*1208 Petitioner contracted to pay a fixed charter hire for seven cargo ships, and to operate them. After deducting operating expenses, including an operator's commission, the net profits were to be equally divided between petitioner and the owner. The contract provided that when the owner's share of the profits equaled the agreed value of the ships, petitioner should receive 51 per cent of the owner's capital stock. The contract was terminated, by mutual consent, before the owner had received the value of the ships. Held, payments made by petitioner under the contract, over and above the fixed charter hire, did not constitute taxable income to the petitioner.
*1294 These proceedings, which were consolidated for hearing, are for the redetermination of deficiencies in income tax asserted by the respondent as follows:
| Docket No. | Year | Deficiency |
| 47487 | 1923 | None. |
| 47487 | 1924 | $6,776.12 |
| 47487 | 1925 | None. |
| 47487 | 1926 | 12,884.29 |
| 47487 | 1927 | 6,932.06 |
| 55185 | 1928 | 2,766.08 |
*1209 Upon motion the proceeding was dismissed in respect of the years 1923 and 1925.
The errors alleged are that the respondent in each year disallowed as a deduction, and added to taxable income, amounts paid by petitioner to another corporation under the terms of a contract.
FINDINGS OF FACT.
The petitioner is a New York corporation, with its principal office in New York City. During the taxable years it was engaged in the business of operating a fleet of seven cargo vessels which it acquired pursuant to an agreement dated March 23, 1923.
Prior to the incorporation of the petitioner, which occurred in March 1923, these seven vessels had been a part of the fleet owned and operated by the Green Star Steamship Corporation. During 1919 this corporation had mortgaged its yessels for more than $6,000,000, naming the Equitable Trust Company of New York as trustee in the mortgages, and floating their mortgage bonds to the public through the regular trade channels. In 1921 the Green Star Corporation found itself in financial difficulties, a number of its vessels had been tied up by means of libel, maritime liens, and other claims, it had defaulted in its interest payments on its*1210 bonds, and a *1295 general creditor had thrown the corporation into the hands of a receiver. When the corporation defaulted on its bond interest the bondholders organized a bondholders' protective committee, naming Morris K. Parker and Robert C. Adams, among others, as members of the committee. Adams was associate manager of the Equitable Trust Company's bond department and was, therefore, familiar with the distribution that had been made of the Green Star Corporation's bonds. The receivership resulting from the general creditor's action forced the Equitable Trust Company, as trustee, to file a petition to foreclose the mortgages in order that the interests of the bondholders would be protected.
The foregoing situation existed in 1922 when Adams began negotiating with Arthur R. Lewis, who was an experienced ship operator, for the purpose of placing the mortgaged vessels in operation, thereby salvaging whatever could be salvaged for the former bondholders of the Green Steamship Corporation. Lewis was interested in operating the vessels and after numerous conferences they evolved a plan which was ultimately carried out. Under their plan Adams and Parker, as reorganization*1211 managers, acquired the vessels at sales in admiralty proceedings by bidding them in for the bondholders. The vessels were then transferred by the reorganization managers to the planet Steamship Corporation, a maine corporation organized by the bondholders, who exchanged their bonds for common stock of the new corporation. The new corporation reconditioned the seven vessels with funds derived from the sale of certain other vessels of the Green Star fleet, and with funds borrowed from the Equitable Trust Company, giving as security income bonds of the planet Steamship Corporation. After the seven vessels were recoditioned they were turned over to the Planet Line, Inc., the petitioner herein, which was organized by Lewis to operate the vessels under the agreement of March 23, 1923.
The pertinent provisions of this agreement read as follows:
AGREEMENT made this 23rd day of March, 1923, between PLANET LINE, INC., a corporation organized and existing under the laws of the State of New York, (hereinafter referred to as the "Charterer"), party of the first part, MORRIS K. PARKER AND ROBERT C. ADAMS, as reorganization Managers under an Agreement of Reorganization of Green Star Steamship*1212 Corporation, dated October 1, 1922, (hereinafter referred to as the "Managers"), parties of the second part, and PLANET STEAMSHIP CORPORATION, a corporation organized and existing under the laws of the State of Maine, (hereinafter referred as the "Owner"), party of the third part.
The parties hereto enter into this Agreement for the purpose of providing, among other things, for the operation of the terms herein provided of the following fleet of vessels, which vessels have been acquired in behalf of the Managers at sales in admiralty proceedings:
| VESSEL | DEAD WEIGHT | WHEN BUILT |
| Corvus | 8,600 | November, 1919 |
| Circinus | 8,600 | December, 1919 |
| Clauseus | 8,600 | December, 1919 |
| Centaurus | 8,600 | December, 1919 |
| Eurana | 9,310 | January, 1916 |
| Chincha | 9,650 | September, 1912 |
| Santa Cecilia | 9,330 | November, 1913 |
*1296 The parties hereto, in consideration of the mutual promises herein contained, mutually agree as follows:
* * *
SECOND: For the purpose of this Agreement a valuation of Thirty Dollars ( $30) per deadweight ton shall be placed upon each of the above vessels at the deadweight tonnage set forth in Paragraph First hereof, and the Charterer will*1213 pay to the Owner in advance on each vessel, in quarterly payments during the term of this contract, beginning on the date of the delivery of such vessel, an amount equal to Ten Per Cent. (10%) per annum on the valuation of each vessel as so computed. The obligation of the Charterer to pay the aforesaid Ten Per Cent. (10%) per annum during the term of this Agreement or until said Agreement shall be determined or said vessel shall become a total or constructive loss, shall be absolute and shall not depend upon whether the vessels shall be operated, or, if operated, profits shall result from the operation.
THIRD: The Charterer will deposit with the Equitable Trust Company of New York, in an account which shall hereafter be referred to as the Joint Operating Account, all freight moneys and other moneys collected or received from such operation, but at the time of depositing such moneys in the Joint Operating Account the Charterer may deduct therefrom and receive for its own account Seven and one-half per cent. (7 1/2%) of the gross freight of each cargo loaded into any of the vessels covered hereby, and moneys received from charter hire, dead freight and demurrage, which amount shall*1214 cover all expenses of the Charterer for management, overhead, husbanding, solicitation of freight, brokerage, agency fees and commissions at any and all ports.
FOURTH: The expenses of operation, to the extent and in the manner hereinafter provided, shall be chargeable against and paid out of the Joint Operating Account, but to the extent that the funds in the Joint Operating Account or the Six Months Reserve Account hereinafter provided for shall not be sufficient for the purpose, such expenses of operation shall be paid by the Charterer, and the Charterer may thereafter reimburse itself out of the Joint Operating Account.
* * *
NINETEENTH: The Charterer shall have the right to pay to the Owner such amounts in cash as they may desire, in addition to the payments herein provided for, toward the payment of the Purchase price of the 51% of the capital stock of the Owner. In determining the balance of the purchase price of the 51% of the capital stock of the Owner payable by the Charterer, the Charterer shall be credited with all payments to the Owner out of the Joint Operating Account which have not been subsequently repaid to the Charterer as herein provided, and with all insurance*1215 moneys paid to the Owner out of actual or constructive total loss of any vessel covered hereby and/or with such payments in cash as the Charterer shall make for the purpose of completing the purchase price of such stock as aforesaid, but the Charterer shall not be credited on *1297 the purchase price with the payment of 10% per annum provided for in Paragraph Second hereof.
* * *
TWENTY-FIRST: In the Joint Operating Account which the Charterer shall open at The Equitable Trust Company of New York as hereinbefore provided, the Charterer shall deposit all freight moneys and other moneys collected or received from or on account of the operation of the vessels covered hereby * * *. As near the end of each calendar six-months period during the term of this Agreement as may be practicable, the net profits, if any, which shall be shown by the completed liquidation accounts of each voyage for the entire six-months period shall be divided equally between the Charterer and the Owner, but in case the Charterer shall have made payments as herein provided, for which it is entitled to be reimbursed as herein set forth, and there shall not be sufficient funds in the Joint Operating*1216 Account at the time to reimburse the Charterer in full, the Charterer shall be reimbursed from the Joint Operating Account out of the net profits from future voyages of any of the vessels, except that the Owner shall hold each six-months current profits received by it intact until the end of the next succeeding six-months period except as hereinafter provided, and that so much of the net profits so held as may be necessary, together with an equal amount of profits theretofore received by the Charterer, shall be applied to the reimbursement of the Charterer, to the extent that there shall not be sufficient money in the Joint Operating Account fol that purpose.
TWENTY-SECOND: Upon the payment to the Owner out of net profits from the Joint Operating Account, or by the Charterer as provided in Paragraph Nineteenth hereof, or out of the insurance money received by the Owner through the actual or constructive total loss of any vessel or vessels covered hereby, of an aggregate amount equal to the value of the aforesaid vessels at the rate of Thirty Dollars ( $30) per deadweight ton of such vessels, the Owner shall deliver to the Charterer an amount of the capital stock of the Owner*1217 which shall equal fifty-one per cent (51%) of the total capital stock of the Owner issued and outstanding after such delivery shall have been made to the Charterer * * *.
TWENTY-THIRD: In case the Owner shall not have received, before this Agreement shall terminate or expire, as its share of the profits from the Joint Operating Account or as otherwise hereinbefore provided, a sum equal to Thirty Dollars ( $30), per deadweight ton on all the vessels, and the Charterer shall not exercise the right to renew this Agreement for a further term or shall not have the right to renew it, the Charterer shall not receive or be entitled to receive any of the stock hereinbefore referred to.
* * *
The omitted portions of the above agreement relate principally to classification surveys, the owner's right of inspection, insurance provisions, the liability of owner and charterer under various situations that might arise, cargoes, ship inventories, care and upkeep of the vessels, the duration of the agreement with optional renewal privileges, and moneys that were to be paid into the joint operating account that are not hereinabove set forth in the quoted paragraphs.
Pursuant to the general*1218 plan 51 per cent of the owner's capital stock, referred to in paragraph nineteenth, supra, amounting to 72,630 shares, was deposited in escrow with the Equitable Trust Company*1298 of New York on or about September 25, 1923, under an escrow agreement bearing date of April 1, 1923. The terms of the escrow agreement provided that neither the shares nor any interest therein could be sold, pledged, assigned, transferred or otherwise disposed of, nor could the stock be voted, or dividends paid or accrued thereon or set aside therefor during the period that said stock was held in escrow. Upon payment by petitioner of the value of the vessels at $30 per dead-weight ton, the depositary was to transfer the stock to the petitioner, but if the total amount paid was less than the value of the vessels at that rate, then the stock was to be returned to the Planet Steamship Corporation.
Specific performance of the operating agreement by the petitioner was guaranteed the Planet Steamship Corporation, upon its insistence, by a separate instrument executed by the Seas Shipping Company, Inc., which owned and operated a fleet of steamships, and owned more than 50 per cent of the capital*1219 stock of the petitioner. One of the considerations stated in the guaranty agreement is that the Seas Company had requested the Planet Steamship Corporation to enter into the operating agreement of March 23, 1923, "in order to furnish the Planet Line with a fleet of steamships for operation."
During 1925 Adams, who was president of the owner corporation, approached Lewis, president of the petitioner, to determine whether the petitioner intended renewing the operating agreement upon its expiration. The petitioner, however, had been losing money and Adams was dissatisfied with some of the provisions of the original agreement. Certain amendments were executed, respecting paragraphs eleven, twenty-one, and twenty-four, which were designed to relieve both the petitioner and the owner from some of their burdens. These amendments, set forth in an instrument dated November 30, 1925, provided that reclassification survey costs should be paid out of the joint operating account, that all payments for charter hire could be made from the joint operating account, and that the term of the agreement should be changed from five years from March 23, 1923, to eight years from that date.
Subsequently, *1220 the owner had an opportunity to sell the seven cargo vessels and the petitioner was approached regarding a termination of the original agreement as amended. On or about November 20, 1929, the parties terminated the operating agreement by mutual consent, the vessels being returned by petitioner to the owner, who thereafter consummated the sale of the vessels.
During the period that petitioner was engaged in operating these vessels it regularly deposited all moneys received from freight and other sources in the joint operating account. Every six months the petitioner rendered an accounting to the owner and paid over *1299 to the owner its one-half of the profits remaining in the joint account after the payment of the expenses of operation. The total profits thus realized by the owner over the period of operations amounted to approximately $270,000, while the total charter hire paid by petitioner over the period of operations amounted to $1,179,000. The $270,000 paid over by the petitioner to the owner was the only payment received by the owner which might fall within the terms of paragraphs nineteen and twenty-two, supra. Upon termination of the operating agreement*1221 the owner retained all of the profits that it had received from time to time as its half of the joint operating account.
On its income tax returns for the years 1923 to 1929 the petitioner reported as income one-half of the profits derived from the joint operating account. The Commissioner has increased the petitioner's net income by determining that all of the profits in the joint operating account were petitioner's income in the first instance.
OPINION.
MARQUETTE: The question presented is whether the petitioner is taxable upon all the profits derived from the joint operating account provided for in the agreement of March 23, 1923, or whether it is taxable on only one-half of said profits. The determination of this question rests primarily upon the construction and interpretation of the contract of March 23, 1923.
The respondent contends that this contract was one for the purchase of stock in the Planet Steamship Corporation by the petitioner, as well as a contract chartering vessels, and upon this theory he has held that the $270,000 of profits received by the owner out of the joint operating account was income to the petitioner in the first instance and was thereafter*1222 paid over to the owner in purchase of stock. The petitioner contends that the contract, when read and considered as a whole, is essentially and primarily concerned with the operation of certain cargo vessels, but provides for an even division of any profits that might accrue. Petitioner urges that the stockpurchase provisions merely gave an option which might provide an added stimulus for successful operation of the vessels, and that the $270,000 paid over to the owner was never income of the petitioner under the terms of the agreement.
Before turning to the specific terms of the contract of March 23, 1923, we think it advisable to consider the facts that motivated the parties entering into this contract. The bondholders of the Green Star Steamship Corporation were faced with the loss of a large sum of money, in the aggregate, unless some plan could be devised *1300 whereby their interests would be protected and their losses minimized. The Planet Steamship Corporation and the petitioner were creatures of the plan devised by the bondholders and Arthur R. Lewis, whereby these mortgaged vessels could be released from claims and libels outstanding against them and put back*1223 into operation. The bondholders organized the lessor corporation to acquire the cargo vessels, and Lewis organized the petitioner to lease the vessels from the bondholder's corporation.
The resulting agreement of March 23, 1923, is a tripartite agreement designed to put the above plan into effect, but the obligations imposed by its terms rest primarily upon the owner and the petitioner. It is these obligations with which we are principally concerned in construing this agreement.
It is a cardinal rule of construction that a written instrument must be considered as a whole and the intention of the parties must be collected from the entire writing, not from detached portions thereof. Individual clauses and particular words must be considered in connection with the rest of the agreement, and effect must be given to all parts of the instrument if possible. 13 Corpus Juris, sec. 486. Following that rule, we cannot here consider only the contract provisions relating to possible acquisition of stock by the petitioner, and ignore the other provisions of the agreement.
Considering the contract as a whole, together with the facts as they existed at the time the contract was entered*1224 into, it is our opinion that the construction adopted by the respondent is unjustified, because, fundamentally, the contract is a ship-operating agreement and not a contract to purchase capital stock. It is true that petitioner first received the income resulting from the operation of the vessels, but it was obligated under the terms of the agreement to deposit these receipts in a special account, to cover from these deposits so made the expenses of operation, and at the end of every six-month period to account to the owner for all ship voyages made and pay over to the owner its one-half of the profits remaining in the joint operating account. These things were done and constituted the essence of the agreement.
But the agreement further provided, and it is these provisions that are the basis for the respondent's contention, that when the owner's share of profits paid over out of the joint operating account should total the agreed valuation of the seven cargo vessels, viz., $1,880,700, 51 per cent of the owner's capital stock should be transferred to the petitioner. It further provided that the petitioner could pay all or any part of the purchase price with its own funds, but*1225 since no such payments were made, this provision need not be further considered.
*1301 Do these stock-purchase provisions change the evident intent and purpose of the parties from an operating agreement for mutual benefits to an agreement for the purchase of 51 per cent of the owner's capital stock? We think not. The provisions merely give the petitioner the right to acquire, or an option to acquire, that amount of stock, and specify what funds shall be used in computing the total sum to be paid, that is, the agreed valuation of the cargo vessels. The evidence is undisputed that the only funds received by the owner that could be used in the purchase of the capital stock under the above provisions, were the owner's one-half of the profits in the joint operating account, which totaled approximately $270,000. But under the provisions of paragraph twenty-one, one-half of the profits belonged to the owner in any event, and this is true, regardless of whether these payments were applied against the total payments that were due and payable before petitioner could acquire the stock.
Respondent's contention is further refuted by the guaranty agreement that was entered into*1226 at or about the time of the operating agreement. In the guaranty agreement, given by the Seas Shipping Company, Inc., to the owner, it was specifically stated that one of the considerations for leasing the seven cargo vessels to the petitioner was to furnish the latter with a fleet of steamships for operation, but no mention is made therein that said Seas Shipping Company, Inc., would guarantee the payment of the purchase price of the stock. Furthermore, there is no showing made in the record that upon termination of the operating agreement the owner insisted upon the guarantor making good for the unpaid balance of the purchase price. It is almost inconceivable that the owner would fail to exercise its rights under the guaranty agreement if the contract of March 23, 1923, were a contract obligating the petitioner to purchase the stock in question. We think the respondent erred in including the entire profit in petitioner's income.
Decision will be entered under Rule 50.