*2917 CORPORATE ASSETS - SALE OR LIQUIDATING DISTRIBUTION - INCOME. - The two stockholders of petitioner corporation in 1921 by individual contract subscribed to stock in a new corporation then being organized and agreed, in payment therefor, to secure the transfer to that corporation of certain assets of petitioner. In 1922, at a special meeting of stockholders, a resolution was adopted by petitioner to liquidate and dissolve and to convey the assets in question to the new corporation in satisfaction of the stock subscription made by th stockholders individually, the stock to be issued to those stockholders direct. The making of the transfer direct to the new corporation was to avoid the expense of a double transfer, one to the stockholders in liquidation and the second by them to the new corporation. Held, that the transfer by petitioner was not a sale of assets whereby a gain or loss was sustained by petitioner but merely a method effecting a disstribution of assets in the course of liquidation.
*116 Petitioner appeals from a deficiency in income*2918 and profits tax in the amount of $5,997.94 for the calendar year 1921, determined and advised of by respondent on March 30, 1926.
This deficiency arises from respondent's inclusion in petitioner's income for the taxable year in question of an alleged gain on the sale of capital assets. Petitioner raises two issues - first, that the transaction in question did not constitute a sale of assets but merely a transfer effecting a distribution of same to its stockholders, and, second, that if the transaction were a sale it was made in the calendar year 1922 and no gain could have been realized in the year 1921.
FINDINGS OF FACT.
Petitioner is a Massachusetts corporation, located at Woburn in that State, and with an issued capital stock of 2,000 shares of a par value of $200,000. Prior to November 1, 1921, it was engaged in the leather-tanning business and since that date its activities have been confined to liquidating and distributing its assets.
During the calendar year 1921, and since that year, all of petitioner's capital stock was owned by two brothers, Everett P. Fox, with 1,333 shares, and John W. Fox, with 667 shares. During that year Everett P. Fox was a partner in*2919 the partnership of Tolman, Dow & Co., of Boston, which acted as a sales agent for petitioner.
On October 27, 1921, a contract in writing was executed by Gilbert Tolman, Frederick W. Dow, Oliver Hall, Herbert E. Cox, and Everett P. Fox, as individuals. This agreement witnessed the fact that the parties thereto were causing to be organized a corporation under the same of Tolman, Dow & Co., Inc., whose purpose was to take over and operate the business of the partnership of Tolman, Dow & Co., and the business of petitioner. The corporation to be organized was to have a capital stock of 4,500 shares preferred of $450,000 par value, and 1,000 shares common without par value. By this contract Everett P. Fox subscribed to 2,000 shares of preferred and 200 shares of common stock of the new corporation and agreed to pay for same by causing to be conveyed to it the real estate, machinery and equipment comprised in the tannery of petitioner at Woburn, this to be received at a valuation of $150,000 and by the contribution of a further sum of $50,000 in cash or liquid assets. The other parties *117 to the contract subscribed to the remaining preferred and common stock.
On November 1, 1921, a*2920 contract was entered into in writing between Everett P. and John W. Fox, whereby the action of the former in executing the aforementioned agreement of October 27 was ratified and approved as having been taken for them both, it being agreed that the stock of the new corporation subscribed for should be issued in proportion to their individual interests of two-thirds and one-third in the stock of petitioner. It was further agreed that the assets of petitioner should be transferred and conveyed to the new corporation in payment for the capital stock as provided for.
On October 27, 1921, the new corporation was duly organized. On November 1, 1921, that corporation took possession of the real estate, buildings and machinery comprising the tannery of petitioner. Petitioner from that date ceased to do business with the exception of disposing of its inventory, collecting its accounts and paying its obligations and other acts incident to liquidation, and in performing the specific acts hereafter described.
On January 10, 1922, a special meeting was held of the stockholders of petitioner, at which all of the stock was represented and the minute book petitioner shows the following proceedings*2921 as having taken place:
SPECIAL MEETING OF THE STOCKHOLDERS
BOSTON, MASS., Jan. 10, 1922.
* * *
The President, Mr. Everett P. Fox, stated to the meeting that the liquidation of the corporation and a consolidation of its interests with the business heretofore conducted by the partnership of Tolman, Dow & Company in the City of Boston had been considered by the stockholders; that such course of action seemed to be desirable; that to this end he had participated in the organization of a corporation under the laws of the Commonwealth of Massachusetts under the name of Tolman, Dow & Co. Inc., for the purpose of taking over and consolidating the business of this corporation and the business of the partnership of Tolman, Dow & Company, as stated, and that he had subscribed for capital stock thereof, and had agreed with his associates in such new corporation that this corporation would liquidate its affairs, and transfer and convey its real estate, plant and equipment, supplies and goodwill to such new corporation in payment for capital stock subscribed for by Mr. Fox. The matter was discussed and explained at length, and, thereafter, it was moved and seconded:
That all the real*2922 estate of this corporation located in Woburn, Massachusetts, be conveyed to Tolman, Dow & Co. Inc., a Massachusetts corporation, and the Treasurer be, and he hereby is, authorized to have prepared and to execute, acknowledge and deliver in the name, and on behalf, of this corporation, such deeds or other instruments as may be necessary and proper for carrying out the purpose of this vote.
On the foregoing motion and proposition, a stock vote was taken, Mr. Bucknam acting as teller, and he reported as follows:
2000 votes cast in the affirmative.
*118 No votes cast in the negative, and the motion was duly declared unanimously adopted.
It was also moved and seconded:
That all the machinery, equipment and manufacturing supplies of the corporation, including all extracts, tanning materials, oils and greases, and cash to an amount which, together with said supplies, will inventory at $50,000, and also the goodwill of the corporation, be paid over, assigned, transferred and set over to Tolman, Dow & Co. Inc., a Massachusetts corporation as of November 1, 1921, and the Treasurer be, and he hereby is, authorized to have prepared, and to execute and deliver in the name, and*2923 on behalf, of this corporation, such checks, bills of sale, or other instruments as may be necessary and proper for carrying out the purposes of this vote.
On the foregoing motion and proposition, a stock vote was taken, Mr. Bucknam acting as teller, and he reported as follows:
2000 votes cast in the affirmative.
No votes cast in the negative, and the motion was duly declared unanimously adopted.
It was also moved and seconded:
That, upon the delivery and receipt of proper deeds, checks, and bills of sale of the real estate and assets of this corporation to and by Tolman, Dow & Co. Inc., as provided for in the two preceding votes, the said Tolman, Dow & Co. Inc., shall be authorized and entitled to apply the same to the subscriptions of Everett P. Fox to the capital stock of said corporation, and to issue and to deliver to said Fox, or his nominee, individually, as Trustee, or otherwise, as said Fox may direct, in exchange for said assets, the capital stock of said corporation in accordance with the subscription agreement therefor of said Everett P. Fox.
On the foregoing motion and proposition, a stock vote was taken, Mr. Bucknam acting as teller, and he reported as*2924 follows:
2000 votes cast in the affirmative.
No votes cast in the negative, and the motion was duly declared unanimously adopted.
It was moved and seconded:
That, as to the preferred stock of Tolman, Dow & Co. Inc., subscribed for by Everett P. Fox, and to be paid for by the transfer of the assets of this corporation, the said Everett P. Fox shall distribute the same as and when received by him, or shall direct the same to be issued and delivered to the stockholders of this corporation, in the following manner and amounts:
One third thereof to John W. Fox, and
Two thirds thereof to Everett P. Fox.
On January 12, 1922, petitioner by deed of conveyance transferred to Tolman, Dow & Co., Inc., the land and buildings referred to in th corporate resolution of January 10, above set out, and on the same date by bill of sale transferred to that corporation various items of personal property and made to it a payment of cash necessary to make up a total of $50,000 in such property. The transfer of the personal property was made by the terms of the bill of sale as of November 1, 1921.
On May 28, 1922, there was issued and delivered to Everett P. Fox 1,333 shares, and to John*2925 W. Fox 667 shares of preferred stock of *119 Tolman, Dow & Co., Inc., the certificates in each case being dated back to November 1, 1921.
In the work of auditing the books of W. P. Fox & Sons, Inc., for the year ending December 31, 1921, an outside auditor was employed for this purpose. Some time in the fore part of the year 1922, in the preparation of the tax report and the closing of the books for 1921, he instructed the bookkeeper of W. P. Fox & Sons, Inc., to make an entry on the ledger as of November 1, 1921, as follows:
| Nov. 1. | |
| Investment in Preferred Stock of | |
| Tolman, Dow & Co. Inc. to Plant Acct | $ 132,592.24 |
| Tolman, Dow & Co. Inc | 50,000.00 |
At a meeting of Stockholders held Jan. 10, 1922, it was voted to exchange the Real Estate, Machinery and Equipment of this company for preferred stock in Tolman, Dow & Co. Inc., and also to transfer certain materials and supplies together with cash to the amount of $50,000 for preferred stock in Tolman, Dow & Co. Inc.
This entry was made by the bookkeeper in accordance with such instructions of the auditor, and never came to the attention or knowledge of any of the officers of the corporation until*2926 the examination of the company's books by the revenue agent some years subsequent. In its return filed for the year 1921, the taxpayer corporation did not reflect any conveyance of its assets to Tolman, Dow & Co., Inc.
The reason that the taxpayer did not transfer its real estate, machinery and equipment as aforesaid direct to its stockholders in liquidation was in order to avoid the circuity of a double transfer, as the same assets would then have to be transferred by the stockholders to Tolman, Dow & Co., Inc., involving a double tax on the deed for the transfer of real estate, amounting to a substantial figure.
Respondent in his determination of deficiency herein appealed from held the transfer of petitioner's assets to Tolman, Dow & Co., Inc., to have been a sale from which a taxable gain was realized by petitioner in the calendar year 1921.
OPINION.
TRUSSELL: The facts in this proceeding are all stipulated. The deficiency is asserted for the calendar year 1921, and arises from the action of respondent in increasing the income reported by petitioner for that year by an amount determined by him as profit realized in that year by petitioner in the sale of its plant*2927 and other assets to another corporation.
In respect to the first contention of petitioner, that the conveyance of the assets was merely a transfer effecting a distribution to stockholders in liquidation and not a sale, the stipulated facts show beyond *120 question that petitioner actually received nothing for the assets transferred, and that the transfer was made in carrying out the liquidation formally determined upon and directed by the stockholders. Can it be said that there was constructive receipt on its part of the consideration received by the stockholders?
As a matter of fact, petitioner has in the course of liquidation merely transferred certain of its assets, subject to distribution to its two stockholders, to another corporation with direction to apply them against subscriptions made personally by such stockholders to the stock of the transferee and with direction to issue the stock direct to such subscribers.
The facts in this case are not similar to those in , in which we held that a corporation which sold assets under a contract which specified that a certain portion of the consideration was to be paid*2928 it "as agent for its stockholders and distributed among such stockholders," was taxable upon the gain represented by the entire consideration as it was not in fact an agent for distribution to its stockholders of the consideration received from sale of its assets. In that case the consideration was actually received by the corporation and irrespective of any recital in the contract of sale its obligation to its stockholders was in no way increased or altered.
In the present case petitioner received no part of the consideration paid for the transferred assets by the corporation receiving them. In so far as petitioner was concerned, the transfer effected no more than the redemption of its stock outstanding in the hands of its stockholders. Such conclusion can not be avoided, in our opinion, when it is agreed and stipulated by petitioner and respondent that the transfer was an act in effecting a liquidation and was made direct to Tolman, Dow & Co., Inc., instead of to the stockholders merely for the purpose of avoiding the expense of a double transfer.
The book entry made in 1922, as of November 1, 1921, recording this transaction as an investment in the stock of Tolman, Dow*2929 & Co., Inc., is shown to have been an entry not authorized by and unknown to the officers of petitioner, and in view of the admitted facts is clearly shown to be erroneous. This being the case it can not determine petitioner's tax liability. Income is not a matter of bookkeeping but of fact. As we said in :
Mere bookkeeping entries can not make sales from transactions which were in fact not sales, or income from something which is in fact not income.
In view of these facts we hold that the transfer in question was not a sale of property in which a gain was realized in so far as petitioner was concerned, but a transfer by it intended to take effect, and which *121 did take effect, as a distribution of its assets. The conclusion reached necessarily disposes of the alternative issue presented.
Judgment will be entered for the petitioner.