American Range Lines, Inc. v. Commissioner

American Range Lines, Inc. (Formerly American Range-Liberty Lines, Inc.), Petitioner, v. Commissioner of Internal Revenue, Respondent American Range Lines, Inc. v. Commissioner Docket No. 25160 United States Tax Court 17 T.C. 764; 1951 U.S. Tax Ct. LEXIS 45; November 8, 1951, Promulgated *45 Decision will be entered for the respondent. 1. Transfer of property of petitioner corporation simultaneously with payment by transferee to petitioner's shareholder held to result in capital gain to petitioner notwithstanding payment was not made to petitioner. 2. Lucille H. Rogers, 11 T. C. 435, revd. (C. A. 3) 180 F. 2d 720, held, further, not res judicata although facts were identical, parties not being the same or in privity. George E. Beechwood, Esq., for the petitioner. Ellyne E. Strickland, Esq., for the respondent. Opper, Judge. Harron, J., dissents. OPPER *764 Respondent determined a deficiency in income tax for 1944 in the amount of $ 20,625.90. The remaining question, an issue relating to a net operating loss deduction having been abandoned at trial, is whether petitioner is taxable on $ 63,706.74 which was paid to its sole stockholder. FINDINGS OF FACT. Petitioner, a Delaware corporation, organized in 1936 for the purpose of engaging in the shipping business, has its principal office and place of business in Philadelphia, Pennsylvania. Its return for the calendar year 1944 was*46 filed with the collector at New York, New York. Prior to June 1941 petitioner was engaged in the business of operating ships chartered from the owners. By August 1943, because of war conditions, petitioner had ceased to own or operate any vessels. At about that time petitioner, through its president, Jacob L. Alwine, was endeavoring to have the War Shipping Administration, hereinafter referred to as W. S. A., allocate to it some vessels under a general agency agreement. Contemporaneously American Liberty Steamship Corporation, hereinafter referred to as Liberty, was also negotiating with W. S. A. As neither petitioner nor Liberty was successful in satisfying its requirements, W. S. A. suggested that the companies come to some agreement in order to qualify for an agency contract. *765 Negotiations to that end were undertaken between petitioner, petitioner's sole stockholder, Lucille H. Rogers, hereinafter referred to as Mrs. Rogers, and Liberty. The services of a lawyer were engaged to work out an agreement. Mrs. Rogers paid one-half of a $ 3,500 lawyer's fee thus incurred, and Liberty paid the other half. She also paid $ 90 to Price Waterhouse & Company as her half of audit*47 charges for examining petitioner's books. On August 16, 1943, these negotiations were culminated in an agreement between petitioner, Mrs. Rogers, and Liberty. It was subscribed to by Jacob L. Alwine, petitioner's president, by A. D. Rissmiller, Liberty's president, by Mrs. Rogers, and the companies' respective boards of directors. The agreement provided, inter alia: American Range Lines, Inc. and American Liberty Steamship Corporation have both been organized to carry on and conduct the business of shipping. The directors of the respective corporations deem it advantageous for the respective corporations and for the benefit of their stockholders to engage in a joint venture to operate under a General Agency Assignment for the War Shipping Administration. Both corporations have heretofore filed a joint application with the War Shipping Administration for a General Agency Assignment, which offer, as submitted to the War Shipping Administration, proposed a merger of the personnel of the respective corporations and the creation of a capital of $ 170,000.00 in cash, free and clear of all debts and liabilities. * * * * The mode of carrying the joint venture into effect shall be as*48 follows: The name of American Range Lines, Inc. shall be changed to American Range-Liberty Lines, Inc. The Certificate of Incorporation of American Range Lines, Inc. shall be further amended as provided in this agreement so as to provide for an equal investment of $ 85,000.00 each, to carry out the business of the joint venture. The by-laws of American Range Lines, Inc. shall be amended so as to provide for equal management and control of the affairs of American Range-Liberty Lines, Inc. between American Liberty Steamship Corporation and Lucille H. Rogers. At the termination of the General Agency Assignment, it is proposed to restore each of the two corporations, American Liberty Steamship Corporation and American Range Lines, Inc. to their former position, so that each might pursue and conduct their own businesses separately and individually. As part of the agreement, and in order to persuade Liberty to enter into and observe its terms, Mrs. Rogers, joined by petitioner, represented and warranted to Liberty that petitioner was a legally constituted corporation and that its financial conditions and contractual obligations were as represented, and agreed to save and hold harmless*49 Liberty by reason of any breach of the representations. Mrs. Rogers further agreed to pay and contribute to petitioner any money necessary to discharge "* * * all losses, expenses, claims, damages or liabilities arising out of or based upon any matter, cause, thing or transaction whatsoever, initiated or had prior to the date of this agreement by American Range Lines, Inc., it being the intention of the *766 parties that the sum of $ 170,000.00 to be contributed by the American Liberty Steamship Corporation and Lucille H. Rogers for the conduct of the joint venture above described, shall not be impaired or diminished or charged with any claim, debt or liability, which has resulted or which may accrue as the result of any act or transaction which occurred prior to the date of this agreement or which may result from any act or transaction which is unconnected with the operation of the joint venture." To secure performance of these provisions of the agreement Mrs. Rogers further agreed to deposit the sum of $ 36,168.99 with a designated escrow agent under terms obligating the escrow agent to pay over such sums to Liberty or to petitioner under the name of American Range-Liberty*50 Lines, Inc., as would be necessary to discharge liabilities or claims resulting from the breach of any representations. The agreement further provided: EIGHTH: The present by-laws of American Range Lines, Inc. shall be amended in the following respects to provide for equal control and management of the affairs of American Range-Liberty Lines, Inc. during the term of this agreement between American Liberty Steamship Corporation and Lucille H. Rogers: (a) The number of Directors shall be increased from three to six. (b) Three members of the Board of Directors shall be persons nominated by the American Liberty Steamship Corporation, hereinafter designated as Liberty Group", and an equal number of the Board of Directors shall be persons nominated by Lucille H. Rogers, hereinafter designated as "Rogers Group". (c) In the event of the death, resignation or inability to act of any director, the vacancy occurring shall be filled by the nominee of the group of stockholders or stockholder, who originally nominated the director whose office has become vacant, so that American Liberty Steamship Corporation and Lucille H. Rogers shall have at all times equal representation upon the Board of*51 Directors. (d) The by-laws shall not be amended except by the affirmative vote of at least five of the whole Board of Directors. (e) The by-laws shall provide that a quorum of the Board of Directors shall consist of at least five directors, but less than a quorum may adjourn any meeting, which may be held on a subsequent date without further notice, provided a quorum be present at such deferred meeting. * * * * NINTH: The Board of Directors shall elect the President and Treasurer of the corporation as designated by the "Liberty Group". The Board of Directors shall elect the Executive Vice-President and Secretary as designated by the "Rogers Group". The Board of Directors shall also elect as its Chairman such person as is designated by the "Rogers Group". * * * * TENTH: Immediately upon the execution of this agreement and upon the amendment of the Certificate of Incorporation of American Range Lines, Inc. as above set forth, the American Liberty Steamship Corporation shall subscribe for 850 shares of preferred stock and shall pay therefor $ 85,000 in cash; Lucille H. Rogers shall also subscribe for 850 shares of the preferred stock and shall pay therefor $ 85,000 in cash. In addition*52 to the preferred stock the American *767 Liberty Steamship Corporation and Lucille H. Rogers shall each purchase 850 shares of the common stock, such stock to be deemed fully paid and shall be nonassessable. The total capital of $ 170,000.00 thus created, shall be used solely for the operation and conduct of the business of the corporation under the General Agency Assignment with the War Shipping Administration. * * * * FOURTEENTH: This agreement shall end and terminate simultaneously with the termination of the General Agency Assignment, under which this corporation proposes to conduct its business. Upon the termination of this agreement, the parties covenant and agree to take such steps as may be necessary to terminate this joint venture and to restore to the respective parties the capital contributed by each party or so much of it as may remain after losses, if any, of operations during the terms of this agreement, which losses shall be borne equally by the American Liberty Steamship Corporation and Lucille H. Rogers, plus a division of all other assets acquired by American Range-Liberty Lines, Inc. since the date of this agreement and all undivided profits. * * * The foregoing*53 plan was carried out. Petitioner was reorganized and under amendments to its charter its name was changed to American Range-Liberty Lines, Inc. Mrs. Rogers invested the $ 85,000 required of her by having petitioner leave intact its existing bank balance of $ 78,199.99 and by executing and delivering to petitioner her personal check in the amount of $ 6,800.01 for the balance. Rissmiller and Schneider, the president and secretary, respectively, of Liberty were elected at the direction of the "Liberty Group" to the same offices with petitioner as reorganized, and Jacob L. Alwine became the vice-president at the direction of the "Rogers Group." On the face of the certificates of preferred stock issued by petitioner under the name American Range-Liberty Lines to the incorporators was the following language: Every stockholder shall purchase or hold stock subject to all the terms, conditions, restrictions and limitations of a certain agreement, dated the 16th day of August, 1943, and entered into by and between Lucille H. Rogers, of Wynnewood, Pennsylvania, and American Liberty Steamship Corporation, a Delaware corporation, provided, however, that such terms, conditions, restrictions*54 and limitations are not in conflict with the provisions of the General Corporation Law of the State of Delaware. On August 19, 1943, Mrs. Rogers paid into petitioner's capital the sum of $ 850 and on February 14, 1944, an additional $ 40,000. On September 8, 1943, W. S. A. entered into a general agency agreement with petitioner under the name of American Range-Liberty Lines by which the latter, as general agent, was to manage vessels assigned it by the United States in return for reasonable compensation. Subsequent operations gave rise to serious disputes between the officers representing the "Rogers Group" and the "Liberty Group." As a result Mrs. Rogers and Liberty agreed to terminate their agreement. Having secured the consent of the W. S. A. as required by the general agency agreement, Mrs. Rogers and Liberty by agreement *768 dated November 27, 1944, "cancelled and terminated" as of December 1, 1944, the August 16, 1943, agreement. That instrument recited, in part, as follows: The AMERICAN LIBERTY STEAMSHIP CORPORATION agrees to pay to LUCILLE H. ROGERS in full satisfaction and discharge of all claims asserted by LUCILLE H. ROGERS against AMERICAN LIBERTY STEAMSHIP CORPORATION*55 and for the promise of LUCILLE H. ROGERS to cancel and terminate the above mentioned agreement and release the AMERICAN LIBERTY STEAMSHIP CORPORATION from the obligations thereunder, the sum of Seventy-five Thousand ($ 75,000.00) Dollars, as follows: (a) The sum of $ 20,000.00 on December 1st, 1944. (b) The sum of $ 20,000.00 on March 1st, 1945. (c) The sum of $ 7,500.00 on July 1st, 1945. (d) The sum of $ 27,500.00 on February 1st, 1946. The aforesaid payments due respectively on March 1st, 1945, July 1st, 1945, and February 1st, 1946, shall be evidenced by three (3) negotiable promissory notes under the seal of the AMERICAN LIBERTY STEAMSHIP CORPORATION, each bearing date of December 1, 1944, and payable as aforesaid, without interest. IT IS UNDERSTOOD AND AGREED that said promissory notes shall not be negotiated, assigned or transferred by LUCILLE H. ROGERS but the said promissory notes shall be held in escrow by GEORGE E. BEECHWOOD, ESQ., attorney for LUCILLE H. ROGERS until their respective due dates and that on their respective due dates, they shall be presented for payment by GEORGE E. BEECHWOOD, ESQ., as attorney for LUCILLE H. ROGERS to the AMERICAN LIBERTY STEAMSHIP*56 CORPORATION. IT IS FURTHER UNDERSTOOD AND AGREED that the sum of $ 20,000.00 to be paid to LUCILLE H. ROGERS by the AMERICAN LIBERTY STEAMSHIP CORPORATION on December 1st, 1944, shall be reduced by all sums of money received by LUCILLE H. ROGERS from the AMERICAN RANGE-LIBERTY LINES, INC. by virtue of dividends or otherwise on or after November 27, 1944 and it is understood and agreed that such sums so received by LUCILLE H. ROGERS shall be deemed credits to the AMERICAN LIBERTY STEAMSHIP CORPORATION and the amount to be paid by the AMERICAN LIBERTY STEAMSHIP CORPORATION shall be reduced accordingly. Each party hereto releases and forever discharges the other party from all moneys, claims, demands, contracts, action, whatsoever arising under the agreement between the parties, dated the 16th day of August, 1943, and nothing herein contained shall be deemed to be a release from the obligations contained in this agreement. On that same day by a separate instrument denominated "Agreement and Bill of Sale" petitioner consented to the substitution of Liberty as its successor to the W. S. A. general agency agreement and for that purpose did "sell, assign and transfer" to Liberty all "its*57 right, title and interest in the said contract * * *." It was further provided: To further effectuate the aforesaid purpose and to carry the same into full force and effect, the American Range-Liberty Lines, Inc., has granted, bargained, sold, conveyed, transferred, assigned and set over, and does hereby grant, bargain, sell, convey, transfer, assign and set over unto American Liberty Steamship Corporation, its successors, assigns forever, all and singular, all of the property, *769 assets, rights of American Range-Liberty Lines, Inc., which came in its possession beginning with August 17th, 1943, including all assets and accounts receivable created or accruing to American Range-Liberty Lines, Inc. beginning with August 17th, 1943, including but not limited to all cash on deposit, contingent funds, petty cash, accounts receivable, claims for compensation due from the United States Government under the contract of September 8th, 1943, remittances in transit, insurance in suspense, claims for reimbursement, prepaid expenses, asset adjustment accounts, books of account, records, all office furniture and fixtures and supplies located in the offices maintained by American Range-Liberty*58 Lines, Inc. at its office at 75 West Street, in the City of New York, and in the Drexel Building in the City of Pennsylvania [sic], and all other property and rights and interest in property, real, personal and mixed, tangible and intangible, contracts and agreements, leases, credits and choses in action of every kind whatsoever, except such as are specifically excluded under the terms and provisions hereof. TO HAVE AND TO HOLD the property hereby granted, bargained, sold, conveyed, transferred, assigned and set over or intended so to be unto the American Liberty Steamship Corporation, its successors and assigns forever. Excepted and excluded from the properties transferred were "cash of $ 125,850, representing the capital investment of Lucille H. Rogers," which she withdrew, all assets acquired prior to August 17, 1943, and a certificate of necessity and convenience, or the value thereof. The sum of $ 20,000 payable to Mrs. Rogers on December 1, 1944, was paid as follows: $ 11,293.26 by check of petitioner as one-half of its 1944 earnings and profits, and the balance, $ 8,706.74, by check of Liberty. In the notice determining the deficiency in this proceeding, the respondent *59 explained the deficiency, in part, as follows: It is held that as a result of the sale and/or transfer of Contract W. S. A. -- 5787, dated September 8, 1943, to the American Liberty Steamship Corporation, you realized a long-term capital gain of $ 63,706.74, which was not reported on your return. OPINION. The identical facts were before us in Lucille H. Rogers, 11 T. C. 435, revd. (C. A. 3) 180 F. 2d 720. We there held in the case of an individual taxpayer who was a shareholder in the present petitioner that what she received was in the nature of a distribution of petitioner's earnings, which in turn represented part payment to it for assets of which the transfer created the consideration for the payment. That conclusion was disapproved on review with the comment in part that: "In the absence of a suggestion of fraud, we are all bound to acquiesce in the judgment of Liberty [the purchaser] that the purchase price for the interest of Mrs. Rogers in the business was the amount paid her, and the value of the interest of Range [petitioner] was the value of the contract of dissolution between Range and Liberty." There can, of course, *60 be no assumption of fraud in the arrangement *770 which we were then and are now examining. The numerous cases where a payment by a purchaser or lessee of a corporation's property is made directly to its stockholders contain no suggestion that the form of the arrangement is more effective than its substance, or that the parties were engaged in an illegal or fraudulent operation. See, e. g., Commissioner v. Court Holding Co., 324 U.S. 331; United States v. Joliet & Chicago Railroad Co., 315 U.S. 44. It could not have mattered to Liberty who received the consideration for the transfer of the business. But in any event, the principle to be applied is that which we quoted in the Rogers case, supra, p. 440: "* * * all sums of money and considerations agreed to be paid for the use, possession, and occupation [here, the sale] of the corporate property belongs to the corporation, the legal owner of such corporate property. It is by way of dividends that the stockholders are entitled to the earnings of the road * * *." Rensselaer & Saratoga Railroad Co. v. Irwin (Dist. Ct. N. Dist. N. Y.), 239 Fed. 739, 746;*61 affd. (C. C. A., 2d Cir.), 249 Fed. 726. * * * By the express terms of the contracts between the respective parties the agreement with W. S. A. for the operation of the vessel and the profits and other proceeds accumulated from its successful prosecution were, as we noted in Lucille H. Rogers, supra, "'granted, bargained, sold, conveyed, transferred, assigned and set over'" as a part of the transaction. 1 There is no evidence as to how much these assets were worth. It may be, as petitioner now contends, that they were less valuable than the total consideration paid. If so, it is possible that upon appropriate evidence it could have been determined how much of the payment was in exchange for the corporate assets and how much, if any, was an excess inducement to Mrs. Rogers to consent to the corporation's act. But the burden was on petitioner. In the absence of any showing as to value, and in the face of respondent's determination, we cannot legitimately conclude that the consideration paid was not given for the corporate assets whose substantial earning power had already been demonstrated. *62 We quite agree with petitioner that the same question was involved in the Rogers case as that now before us, and that the decision of reversal by the Court of Appeals is an authority which could now be followed to reach a result in petitioner's favor. But, for the reasons *771 stated, we are respectfully constrained to maintain instead the position originally taken by us and not to rely upon the reversal as authority in the present proceeding. See Florence Pearlman, 4 T. C. 34, 54, affd. (C. A. 3) 153 F. 2d 560. There remains only to be considered petitioner's contention that the Rogers proceedings are binding under the doctrine of res judicata. That principle is normally applicable where the issues and the parties are the same. See Evergreens v. Nunan (C. A. 2), 141 F. 2d 927, certiorari denied 323 U.S. 720; Commissioner v. Sunnen, 333 U.S. 591. It is pressed upon us here, however, that, even though the parties are different, Mrs. Rogers' status as petitioner's stockholder created a privity between them which renders*63 the prior proceeding binding as to this petitioner. Cf. D. Bruce Forrester, 4 T. C. 907. It is one thing, however, to bind the individual stockholders in their capacity as such by the official acts of their corporation, including any litigation in which it may engage. 2 It is quite another to force the corporation to conform to actions participated in by its stockholders in their individual capacity. Where the prior litigation is of this nature, it does not form the basis for estoppel by judgment in later litigation in which the corporation is a party. Societe Vinicole De Champagne v. Mumm Champagne & Importation Co., (S. D., N. Y.), 10 F. Supp. 289, 293, affd. (C. A. 2) 143 F. 2d 240; Cleveland-McLeod Lumber Co. v. McLeod, 96 Ark. 405, 131 S. W. 878; Spitz v. M. Brooks & Son, Inc., 210 App. Div. 438, 206 N. Y. S. 313; Philadelphia Auburn-Cord Co. v. Shockcor, 133 Pa. Super. 138, 2 A. 2d 501. *64 We conclude, as we did in Lucille H. Rogers, supra, that the payments in question, although made directly to her, were in fact the property of petitioner and hence constitute its income. Since the deficiency adopts the theory that the corporate income gave rise only to capital gain, the single question left open in the Rogers case need not now be further considered. Decision will be entered for the respondent. Footnotes 1. That the W. S. A. contract was the property and in fact the stock in trade of petitioner appears not only from the facts of its operation, but from the scheme of organization. The original contract provides: "This agreement shall end and terminate simultaneously with the termination of the General Agency Assignment, under which this corporation [petitioner] proposes to conduct its business. * * *" [Emphasis added.] And the contract giving rise to the present controversy, as summarized in petitioner's brief, "provided that all of the business assets↩ should be transferred to Liberty, and it was expressly contemplated that Liberty should receive from the War Shipping Administration the continued right to do business under the G. A. A. agreement." [Emphasis added.] 2. "* * * It is also well settled that a corporation represents its stockholders in all matters within the scope of its corporate powers transacted in good faith by its officers. * * *." Jahncke Service, Inc., 20 B. T. A. 837, 847. "A stockholder is so far an integral part of the corporation that, in view of the law, he is privy to the proceedings touching the body of which he is a member. * * *" Hawkins v. Glenn, 131 U.S. 319↩.