*847 1. In the absence of proof of the cost of petitioner's intangibles, gain was realized on the sale of petitioner's assets, tangible and intangible, measured by the difference between the adjusted cost and the sale price, less costs of sale.
2. A corporation whose liabilities exceed its assets is not "in receivership", as that term is used in section 14(d)(2) of the Revenue Act of 1936, merely because its affairs are being wound up by its directors, acting as liquidating trustees under state statutes.
3. A corporation prohibited by a state law from declaring dividends because of a deficit is not entitled to a deduction under section 26(c)(1) of the Revenue Act of 1936.
*467 This proceeding was brought to redetermine a deficiency in the income and the undistributed profits taxes of the Cooperative Publishing Co., hereinafter referred to as the petitioner, for the year 1936 in the sum of $155.81, in its income tax for the year 1937 in the sum of $1,782.96, in its surtax on undistributed profits for that year in the sum of $2,307.81, and*848 in its excess profits tax for the same year in the sum of $1,526.85.
The primary issue is whether or not the petitioner realized a gain in 1937 by reason of the involuntary sale of its assets under a foreclosure decree.
An ancillary issue is whether or not the petitioner was in receivership within the purview of section 14(d)(2) of the Revenue Act of 1936, when all of its assets were sold by order of court in August 1937 and its directors thereafter acted as liquidating trustees of the corporation.
The petitioner raised the further question that it is not chargeable with having failed to declare dividends when, under the state statutes, its financial condition precluded its doing so.
FINDINGS OF FACT.
The petitioner is an Idaho corporation, organized in 1918, with its principal place of business in Nampa, Idaho. Prior to August 7, 1937, it was engaged in the printing and publishing of a daily newspaper, the Idaho Free Press.
The petitioner ceased to transact business on August 7, 1937, and since that date it has been in the process of liquidation and dissolution, under the direction and control of its directors as statuory liquidating trustees.
Prior to 1936, *849 a suit was brought against the petitioner by bondholders for the foreclosure of their lien against its assets. The action was entitled "F. I. Poage, Trustee, et al v. Cooperative Publishing Company, a Corporation et al" and was filed in the District Court of Canyon County, Idaho. On July 16, 1937, the court entered against the petitioner its judgment and decree, pursuant to which the sheriff of Canyon County, on August 7, 1937, sold all the petitioner's assets, tangibles and intangibles, including subscription and circulation lists, advertising contracts, good will, the name of the paper, etc. The purchasers, who were not stockholders of the petitioner, paid $36,600 in cash. They immediately took possession of the property so sold and continued the publication of the Idaho Free Press without omitting an issue.
*468 By order of the court the purchase price was paid out as follows:
| Sheriff's fees | $1,291.15 |
| Principal and interest on second mortgage | 776.71 |
| Bondholders' principal and interest | 27,512.39 |
| Publication notices | 22.12 |
| Clerks' fees | 7.63 |
| To the petitioner | 6,990.00 |
| Total | 36,600.00 |
After such sale, at a meeting regularly held, the*850 stockholders of the petitioner, by a two-thirds vote of all outstanding stock, ordered and directed the petitioner's directors to proceed to wind up its affairs and cause it to be dissolved. Since that time the petitioner's directors have been acting as its liquidating trustees and have instituted an action in the District Court of Canyon County to dissolve the corporation and to distribute its remaining assets to those entitled thereto.
The number of subscribers to the newspaper on the day of sale was about 2,500. Almost all of them continued their subscriptions after the sale.
The petitioner had always operated at a loss. It never declared dividends. Its deficit on December 31, 1936, was $36,383.52. On December 31, 1937, after applying the proceeds of sale, its deficit was $18,738.86. It then had assets of $11,368.49, and liabilities of $30,107.35 as follows:
| Accounts payable | $2,618.52 |
| Accrued wages | 400.00 |
| Notes payable | 1,548.83 |
| Preferred stock | 1,895.00 |
| Common stock | 23,645.00 |
| Total | 30,107.35 |
The respondent determined that the petitioner had realized a gain of $22,265.84 by deducting from the sale price of $36,600 an adjusted cost basis of*851 $14,334.16 for tangible assets. He deducted no amounts as the cost of subscription lists or good will. The petitioner's books contain no entries or accounts showing the cost of good will, of acquiring circulation or of obtaining subscription lists. All expenditures were charged to operating expenses and deducted on the petitioner's income tax returns. The petitioner's ledger account showed the adjusted cost basis of its tangible assets as $14,334.16 and the sale price of its assets as $36,600, producing a net realized gain therefrom amounting to $22,265.84. Expenses of sale, aggregating $1,320.90, *469 reduced the net gain to $21,944.94. The petitioner's income tax return for 1937 showed a deficit of $5,801.39.
OPINION.
VAN FOSSAN: The petitioner contends that the tax on the undistributed profits in 1936 was not properly assessable because it had a deficit at the end of that year and because it was "actually insolvent and virtually in receivership" by reason of the bondholders' suit then pending against it. Neither reason is persuasive. It was said in *852 , that Congress has the power to tax the current income of all corporations, whether they have deficits or not. . The petitioner has advanced no argument that alters that view.
Section 14(d)(2) of the Revenue Act of 1936 exempts from the imposition of the surtax on undistributed profits (section 14(b) 1) "Domestic corporations which for any portion of the taxable year are in bankruptcy under the laws of the United States, or are insolvent and in receivership in any court of the United States or of any State, Territory, or the District of Columbia." The petitioner argues that it was insolvent in 1936, that its condition culminated in its compulsory dissolution in 1937, and that the situation in which it had been forced was equivalent to a receivership. The Idaho statutes, which constitute the directors of a corporation in dissolution trustees for the creditors and stockholders to settle the affairs of the corporation, are cited to support the argument.
*853 A receivership is a distinct legal status, arising from appropriate proceedings in a court of jurisdiction. Here no such action had been taken. Petitioner was in dissolution but not "in receivership." The statute is in the conjunctive. To come within its scope a corporation must be "insolvent and in receivership." The exemption granted can not be enlarged to include situations not contemplated by Congress.
The petitioner further contends that it could declare no dividends for either 1936 or 1937 because it was prevented from so doing by the statutes of Idaho, which prohibit the payment of dividends except out of surplus. We considered this contention in , and held that in a similar situation, under North Dakota statutes, the petitioner was not entitled to a deduction under section 26*470 (c)(1) of the Revenue Act of 1936. 2 Our decision there controls the disposition of that issue in the case at bar.
*854 The basic question relating to the year 1937 is whether or not a taxable gain was realized by the petitioner upon the forced sale of its assets on August 7 of that year. The respondent determined that the petitioner had realized such a gain, amounting to $22,265.84, by subtracting from the purchase price the adjusted cost basis of the tangible assets. In his computation, he ignored such intangible assets as good will, the cost of securing subscriptions, and of increasing circulation, the value of publishing legal notices, etc. He also failed to allow the expense of the sale, amounting to $1,320.90, which he now concedes to be a correct deduction. The net gain in question, therefore, is reduced to $20,944.94.
The petitioner contends that the cost of the good will and other intangibles was greater than the difference between the adjusted cost basis of the tangible assets and their sale price. The petitioner's books do not support this theory. They contain no account showing any cost of securing subscriptions or increasing circulation or of any other intangible item generally classified as "good will." The petitioner argues, however, that the stockholders' and bondholders' *855 investments, loans and accounts payable, less depreciation taken, amount to over $38,000 and that, since no dividends were ever paid to the stockholders, its invested capital was used and absorbed to produce and preserve its assets and, consequently, such capital represents the cost of the intangibles, after the adjusted cost of the tangible assets is deducted.
The fallacy of this argument is manifest from the fact that it gives no consideration to losses incurred in almost 20 years of operation, to mismanagement, and to many other such factors which might retard instead of develop good will. Cost must be proved with reasonable accuracy. In the absence, therefore, of any positive and satisfactory proof of the cost of the intangibles, we must sustain the respondent's action.
The petitioner further maintains that, at the most, only the $6,990 which it received after the preferred creditors and the costs of suit were paid, should be taxed as its income. The suit was brought to subject the petitioner's property to the payment of its own debts, *471 secured by liens. Other debts remained to be settled after the $6,990 was paid over. The application of the sale price of*856 the petitioner's assets bears no relation to the capital gain derived from their sale. We see no merit in this argument.
We sustain the action of the respondent, as modified by the record.
Decision will be entered under Rule 50.
Footnotes
1. (b) IMPOSITION OF TAX. - There shall be levied, collected, and paid for each taxable year upon the net income of every corporation a surtax equal to the sum of the following, subject to the application of the specific credit as provided in subsection (c):
7 per centum of the portion of the undistributed net income which is not in excess of 10 per centum of the adjusted net income.
* * * ↩
2. (c) CONTRACTS RESTRICTING PAYMENT OF DIVIDENDS. -
(1) PROHIBITION ON PAYMENT OF DIVIDENDS. - An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends. If a corporation would be entitled to a credit under this paragraph because of a contract provision and also to one or more credits because of other contract provisions, only the largest of such credits shall be allowed, and for such purpose if two or more credits are equal in amount only one shall be taken into account. ↩