Northwest Utilities Sec. Corp. v. Commissioner

NORTHWEST UTILITIES SECURITIES CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Northwest Utilities Sec. Corp. v. Commissioner Docket Nos. 54758, 59366. United States Board of Tax Appeals 27 B.T.A. 524; 1933 BTA LEXIS 1346; January 9, 1933, Promulgated *1346 A corporation executed a contract of sale for a large quantity of its capital assets, upon which it was paid a part of the purchase price in cash. Subsequently, it transferred such assets to trustees, who completed the sale by delivery of the assets to the purchaser and collecting the purchase price. Held, that the profits of the sale and income from the corpus, pending liquidation, constituted income of the corporation. Leland W. Scott, Esq., for the petitioner. J. A. Lyons, Esq., for the respondent. LANSDON *525 These consolidated appeals relate to the petitioner's tax obligations for 1927, 1928 and 1929, represented by deficiencies of $82,870.22, $8,419.16 and $339.63 which the respondent has asserted for the respective years. Two issues are involved: (1) Whether or not, in the circumstances, the profit and income derived from a group of capital assets sold by the petitioner, but delivered and collected by trustees, who paid its debts and distributed the net proceeds among its stockholders, constituted corporation income during the period of such liquidation and distribution, and (2) whether or not the petitioner sustained a deductible*1347 loss in 1929 through the forfeiture of its corporate franchise in that year. FINDINGS OF FACT. The petitioner is a corporation, organized and existing under the laws of Delaware, with principal office in Minneapolis, Minnesota. On the 8th of March, 1927, petitioner entered into a written contract of sale with Thompson, Ross & Company, a corporation, whereby it sold to that corporation a large group of commercial securities for the price of $2,400,000, payable $1,975,000 in cash and the balance in securities. A payment of $50,000, termed "earnest money," was made by the purchaser at the signing of the contract, which gave it the right to rescind the same on or before March 20, following, in event its attorneys, after investigations, should advise that the purchase was "inadvisable from a legal standpoint." Under the terms of sale, delivery of the assets was to be made at the vendee's office in Chicago, Illinois, on or before June 1, 1927, at which time and place final payment of purchase price was to be made. On May 10, 1927, petitioner's stockholders formally ratified the sale of its assets and, by proper resolution, directed the board of directors to carry out its terms. *1348 They also, by resolution, authorized the directors, should they deem it advisable, to liquidate the property and business of the corporation and distribute its assets in accordance with its charter provisions. Thereafter, on the same date, petitioner's board of directors, by proper resolution, directed its officers to transfer all of the corporate assets to Lane, Piper & Jaffray, Inc., L. P. Runkel and G. A. Stevens, as trustees; and, thereafter, on May 14, 1927, in accordance therewith, a conveyance in trust was executed by said officials to said named trustees of all of the corporation's assets, including, by specific reference thereto, its rights under the sales contract of March 8, 1927, "in and to the purchase price * * * and the payments due it thereunder." The trust instrument provided that, pending liquidation, Lane, Piper & Jaffray, Inc., should have actual charge of all books and be the custodian of all securities and funds constituting a part of the *526 estate, as a general deposit, upon which it should pay interest at rates to be agreed upon from time to time between it and the other two trustees. The trustees delivered all of the corporation's assets to Thompson, *1349 Ross & Company, under the terms of the sale contract of March 8, 1927, and received the balance of the purchase price, which, except for the sum of $96,729 still retained, they disbursed according to the terms of the trust instrument during 1927 and 1928. At the time of the organization in 1925, petitioner expended the sum of $46,979.25 as an organization expense, which sum it capitalized. It now claims that this sum was lost to it in 1929, when, as it alleges, it forfeited its corporate franchise through failure to pay the State corporation tax. OPINION. LANSDON: The petitioner argues that it ceased to exist as a body corporate in 1929, in virtue of its failure to pay the state corporation tax, which omission, under the state laws, subjected its charter to forfeiture. It introduced no evidence at the hearing to establish either that its corporation tax for 1929 was not paid, or, if not, that a forfeiture of its charter rights was invoked by the state of its creation. In the absence of any evidence to support this contention, we sustain the act of the respondent in denying the loss claimed for 1929. Petitioner contends that the conveyance in trust of its assets on May 14, 1927, amounted, *1350 in effect, to a distribution of them "in kind" to its stockholders, who thereafter sold them through the trustees. The respondent's basic contention respecting the other tax items here disputed is that the transfer of the corporation's assets to the trustees in 1927, in the circumstances, did not change its taxable status as owner of the profits from their sale, under its contract with Thompson, Ross & Company, or the earnings of the converted assets, pending their distribution to the stockholders. The record does not support any theory of a sale made by the trustees, or that they acquired any rights in the trust corpus which they could have sold other than in accordance with the directions of the trust instrument, which they were bound to obey. It does show, however, that the corporation made a sale of its assets to Thompson, Ross & Company on March 8, 1927, and received a binding payment of $50,000 in "earnest money." This was not an option contract, as contended for by the petitioner, but an executed sale which gave the purchaser vested property rights in the assets. *1351 ; ; ; ; ; . The purchaser's contingent option to rescind *527 did not postpone the vesting of its rights in the property. ; . That right of election expired March 20, 1927; and after that date the contract of sale was without a condition to either party. All conditions being removed, the assets being in a deliverable condition, the property in them passed to the buyer. Sec. 8394 (Rule 1) Mason's Minn. Stats. (Conditional Sales Acts); ; ; ; ; . That the stockholders intended this sale to stand is shown by their action at their meeting of May 10, 1927, when, by resolution, they directed as follows: *1352 BE IT FURTHER RESOLVED that the proper officers of this corporation be and they hereby are authorized to carry out and perform, or cause to be carried out and performed, all of the obligations of this corporation under and pursuant to said contract of March 8th, 1927. The board of directors entrusted that duty to the trustees, who accepted the trust and complied with the mandate. In so doing the trustees acted for and in behalf of the corporation. ; ; and . The cases cited in petitioner's brief are not applicable to the facts here. Several of them show a transfer of corporation assets to a trustee or stockholder, which we recognized as valid to pass title to the transferee, but in none of them was there a closed contract of sale to a third party which had intervened to prevent the passing of title to the trustees, or stockholders. Of the cases cited, the nearest approach to one in point with the situation here considered is found in *1353 , where a prior sale of the corporation's assets had been negotiated but not consummated by its officials. Thereafter, the officials sold the corporation's assets for cash, to one of the stockholders as trustee, who renewed the negotiations and sold them to the Bell Telephone Company. Inasmuch as the property was not otherwise encumbered, this Board sustained that sale. In , the issue was controlled by facts in no respect similar to these here considered. In that case the corporation had transferred construction contracts to its president, and the Board held that, to all intents and purposes, they had been completed and the profits on them earned by the corporation before the transfer. Accordingly, the Board held that such profits constituted income to the corporation. The United States Circuit Court of Appeals reversed the decision of the Board for the reason, as stated in its opinion, that the counsel for the Commissioner conceded at the hearing *528 that there was no basis for the Board's findings that the profits had been earned before the transfer. *1354 In the case at bar we sustain the sale to Thompson, Ross & Company, as well as the subsequent transfer to the trustees. The first of these, however, passed the property rights in the assets to the purchaser as of March 8, 1927, when the deal was closed and the earnest money paid. Decision will be entered for the respondent.