1944 U.S. Tax Ct. LEXIS 102">*102
1. Where the sole stockholder of a corporation contracts as an individual to sell property which he expects to receive as a distribution in liquidation of a corporation already in process of dissolution, and the sale is consummated after title vests in him,
2. An agency relationship may not be implied from the mere fact that a sole stockholder of a corporation in process of dissolution contracts as an individual to sell property which he expects to receive as a distribution in liquidation.
3 T.C. 1002">*1003 The Commissioner has determined that the petitioner, as transferee of the assets of the Seekonk Corporation, a dissolved corporation, is liable for deficiencies in income tax and declared value excess profits tax for the year 1941 in the amounts of $ 167,567.38 and $ 80,661.40. The petitioner does1944 U.S. Tax Ct. LEXIS 102">*103 not dispute his liability, as transferee, for deficiencies of the corporation, but contends that the determination of the deficiencies is erroneous. The questions presented are whether a gain upon the sale of a motor ship and income from the operation of the ship prior to the sale are taxable to the corporation or to the petitioner individually.
FINDINGS OF FACT.
The petitioner, George T. Williams, is an individual residing in San Francisco, California, with his place of business at 310 Sansome Street, San Francisco. He filed his income tax return for the period here involved with the collector of internal revenue for the first district of California.
The Seekonk Corporation was duly organized under the laws of the State of New York on November 22, 1927, with an authorized capital of 2,000 shares of no par value. George T. Williams was one of the original stockholders of the Seekonk Corporation, and on or before December 31, 1932, he became and, until the date of dissolution of the corporation, remained its sole stockholder. The principal assets of the Seekonk Corporation, as of March 25, 1941, were the motor ship
In the month of November 1940, Seekonk Corporation entered into negotiations with Wallem & Co. of Hong Kong, looking to the purchase of the
On March 13, 1941, the Seekonk Corporation contracted to sell the
In January 1941 the
After the refusal of the United States Maritime Commission to permit the transfer of the vessel to Philippine registry, it was apparent to Williams and to the other directors of the Seekonk Corporation that no sale involving a transfer to a foreign registry would be permitted by the Maritime Commission. Such inquiries as had been made by American buyers during the preceding six months indicated that American buyers were offering prices much lower than the prices offered by foreign buyers and it appeared to the directors of the Seekonk Corporation that at the going charter rates the vessel would earn more in twelve months than had theretofore been offered by American buyers for similar vessels. Thereafter Seekonk commenced negotiations looking toward further charters.
Between March 1 and March 25, 1941, Lewis D. Craig, bookkeeper and office manager of Seekonk Corporation, and bookkeeper for Williams personally, advised Williams that if the vessel were to continue on charter a considerable amount in income taxes and excess profits taxes could be saved by liquidating1944 U.S. Tax Ct. LEXIS 102">*106 the corporation and by Williams conducting the business as an individual. On March 25, 1941, Williams decided to follow Craig's recommendation and to liquidate the Seekonk Corporation. On that day the board of directors, composed of Williams, Craig, and Chalmers Graham, adopted the following resolution:
Resolved: That the said corporation be liquidated and that Chalmers G. Graham, attorney at law, be and he hereby is authorized and empowered to do and perform all things necessary to effect such liquidation.
Resolved: That the President and Secretary of the corporation do and perform all things and sign all documents necessary to accomplish said liquidation and distribution of the assets of the corporation to the stockholders.
On the same day a special meeting of the stockholders of the corporation was held, at which there was present Williams, the sole stockholder. The following resolutions were adopted:
Resolved: That the action taken on March 25, 1941, at the hour of ten o'clock a. m. by the Board of Directors in resolving that the corporation be dissolved and its assets distributed to the stockholders, be, and the same hereby is, ratified and confirmed in all respects.
Resolved: 1944 U.S. Tax Ct. LEXIS 102">*107 That said directors and officers of the said corporation are hereby authorized and empowered to effect such dissolution of said corporation and to distribute the assets of said corporation to the stockholders thereof on condition that any or all remaining debts or liabilities of said corporation be assumed by the distributees of the property of said corporation.
3 T.C. 1002">*1005 Resolved: That the President and Secretary of said corporation do and perform all things necessary to effect the dissolution of said corporation, to transfer its assets to the stockholders, and to provide for the payment of its obligations.
On March 28, Graham telegraphed Arthur M. Boal, counsel in New York for the Seekonk Corporation, and for Williams personally, as follows:
Seekonk Corporation incorporated New York November 22 1927 sole stockholder owning 2000 shares common George T. Williams desires immediate voluntary dissolution and distribution of assets to sole stockholder please advise straight whether you can accomplish same without necessity sending any documents from here. If not air mail immediately documents required accomplish dissolution. Could you sign documents on telegraphic authority power of1944 U.S. Tax Ct. LEXIS 102">*108 attorney from Williams.
The certificate of dissolution and the application for consent to dissolve were received from Boal on March 31, and immediately executed by Williams and Craig, as president and secretary of the Seekonk Corporation. In the application for consent to dissolve, it was recited that none of the assets had then been transferred to the sole stockholder, that he would acquire the assets upon dissolution, and that no liquidating dividends had been made up to that time. On the balance sheet attached to the form the
No date was formally fixed for the liquidation of the corporation, but it had been suggested in the meeting of March 25 that a logical time would be March 31, 1941, inasmuch as that was the close of the first calendar quarter. Graham, 1944 U.S. Tax Ct. LEXIS 102">*109 in the letter accompanying the executed forms for dissolution sent to Boal on March 31, wrote as follows:
* * * We trust that this will enable you to close out this corporation immediately. Naturally, we should like it done as of April 1, so we can close our books of that date.
The bank account standing in the name of the Seekonk Corporation was not immediately transferred to the name of George T. Williams, but was used to pay certain of the liabilities incurred by Seekonk prior to March 31, 1941. On July 11, 1941, most of the balance of the bank account was transferred to Williams' personal account. Shortly after July 11, the closing entries on the books of the Seekonk Corporation were made "as of" March 31. The following balance sheets show the assets and liabilities of the corporation on March 31, 3 T.C. 1002">*1006 1941, and the assets and liabilities transferred to Williams on the books of the corporation.
As of date | ||
As of March | transferred on | |
31, 1941 | books to | |
Williams | ||
ASSETS | ||
Cash in bank | $ 20,882.72 | $ 32,964.67 |
Investments | 4,045.00 | 4,045.00 |
Due from broker | 370.00 | 370.00 |
Notes receivable | 337,744.33 | 304,744.33 |
Master's a/c's | 2,816.23 | 2,695.05 |
Personal injury claims | 350.00 | 1,250.33 |
Ships accidents claims | 8,000.00 | |
M/S Willmoto | 235,000.00 | 235,000.00 |
Spare parts | 6,941.53 | 6,941.53 |
Furniture and fixtures | 543.00 | 543.00 |
Prepaid insurance | 14,692.00 | 13,017.59 |
Norton, Lilly | 1,397.07 | |
Total | 631,384.81 | 602,968.57 |
LIABILITIES | ||
Depreciation reserve | 181,428.67 | 184,724.23 |
1940 income taxes | 50,000.00 | 62,251.00 |
1941 income taxes | 41,000.00 | |
Accrued wages | 9,550.00 | 9,675.00 |
Capital stock | 110,000.00 | 110,000.00 |
Surplus | 239,406.14 | 236,318.34 |
Total | 631,384.81 | 602,968.57 |
1944 U.S. Tax Ct. LEXIS 102">*110 On August 13 the last checks of Seekonk were cleared by the bank, exhausting the balance, and the account was closed.
From and after April 1, 1941, every item of income realized from the operation of
Income: | |||
Charter hire | $ 30,969.44 | ||
Stores sold | 3,048.66 | ||
Insurance recovered (accident) | 4,054.22 | ||
Total | 38,072.32 | ||
Deductions: | |||
Charter commissions | $ 799.55 | ||
Freight | 170.23 | ||
Repairs | 3,662.00 | ||
Salaries and wages | 11,449.00 | ||
Rent | 810.00 | ||
Travel | 411.64 | ||
Food | 399.34 | ||
Telephone and telegraph | 78.58 | ||
Ships accidents | 5,355.00 | ||
Personal injuries | 3,933.15 | ||
Social security | 251.54 | ||
Insurance | 3,882.57 | ||
Miscellaneous | 480.55 | ||
Total | 31,683.75 | ||
Net income | 6,388.57 |
3 T.C. 1002">*1007 The amount representing charter hire was received in two payments, one by check in the amount of $ 21,697.50, covering the first half of April. This check, payable to the Seekonk Corporation, was deposited in the personal account of Williams. The balance1944 U.S. Tax Ct. LEXIS 102">*111 of the amount, covering the charter hire for the period April 15-22, was paid some months later, and deposited in Williams' account. "Insurance recovered" represents an amount recovered from the insurance company by reason of repairs made to the ship after it returned to New York. The amount was paid by check to Seekonk, and endorsed to Williams, who deposited it in his personal account on December 26, 1941. The item of $ 3,048.66 represents the proceeds of foodstuffs and ship supplies sold separately.
Due to difficulties in securing the necessary documents, the formal bill of sale evidencing the transfer of title of the
On Saturday, March 29, 1941, and Monday, March 31, 1941, A. F. Pillsbury, of the firm of Pillsbury & Martignoni, consulting engineers and ship appraisers, wired 1944 U.S. Tax Ct. LEXIS 102">*112 Williams from New York stating that he had a prospective American buyer for the
Although not disclosed at the time, Pillsbury was acting in conjunction with American Ship Brokerage Corporation, ship brokers with offices in New York City, for the purpose of acquiring a vessel for National Gypsum Co. National Gypsum Co. was anxious to obtain a vessel immediately.
On Monday, March 31, 1941, Pillsbury, having heard nothing from Williams, telegraphed his partner, Walter Martignoni, at their office in San Francisco, stating that he had wired Williams the preceding Saturday, but had received no reply and requested Martignoni to ascertain from Williams whether he would be interested in selling the
On the following morning, April 2, 1941, Williams went to his office and in the margin of the telegram of April 1 from Pillsbury, wrote the points agreed upon in the conversation of the preceding evening as follows: "Price $ 655,000, net to seller George T. Williams, delivery before May 10, 1941, as is, class maintained Lloyd's 100-A etc."
Williams and Craig then went to the law office of Graham and Morse and were joined by Martignoni for the purpose of drawing up a letter evidencing the agreement of the preceding evening. In Williams' presence a letter to Pillsbury & Martignoni was dictated by Williams' counsel, 1944 U.S. Tax Ct. LEXIS 102">*114 reading in part as follows:
Gentlemen:
We confirm sale through you as brokers of the MS WILLMOTO, as is, for the sum of $ 655,000.00 cash net to us. Formal agreement for the purchase of the vessel is to be drafted, but shall include the following provisions:
* * * *
Among the provisions set forth were the following: Delivery before May 10, 1941; the buyer to inspect the vessel afloat and in dry dock, and if the bottom was found damaged the seller to have the option to effect repairs to such damaged underwater parts; the bill of sale to be signed either by Williams or by the Seekonk Corporation. This latter provision was inserted by reason of the fact that title to the
This letter as prepared by counsel was typed for Williams' individual signature and was signed by him individually. Then, at Williams' direction, Craig wrote the words "Seekonk Corporation" on the letter and Williams signed "George T. Williams, President." The letter was given to Martignoni and1944 U.S. Tax Ct. LEXIS 102">*115 retained by him. Copies were immediately made by him, one of which was forwarded to Pillsbury. In making the copies Martignoni's secretary omitted the words "Seekonk Corporation, George T. Williams, President," and the copy sent Pillsbury disclosed only Williams' individual signature. At no time did Pillsbury know that the letter had been signed otherwise.
On the next day, April 3, 1941, Graham prepared a draft of the proposed agreement for the purchase and sale of the vessel and forwarded it to Boal in New York for presentation to the prospective purchaser. In the letter accompanying the proposed draft Graham 3 T.C. 1002">*1009 said: "In view of the fact that the
On April 5, 1941, Boal conferred with the attorney for the National Gypsum Co. with respect to the drafting of the contract of purchase and sale. On April 7, 1941, the form of the contract was agreed to by both parties and was actually signed in New Jersey on April 8, 1941, by George T. Williams, individually, and National Gypsum Co., by their respective attorneys in fact. The contract of sale, although actually signed on April 8, 1941, was dated April 7, 1941.
Under this contract Williams agreed to sell and National Gypsum Co. agreed to buy the
The agreement of April 8, 1941, recited that the seller had agreed to sell and the buyer had agreed to purchase title to the vessel; that the seller desired to retain title and control of the vessel and to enjoy the fruits and avails of the existing charter until the charter had been completed; that the buyer desired to be relieved of the management, direction, and operation of the vessel1944 U.S. Tax Ct. LEXIS 102">*118 so long as it was subject to the 3 T.C. 1002">*1010 provisions of the time charter; and that the provisions of the contract should be carried out after the completion of the charter, at which time the vessel was to be placed in drydock and examined by the purchaser.
On April 15, 1941, in anticipation of the return of the vessel, Craig was sent to New York with $ 15,000, drawn from the personal account of Williams, to cover the expenses of the vessel upon its return and any expenses in connection with its transfer.
The
The purchaser refused to accept the vessel until the repairs were entirely completed. Accordingly, after completion of the repair work, on the morning of May 5, 1941, Boal, Craig, and two attorneys representing the National Gypsum Co. met at the customs house in Newark, New Jersey, at which time the sale was completed. Boal delivered1944 U.S. Tax Ct. LEXIS 102">*119 the bill of sale and received from the escrow holder the check for $ 155,000 and two additional checks in the total amount of $ 500,000. The three checks representing the purchase price were deposited on the same day in the personal account of George T. Williams with Laidlaw & Co. in New York City.
The charterer, American South African Lines, was not notified of any change in the ownership of the vessel until the charter period had been fully completed. Norton Lilly, New York agent for Seekonk Corporation in the operation of the
The Seekonk Corporation was dissolved on April 14, 1941. Title to the
OPINION.
The fundamental question we are called upon to determine is whether the sale of the
The first controverted point in the chain of events leading up to the ultimate sale of the
Further, the charterer was never notified of any change of ownership until the charter party had been fully completed. Norton Lilly, New York agent for Seekonk in the operation of the
From this fact the respondent argues that Williams, in contracting to sell the
The crucial question involved herein, as we see it, is whether the gain upon the sale of the
In this case, however, we have a different situation. The record, as a whole, is exceedingly clear that Williams at all times intended to make the sale to the National Gypsum Co. as an individual, for the reason that all necessary steps to dissolve the corporation had already been taken. The board of directors and the sole stockholder had adopted resolutions to dissolve on March 25, and on March 31 all documents required for the dissolution of the corporation were executed and mailed to New York to be filed with the proper authorities. Up to that time there had been no negotiations for the sale of the
From the testimony it is apparent that Seekonk was included in the memorandum of April 2 merely as an assurance to the purchasers that good title would be forthcoming from either the corporation or Williams, although Williams himself had no doubt in this matter. This is evidenced by the letter of April 3 from Graham to Boal in which the proposed transfer to National Gypsum Co. was described as a sale by Williams, individually, and by the telegram of April 4 to Boal in which Boal was instructed that the corporation was not to 3 T.C. 1002">*1013 be brought into the transaction at all. The formal contract of sale, executed on April 8, made no mention of Seekonk, but was the individual undertaking of Williams to sell the ship. Title was transferred from the corporation to Williams on April 21, and on May 5, Williams, pursuant to his contract of April 8, transferred title to the National Gypsum Co. The purchase price was paid by three checks made payable to Williams and deposited in his personal account. Thus, it may be said that Williams was carrying out his own primary obligation in consummating the sale. In this, we 1944 U.S. Tax Ct. LEXIS 102">*126 think, the case is basically distinguishable from those cases where the stockholder merely serves as a conduit in consummating the corporate obligation. The transfer to Williams was not unreal or sham, for it was a natural culmination of steps taken prior to any negotiation to sell and divorced from any purpose to sell. The reason for the rule in the cases relied upon by the respondent is absent from this record and, in our opinion, the sale must be held to be the sale of Williams, individually, and the gain thereon not income to the corporation.
The second issue has to do with the determination of the Commissioner that the net income realized from the operation of the vessel after March 31 was realized by and taxable to the Seekonk Corporation. The items of income have been specifically set forth in our findings of fact. The petitioner contends that all items of income accruing after March 31 were properly taxable to Williams, individually, for the reason that title to the ship vested in him on that date. We have found, as a fact, that title to the ship was not transferred to Williams until April 21, 1941. The items of income from the operation of the ship are, therefore, properly1944 U.S. Tax Ct. LEXIS 102">*127 taxable to the corporation. There is no evidence that the "ships stores," which were sold at a somewhat later date, were in fact ever transferred to Williams prior to their sale and, consequently, the sale must be held to be the sale of the corporation through Williams as president. The respondent in his determination of the deficiency has allowed the deduction by the corporation of the various items of expense set forth in our findings of fact. On this point the respondent is sustained.