Decisions will be entered for the respondent.
O.B.M. adopted a plan of complete liquidation on June 23, 1961. On June 23, 1962, O.B.M. retained assets in excess of those needed to meet its claims. Held:
1. The petitioners have failed to prove that O.B.M. made a diligent attempt to determine what assets needed to be retained to meet claims and to distribute the rest of its assets, and accordingly, sec. 337, I.R.C. 1954, does not apply to the liquidation.
2. The individual stockholders are liable as transferees for the deficiency found against O.B.M.
*619 The respondent determined deficiencies in the income tax of the corporate petitioner, O.B.M., Inc., as follows:
| T.Y.E. | |
| Dec. 31 -- | Deficiency |
| 1961 | $ 37,679.73 |
| 1962 | 18,815.00 |
| 1963 | 7,100.00 |
| Total | 63,594.73 |
The respondent further determined that each of the individual petitioners is liable, as a transferee of O.B.M., Inc., for the total amount of the deficiencies asserted against O.B.M., Inc., $ 63,594.73, plus interest. The principal issue presented is whether all the assets of O.B.M., Inc., except for assets *96 retained to meet claims, were distributed within 12 months of its adoption of a plan of complete liquidation, so that, under section 337 of the Internal Revenue Code of 1954, 2 it is not taxable on the gain from the redemption of certain stock owned by it. The answer depends upon the interpretation of the phrase in that section, "less assets retained to meet claims," and the application of that phrase to the facts of this case.
FINDINGS OF FACT
Some of the facts have been stipulated, and those facts are so found. O.B.M., Inc. (O.B.M.), was organized under the laws of the State *620 of New York in 1906. Although the company was known by different names during its existence, we shall refer to it consistently as O.B.M. Its corporate income tax returns for the taxable years 1961, 1962, 1963, and 1964 were filed with the district director of internal revenue, Manhattan, New York. Its principal office was in New York City, N.Y., at the time its petition was filed in this case.
Each of the individual petitioners had his legal residence within the State of New York at the time his petition was filed *97 in this case. At all times relevant to the issues herein, the individual petitioners owned stock in O.B.M. as follows:
| Shareholdings | ||
| Docket No. | Name | percent |
| 4486-65 | Burton O'Brien | 50 |
| 4487-65 | Gerard M. McAllister | 12 1/2 |
| 4488-65 | Anthony J. McAllister | 12 1/2 |
| 4489-65 | James P. McAllister | 12 1/2 |
| 4490-65 | Roderick H. McAllister | 6 1/4 |
| 4491-65 | Charles D. McAllister | 6 1/4 |
Prior to 1958, O.B.M.'s principal business was contract dredging of boat slips in New York Harbor and towing of scows and equipment. On or about June 19, 1958, O.B.M. ceased all dredging operations and sold all of its operating equipment and properties, except for the tug DuBois II, to Tidewater Dredging Corp. (Tidewater). In return, O.B.M. received 50 percent, or 4,180 shares, of Tidewater's preferred stock and 50 percent, or 1,420 shares, of its common stock. The Tidewater stock constituted O.B.M.'s principal asset after June 19, 1958.
O.B.M. chartered the tug, DuBois II, to Tidewater from June 19, 1958, to March 31, 1960. From April 1, 1960, to approximately June 10, 1960, the tug was chartered to McAllister Bros., Inc.McAllister Bros., Inc., paid O.B.M. commissions in the amounts of $ 6,926.97 between June 1, 1960, and December 31, 1960, *98 and $ 5,250 between January 1, 1961, and June 30, 1961. The U.S. Coast Guard certificate of inspection of DuBois II expired on June 12, 1960. The Coast Guard made a biennial inspection of the tug and on June 20, 1960, sent O.B.M. a letter detailing needed repairs. O.B.M. estimated that the repairs would cost $ 25,000 and decided not to make them. The DuBois II was not operated after June 1960.
On June 23, 1961, at a special joint meeting of stockholders and directors, a plan of complete liquidation of O.B.M. was adopted. Under the plan, O.B.M. was to sell all of its salable assets and distribute to its stockholders, within a 12-month period from the date of the plan, the sale proceeds and its other assets, "less such assets, if any, as may be necessary to meet * * * [O.B.M.'s] claims." On June 26, 1961, O.B.M.'s board of directors met and resolved that the *621 corporation be dissolved under section 337 and appointed Gerard M. McAllister, a stockholder, director, and officer (and one of the petitioners herein), as the trustee in liquidation. Louis J. Riso, the treasurer of O.B.M., handled the details of the liquidation under Mr. McAllister's general supervision.
On June 23, 1961, the *99 balance sheet of O.B.M. reflected the following assets and liabilities:
| TABLE I | ||
| Assets | ||
| Cash in bank | $ 29,359.69 | |
| Accounts receivable | 8,087.89 | |
| Claims receivable | 12,507.39 | |
| Investment in U.S. Treasury bills | 198,810.00 | |
| Accrued interest receivable, U.S. Treasury bills | 400.98 | |
| Investment in preferred stock, Tidewater Dredging Corp | 418,000.00 | |
| Investent in common stock, Tidewater Dredging Corp | 189,637.46 | |
| Investment in stock, Mersick Industries (16,236 shares) | 50,000.00 | |
| Investment in O'Brien-Quist, joint venture | 39,937.90 | |
| Floating equipment tug, DuBois II | $ 229,720.43 | |
| Less reserve for depreciation | 210,104.91 | |
| 19,615.52 | ||
| Total | 966,356.83 | |
| Liabilities | ||
| Accounts payable | 875.00 | |
| Miscellaneous taxes payable | 545.09 | |
| Liability for damage claims | 1,750.00 | |
| Total | 3,170.09 |
Between June 23, 1961, and June 22, 1962, O.B.M. made cash distributions to its stockholders totaling $ 1,127,000. 3 In addition, on June 19, 1962, O.B.M. caused its 16,236 shares of stock in Mersick Industries, Inc., valued at $ 2.50 per share for Federal tax stamp purposes, to be transferred to its stockholders in proportion to their O.B.M. stockholdings.
On June 23, 1962, O.B.M. had assets, ascertained in existence and value, totaling $ 5,099, consisting *100 of $ 3,913 in cash and $ 1,186 in insurance claims. It had liabilities ascertained as to existence and amount totaling $ 2,250, consisting of accounts payable of $ 1,000 and provision for damage claims in excess of insurance coverage of $ 1,250. In addition, as a result of its participation in a joint venture, described more fully later, O.B.M. was liable for a judgment which New York City had obtained against the joint venture for unpaid general business tax. This judgment was for $ 4,416.61 plus interest from the date of *622 the judgment, which amounted to approximately $ 1,300 on June 23, 1962.
Also on that date, O.B.M. owned the tugboat DuBois II with a book value of $ 14,553, an investment in the joint venture whose book value was $ 39,938, and its stock in Tidewater. On that date, certain of O.B.M.'s Federal, State, and local tax returns remained unaudited. These items are discussed later.
Tug DuBois II. -- The tug DuBois II was not operated after June 12, 1960. From that time until August 31, 1967, O.B.M. and Mr. McAllister as trustee in liquidation for O.B.M. maintained and paid for insurance on the tug and continued to offer it for sale for commercial purposes or for scrap. *101 The tug had a scrap value, as of June 23, 1962, of between $ 3,000 and $ 5,000. In 1966, William B. McConnell made an offer of $ 12,000 for the tug, intending to use it as a shrimp boat. Mr. McConnell placed a $ 2,000 deposit on the boat, but after a thorough inspection, he decided not to purchase it and forfeited his deposit. In 1967, the tug was sold for scrap for $ 4,000.
Joint Venture. -- Prior to 1953, O.B.M. was engaged in a joint venture with Quist Construction Co., Inc., to perform a contract with New York City for the demolition of a pier. In 1953, the joint venture instituted a suit against New York City seeking damages in the amount of $ 250,000 on account of an alleged misrepresentation by the City in the demolition contract. On June 23, 1962, this lawsuit was still pending and was the joint venture's sole remaining asset. In 1958, O.B.M. acquired the right to any proceeds of this lawsuit, with limitations not here relevant. In 1954, two law firms declined to handle the suit and advised O.B.M. that it was worthless, but Albert Foreman, an attorney, agreed to represent the joint venture in the suit for a contingent fee of 33 1/3 percent, later reduced to 25 percent. *102 Mr. Foreman engaged in various conferences with representatives of the City and, between the time he took the case and October 1962, stood ready to settle the case for no less than $ 70,000. In 1958, the City's legal representative proposed to recommend to the City comptroller that the case be compromised for $ 15,000; this proposal amounted to an offer of settlement. This offer was rejected at that time by Mr. Foreman but was never withdrawn prior to October 1962.
In October 1962, at a pretrial conference, Mr. Foreman offered to settle the case for $ 40,000, and the City refused. The judge thereupon strongly urged the attorneys for O.B.M. and the City to obtain authorization from their respective principals to settle the case for $ 25,000. Thereafter sometime prior to December 1963, the parties finally agreed to settle the case for $ 25,000. On account of this settlement, O.B.M., on May 20, 1964, received the net amount of $ 12,859.83. This amount *623 took into consideration a compromise of the City's judgment for business taxes and interest against O.B.M. This amount was computed as follows:
| TABLE II | |||
| Total settlement | $ 25,000.00 | ||
| Less: | |||
| Amount payable to New York City for business tax | |||
| judgment plus interest | $ 4,751.67 | ||
| Attorneys' fees (25% of recovery) | 6,250.00 | ||
| Attorneys' expenses | 88.50 | ||
| Due Messrs. Quist and Ferrugio (5% of | |||
| recovery) | $ 1,250 | ||
| Less amount previously paid | 200 | ||
| 1,050.00 | |||
| 12,140.17 | |||
| Balance | 12,859.83 |
The *103 Tidewater Stock. -- On or about June 19, 1961, Tidewater's stockholders voted to sell all of its physical assets to the Great Lakes Dredge & Dock Co. (Great Lakes) for $ 2,150,000. Great Lakes is a publicly owned company, with its principal office at Chicago, Ill., whose business is marine contracting and dredging. None of the stockholders of O.B.M. are or were stockholders of Great Lakes. On June 23, 1961, the stockholders voted that, following consummation of the sale, Tidewater should pay all of its debts and obligations and distribute to its stockholders, within 12 months of the adoption of the plan of liquidation, "all of the remaining assets of Tidewater less such assets, if any, as may be necessary to meet Tidewater's claims," and thereby observe the requirements of section 337. Mr. McAllister, who was a stockholder and officer of Tidewater, was designated trustee in liquidation, but Mr. Riso, who was Tidewater's financial vice president, handled the details of the liquidation. At the June 23, 1961, stockholders' meeting, Tidewater's name was changed to United Maritime Associates, Inc. 4*104
On June 30, 1961, Tidewater received from Great Lakes $ 2,136,000 on account of the sale of its assets. 5 Thereafter, O.B.M. received from Tidewater, prior to June 23, 1962, distributions totaling $ 834,060 on account of Tidewater's liquidation, the last distribution in that period being received on February 28, 1962. 6 None of the Tidewater shares *624 held by O.B.M. or any other of Tidewater's stockholders were ever surrendered as a result of the Tidewater liquidation.
As of February 28, 1962, after the liquidating distributions of that date, Tidewater's books reflected the following assets, liabilities, and stockholders' equity:
| TABLE III | ||
| Assets | ||
| Cash in Grace National Bank | $ 3,440 | |
| Accounts receivable | 90,909 | |
| Federal income tax refund receivable | 14,342 | |
| Insurance claims receivable | 12,338 | |
| Deposit (collected Mar. 20, 1962) | 6,000 | |
| Insurance premium refunds (collected Apr. 18, 1962) | 82 | |
| Other receivables: | ||
| Burton E. O'Brien | $ 936 | |
| Robert M. Catherine, Jr | 606 | |
| 1,542 | ||
| Total | 128,653 | |
| Liabilities and stockholders' equity | ||
| Accounts payable: | ||
| Johnson & Higgins | 394 | |
| Henry Brout & Co | 2,500 | |
| $ 2,894 | ||
| Taxes payable: | ||
| Income tax withheld from employee | 3,063 | |
| New York City excise tax on gross receipts | 2,180 | |
| State franchise taxes (estimated) | 1,000 | |
| 6,243 | ||
| Accrued expenses: | ||
| Workmen's compensation insurance in connection with | ||
| Verrazano Bridge contract | 1,936 | |
| Various in connection with Judi Bob claim | 1,264 | |
| 3,200 | ||
| Estimated liability for damage claim (in excess of insurance coverage) | 500 | |
| Total liabilities | 12,837 | |
| Stockholders' equity | 115,816 | |
| Total | 128,653 |
*105 Tidewater's annual report for the fiscal year ending February 28, 1962, stated that this balance sheet, which shows stockholders' equity in the amount of $ 115,816, did not reflect certain contingent liabilities, viz, additional retroactive workman's compensation premiums of approximately $ 51,000; liability to the owner of the vessel Judi Bob for damages estimated at $ 20,000 over and above the amount shown *625 on the books; and liability for additional Federal, State, and local taxes which might be asserted with respect to unaudited tax returns.
Subsequent to February 28, 1962, the Federal taxing authorities denied certain deductions claimed on Tidewater's 1962 income tax return and asserted a deficiency of approximately $ 30,000 plus interest. The Federal tax claims against Tidewater were settled sometime during 1963. Also in 1963, the workmen's compensation liability was settled for an amount less than the anticipated $ 51,000. On February 28, 1963, Tidewater made a distribution to its stockholders of which O.B.M. received $ 28,400. In 1964, Tidewater satisfied its liability arising out of the damage to the Judi Bob for $ 4,900. On December 9, 1964, Tidewater made a distribution *106 to its stockholders, of which Mr. McAllister, as trustee in liquidation for O.B.M., received $ 7,500. On September 6, 1966, Tidewater completely wound up its affairs and made a final liquidating distribution to its stockholders of $ 1,107.32, of which Mr. McAllister, as trustee in liquidation for O.B.M., received $ 553.66.
Contingent Federal, State, and Local Tax Liabilities. -- As of June 23, 1962, certain of O.B.M.'s State and City tax returns were still subject to audit. Federal tax returns for the taxable years after 1957 were subject to audit; however, the 3-year statute of limitations had run with respect to the taxable year 1958. As of June 23, 1962, Mr. Riso and Gerard McAllister did not anticipate any specific tax liability for any particular year and set no assets aside specifically to meet anticipated tax liabilities.
On March 1, 1963, O.B.M., following the receipt of the $ 28,400 distribution from Tidewater, distributed $ 28,000 to its stockholders. On July 10, 1964, O.B.M. filed a certificate of dissolution with the secretary of state of New York, distributed its remaining assets to Mr. McAllister as trustee in liquidation for O.B.M., and went out of existence.
Between *107 July 16, 1964, and September 7, 1966, the following deposits were made in a checking account in the name of Gerard M. McAllister, as trustee in liquidation for O.B.M.:
| TABLE IV | ||
| Date | Item | Amount |
| 7/16/64 | Recovery on claim for joint venture | $ 12,859.83 |
| O'Brien Bros. -- Quist bank account 1 | 463.25 | |
| O.B.M. account | 2,575.41 | |
| 10/26/64 | Refund New Jersey franchise tax | 50.00 |
| 12/10/64 | Tidewater distribution | 7,500.00 |
| 2/3/66 | Wm. B. McConnell -- deposit on sale of DuBois II | 2,000.00 |
| 9/7/66 | Final Tidewater distribution | 553.66 |
| Total | 26,002.15 |
*626 On July 20, 1964, Mr. McAllister, as trustee in liquidation for O.B.M., distributed $ 15,000 to O.B.M.'s stockholders, which amount consists, in part, of the proceeds of the settlement of the joint venture claim against New York City. On September 14, 1965, he distributed, as trustee, $ 4,000 to O.B.M.'s stockholders, so that they could pay attorneys' fees arising out of the present proceeding. As of the date of the trial in this case, the checking account in the name of Mr. McAllister, as trustee in liquidation for O.B.M., showed a balance of $ 8,339, which amount was retained in that account to pay the costs of the present proceeding, including possible appeals.
The *108 following table summarizes the distributions received by O.B.M. from Tidewater and the cash distributions it made to its stockholders:
| TABLE V | ||
| Distributions | Cash distributions | |
| Date | by Tidewater | by |
| to O.B.M. | O.B.M. to | |
| its stockholders | ||
| During 12-month period: | ||
| July 13, 1961 | $ 418,000 | |
| July 14, 1961 | $ 500,000 | |
| July 31, 1961 | 241,400 | 240,000 |
| Aug. 25, 1961 | 200,000 | |
| Sept. 5, 1961 | 99,400 | |
| Sept. 21, 1961 | 100,000 | |
| Feb. 28, 1962 | 75,260 | |
| Mar. 1, 1962 | 75,000 | |
| June 19, 1962 | 12,000 | |
| Total during 12-month period | 834,060 | 1,127,000 |
| After 12-month period: | ||
| Feb. 28, 1963 | 28,400 | |
| Mar. 1, 1963 | 28,000 | |
| July 20, 1964 1 | 2 15,000 | |
| Dec. 9, 1964 | 7,500 | |
| Sept. 14, 1965 | 4,000 | |
| Sept. 6, 1966 | 554 | |
| Total after 12-month period | 36,454 | 47,000 |
| Grand total | 870,514 | 1,174,000 |
From 1961 through 1965, the individual petitioners received the following cash amounts in liquidation of their stockholdings in O.B.M.:
| TABLE VI | |
| Burton O'Brien | $ 587,000 |
| James P. McAllister | 146,750 |
| Gerard M. McAllister | 146,750 |
| Anthony J. McAllister | 146,750 |
| Roderick H. McAllister | 73,375 |
| Charles D. McAllister | 73,375 |
| Total | 1,174,000 |
OPINION
While *109 O.B.M. was in the process of liquidation, it received liquidating distributions from Tidewater in excess of its basis in the Tidewater*627 stock. The question presented is whether O.B.M. has met the requirements of section 337(a) so that it is not required to recognize the gain it realized on the Tidewater liquidation. Section 337(a) provides:
SEC. 337. GAIN OR LOSS ON SALES OR EXCHANGES IN CONNECTION WITH CERTAIN LIQUIDATIONS.
(a) General Rule. -- If --
(1) a corporation adopts a plan of complete liquidation on or after June 22, 1954, and
(2) within the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete liquidation, less assets retained to meet claims,
then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within such 12-month period.The answer depends on whether O.B.M. distributed within the 12-month period all of its assets "less those retained to meet claims." 7*110
It is undisputed that O.B.M. did not distribute all of its assets within 12 months of the adoption of the plan of complete liquidation. On June 23, 1962, it still had assets consisting of cash and insurance claims totaling $ 5,100, the tug DuBois II with a minimum value of $ 3,000, its claim against the City arising out of the O'Brien-Quist joint venture, and the Tidewater stock. On that date, it had liabilities, which were ascertained as to existence and amount, consisting of accounts payable, a liability for an insured damage claim, and the judgment of New York City against the O'Brien-Quist joint venture on account of unpaid general business tax. These liabilities totaled $ 7,950, and it had assets the value of which were ascertained to be worth at least $ 8,100 -- clearly an amount sufficient to cover its liabilities.
The question, then, is why the claim against New York City arising out of the joint venture and the Tidewater stock were not distributed. The petitioners argue that O.B.M., when it adopted its plan of liquidation, directed Mr. McAllister and Mr. Riso to distribute all its assets within 12 months except *111 for those retained to meet claims; that these gentlemen did undertake to distribute all the corporate assets and did in fact distribute substantially all of them within the 12-month period; that in good faith they believed the claim and the stock to be worthless on June 22, 1962, and did not distribute them for that reason; and that section 337 requires no more than such a good-faith attempt to comply with its terms.
The petitioners' contention that the claim against the City was worthless rests on the testimony of Mr. McAllister that he considered *628 it worthless in 1962. However, in 1958, the City offered to settle the suit for $ 15,000. O.B.M.'s attorney, who was asking $ 70,000 in settlement, refused this offer, but the City did not withdraw it. At all times until October 1962, the City's offer remained open, and the case could have been settled for that amount. O.B.M. continued to ask for $ 70,000 until October 1962 when it made a settlement offer of $ 40,000. At a pretrial conference in October 1962, the judge urged the parties to settle the case for $ 25,000 and set in motion the machinery which led to actual settlement for that amount in 1963. On the basis of these facts, *112 the conclusion is inescapable that as of June 23, 1962, the case had a minimum settlement value of no less than $ 15,000. Taking into account witness and attorney fees and expenses to be deducted from any settlement, the lawsuit had a minimum cash value of at least $ 10,500.
The petitioners argue that whatever the lawsuit's actual value, Mr. McAllister held a good-faith belief that it was without value and that this good-faith belief is sufficient justification under section 337*113 for the failure to distribute or otherwise dispose of the claim. Mr. McAllister testified that his belief that the suit was worthless was based upon the legal advice which had been received in 1953 and 1954 and the unavailability of certain key witnesses. However, he was unaware of the offer of the City to settle the claim for $ 15,000. The true state of affairs could and should have been learned in the process of liquidating the corporation in the 12-month period, yet the record discloses no effort on the part of those in charge of the liquidation to learn the correct facts. Mr. McAllister did not consult the counsel handling the litigation as to the chances of recovery or as to the value of the claim.
On the basis of the record before us, we believe that the petitioners have failed to prove that a good-faith attempt was made to comply with the requirements of section 337. We do not fault O.B.M. for lacking perfect vision as to the future course of events. They failed to meet the requirements of the statute, not because they did not correctly anticipate the value of the claim, but because they did not make a serious effort to determine its value as of June 23, 1962. To determine *114 what liability should be anticipated and what assets should be retained to satisfy them calls for the exercise of some judgment on the part of corporate officials arranging for the liquidation of a corporation. Had these corporate officials made a serious effort to determine the value of the claim, we would have a different case, irrespective of whether their forecast turned out to be accurate or inaccurate. However, they have failed to prove that they made such an attempt. They argue that their general purpose was to comply with section 337, that there was no purpose of tax avoidance, and that they were not deliberately *629 attempting to time the tax consequences for stockholders. Nevertheless, this evidence, even if it is true, fails to demonstrate that they inquired into the value of the claim against the City. In our opinion, a taxpayer who is seeking to qualify for the tax benefit of section 337 must establish more diligence in attempting to meet the requirements of the section. The statute requires that all assets be distributed, except for those retained to meet claims, and we think that as a minimum the taxpayer must diligently attempt to determine what assets the corporation *115 has and attempt to distribute them in accordance with this requirement of the statute.
The Tidewater stock presents a slightly different situation. The petitioners contend that this asset also was worthless on June 22, 1962, inasmuch as Tidewater itself had just completed a 12-month liquidation pursuant to section 337 and had retained only such assets as were necessary to meet claims. On brief, both the petitioners and the respondent invite us, in effect, to consider whether Tidewater itself satisfied the requirements of section 337. We decline to do so.
Even if it is assumed that by June 23, 1962, Tidewater had distributed all of its assets except those retained to meet claims, within the requirements of section 337 (and we expressly do not so decide), it does not follow that its stock was worthless. The fact that Tidewater may have acted reasonably in anticipating and providing for its contingent liabilities did not preclude the possibility, which became an actuality, that such claims would not materialize or would be settled for an amount less than anticipated. We think that the fact that after the close of the 12-month period Tidewater became able to make additional distributions *116 to its stockholders is not merely accidental but illustrates the potential value of the stock of a liquidating corporation which retains assets to meet claims. Indeed, although O.B.M.'s officers professed to believe that the Tidewater stock was without value on June 22, 1962, we doubt that they would have been willing to abandon it altogether, thereby giving up any right to possible future distributions from Tidewater. If these officials had exercised due diligence in attempting to comply with the requirements of section 337, they would have recognized the potential value of the Tidewater stock and would have distributed it to the O.B.M. stockholders. 8
In the alternative, the petitioners attempt to justify the retention of the claim against the City and the Tidewater stock on the basis that they were needed to meet contingent claims against O.B.M. However, this position is inconsistent with the testimony of Mr. McAllister and Mr. *117 Riso that they considered the claim and the stock to be worthless -- *630 if they were worthless, then there was no reason to retain them to meet claims. In addition, the petitioners have failed to prove the amounts of the contingent claims or that they made any reasonable effort to ascertain such amounts. At trial and on brief, the petitioners contend that O.B.M. had contingent claims outstanding against it consisting of liquidating expenses, insurance on the tug Dubois II, continuing interest on the general business tax judgment, and liability for increased taxes asserted with respect to unaudited tax returns. Yet, the record contains little or no evidence with respect to the likely amount of these claims as of June 23, 1962. Inasmuch as we are not given any indication of the magnitude of these claims, we could not determine what amount of assets might reasonably have been retained to meet them. What is more, it does not appear that Mr. McAllister and Mr. Riso made any serious effort to anticipate the amounts of such claims with any degree of specificity whatsoever. Those who seek to comply with section 337 must make a diligent effort to ascertain as well as possible both the existence *118 and the amounts of claims remaining at the end of the 12-month period, in order to make reasonable provision therefor. There is no evidence that such effort was made with respect to the contingent claims.
The petitioners contend that the respondent is attempting to penalize O.B.M. and its stockholders for the fact that Mr. McAllister and Mr. Riso exercised "conservative" judgment in valuing its assets and determining the amount necessary to meet claims; that is not the ground of our holding. We are not concerned with the business philosophy underlying the business judgment; the question is whether any serious judgment, based on facts ascertained as well as possible, was made at all with respect to the retention of assets to meet claims; and our holding is based upon the petitioners' failure to prove that any such judgment was exercised.
In conclusion, we hold that O.B.M. has not met the requirements of section 337 and that it is therefore taxable on the gain it realized as a result of the liquidation of Tidewater.
The respondent has asserted transferee liability under section 6901 on the part of the individual petitioners for the deficiency asserted against O.B.M. Section 6901 provides *119 a procedure whereby the respondent may collect unpaid taxes from a transferee; the substantive liability of a transferee is a matter of State law. Commissioner v. Stern, 357 U.S. 39">357 U.S. 39 (1958). The burden of proof is on the respondent to establish that the individual petitioners are liable as transferees for the deficiencies which we have found to have been properly asserted against O.B.M. for its taxable years 1961, 1962, and 1963. Sec. 6902(a).
The amounts paid to the individual petitioners as liquidating distributions were without full and adequate consideration; each distribution *631 was one of a series of distributions in complete liquidation which left O.B.M. insolvent. See Drew v. United States, 367 F. 2d 828 (Ct. Cl. 1966); J. Warren Leach, 21 T.C. 70">21 T.C. 70 (1953). The income tax liability of O.B.M. was accruing from the time of the first distributions in complete liquidation of O.B.M. Under such circumstances, sections 273 and 278 of the New York Debtor and Creditor Law impose liability on the stockholders, in the amount each received as a liquidating distribution, for the claims of O.B.M.'s creditors. The facts therefore fully support the respondent's claim of transferee liability *120 and the record discloses no grounds for our holding to the contrary. See Archie A. Swinks, 51 T.C. 13">51 T.C. 13 (1968). The petitioners make no argument and adduced no proof with respect to this issue; their sole stated ground for resisting transferee liability is that O.B.M. was not liable for the claimed deficiencies, a position we have rejected. Since each of the individual petitioners received amounts in excess of the amount of O.B.M.'s deficiencies, we hold that they are each liable as transferees for O.B.M.'s deficiencies in income tax, as here found, plus interest as provided by law.
Decisions will be entered for the respondent.
Footnotes
1. Cases of the following petitioners are consolidated herewith: Burton O'Brien, docket No. 4486-65; Gerard M. McAllister, docket No. 4487-65; Anthony J. McAllister, docket No. 4488-65; James P. McAllister, docket No. 4489-65; Roderick H. McAllister, docket No. 4490-65; and Charles D. McAllister, docket No. 4491-65.↩
2. All statutory references are to the Internal Revenue Code of 1954, unless otherwise indicated.↩
3. See Table V, infra↩, p. 626.
4. "Tidewater" as used herein refers to "Tidewater Dredging Corp." or "United Maritime Associates, Inc.," as the case may be.
5. The record does not disclose how, when, or whether Tidewater received the other $ 14,000 from Great Lakes.↩
6. See Table V, infra↩, p. 626.
1. Uncashed checks.↩
1. O.B.M. formally dissolved July 10, 1964. Thereafter, receipts and disbursements were managed by Mr. McAllister as trustee in liquidation for O.B.M.↩
2. On May 20, 1964, O.B.M. received $ 12,859.83 in settlement of the joint venture's lawsuit against New York City.↩
7. The parties agree that O.B.M.'s gain on the Tidewater liquidation is the sort of gain which may go unrecognized under sec. 337. See Rev. Rul. 57-243, 1 C.B. 116">1957-1 C.B. 116; Bittker & Eustice, Federal Income Taxation of Corporations & Shareholders 401 (2d ed. 1966).
8. Because of our conclusion that sec. 337↩ does not apply in this case, we do not have to face the question concerning the effect of that section on the portion of the gain from the Tidewater stock realized by O.B.M. after the close of the 12-month period.