Goetze Gasket & Packing Co. v. Commissioner

Goetze Gasket & Packing Co., Inc., et al., 1 Petitioners, v. Commissioner of Internal Revenue, Respondent Goetze Gasket & Packing Co. v. Commissioner Docket Nos. 43765, 43766, 43767 United States Tax Court 24 T.C. 249; 1955 U.S. Tax Ct. LEXIS 185; May 23, 1955, Filed *185 Decisions will be entered under Rule 50. 1. Income -- Gain From Sale -- Who Was Seller. -- Two corporations were the sellers of their assets although the fiduciary of the estate which owned all of the stock of the two corporations did all of the negotiating with the purchaser and joined with the two corporations in the final contract of sale. 2. Income -- Gain From Sale -- Contingency as to Future Payment. -- A taxpayer on an accrual basis is not required to include in the "amount realized" (as property other than money) the value of the right to receive property in a future year where there is a substantial contingency as to the amount ultimately to be received. John Lewis Kelly, Esq., and Henry M. Kannee, Esq., for the petitioners. Stanley W. Herzfeld, Esq., for the respondent. Murdock, Judge. MURDOCK *250 The Commissioner*186 determined deficiencies in income tax for 1947 as follows: Petitioner Deficiency Goetze Gasket & Packing Co., Inc. $ 28,873.75 Azor Corporation 2,587.23 Estate of Frederick W. Goetze 29,741.76 The issues for decision are whether the sales of assets of the two corporate petitioners to Johns-Manville Corporation were made by the corporations or were made by the Estate of Frederick W. Goetze, and whether and at what value 1,000 shares of common stock of Johns-Manville Corporation is to be included in the 1947 gain of the seller or sellers. FINDINGS OF FACT. The petitioners filed their 1947 income tax returns with the collector of internal revenue for the fifth district of New Jersey. The two corporate petitioners, hereafter sometimes called Goetze and Azor, had been engaged for a number of years prior to 1947 in the business of manufacturing and selling gaskets and packing. They used an accrual method of accounting. Federick W. Goetze was the founder and the president, general manager, and sole stockholder of the two corporations until the time of his death on January 30, 1944. He possessed unique mechanical and administrative abilities and operated each corporation as*187 a one-man organization. His widow, Margie C. Goetze, now by remarriage Margie G. Godsey, became the executrix and sole trustee of his estate. A cash basis of accounting was used by the estate. Margie, realizing that she was not qualified to manage the business and needing funds with which to pay estate taxes, determined to dispose of the business. She learned through a neighbor that Johns-Manville Corporation (hereafter called J-M) might be interested as a purchaser. She discussed the possibility of a sale with representatives of J-M for the first time on January 11, 1946, and thereafter had numerous meetings with them. She was assisted in the negotiations by her father and by two attorneys. Her father was a director of *251 Goetze and one of the attorneys was a director of both Goetze and Azor. Margie was eventually asked to set a price for the fixed assets, patents, goodwill, names, and inventories, but excluding liquid assets, of Goetze and Azor. She set a price of 6,000 shares of J-M stock for the assets, excluding the inventories which were to be paid for in cash. That offer was made in the latter part of 1946 and J-M accepted it contingent upon an examination of*188 the inventories in order to determine the items which J-M desired to purchase and the prices which it would be willing to pay for them. The attorneys for the parties were instructed to prepare a tentative agreement which would be subject later to the execution of a final contract. Margie left the form and details of carrying out the transaction entirely to her attorneys. The preliminary agreement, in the form of a letter to Margie "individually and as sole Trustee of the Estate of Frederick W. Goetze," was signed and accepted by her in those two capacities on or about January 24, 1947. The agreement provided that J-M or a subsidiary would purchase all of the business assets of the two corporations, except their cash, receivables, and inventories, for 6,000 shares of J-M common stock to be divided between the two corporations in proportion to the assets sold by each, and would purchase inventories of each, at a fair value to be determined by mutual agreement, for which payment would be made either in additional shares of J-M or in cash, at Margie's option. The letter contained a provision that "you and such companies will undertake to indemnify us and hold us harmless from any *189 and all such liabilities not expressly assumed and from any costs, damage or expense involved through the assertion against us of any claim of responsibilities therefor as a result of the acquisition of such assets," and the same parties were to warrant the correctness of the balance sheets and earnings statements of the companies for December 31, 1945. The properties were to be conveyed by deeds, bills of sale, or the like, with full covenants of warranty. The two corporations were to eliminate the word "Goetze" and the word "Azor" from their names after the closing date, and they were to furnish copies of or extracts from minutes of meetings of their boards of directors and stockholders showing "the authority of such companies to complete the transaction contemplated by this proposal." One thousand of the 6,000 shares of J-M stock were to be withheld by J-M for 3 years after the closing date, as security for the recovery of damages for any breach of the warranties involved in the sale, and "If any such loss or damage shall have occurred, the number of shares to be delivered shall be diminished by such number as shall (upon the basis of the average closing prices of said stock on*190 the New York Stock Exchange during the five business *252 days next preceding the date of closing) equal the amount of such loss or damage." The purchasers were to pay "to the person designated to receive them an amount equal to the dividends that would have been received by such person had the shares been issued in the name of such person and delivered on the closing date and any overpayment of such amounts resulting from a diminution of the number of shares to be delivered will be adjusted on the date of delivery." The agreement recited that the estate owned all of the issued and outstanding stock of the two corporations, had the sole right to vote all such shares upon all matters, and would "procure the performance by said companies of such of the above actions as are to be performed by them and the taking of all necessary corporate action therefor." The sale of the assets was approved at stockholders' meetings of the two corporations in March 1947, and, on the same day, the boards of directors met and approved the terms of the sales of the specified assets and authorized and directed their officers to enter into a contract to be dated as of February 28, 1947, to make modifications*191 in the contract and to execute and deliver all instruments that might be necessary to vest title to the assets in the purchaser. A formal contract dated February 28, 1947, was entered into in the latter part of March 1947 by Margie, individually and as sole trustee of the Estate of Frederick, Goetze, Azor, and J-M. It recited: Whereas, Mrs. Godsey is the owner of all the issued and outstanding stock of Goetze and Azor; and Whereas, Goetze and Azor desire to sell all of their assets (except for cash items and other items referred to below) to J-M and J-M desires to purchase such assets: Margie and the two corporations jointly and severally gave warranties. Goetz and Azor agreed to sell the assets and to execute and deliver all documents that would be necessary to vest full title to those assets in J-M, and J-M agreed to buy the assets from the two corporations. The total consideration was 5,900 shares of common stock of J-M plus $ 237,113 in cash, 5,564 shares and $ 211,713 in cash to Goetze and 336 shares and $ 25,400 in cash to Azor. The value to Goetze and Azor of their rights in the 1,000 shares of J-M common stock withheld was not readily ascertainable with any reasonable*192 certainty at the time of the closing. Goetze and Azor executed bills of sale to J-M for their personal property on March 31, 1947, and on that same day Goetze executed a deed to J-M for some real property. Interests in patents, patent applications, and trade-marks were assigned by Goetz to J-M on April 23, 1947. The receipt of the cash and common stock of J-M was recorded on the books of Goetze and Azor. The 1,000 shares withheld (later 3,000 following a stock split) were issued by J-M in May 1947 to J. P. Morgan and Company, *253 Incorporated, as escrow agent subject to the instructions of J-M with respect to their delivery. Morgan voted the shares in accordance with instructions from J-M, and J-M received the dividends on the shares from Morgan, after which it paid corresponding amounts during 1947 to Goetze and Azor and thereafter to Margie as sole trustee. Goetze and Azor were dissolved in December 1947 and liquidating dividends of cash, of J-M stock, and of the right to receive the remaining shares of J-M stock were declared at that time. Goetze, on its return for 1947, reported the sale by it to J-M of land and depreciable assets for a total sales price of $ 593,191.29, *193 consisting of $ 16,432.73 in cash and 4,621 shares of J-M common stock at a value of $ 576,758.56 from which it reported a long-term capital gain of $ 424,581.70 and a loss of $ 3,516.51 from the sale of non-capital assets. It also reported dividends on the J-M stock. Azor, on its return for 1947, reported the sale by it to J-M of its assets for cash and J-M common stock in the total amount of $ 35,815.43, and it reported gain from the sale of property other than capital assets in the amount of $ 27,225.58. It also reported on that return dividends on the J-M common stock. The Estate of Frederick W. Goetze, on its return for 1947, reported a long-term capital gain from the disposition through liquidation of the stock of Goetze and Azor. The Commissioner, in determining the deficiency against Goetze, held "that the long-term capital gain reported on your 1947 income tax return should be increased in the amount of $ 119,698.19 representing the fair market value of 943 additional shares of Johns-Manville Corporation stock." The Commissioner, in determining the deficiency against Azor, held "that the long-term capital gain reported on your 1947 income tax return should be increased *194 in the amount of $ 7,114.31 representing the fair market value of 57 additional shares of Johns-Manville Corporation stock." The Commissioner, in determining the deficiency against the Estate of Frederick W. Goetze, held "that the capital gains you reported from the liquidation of the stock of Goetze Gasket & Packing Co., Inc. and Azor Corporation should be increased in the total amount of $ 60,187.50 (after applying the 50% capital gain limitation)." The assets conveyed to J-M pursuant to the contract of February 28, 1947, were sold by Goetze and Azor and not by the Estate of Frederick W. Goetze. All facts stipulated by the parties are incorporated herein by this reference. *254 OPINION. The original petitions in these cases, filed August 29, 1952, raise only the issue relating to the 1,000 shares of J-M stock which were withheld for 3 years after the final closing of the sales in 1947, that is, whether any amount and what amount representing the value of the right to receive those shares should be included in computing the 1947 gains of Goetze and Azor from the sale of their assets to J-M and the effect thereof upon the gain realized by the estate from liquidating dividends *195 of Goetze and Azor. The contention that the sales were not made by Goetze and Azor but were made by the Estate of Frederick after constructive liquidations of the two corporations was not raised in this proceeding until the filing of amended petitions on May 18, 1954. This circumstance is mentioned because it tends to confirm the conviction obtained from the evidence in the case that neither Margie nor anyone involved in the transactions had any thought at the time that the estate, rather than the two corporations, Goetze and Azor, was to make the sale or that there was to be any liquidation of the two corporations, actual or constructive, so that the sale of the assets would be made by the estate rather than by the corporations. It is clear from the evidence that each corporation, as was intended, sold its own assets to J-M, despite the fact that Margie, as fiduciary of the estate of her deceased husband, which estate owned the stock of the two corporations, negotiated with J-M up to and including the signing of the agreement dated February 28, 1947. Margie, as fiduciary of the estate of her deceased husband, the sole stockholder of the two corporations, could have negotiated a*196 sale of the assets of those corporations on behalf of the estate with the intention that she would cause the corporations to liquidate and distribute the assets to the estate so that it could sell them. However, she did not do that or seek to do that. She chose another method. That method was to negotiate the sales on behalf of Goetze and Azor and have those corporations themselves make the sales. Thereafter she caused Goetze and Azor to liquidate. The tax consequences depend upon what was done and not upon what might have been done. Margie either intended from the start that the two corporations would make the sales rather than the estate or else, because of lack of experience, her mind did not contemplate this detail in the beginning and when it was brought to her attention she fully approved of the method and adopted it. There is no difference between the substance and the form of these transactions. The cases cited by the petitioners do not support their contention, because of factual differences. There is no reason based upon the evidence in this case, to hold that the two corporations, *255 Goetze and Azor, did not make taxable sales of their assets to J-M but, *197 instead, were constructively liquidated and the sale of the assets received by the sole stockholder in those constructive liquidations was made by the estate of J-M, unless as a matter of law that result is required. The Court knows of no principle of law requiring such a result so contrary to the acts and intentions of the parties as is disclosed by the evidence in this case, and on this point the determination of the Commissioner, in accordance with the returns of the petitioners, will not be disturbed. The second issue, and the one upon which the deficiencies herein are based, is whether the 1947 gain of Goetze and Azor from the sale of their assets to J-M was to include some amount representing the then value of the 1,000 shares of J-M common stock which was withheld by J-M in order to assure itself that it would have no loss resulting from any breach of the warranties upon which the purchase was predicated. As a matter of fact, a cloud on the title of Goetze to certain real estate conveyed to J-M actually developed. Section 111 of the Internal Revenue Code of 1939 provides that the gain from the sale of property shall be the excess of the amount realized therefrom over the *198 adjusted basis, and it defines the amount realized as "the sum of any money received plus the fair market value of the property (other than money) received." The 1,000 shares were not actually received in 1947. The "property (other than money) received" in 1947 included the right to receive the 1,000 shares after the lapse of 3 years, provided that in the meantime no circumstance had developed which would give J-M the right to retain some or all of those shares. The problem is whether that right of the sellers had an ascertainable fair market value at the time of the closing in 1947 and, if so, what that fair market value was. The evidence as a whole preponderates in favor of the conclusion indicated by the findings of fact that the right had no ascertainable fair market value at that time. The number of shares which would be received eventually was subject at that time to a substantial contingency so that neither seller was required to include any value of this right in the amount realized from the sale as a 1947 gain. Cleveland Trinidad Paving Co., 20 B. T. A. 772, affd. 62 F. 2d 85. Cf. Charles F. Dally, 20 T. C. 894;*199 Boston Elevated Railway Co., 16 T. C. 1084, affirmed on other grounds, 196 F. 2d 923; Higgins Estate, Inc., 30 B. T. A. 814; Continental Tie & Lbr. Co. v. United States, 286 U.S. 290. The fact that the equivalent of dividends was paid on the stock during the 3-year interval is not controlling. Cf. Mobile Light & Railroad Co., 23 B. T. A. 543. Decisions will be entered under Rule 50. Footnotes 1. Proceedings of the following petitioners are consolidated herewith: Goetze Gasket & Packing Co., Inc., Docket No. 43765; Azor Corporation, Docket No. 43766; Estate of Frederick W. Goetze, Margie G. Godsey, Executrix, Docket No. 43767.↩