*1163 The three stockholders of the petitioner corporation, who were also its officers and directors, authorized the sale of corporate real estate to petitioner's president, who had procured a purchaser therefor at an advanced price, and who in turn sold the real estate to the said purchaser and distributed the profit realized to the shareholders in proportion to their stockholdings, pursuant to an agreement between the stockholders entered into before any of the formal steps to effect the transfer were taken. Held, that, in substance, under the law of Pennsylvania, the sale was made by the corporation and the profit realized thereon is taxable to the corporation.
*1337 The Commissioner determined a deficiency of $5,547.12 in the petitioner's income tax for the period September 1, 1926, to August 3, 1927. The petitioner alleges that the Commissioner erred:
In adding to the petitioner's statutory income $65,000. profit received by Stephen A. MacQueen from his resale of real estate purchased by him from the petitioner, *1164 together with $324.30 interest received by Stephen A. MacQueen thereon.
The facts were stipulated.
FINDINGS OF FACT.
The petitioner was organized December 11, 1916, under the laws of the State of Pennsylvania; its principal office is at 415 W. Willow Grove Avenue (formerly 41 Allen's Lane), Philadelphia, Pennsylvania. *1338 By decree of the Court of Common Pleas of Philadelphia County, Pa., the petitioner corporation was dissolved as of August 3, 1927, and no liquidating trustee was appointed. Under the Pennsylvania statute of May 21, 1881, (P.L. 30) as amended June 28, 1923, (P.L. 894) the petitioner, notwithstanding the decree of dissolution, is authorized to bring suit and maintain and defend suits already brought for the protection and possession of its property and the collection of debts and obligations owing to or by it, and to sell, convey and dispose of its property and make title thereto, and the officers last clected or the survivors of them are authorized as officers to represent the corporation for such purposes. Stephen A. MacQueen is the last elected president and surviving officer of the petitioner.
From October 5, 1926, to August 3, 1927, when*1165 dissolution became effective, the entire outstanding stock of the petitioner was held and owned as follows:
| Number of shares | ||
| Name of stockholder | Preferred | Common |
| Stephen A. MacQueen | 193 | 294 |
| Richard M. Shoemaker, Jr | 50 | 50 |
| Walter R. Yeager | 6 | 6 |
| 249 | 350 |
For the same period the board of directors was composed of the same three persons.
At a meeting of the stockholders of the petitioner duly called and held February 1, 1927, at which all the stockholders were present and voted in person, it was unanimously:
RESOLVED, that the board of directors be and are hereby authorized and directed to sell to S. A. MacQueen the Company's real estate situate No. 1723 Walnut St., Philadelphia, for such price and upon such terms as to it shall seem expedient.
At a meeting of the board of directors of the petitioner duly called and held February 1, 1927, following the stockholders' meeting, at which all the directors were present and voted in person, the following preamble and resolutions were unanimously adopted:
WHEREAS, S. A. MacQueen has offered $85,000.00 for the Company's real estate situate No. 1723 Walnut Street, the same to be conveyed to him free*1166 and clear of all mortgages and other encumbrances and subject only to the objections now appearing on Title Policy No. 276550 of the Real Estate Title Insurance and Trust Company, the agreement of sale to contain the customary provisions as to apportionment of taxes, water rent, title possession, etc.
Now BE IT RESOLVED that the Board of Directors hereby accepts the offer of S. A. MacQueen of $85,000.00 for the property situate No. 1723 Walnut Street, free of all encumbrances except as specified above.
*1339 FURTHER RESOLVED that the proper officers are authorized and directed to execute an agreement of sale for said property containing provisions satisfactory to it, and upon receipt of the consideration money aforesaid, less present mortgages and encumbrances, if any, to execute and deliver a good and sufficient deed for said property situate No. 1723 Walnut Street to S. A. MacQueen.
On February 2, 1927, Stephen A. MacQueen agreed to sell the said real estate to Henry Reed Hatfield for $150,000.
On February 11, 1927, Stephen A. MacQueen executed a declaration of trust, which, in so far as material hereto, is as follows:
WHEREAS by Agreement of Sale dated February 1, 1927, the*1167 S. A. MacQueen Company has undertaken to convey to Stephen A. MacQueen for a consideration of $85,000. the property No. 1723 Walnut Street, Philadelphia, and
WHEREAS by Agreement dated February 2, 1927, Stephen A. MacQueen has undertaken to convey to Henry Reed Hatfield for a consideration of $150,000. the aforesaid premises, namely, No. 1723 Walnut Street, Philadelphia;
NOW KNOW ALL MEN BY THESE PRESENTS THAT I, Stephen A. MacQueen, provided that the two conveyances hereinabove referred to are consummated in accordance with the terms thereof, do hereby declare as follows:
One, That the excess money received by me in the sale of the aforesaid property shall be received and held by me for the benefit of the holders of common stock of S. A. MacQueen Company in proportion to their respective Common Stock holdings, as follows:
| Stephen A. MacQueen | 84% |
| Richard M. Shoemaker, Jr | 14.29% |
| Walter R. Yeager | 1.71% |
TWO. That it is my intention to distribute the said fund held for the benefit of the aforesaid holders of Common Stock from time to time, but in any event within one year, unless in my opinion for some unforeseen reason, distribution would be inadvisable.
*1168 Three. That I, reserve the right to pay out of the said fund held for the benefit of the aforesaid holders of Common Stock such sum or sums of money for costs, charges, fees, etc. as I in my sole discretion shall deem proper.
Four. It is my intention to open an account with the Fidelity-Philadelphia Trust Company, in which the proceeds of the sale of No. 1923 Wainut Street, Philadelphia, hereinbefore referred to, will be deposited and out of which payments will be made. In the event of my death prior to the entire distribution of the fund above referred to, my Executor, the Fidelity-Philadelphia Trust Company, to have power to act under this Declaration and exercise all the powers and rights that have been reserved by me.
The above declaration of trust was in conformity with and in confirmation of an understanding subsisting between the three persons named at and prior to the resolutions adopted February 1, 1927.
On March 1, 1927, the petitioner by its proper officers executed and delivered a deed conveying the real estate to Stephen A. MacQueen pursuant to the foregoing resolutions, and the said Stephen A. MacQueen thereupon paid the petitioner the consideration money*1169 stated in said resolutions.
On March 1, 1927, after receiving title from the petitioner, Stephen A. MacQueen conveyed the property to Henry Reed Hatfield *1340 for the consideration of $150,000, and thereafter paid to the three beneficiaries of his declaration of trust, pursuant to said trust and in the proportions therein stated, the excess of $65,000 received by him from Hatfield, together with $324.30 interest received thereon.
Prior to paying over the excess of $65,000 to the beneficiaries, Stephen A. MacQueen placed the same in bank to his credit as trustee under the declaration of trust, and received as interest thereon $324.30, which he paid over to the beneficiaries of the trust.
At all times before, during and after the time of the resolutions and deed of sale the petitioner was solvent. The consideration for the sale was in excess of the cost of the property to the petitioner and the petitioner duly included such excess in its income-tax return for the period September 1, 1926, to August 3, 1927. The sale did not impair petitioner's capital. All creditors of the petitioner were paid in full.
The three beneficiaries of the above trust duly included in*1170 their 1927 income-tax returns the amounts received as their shares of the excess and interest, amounting to $65,324.30.
The Commissioner has included the profit of $65,000 and the interest of $324.30 thereon in the petitioner's taxable income for 1927; in the statement attached to the deficiency notice is the following explanation:
Concerning the profit on the sale of real estate, this office approves the examining officer's adjustment in adding to statutory income $65,000.00 unreported profit. It is held that there was no bona fide sale to Mr. S. A. MacQueen, who was merely acting for the corporation. * * *
OPINION.
SMITH: The only issue is whether, by the means employed and fully recounted in our findings of fact, the petitioner successfully disposed of the real estate in question without realizing a taxable profit, the amount of which was distributed proportionately to its common stockholders. In other words, did the petitioner corporation sell the property to MacQueen in good faith in an arm's length transaction, and did MacQueen in turn sell the property to Hatfield; or did the taxpayer, in substance, make the sale to Hatfield and realize the $65,000 profit?
Stephen*1171 A. MacQueen, at all times material hereto, was president, director and chief stockholder of the petitioner corporation. The record indicates that the sale to Hatfield had been negotiated by MacQueen and that he procured the transfer of the property to himself in order to make the sale to Hatfield. The corporation was solvent and the stockholders consented to the sale to MacQueen, *1341 but the property was not actually transferred to MacQueen until after he had executed the declaration of trust in favor or the common stockholders in "conformity with and in confirmation of an understanding subsisting" between MacQueen and the other two stockholders "at and prior to the resolutions adopted February 1, 1927," by which the board of directors was authorized to sell the property to MacQueen. Obviously, therefore, when MacQueen received title to the property, he did so not in his individual right, but as trustee (cf. , and as a director of the petitioner corporation he occupied a place of trust and must execute the trust with fidelity for the common benefit of the stockholders of the corporation rather than for his own*1172 benefit (, and in such cases he may be compelled to account to the corporation for any profit realized upon the sale of the property. ; . In the case just cited the Supreme Court of Pennsylvavia said:
* * * a director is a trustee for the entire body of stockholders, and both good morals and good law imperatively demand he shall manage all the business affairs of the company with a view to promote, not his own interests, but the common interests; and he cannot, directly or indirectly, derive any personal profit or advantage by reason of his position, distinct from his coshareholders. 1 Potter, Corp. § 330; Mor. Priv. Corp. 517, 518. And by assuming the office he undertakes to give his best judgment in the interests of the corporation in all matters in which he acts for it, untrammeled by any hostile interest in himself or others. There is an inherent obligation on his part that he will in no manner use his position to advance his own interest as an individual, as distinguished from that of the corporation. *1173 ; . And all secret profits derived by him in any dealings in regard to the corporate enterprise must be accounted for to the corporation, even though the transaction in which they were made also advantaged the corporation of which he was director. . * * *
The Bird Coal & Iron Co. v. Humes case, supra, was followed in ; , wherein the court said:
* * * An officer is but the agent of his corporation, and in all transactions in which its interests are involved he must act for it with unselfish singleness of purpose. If in any such transaction it appears that he has acted against the interest of his corporation, the mere fact that the means used to accomplish the unlawful end would, if standing alone, be lawful in themselves will not save such officer from responsibility to account for profits thus made by him which otherwise might have gone into the coffers of his corporation. * * * In scrutinizing the acts*1174 of such officers, the court will not heed mere forms when the substance which lurks behind them shows profits from a dealing in the corporation property.
*1342 The respondent attacks the bona fides of the sale to MacQueen, and obviously that transaction, previously hedged about by a declaration of trust to protect the shareholders, who had "equal rights in the distribution of corporate assets after the general debts of the corporation have been paid" (; , created a situation "which in law implies a fraud" upon the corporation. ; .
In substance, the purported sale to MacQueen did not effect any change in the beneficial ownership of the assets involved. Had the corporation transferred the property directly to Hatfield, the profit would have been distributable to the same persons receiving it from MacQueen, who was, in accordance with an agreement subsisting prior to any of the steps taken to effect the transfer, merely a trustee for the shareholders. *1175 This was in effect a recognition of the fiduciary relation which he occupied and was merely a means to carry out his duty to the corporation and to his coshareholders, while at the same time attempting a conveyance that would relieve the corporation of the tax upon the profit realized from the sale of the real estate. Although the petitioner corporation was entirely solvent and its dissolution and liquidation did not take place until several months later, the transfer to MacQueen was in reality a transfer in trust, and recognized as such by all the interested parties; his subsequent sale of the property should be treated in the same manner as the sales involved in ; ; affd., ; certiorari denied, ; ; and , to wit, as the sale of the corporation, and the profit taxed accordingly. Cf. ; certiorari denied, October 10, 1932.
*1176 The facts of record distinguish the instant proceeding from the transactions involved in , and , wherein corporate taxpayers were held to have successfully divested themselves of corporate property and that the individual stockholders thereafter selling the property involved in the first case and fulfilling the contracts involved in the second case, realized income which could not be considered taxable to the corporation. The steps taken in the instant case to safeguard the trust relation were not present in either of those cases and, for all the record discloses, there is nothing to indicate that the laws of Georgia and Iowa would place the same interpretation upon such transactions as does the Pennsylvania law. In the circumstances, we do not think either of those cases controlling here.
Judgment will be entered for the respondent.