*2610 Held that the assignment by the petitioner to its stockholders of the right to receive proceeds from insurance policies on a vessel which had sunk does not constitute a distribution of the vessel in kind, and such proceeds, to the extent that they exceed the depreciated cost of the vessel, constitute taxable income to the petitioner.
*655 This proceeding is for the redetermination of a deficiency in income and profits taxes of $30,593.47 for 1919. The only matter in issue is whether certain proceeds from insurance policies on a steamship belonging to the petitioner which sank in 1918 and was abandoned as a total loss constitute taxable income to the petitioner.
FINDINGS OF FACT.
The petitioner is a Minnesota corporation, organized in 1912 and having its principal office at Duluth. The petitioner was engaged in the transportation of general bulk shipments on the Great Lakes and in this connection owned several bulk freight steamers including the steamer Vulcan, which was purchased in 1912 for $70,000. On*2611 October 30, 1918, the Vulcan ran aground, but was thereafter towed to dock. On November 9, 1918, it sank at a coal dock at Houghton, Mich.
The Vulcan was insured with about 29 foreign and domestic insurance companies, such insurance having been placed in the amounts of $98,504 and $50,000 by Prindiville & Co. and Osborn & Co., respectively, insurance brokers of Chicago, Ill. On November 9, 1918, the day the Vulcan sank, the petitioner's president, D. T. Helm, not knowing whether the steamer was a total loss, but intending that the underwriters should do any wrecking and salvaging of it, notified the insurance brokers that the Vulcan had been abandoned to the underwriters as a total loss. Similar notice was also given to R. Parry-Jones, insurance surveyor, who represented all of the companies which had underwritten the Vulcan. Parry-Jones' duties as surveyor for the insurance companies were to see the wreck or vessel in trouble or to send his representative to see it and after the necessary things had been done to save the vessel, if it could be saved, to recommend what repairs should be made, and if the vessel could not be saved, to so recommend to the underwriters*2612 and that it was therefore a total loss. It is unusual for the insurance companies not to follow the surveyor's recommendation and it was in a comparatively small number of cases that Parry-Jones' recommendations were not followed by them. The insurance policies on the Vulcan contained the following provision: "No abandonment shall in any case be effectual unless notice thereof be made in writing to the Agents of the Assurers nor unless the amount of the loss exceeds seventy-five per cent. of the combined value in this policy, as set forth above."
Under date of November 25, 1918, Parry-Jones advised the partnership of D. T. Helm & Co., which was the manager for the petitioner, that the undersriters were approving a bid to raise and *656 deliver the Vulcan alongside the dock at Houghton, but stipulated that the bid must be accepted by the partnership and suggested an acceptance be forwarded the bidder, which was done by the petitioner. Thereafter, on December 12, 1918, Prindiville & Co. sent D. T. Helm & Co. the following letter:
"VULCAN" - OCT. 30, 1918.
Mr. Parry-Jones now advises us that the wreckers have their outfit alongside the wreck, although he does*2613 not think actual operations are commenced. He is of the opinion that the vessel can and will be raised within the next few weeks and he does not recommend the underwriters to pay for a total loss at present. We will keep in close touch with the case and as soon as we are able to get Mr. Parry-Jones to recommend the underwriters to pay the total loss, we will do so.
After the receipt of the foregoing letter and prior to the receipt of the checks representing the proceeds from insurance policies, the petitioner did not have any information from any of the insurance companies with which the Vulcan was insured or from their representatives or the brokers that the Vulcan would be accepted as a total loss, nor did Parry-Jones inform the petitioner as to his recommendations to the insurance companies as to payment. The total proceeds from the policies amounted to $148,503 and on the following dates checks totaling the amounts indicated were received from the insurance companies:
| January 3, 1919 | $15,875 |
| January 7, 1919 | 1,250 |
| January 10, 1919 | 2,875 |
| January 13, 1919 | 12,500 |
| January 16, 1919 | 5,000 |
| January 17, 1919 | 75,922 |
| January 21, 1919 | 6,402 |
| January 24, 1919 | $4,433 |
| January 31, 1919 | 4,000 |
| February 3, 1919 | 9,851 |
| February 10, 1919 | 2,500 |
| February 12, 1919 | 4,925 |
| March 22, 1919 | 1,970 |
*2614 The book value of the Vulcan on December 31, 1918, was $52,500, depreciation of $17,500 having been taken thereon.
On January 8, 1919, a special meeting of the stockholders of the petitioner was called for January 14, 1919, for the purpose of electing a board of directors and of taking action concerning a proposition to sell to the stockholders the petitioner's interest in the wreck of the steamer Vulcan and all interest of the company in and to any and all insurance policies on the Vulcan and any monies arising therefrom for the amount of $52,500 to be paid by the stockholders surrendering stock for cancellation proportionate to their holdings, the total amount to be surrendered being $52,500.
At a special meeting of the stockholders held on January 14, 1919, at which stockholders owning 2,864 shares of a total outstanding of 3,000 shares were present or represented by proxy, D. F. Helm, president *657 of the petitioner reported the following proposition made by the stockholders of the petitioner:
JANUARY 9, 1919.
ATLAS STEAMSHIP COMPANY,
Duluth, Minnesota.
GENTLEMEN: We herewith tender to you the following proposition:
That we, Margaret Dale*2615 Ames, Harriet C. Barnes, D. T. Helm, R. C. Helm, W. J. Scott, A. L. Searle, D. G. Cutler, Jr., David Williams, H. J. Atwood, C. H. Scott and F. T. Helm, comprising all of the stockholders of Atlas Steamship Company, hereby offer to purchase from Atlas Steamship Company the company's interest in the wreck of the Steamer Vulcan, and all interest of the company in and to all insurance policies in the Steamer Vulcan and any moneys arising therefrom, for the sum of Fifth-two Thousand Five Hundred ($52,500.00) Dollars, said amount to be paid by us surrendering stock in said corporation for cancellation proportionate to our ownership of stock in said corporation, the total amount of stock to be surrendered being of the par value of $52,500.00, and the amount each one of us to surrender for cancellation being as follows:
| Shares | |
| Margaret Dale Ames | 113.225 |
| Harriet C. Barnes | 113.225 |
| D. T. Helm | 61.95 |
| R. C. Helm | 59.5 |
| W. J. Scott | 17.5 |
| A. L. Searle | 47.6 |
| D. G. Cutler, Jr | 23.8 |
| David Williams | 23.8 |
| H. J. Atwood | 23.8 |
| C. H. Scott | 35 |
| F. T. Helm | 5.6 |
| Total | 525 |
Your acceptance of this proposition will constitute the agreement between your company to convey the hereinbefore*2616 described property or interest in property to us and for us to surrender said stock for cancellation in the proportions hereinbefore set forth.
In the event of your acceptance of said proposition we hereby appoint and nominate D. T. Helm to act for us as trustee in the aforesaid matter, you to make all conveyances to him and he to accept to us for our proportionate interests in the aforesaid property. His acceptance of said trust shall be denoted by his signing this proposition.
In accordance with a resolution of its stockholders adopted on January 14, 1919, and a resolution of the board of directors passed on the same day, the proposal was accepted by the petitioner and it assigned the rights to receive the proceeds of the insurance policies. D. T. Helm also accepted the appointment of trustee to carry out the provisions of the agreement.
Thereafter the respective stockholders surrendered the number of shares of stock agreed upon in their offer totaling 525 shares and the stock so surrendered was canceled. In conformity with the laws of Minnesota the capital stock of the petitioner was reduced by $52,500, or from $300,000 divided into 3,000 shares of a par value of $100*2617 each, to $247,500 consisting of 2,475 shares of the par value of $100 each. As a result of the transaction 17.5 per cent of the amount of stock owned by each stockholder on January 14, 1919, was canceled.
*658 D. T. Helm as trustee for the stockholders deposited in the First National Bank of Duluth from January 22, 1919, to March 22, 1919, the amount of $148,503 representing the proceeds received on insurance policies from the insurance companies carrying policies on the Vulcan. Helm thereafter distributed to the stockholders their respective proportional parts of the proceeds of insurance, $148,503, plus $1,337.21 interest allowed by the bank, less expenses of $1,850, or a net total of $147,990.21. He also as trustee reported to the Commissioner, on information returns Forms 1096 and 1099 provided in this regard, the amounts so paid to the respective stockholders of the petitioner, showing such amounts as a "distribution."
Since its organization the petitioner has kept its books on a cash receipts and disbursements basis. No entry was made in the petitioner's books with respect to the proceeds of the insurance policies on the Vulcan, nor is there anything in*2618 the petitioner's records to show the dates of receipt of the various checks constituting the proceeds of the insurance policies.
The method of handling the proceeds from the insurance on the Vulcan was made use of on advice of counsel and the purpose of adopting the procedure was to keep down the petitioner's taxes as high taxes had been paid on the proceeds from insurance on another vessel owned by the petitioner.
In determining the deficiency here involved, the respondent determined that the difference between the amount of $147,990.21 representing the net proceeds from the insurance policies and bank interest thereon, and the book value of the Vulcan on December 31, 1918, of $52,500, or $95,490.21, was income to the petitioner.
OPINION.
TRAMMELL: The only issue in this case is whether the amount received from the insurance companies as proceeds of insurance policies to the extent that such amount exceeds the depreciated cost of the Vulcan represents taxable income to the petitioner.
The petitioner contends that the action of the stockholders on January 14, 1919, constituted a partial liquidation of the corporation and that the Vulcan was distributed*2619 in kind to the stockholders. Upon this premise it is contended that when the stockholders received the proceeds of the insurance policies the transaction amounted to a receipt by the stockholders of a profit, but that the corporation received no taxable gain from the transaction.
If, as a matter of fact, the corporation distributed in kind the steamship in exchange for stock surrendered by the stockholders instead of the proceeds of insurance policies or the right to receive *659 such proceeds, it may be conceded that no taxable gain resulted to the corporation. Before this principle of law, however, is shown to be applicable to this proceeding, the fact must be established by the preponderance of the evidence that the steamship which is claimed to have been distributed in kind was so distributed.
On this issue we find that the vessel sank on November 9, 1918; that on January 3, 1919, and January 7, 1919, January 10 and also 13, 1919, insurance policies with four companies had been paid. We can not, from the evidence, find otherwise than that these amounts were paid to the petitioner corporation, as it was not until January 14, 1919, after these policies had been paid, *2620 that the action was taken by the corporation for the purpose of distributing to its stockholders "the Company's interest in the wreck of the Steamer Vulcan and all interest of the Company in and to all insurance policies in the Steam Vulcan and any monies arising therefrom."
We must consider also the fact that on November 9, 1918, the petitioner had notified the insurance companies that the steamship had been abandoned as a total loss. It is true that no notification had been received that the insurance companies would accept it as a total loss, but we can not overlook the fact that on January 14, 1919, as much as $32,500 had already been received by the petitioner, which appears to represent the total amount for which the four companies had insured the vessel. We must also consider the wording of the offer of the stockholders which was made on January 9, 1919, which offer was accepted on the 14th of January, 1919, the fact that the individual who was the surveyor or adjustor for the insurance underwriters represented all of them. It would seem unreasonable that he would recommend to some of the companies that the vessel was a total loss if he did not so treat it with respect*2621 to the other companies. The vessel was at the bottom of the sea. The settlement was in process of being made, and, as stated above, $32,500 had already been paid on insurance policies. The facts and circumstances of the case lead us to the irresistible conclusion that what was transferred to the stockholders was the actual proceeds of the insurance policies at that time already received and the right to receive the proceeds of other insurance policies and that the vessel, itself, was not intended to be and was not in fact distributed in kind to the stockholders as a liquidating dividend.
We think that the facts are inconsistent with the contention that the vessel, itself, was distributed in kind to the stockholders. Clearly at least as much as $32,500 was distributed to the stockholders in cash by the petitioner, as this arrangement between the stockholders and the corporation was not made until after the corporation had actually received that amount in cash from the proceeds of the policies.
*660 It seems to us that the fact that four of the insurance companies had paid their claims apparently in full, and that all of the companies had the same surveyor or adjuster*2622 on whose recommendations they constantly relied, is sufficient to put the petitioner upon notice that the abandonment of the vessel had been accepted and that it was reasonably certain that the stockholders would receive only the proceeds of insurance policies when the transfer to the stockholders was made.
In view of the foregoing we have found as a fact that what was distributed was the proceeds of the insurance policies.
In view of our conclusion as to the fact that the Vulcan was not in fact distributed in kind to the stockholders, we think that it is immaterial that the stockholders were assigned the right to receive the proceeds of the insurance policies direct from the companies rather than from the petitioner. ; ; .
The gain derived from the transaction was therefore taxable to the petitioner.
Judgment will be entered under Rule 50.