboratory expenses incurred by it at the request of the Trustee during the period from January 1, 1946, to August 31, 1950, in connection with the preparation for trial of pending patent infringement cases.
Cold Metal was a party to a number of actions which were pending after December 29, 1945. These actions were in addition to the suits against American Rolling Mill Co., Bethlehem Steel Co., Crown Cork & Seal Co., Jones & Laughlin Steel Corporation, Wheeling Steel Corporation, and Youngstown Sheet and Tube Co., which were brought by Cold Metal, were settled without trial on December 29, 1945, and were subsequently dismissed. The Thomas Steel royalty suit and the Youngstown royalty suit were still pending at the time of the hearing in the present proceeding. At the end of 1949 Cold Metal was the sole plaintiff in actions against Detroit Steel Corporation and Ford Motor Company which were*257 untried but were pending in Federal District Courts. In addition Cold Metal had brought suit in the Federal District Courts against Republic Steel Corporation, Granite City Steel Company, Acme Steel Company, Revere Copper & Brass, Inc., Aluminum Company of America, and United Engineering and Foundry Company prior to December 29, 1945, and all of these actions were pending and untried at the end of 1949. The Trustee was added as a party plaintiff in the suit against United Engineering and Foundry Company on April 5, 1949, and, in the other actions described in the preceding sentence, the Trustee was added as a party plaintiff in 1948. In 1946 the Trustee and the Products Company were added as plaintiffs in the above-described action by Cold Metal against McLouth Steel Corporation. Both Cold Metal and the Trustee were plaintiffs in an action filed in 1946 against the Bopp Steel Corporation. At the end of 1949 Cold Metal was the sole defendant in an action brought by E. W. Bliss Company. Furthermore, Cold Metal was made a party plaintiff to two actions against the United States filed by it and the Trustee in 1949 in the United States Court of Claims. Cold Metal was joined in the*258 latter two actions because the Government threatened to defend on the ground that claims against the United States cannot be assigned.
On December 4, 1951, this Court filed its findings and opinion in the proceeding brought with respect to deficiencies determined against Cold Metal for the year 1945.
On January 11, 1951, the respondent issued the statutory notices of deficiencies in the present proceeding determining that the entire amount received by the Trustee in 1949, or $ 15,438,220.71 was taxable as ordinary income to Cold Metal in that year. On April 17, 1953, the Trustee paid the director of internal revenue, Cleveland, *259 Ohio, the sum of $ 5,550,140.33, being the amount of the deficiency in income tax determined against Cold Metal for which the Trustee was determined to be liable as transferee, together with interest in the amount of $ 1,028,600.66. No part of said sums totaling $ 6,578,740.99 has been refunded.
OPINION.
The first question for decision is whether Cold Metal was a corporation in existence for tax purposes in 1949. Petitioners contend that it was extinct, and respondent determined that it still had sufficient life to be chargeable with the receipt of income.
Respondent contends that Cold Metal, by transferring its assets to the Trustee, merely turned its assets over to a receiver or trustee in liquidation which continued to operate the corporation, and, therefore, the corporation was still in existence, citing
*261 Respondent apparently recognizes that if the Trustee was acting for itself as the sole stockholder it was not a receiver or trustee in liquidation. He argues, however, that the alleged sale of stock to the Trustee, which made it the sole stockholder, was a sale in form only. Respondent asserts that for tax purposes substance prevails over form and that in substance the Trustee became a trustee in liquidation.
The principal fallacy in respondent's argument is that it ignores the Trustee's ownership of 151 shares of Cold Metal stock prior to the acquisition of the remaining shares from the other stockholders. By obligating itself to pay the debts of Cold Metal and to pay the other stockholders up to $ 11,131,000 for their shares, it was assuming the risk that all of its shares, including the original 151 shares, might be rendered worthless if the funds received did not exceed Cold Metal's debts and taxes, 2 future expenses to be incurred in connection with pending litigation, and the purchase price of the other 1,849 shares acquired. In addition, selling the shares to the Trustee permitted those stockholders who were willing to take less to get their money first. Also, by selling*262 their stock to the Trustee, thus limiting the amount they could receive, all of the stockholders other than the Trustee were given greater assurance that they would receive a substantial sum for their stock and in a shorter period of time. This could not have been accomplished by a mere corporate transfer of the assets to a trustee in liquidation.
Perhaps a similar result could have been accomplished by distributing the assets to the old stockholders of Cold Metal and having them convey the assets to a trustee under a trust agreement whereby the funds would be distributed as in the instant case. However, aside from the unreality of such an agreement where one stockholder receives nothing until the other stockholders have been paid in full, the trustee, which was taking the principal risk, might well have objected to someone other than itself administering*263 the assets. Also, as was pointed out in the case of
Respondent contends in the alternative that, even if the Trustee was not a trustee in liquidation, Cold Metal continued to exist through the year 1949 under the laws of Ohio and was in existence for Federal income tax purposes. Unquestionably some life remained in Cold Metal in 1949 under the laws of the sovereign which brought it into being and determines the time of its death. Even after a corporation has filed a certificate of dissolution, the Ohio General Code, section 8623-80, provides:
it shall continue for the sole purpose of paying, satisfying and discharging any existing liabilities*264 and obligations, collecting and distributing its assets and doing all other acts required to adjust, settle and wind up its business and affairs, and it may do all such acts and may sue and be sued in its corporate name.
The question remains, however, as to whether Cold Metal was dead for tax purposes even though living under the local law.
In
*1349 On the above facts this Court held that the corporation was still in existence for tax purposes in 1943 and 1944. The facts in the instant case are very similar. While Cold Metal did not actually receive any payments during 1949, it was a party to 15 different legal proceedings in that year, including those proceedings wherein most of the income in question was ordered paid to the Trustee. It was the sole plaintiff in two of these actions and was the sole defendant in another. In that year, 1949, it was made a plaintiff in two actions filed against the United States for the same reason the corporation was made party to the agreements and documents in the Henry Hess Co. case. We think these facts require the same holding as in the Henry Hess Co. case, and therefore we rule that Cold Metal was in existence for tax purposes during 1949. Where the corporate entity is still used so extensively in aiding its stockholders to realize on claims which it has assigned to them, to borrow the words of Justice Douglas in the case of
We realize that the above holding is contrary to the opinion of the United States Court of Appeals for the Ninth Circuit in the Henry Hess Co. case; but with all due respect to that learned court, we feel that our decision in the Hess case was correct. In reversing this Court, the Court of Appeals relied primarily upon
The italicized portion of the above regulations was added by
(g) Returns Where Taxpayer Not in Existence for Twelve Months. -- In the case of a taxpayer not in existence during the whole of an annual accounting *1350 period ending on the last day of a month, or, if the taxpayer has no such annual accounting period or does not keep books, during the whole of a calendar year, the return shall be made for the fractional part of the year during which the taxpayer was in existence.
In describing this amendment*269 both the House Ways and Means Committee (H. Rept. No. 2333, 77th Cong., 2d Sess., pp. 88, 90) and the Senate Finance Committee (S. Rept. No. 1631, 77th Cong., 2d Sess., pp. 105, 106) use substantially identical language. H. Rept. No. 2333, supra, provides:
Subsection (c) of this section is a technical amendment to
Returns under this subsection will not be placed on an annual basis for income tax purposes, since they are not for the short period described in
The above committee reports and, consequently, that portion of the above regulations added by
The next question for decision is whether Cold Metal is taxable on all or any portion*272 of the $ 15,438,220.71 received by the Trustee in 1949. Respondent determined that the full amount was taxable to Cold Metal, and petitioners contend that Cold Metal is not taxable on any portion thereof.
In our opinion that portion of the $ 15,438,220.71 representing royalties and amounts paid for infringement of patents on production prior to December 29, 1945, the date of the assignment of the assets to the Trustee, is properly taxable to Cold Metal. This amount (over $ 12,000,000) represents income earned, although not accruable (
Petitioners argue that the above cases are distinguishable from the case at bar. They contend that here Cold Metal assigned both the patents and the right to income*273 3 and that the doctrine of the above cases applies only where the transferor retains the agency which earns the income. We do not agree. While petitioners' contention is correct with respect to income earned after the assignment, this Court has held that income which is earned prior to the assignment is taxable to the assignor even though he also transfers the agency which earned it.
Petitioners also contend that the theory of anticipatory assignment of income does not apply since there was no certainty that any part of the funds would be received because of the claims of the United States in the cancellation suit and in the royalty*274 proceedings. Here again we do not agree. In this regard a case in point is
With respect to income earned after December 29, 1945, no part of that income is attributable to Cold Metal as it assigned the patents which represented the tree on which the income subsequently grew.
The next question to be decided is whether the Trustee is liable at law 4 or in equity for the 1949 tax liability of Cold Metal.
*277 The Trustee agrees that it is liable as a transferee at law for the 1949 taxes of Cold Metal if it assumed that obligation under the provisions of the "Assignment and Distribution in Kind" which it accepted on December 29, 1945. That instrument provides that the transfer of the assets to the Trustee was made "in consideration of the assumption and payment therefrom of all taxes and liabilities of said Corporation [Cold Metal]." By this provision the Trustee assumed liability for "all taxes" of Cold Metal, including the taxes in question. And, in our opinion, this provision was not limited to an assumption of the then existing tax liabilities by subsequent language in the instrument providing that the assignment was "* * * subject to all unpaid taxes and other outstanding liabilities * * *."
Our holding that the Trustee was liable as a transferee at law precludes the necessity of deciding whether it was liable for the 1949 taxes of Cold Metal as a transferee in equity. But see
The final question for decision is whether Cold Metal is entitled to a deduction in 1949 for interest*278 in the amount of $ 1,237,176.68 6 paid to the collector of internal revenue in that year. This amount represented interest on a deficieny determined for the year 1945. Respondent contends that Cold Metal was not entitled to the deduction because it was contesting the deficiency. He argues that a taxpayer may not accrue as an expense, interest on the amount of an unpaid contested tax liability. He further argues that Cold Metal did not become entitled to the deduction by paying the interest (see
Petitioners do not contend that*279 the interest was accruable, but take the position that if Cold Metal is chargeable with the receipt of taxable income in 1949, interest paid out of that income was paid by it. In our opinion petitioners' contention is sound. The payment of the $ 1,237,176.68 in interest was in effect made out of a fund in the amount of $ 9,749,000 which had been deposited with the Federal Reserve Bank pursuant to an order of the Court of Appeals. Practically all of the $ 9,749,000 represented payments on infringement claims arising prior to the assignment of the patents, and was, therefore, constructively received by Cold Metal when the fund was disbursed by the Federal Reserve Bank. On January 6, 1949, before an order was entered permitting the fund to be withdrawn, the Federal Reserve Bank was *1354 served with a notice of levy asserting that taxes and interest were owing from Cold Metal for the year 1945. For this reason the entire fund was not unequivocally paid to the Trustee at that time, but to the extent of $ 8,449,973.33 was used for the payment of said interest and taxes. Under the circumstances the interest was in effect paid by Cold Metal whether Cold Metal is considered as *280 the actual payor (cf.
Decisions will be entered under Rule 50.
Footnotes
1.
SEC. 52 . CORPORATION RETURNS.(a) Requirement. -- Every corporation subject to taxation under this chapter shall make a return, stating specifically the items of its gross income and the deductions and credits allowed by this chapter and such other information for the purpose of carrying out the provisions of this chapter as the Commissioner with the approval of the Secretary may by regulations prescribe. The return shall be sworn to by the president, vice president, or other principal officer and by the treasurer, assistant treasurer, or chief accounting officer. In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns. Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or property they have custody and control.↩
2. Respondent's determination in the instant proceedings that the Trustee was liable as a transferee in the amount of $ 11,221,360.23 illustrates the risk it was assuming.↩
3. Here the income was separated from the patents. An assignment of only the patents would not have transferred the right to royalties previously earned and the right to sue for past infringement.
Krentler-Arnold Hinge Last Co. v. Leman, 13 F. 2d 796↩ .4. Contrary to petitioner's contention, the pleadings filed by respondent in Docket No. 33397 sufficiently raise the question of the Trustee's transferee liability under
section 311, Internal Revenue Code of 1939↩ , both "at law" and "in equity."5.
SEC. 311 . TRANSFERRED ASSETS.(a) Method of Collection. -- The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid * * *
(1) Transferees. -- The liability, at law or in equity of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this chapter.
* * * *
Any such liability may be either as to the amount of tax shown on the return or as to any deficiency in tax.
* * * *
(f) Definition of "Transferee." -- As used in this section, the term "transferee" includes heir, legatee, devisee, and distributee.↩
6. Later in 1949 the Trustee paid an additional $ 10,396.04 in interest, which Cold Metal seeks to deduct, on a claimed deficiency in the tax of Cold Metal for the year 1943. The record is not technically complete with respect to when this item accrued; but, as respondent has offered to "adjust this matter on a Rule 50 computation," it is unnecessary to discuss it at this time.↩