Kaufmann v. Commissioner

¶1OPINION.

¶2That this proceeding comes within the purview, and is governed by the principle, of Commissioner v. Court Holding Co.. 324 U. S. 331, seems to us demonstrated by Fairfield Steamship Corporation., 5 T. C. 566. Not only the prevailing opinion, but that of the dissent, makes this clear.

¶3The rationale of that case was that “the sale effected was in substance that which had been arranged while [petitioner] … held title” to the property (page 573). The record here shows that Hyman, who carried on all negotiations for the seller,1 was president of the corporation; he was not a stockholder. He was negotiating for the sale of property of which the corporation, not the stockholders, was the owner. Whatever their final outcome, all of the negotiations were carried on, right down to the formulation and execution of the escrow agreement, while the corporate petitioner continued to hold title to the property. Petitioners do not, in fact, deny this, but insist in their brief merely that “the stockholders had legally obligated themselves to convey title to this property when they acquired the same in the future …. In our case … there were no negotiations for the sale of the property by the corporation with the final vendees whatsoever.”

¶4Even under the theory of the dissenting judges, these are stronger facts for respondent than those in the Fairfield case. There the dissent points out that before any negotiations were started, “The evidence is clear that the parties had decided to transfer the assets of [the corporation] … including” the property in question, “to Atlantic [the stockholder] in exchange for all of” the corporation’s outstanding stock. “… it was only on September 19, after the transfer … that Lewis, as president of Atlantic [the stockholder], was authorized to conclude a contract …

¶5Here, the facts show, and are so construed by petitioners, that no steps whatsoever were taken toward liquidation until the deal for sale of the .property had been conclusively agreed to. As the court said in Trippett v. Commissioner (C. C. A., 5th Cir.), 118 Fed. (2d) 764, affirming 41 B. T. A. 1254, Trippett and Meadows, the two sole stockholders there, “had no right to deal with the corporate property as their own. Texota Corporation had not been dissolved or liquidated and they could only act as its agents.”2 George T. Williams, 3 T. C. 1002, and Acampo Winery & Distilleries, Inc., 7 T. C. 629, may be thus distinguished. Perhaps the view of the Fifth Circuit in Howell Turpentine Co. v. Commissioner, 162 Fed. (2d) 319, reversing 6 T. C. 364, was that the facts there were likewise reconcilable.3 If not, we are, for the sake of uniformity, respectfully constrained to follow the contrary conclusions reached by us in the Howell and Fairfield cases.

¶6The affirmance of the Fairfield case (C. C. A., 2d Cir.), 157 Fed. (2d) 321; certiorari denied, 329 U. S. 774, was, it is true, not placed upon the same grounds as those employed below. Regardless, however, of the reasons given, the cases are, in our view, identical, unless, as we have suggested, the present facts are more favorable to respondent.

¶7There remains for consideration the point, insistently urged by petitioners, that the corporate petitioner was effectively disabled from making any sale of its property, and hence that the stockholders, and not the corporation, must have done so. Rejection of the proposition is required by the facts themselves. The corporation was no more bound not to sell than it was not to distribute its assets. Neither was a categorical prohibition; both depended upon paying off the corporation’s bonds. This was actually done, in the ultimate outcome, out of the proceeds of the sale and new mortgage, which were obviously greatly in excess of what was needed to liquidate the bonds in cash.4

¶8A contract to sell the property upon the simultaneous discharge of the bond indenture is nowhere shown to have been impossible, nor indeed, even difficult. We may take notice that such transactions are of common occurrence. And a contract with two prior conditions instead of one — release of the old mortgage and liquidation of the corporation — was in fact found to be entirely feasible. If it was lawful for the stockholders to contract to sell property which was not only covered by a mortgage and a court decree, but which they did not own, it must have been at least as lawful for the corporation which owned it to do the same.

¶9There are no disputed evidentiary facts in the case. All of the witnesses who testified can be implicitly believed, and the ultimate fact remains, in our judgment, that the actual transaction started out and ended up by being a sale of the corporation’s property negotiated through its chief officer, consented to, as it had to be, by its stockholders, and cast in a more complicated and indirect form from motives concerning which we find it unnecessary to speculate. The resulting gain was that of the corporate petitioner, and the tax must be determined accordingly.

¶10Reviewed by the Court.

¶11Decisions will be entered for the respondent.

¶16concurring: A rule of law might be inferred from the majority opinion to the effect that if any negotiations for the purchase of a corporation’s property are begun while the corporation holds title to the property, then any sale of the property later made by the stockholders after the corporation’s liquidation to a purchaser who had participated in such negotiations in any way and to any extent, must be considered the sale of the corporation under the doctrine of Commissioner v. Court Holding Co., 324 U. S. 331.

¶17Because of my doubt that such a rule of law is correct, and my view that, under the facts found, the decision reached by the majority is correct without resort to it, I am stating the grounds for my concurrence in this opinion.

¶18The Court Holding Co. case was one of a series of cases decided by the Supreme Court which emphasized the importance of the “substance of a transaction,” which should not “be disguised by mere formalities.” In that case the Court held that “a sale by one person, can not be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title.” This rule is applicable to those cases in which there have been negotiations between the corporation and the prospective purchaser of the corporate property resulting in a substantial agreement between the corporation and the purchaser as to the sale of the property. If such a substantial agreement has been reached as a result of negotiations between the prospective purchaser and the officers of the corporation, then the later use of the stockholders of the corporation (by liquidation of the corporation) as “a conduit through which to pass title” will not change what is, in substance, a sale by the corporation to a sale by the stockholders. See Fairfield Steamship Corporation v. Commissioner, 157 Fed. (2d) 321, 322.

¶19In the instant case, taking the facts as found, I am of the opinion that the negotiations between Louben, Inc., and the president of petitioner resulted in a substantial agreement for the sale of the property of the corporation, and the later agreement of the stockholders of petitioner was intended to give effect to the prior agreement of the corporation.

¶20Samuel Hyman was president of petitioner corporation. As such, he was an agent for petitioner and was under obligation to act for the best interests of his corporation. With regard to any proposal to buy the property of the corporation, it is to be at least presumed that he would represent the corporation in conformity with that obligation in any negotiations instituted by Louben, Inc. It is certainly not to be presumed that his actions on behalf of his wife and daughter would affect his fiduciary obligation to the corporation. In any event, petitioner, although having the burden of proof, did not attempt to prove by the witness who was best qualified to testify on this point (Hyman, himself), that Hyman did not represent petitioner in the preliminary negotiations with Louben, Inc.

¶21I would construe the facts found as follows: Hyman, as president of petitioner corporation, negotiated with Louben, Inc., with regard to the sale of the corporation’s property on behalf of the corporation. When a substantial agreement had been reached as a result of these negotiations, Hyman then negotiated the method of carrying out the sale, and the method followed was the purported sale by the stockholders after liquidation of the corporation.

¶22Under this construction of the facts, the rule of the Court Holding Co. case would be clearly applicable.