Dallas Downtown Development Co. v. Commissioner , 12 T.C. 114 ( 1949 )

Dallas Downtown Development Company (Dissolved), W. W. Overton, Jr., Justin McCarty, and Ballard Burgher, Liquidating Trustees, Petitioners, et al., ¹ v. Commissioner of Internal Revenue, Respondent

Dallas Downtown Development Co. v. Commissioner

Docket Nos. 16618, 16224, 16567, 16568, 16614, 16615, 16616, 16617, 16665, 16718, 16729, 16731, 16732, 16734, 16771, 16772, 16773, 16774, 16780, 16829, 17604

United States Tax Court

12 T.C. 114; 1949 U.S. Tax Ct. LEXIS 288;

January 31, 1949, Promulgated

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Decision will be entered for the petitioners.

Sale by numerous stockholders of 100 per cent of stock in petitioner corporation after unsuccessful efforts of purchaser to acquire from corporation the building occupied by purchaser, held not to result in taxable gain to petitioner corporation, notwithstanding acquisition of all of the stock was accomplished on purchaser's behalf by its nominees, followed by immediate liquidation of petitioner corporation and transfer of building through dummy corporation to purchaser. Steubenville Bridge Co., 11 T. C. 789, followed.

Robert Ash, Esq., for the petitioners in Docket Nos. 16224 and 17604.

Webster Atwell, Esq., and E. Crippen, Esq., for the petitioners in Docket Nos. 16614, 16615, 16616, 16617, and 16618.

Leslie M. Shults, Esq., for the petitioners in Docket Nos. 16567 and 16568.

Sam Winstead, Esq., for the petitioner in Docket No. 16665.

J. W. Bullion, Esq., for the petitioners in Docket Nos. 16718 and 16729.

J. I. Worsham, Esq., for the petitioners in Docket Nos. 16731, 16732, and 16734.

Felix Atwood, Esq., for the petitioners in Docket Nos. 16771, 16772, 16773, 16774, and 16780.

John N. Jackson, Esq., for the petitioner in Docket No. 16829.

John W. Alexander, Esq., and J. Marvin Kelley, Esq., for the respondent.

Opper, Judge. Leech, J., dissents. Disney, J., dissenting. Harlan, J., dissenting.

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OPPER

By these proceedings petitioners challenge respondent's determination of a deficiency in income tax against petitioner Dallas Downtown Development Co. (dissolved) in the amount of $ 37,302.55 for the taxable year 1946; they also contest the determination of transferee liability as follows:

		Income tax
Petitioner	Docket No.	deficiency
Estate of J. O. McReynolds	16224	$ 21,000.00
Trust Under Will of James Charles O'Connor	16567	14,700.00
Estate of Ivor Elizabeth O'Connor Morgan	16568	15,400.00
Texas Bank & Trust Co. of Dallas	16614	37,302.55
Ballard Burgher	16615	37,302.55
Justin McCarty	16616	37,302.55
W. W. Overton, Jr	16617	37,302.55
Mina G. McJunkin and Fred McJunkin, Jr., Trust	16665	20,300.00
Estate of E. M. Kahn	16718	21,000.00
Harry L. Meador	16729	37,302.55
Frank O. Witchell	16731	3,500.00
Estate of Mollie I. Witchell 1	16732	15,925.00
Estate of Otto H. Lang	16734	20,300.00
Pauline B. Seay	16771	17,500.00
John M. Seay	16772	17,762.50
Charles E. Seay	16773	35,000.00
George E. Seay	16774	19,250.00
Pauline B. Seay Trust	16780	37,302.55
Cecil A. Keating Trust	16829	14,700.00
Mary Victoria McReynolds Wozencraft	17604	21,000.00

The deficiency against petitioner Dallas Downtown Development Co. (dissolved) resulted from respondent's determination that petitioner realized long term capital gain of $ 149,210.19 from a sale of its building to Texas Bank & Trust Co. of Dallas in the taxable year.

The facts are found from stipulations of the parties, which we hereby adopt as part of our findings, and from testimony and documentary evidence.

FINDINGS OF FACT.

Petitioner Dallas Downtown Development Co. (dissolved), hereinafter called Development Co., filed no Federal income tax return for the taxable year 1946.

The Development Co. was during part of the taxable year a Texas corporation which owned and was engaged in operating an office building known as the Texas Bank Building in Dallas, Texas. As of January 21, 1946, the Development Co.'s capital stock consisted solely of 4,000 shares of $ 100 par value common, which were owned in varying amounts by approximately 62 stockholders, of whom 16 are petitioners in this proceeding and are sometimes hereinafter called old stockholders. Ownership of approximately 61 per cent of the 4,000 shares was divided between petitioner Harry Meador, who was president and a director, and the Seay family, consisting of petitioners Pauline B. Seay and sons John M. Seay, George E. Seay, and Charles E. Seay, the latter two being directors. By a written instrument signed by Meador and the Seays, dated February 28, 1944, and in effect during 1945 and 1946, the parties were committed to give each other the refusal to purchase the Development Co.'s stock before disposing of it to outsiders.

During the period in question and for many years prior thereto, petitioner Texas Bank & Trust Co. of Dallas, hereinafter called Texas Bank, was a tenant in the Texas Bank Building, occupying a portion thereof for its banking business.

As early as 1943 or 1944 petitioner W. W. Overton, Jr., a director and stockholder of Texas Bank, negotiated with Meador, also a director of Texas Bank, for a purchase of stock in the Development Co. But although Meador discussed with Overton a sale of part of the Meador-Seay block of stock, those negotiations did not result in sales.

In the latter part of 1945 Meador made a survey of rental conditions, as a result of which he notified the tenants of Texas Bank Building, including Texas Bank, of a rent increase to become effective January 1, 1946. Shortly after receiving the notice, Overton called Meador to inquire how much the Development Co.'s income would be increased by virtue of the increase in rents, and was given that information by Meador. At about the same time Texas Bank desired to acquire a building of its own. Overton had discussions with the following group of officers, directors, and stockholders of Texas Bank: Petitioners Ballard Burgher and Justin McCarty, Jr., directors; Garrett and Reed, president and vice president, respectively; and Burrus and Brown, principal stockholders. That group appointed Overton, McCarty, and Burgher as a committee to act for Texas Bank Building.

In November 1945 Overton consulted Webster Atwell, an attorney employed by Texas Bank, seeking advice concerning the means by which Texas Bank could acquire title to Texas Bank Building. Atwell advised that under Texas law the bank could not invest in excess of 50 per cent of its capital and certified surplus in a home office building, and that if a more costly building were to be acquired the bank could conform to the law by taking title subject to a lien on the building. Atwell further advised that the Development Co. could convey good title only with consent of all its stockholders. On December 3, 1945, Overton executed and delivered a note payable to Texas Bank in the principal sum of $ 10,000, payable in 90 days, which sum was used in the incorporation of Dallas Downtown Investment Co., hereinafter called the Investment Co. A charter for the Investment Co., issued December 5, 1945, by the Secretary of State of the State of Texas, on application and affidavit of the incorporators, Overton, McCarty, and Burgher, stated that the purpose for which the Investment Co. was formed was "to erect and repair any building or improvement, and to accumulate and lend money for said purposes, and to purchase, sell, and subdivide real property in the City of Dallas, Texas, and its suburbs not extending more than two miles beyond the City Limits of Dallas and its suburbs, and to accumulate and lend money for that purpose." According to the affidavit, the capital stock was divided into 100 shares of common with par value of $ 100 per share, and was subscribed and paid for by the incorporators in the following amounts:

Name	Amount	Amount
	subscribed	paid
Overton	$ 3,500	$ 3,500
McCarty	3,500	3,500
Burgher	3,000	3,000

The above note for $ 10,000 was paid on March 1, 1946, by Overton, McCarty, and Burgher, in the following amounts:

Overton	$ 5,000
McCarty	2,500
Burgher	2,500

Sometime between about December 4 and December 28, 1945, four proposed contracts for sale of Texas Bank Building were drafted, all naming the Development Co. as seller and the Investment Co. as buyer, but none of the four was ever consummated or signed by any of the proposed parties to it. The first of these proposed contracts, reciting a consideration of approximately $ 589,000, was drafted by Atwell on or about December 4, 1945, at Overton's request and was delivered to Meador, who discussed it with Pauline Seay, Charles E. Seay, and the directors of the Development Co. George E. Seay and John M. Seay were both absent at the time, serving with the Army and Navy, respectively. Pauline Seay, Charles E. Seay, and the directors of the Development Co. expressed opposition to a sale of the Texas Bank Building. Therefore Meader notified Overton that there was no chance of consummating the deal.

Negotiations under all four proposed contracts were carried on between Meador and Overton. No discussion was had concerning whether Overton was acting for himself or for Texas Bank, but during the course of negotiations Meador stated that he believed it was a good investment for the bank. The second proposed contract, drafted on or about December 17, 1945, by Ralph W. Malone, an attorney for Meador, and reciting a consideration of $ 700,000, was delivered to Atwell, who drafted the third proposed contract, reciting the same consideration, $ 700,000, but providing that the buyer's performance was contingent upon unanimous consent of the seller's stockholders and directors. Upon receipt of the third proposed contract, Malone, on or about December 28, 1945, drafted the fourth proposed contract, reciting the same consideration, $ 700,000, and providing that the seller's performance also was contingent upon unanimous consent of its stockholders and directors. Meador discussed the $ 700,000 proposals with Pauline Seay, Charles E. Seay, and George E. Seay, who returned to the United States in early January of 1946. Finding the Seays opposed to a sale of the building, Meador informed Overton that the $ 700,000 discussion was just as dead as the $ 589,000 one. Each of the above four proposed contracts stated that the purchaser had deposited with the seller $ 50,000 "as part of the aforementioned consideration, the receipt of which is hereby acknowledged by Seller." However, no sum was paid under any of the proposed contracts.

During 1945 and part of the taxable year, R. L. Thornton was president of Mercantile National Bank, hereinafter called Mercantile Bank, and a director of the Development Co., with one qualifying share. In the latter part of 1945 Overton came to Thornton to discuss the advisability of Texas Bank's acquiring a home office building. Thornton also discussed the same matter with members of the Seay family.

On or about January 9, 1946, at a meeting attended by Meador and all the members of the Seay family, those present agreed to sell their stock for $ 175 a share. Meador had learned thatTexas Bank was preparing to acquire land and erect a home office building, and convinced the Seays that they should sell their stock. On or about January 10, 1946, Meador and the Seays, as sellers, entered into a contract in which Overton, Burgher, and McCarty were denominated the purchasers, by the terms of which the purchasers agreed to pay $ 175 a share for all stock in the Development Co. offered before January 31, 1946, provided that at least 80 per cent of the stock was offered for sale before that date. The 80 per cent condition was included in the contract at the purchasers' request because under Texas law the consent of at least 80 per cent of the stockholders was required for dissolution. The above contract was dated December 31, 1945, at request of the purchasers, who desired that it be so dated for "operating purposes." The contract was drafted by Malone, as attorney for the sellers, and was signed first by the sellers and delivered to the purchasers, who signed on the same day. Subsequently, on January 11, Meador mailed to all other stockholders of the Development Co. letters stating the details of the stock purchase contract and containing a form to be completed by those stockholders desiring to offer their shares to the purchasers under that contract. The form provided, in part, that "said stock certificate, or certificates, has been endorsed in blank and is hereto attached for delivery to Harry Meador, President of said corporation, in trust, pending the consummation of said sale."

By January 21, 1946, 3,835 of the Development Co.'s 4,000 shares were available for sale under the stock purchase contract, and on that date individual checks drawn on Texas Bank, payable to the holders of the 3,835 shares, and signed by "W. W. Overton, Jr., Ballard Burgher, and Justin S. McCarty, by W. W. Overton, Jr.," were sent or delivered to the old stockholders. The amounts used for the stock payments were procured by a loan of $ 700,000 from Mercantile Bank to Overton, McCarty, and Burgher. The loan was secured by a promissory demand note in the amount of $ 700,000 dated January 22, payable to Mercantile Bank, and signed by Overton, McCarty, and Burgher; and by a separate collateral agreement of the same date signed by the same parties and pledging 4,000 shares of the Development Co. stock. Between January 21, and February 19, 1946, the remaining 165 outstanding shares were purchased and paid for by Overton, McCarty, and Burgher in the same manner as that described above for the 3,835 shares. The aggregate of checks drawn against their account in Texas Bank by Overton, McCarty, and Burgher was $ 700,000, consisting of $ 699,639.82 paid to the old stockholders and other former stockholders not parties to this proceeding, and $ 360.18 for Federal and state revenue stamps covering the stock transfers.

On January 1, 1946, a regular stockholders' meeting of the Development Co. was adjourned for lack of a quorum, and at Meador's direction the minutes contained blanks to be filled with the date of the next stockholders' meeting when Meador should decide to call such a meeting. On January 21, 1946, the adjourned meeting of January 1 was convened, and stockholders were stated to be present as follows:

Stockholders	Shares
Overton	1,279
Burgher	1,277
McCarty	1,277
Bishop	1
Atwell	1

All of the foregoing were elected directors at that meeting, and on the same day met, authorized notice of a special stockholders' meeting on February 23, 1946, to vote on the question of dissolving the Development Co., and elected officers as follows: Overton, president; McCarty, vice president; and Bishop, secretary and treasurer.

A special meeting of the board of directors of Texas Bank on January 24, 1946, passed a resolution to call a special stockholders' meeting for February 25, 1946, for the purpose of amending the bank's articles of association with reference to amount of capital stock and number of shares, "Capital Stock to be increased from $ 350,000.00 to $ 500,000.00, the number of shares to be increased from 17,500 to 25,000, the par value to remain at $ 20.00 per share." At the same meeting on January 24, "Upon the motion of Mr. Reed and the second of Mr. Mott, the committee composed of W. W. Overton, Jr., Justin S. McCarty, Jr., and Ballard Burgher was confirmed as negotiator for the purchase of the bank residence, which acquisition had been discussed since November of 1945 and was to be effected as of January 1, 1946." Pursuant to and in accordance with the above resolution, the charter of Texas Bank was amended, and the plan of increase, to sell 7,500 shares at $ 45 per share, $ 150,000 of the proceeds to go to capital stock and $ 187,500 to surplus and/or undivided profits, was carried out.

At a special stockholders' meeting of the Development Co. held February 23, 1946, all stockholders were stated to be present as follows:

Stockholders	Shares
Overton	1,444
Burgher	1,277
McCarty	1,277
Bishop	1
Atwell	1

The meeting unanimously adopted motions to dissolve the Development Co. and appointing all directors thereof as "the trustees of the creditors and stockholders of this corporation," to "have full power to settle the affairs, collect the debts, divide the monies and other properties among the stockholders after paying the debts due and owing by said corporation at the time of dissolution, and in this connection that said President and Directors have the power and authority to sell, convey and transfer all real and personal property belonging to said corporation in the name of said corporation and exercise full power and authority of said corporation over all such assets and properties."

On February 26, 1946, pursuant to a consent certificate of dissolution executed by 100 per cent of the stockholders of the Development Co., the Secretary of State of the State of Texas issued his formal consent certificate of dissolution of the Development Co.

At a special directors' meeting of the Investment Co. on February 28, 1946, attended by that company's three directors, Overton, McCarty, and Burgher, it was resolved that the Investment Co. "purchase" Texas Bank Building from the president and directors of the Development Co. (dissolved) for $ 730,000, of which $ 500,000 was "to be advanced by the Texas Bank" and the remaining $ 230,000 was to be borrowed from the Great National Life Insurance Co., hereinafter called Great National, "secured by a vendor's lien and deed of trust lien on said property." At the same meeting Overton, as president, was authorized to execute in the company's name a note for the $ 230,000 payable to Great National. It was further resolved that, upon receiving the property, the Investment Co. in turn would convey it to Texas Bank, for a recited consideration of $ 500,000, "which will already have been paid by said Bank." At a special stockholders' meeting of the Investment Co. on February 28, 1946, attended by that company's three record stockholders, Overton, McCarty, and Burgher, a resolution was adopted confirming and ratifying all actions of the board of directors taken at the meeting on the same day and described above.

On March 8, 1946, in exchange for a note executed by the Investment Co. in accordance with the above resolution, Great National issued its check for $ 230,000, payable to Overton, Burgher, McCarty, Bishop, and Atwell, president and directors of the Development Co. (dissolved), and as trustee for creditors and stockholders of that company. On the same day Texas Bank issued its credit memorandum for $ 500,000 to the same parties, who deposited to a checking account in their names as liquidating trustees in Texas Bank amounts aggregating $ 752,279.20, made up of the two items above, and $ 22,279.20 representing the Development Co.'s available cash on hand. On the same day checks aggregating $ 752,279.20 were drawn on the above account as follows: To Mercantile Bank for $ 701,750, in payment of the $ 700,000 loan made by Overton, McCarty, and Burgher to effect the Development Co. stock purchase described above, with interest; and to Texas Bank for $ 50,529.20, in payment of the balance due on an installment note for $ 62,500, dated May 1, 1945, payable to Texas Bank, and executed by the Development Co. "By Harry Meador, President." On or about March 8, 1946, stock certificates covering the 4,000 shares of the Development Co., which had been pledged to secure the $ 700,000 loan from Merchantile Bank, were marked "Cancelled" and were pasted in the stock book records of the Development Co. At the time these proceedings were heard, the Investment Co. was still in existence, its note to Great National had not been paid, and its operations as lessor of 75 front feet of real estate situated adjacent to Texas Bank Building and acquired in March or April 1946, resulted in annual gross income of about $ 25,000.

On March 8, 1946, the Development Co. (dissolved), by Overton, Burgher, McCarty, Atwell, and Bishop, as president and directors and individually as grantors, executed a deed conveying Texas Bank Building and other assets of the dissolved Development Co. to the Investment Co. That deed recited a consideration of $ 730,000, "of which Five Hundred Thousand ($ 500,000.00) Dollars is paid in cash, the receipt of which is hereby acknowledged, and the balance of Two Hundred and Thirty Thousand ($ 230,000.00) Dollars is paid and secured to be paid and is payable hereafter according to a vendor's lien note of even date herewith signed by Dallas Downtown Investment Co., a Texas corporation, and payable to Great National Life Insurance Company of Dallas, Texas." It was further "expressly agreed and stipulated that the vendor's lien is retained against the above described property, premises and improvements, until the above described note and all interest thereon is fully paid."

On March 8, 1946, the Investment Co., by Overton, president, executed a deed conveying to Texas Bank the Texas Bank Building and other assets received the same day under conveyance from the Development Co. described above. The deed from the Investment Co. recited a consideration of "Five Hundred Thousand ($ 500,000.00) Dollars cash, the receipt of which is hereby acknowledged, and subject to the indebtedness of Two Hundred and Thirty Thousand ($ 230,000.00) Dollars, evidenced by a note payable to the Great National Life Insurance Company of Dallas, Texas." No payment was made at any time by Texas Bank to either the Investment Co. or the Development Co. except the $ 500,000 credit memorandum described above, issued on March 8, 1946, by Texas Bank to Overton, Burgher, McCarty, Bishop, and Atwell, president and directors of the Development Co. (dissolved), and as trustee for creditors and stockholders of the Development Co.

At the regular monthly meeting of the board of directors of Texas Bank on March 12, 1946, it was resolved that:

Whereas, under authority of this Board of Directors, a Committee * * * negotiating for the purchase of the Texas Bank Building * * * has been conducting such negotiations since November, 1945; and

Whereas, the negotiations * * * have been fruitful in that said Texas Bank Building has been purchased as a home for this Bank,

the actions of the committee be "ratified, confirmed, and approved." A copy of this resolution was transmitted on March 25, 1946, to the Department of Banking, Austin, Texas.

The Development Co.'s balance sheet as of December 31, 1945, discloses the following:

Assets
Property and equipment	$ 589,352.63
Current assets	37,870.29
Cash surrender value of life insurance	2,450.00
Total	629,672.92
Liabilities, capital stock, and surplus
Capital stock	$ 400,000.00
Long term debt	37,500.00
Current liabilities	32,668.11
Deferred income	8,715.00
Earned surplus	150,789.81
Total	629,672.92

Within a variation of about $ 7,000 caused by normal operations, the Development Co.'s assets and liabilities as of January 21, 1946, were the same as on December 31, 1945, shown above.

In his notice of deficiency directed to the Development Co. (dissolved), respondent stated, under "Explanation of Adjustment," as follows:

It has been determined that you realized long-term capital gain in the taxable year upon the sale of assets to Texas Bank & Trust Company of Dallas as shown below:

Sale price		$ 738,562.82
Cost of assets sold	$ 1,172,365.36
Less: Depreciation	583,012.73
Net cost or other basis of assets		589,352.63
Gain realized on sale		149,210.19

Substantially the same explanation of adjustments was made by respondent in notices of deficiency directed to the other petitioners against whom transferee liability is asserted.

In acquiring 3,835 shares of capital stock in the Development Co. on January 21, 1946, and in acquiring the remaining 165 shares before February 19, 1946, the building committee, composed of Overton, McCarty, and Burgher, were acting only as agents and nominees of Texas Bank and not in their capacity as individuals. The shares so acquired were held by the building committee, Atwell, and Bishop for the benefit and use of Texas Bank, their principal. The sum of $ 700,000 was borrowed by the building committee for the account and benefit of the Texas Bank. The members of the building committee received no compensation, property, or other thing of value for their services in acquiring and holding the stock for Texas Bank and carrying out the details of the subsequent liquidation of the Development Co. It was not at any time the intention of Texas Bank, its agents, the building committee, or the trustees of the stockholders and creditors of the dissolved Development Co. that any considerations recited in the deeds of conveyance of the legal titles to the Investment Co. and to Texas Bank would in fact be paid. The only purpose and intent of Texas Bank and its agents in carrying out the transactions subsequent to dissolution of the Development Co. was to acquire, as stockholder, the bank building through liquidation.

OPINION.

We are again confronted with the problem of applying Commissioner v. Court Holding Co. ² to a corporate taxpayer and of the potential transferee liability of two different sets of the corporation's stockholders. As in , an unsuccessful effort to purchase the principal asset of the taxpayer, the Development Co., was followed by the acquisition from the old stockholders of all of its capital stock. That neither petitioner Development Co., as the taxpayer, nor the old stockholders, as transferees, are liable here follows directly from the holding in the Steubenville Bridge case, as to which in that respect the present facts are comparable. See also .

Such distinction as exists here from what occurred in those cases has to do with the developments subsequent to the sale of stock by the old stockholders. The property in question ultimately came to rest in petitioner Texas Bank, which, because of its occupancy of a part of the building as its banking headquarters, was interested in a continuation of that occupancy not as tenant, but as owner. The transaction is complicated, first, by provisions of the Texas banking law, and the necessity that the Texas Bank limit its investment in its banking quarters to a sum substantially less than the requisite purchase price, with the consequence that an intermediate corporation was inserted, the only function of which in the ultimate result was to be the dummy obligor on a mortgage procured from another bank in order to eliminate the unlawful excess of the Texas Bank's investment; and, second, by the conduct of negotiations through a committee of individuals from the Texas Bank's board of directors.

We have found as facts, since every evidential and logical process necessitates such ultimate findings, that the individuals in question were at all times acting as agents and fiduciaries for the Texas Bank; that they attempted to acquire the property and eventually acquired the stock solely in that capacity and, when acquired, that they held it for and on behalf of the Texas Bank. The committee could not have secured the property for their own account, even had they attempted to do so. "* * * the modern current of authority appears to be to the effect that if an agent be employed to negotiate the purchase of land for his principal, and violates the principal's confidence, by purchasing the land with his own money, and taking a deed therefor to himself, he becomes a constructive trustee for the principal's benefit, upon payment of the purchase price. This is the rule adopted by the American Law Institute. 'The agency may be established by a written contract or a verbal contract, or no contract whatever, the assumption of confidence involving a purely gratuitous service, for which the agent is to receive no compensation in any form' * * *." 4 Pomeroy, Equity Jurisprudence, 5th Ed., 141; see ; .

We have found further that the Investment Co., the intermediate corporation, which momentarily secured the record title to the bank building and executed the note and deed of trust in a transitory phase of the whole operation, was no more than a nominee of the owner's then sole stockholder, and received and held the property on behalf of the Texas Bank and without consideration to or from itself. The Investment Co. being "a mere agent or conduit created with this limited function, any gain or loss from the * * * dispositions of the property would be attributable not to it, but to its principal, the controlling stockholders. * * * ." . Property can be conveyed to a stockholder through its nominee or fiduciary without converting a liquidation into something else. .

Stripping away the appearances and attempting then to grasp the essential nature of what actually occurred, we think the only realistic summarization of the entire transaction is that the principal tenant of a business building decides to attempt to acquire it as its headquarters, and, being unsuccessful in buying the property itself from the corporate owner, secures all the stock by purchase from the individual holders, and, as sole stockholder, then dissolves the corporation, and through the intervention of a temporary conduit or agency, acquires the property as a liquidating dividend. So stated, it seems clear that there was no sale of the property by the corporation at any time, no capital gain to it, ; (acquiesced in, Internal Revenue Bulletin, Nov. 15, 1948, p. 1), and hence that there could be no transferee liability on either the old stockholders or the new.

We see nothing in , or , to preclude this view of what occurred and of the resulting liabilities of the parties. The Investment Co.'s holding of the property is being disregarded, not because or in spite of its corporate form or of the issuance of its stock in the names of the Texas Bank's nominees, but because of its transitory and fiduciary character as the mere nominal holder of legal title to the Texas Bank's property. When the Development Co. was dissolved and its property distributed in liquidation through the Investment Co. to its sole stockholder, there was, in our view, a transaction resulting in no gain or loss to the liquidating company, , as surely as if the transfer had been direct. ;

In a sense these cases present the reverse of the situation in such proceedings as ; affd. (C. C. A., 2d Cir.), ; certiorari denied, ; and . There, in lieu of a formal sale by the corporation, there was a dissolution, a transfer to the stockholders, and a sale in form by them to the ultimate vendee. The dissolution was an integral part of the formal arrangements, but there was nowhere any contention that the gain arose because of the transfer from the corporation to the stockholders. Here, whatever sale there was consisted of a transfer of stock from the old shareholders to the new. Dissolution would not have been necessary; the new stockholder could own and operate the property effectively through its control of the intervening corporation. But it is only by reason of the dissolution and the transfer of the property to the new shareholder that there is any basis here for the contention that what occurred was the sale of the property rather than of the shares. Incidentally, we do not have here the question whether Texas Bank, as a taxpayer, secured any gain when it exchanged its stock for the building in liquidation. Cf. ; certiorari denied, . In the instances first cited, the property transferred was the same, whether sold by the corporation directly or through the conduit of its shareholders. Here, there is a fundamental variance between what would have been transferred had the property itself been sold, as was first discussed, and what was dealt with when the stockholders merely sold their shares, demonstrated, in the facts before us, by the increase in the purchase price resulting when the vendee was compelled to add to the price of the shares the net liabilities of the corporation.

The short of the matter seems to us to be that the taxpayer corporation did not sell its property when the stockholders sold their shares, ;; and that it did not become chargeable with any gain on the disposition of the property when it was distributed in liquidation to its sole stockholder. We are accordingly satisfied that no liability exists either on the original taxpayer or on either set of stockholders as transferees.

Decision will be entered for the petitioners.

DISNEY; HARLAN

Disney, J., dissenting: I shall not dwell upon the question as to whether it is important that the earlier agreements had to do with sale of the property, whereas the stock was finally purchased. In either event, in my opinion, the sale finally made was made by the corporation, the Development Co., and the majority wrongly concludes that there was no taxable gain. This to me appears clear for the following reasons: We have heretofore, in Taylor Oil & Gas Co., 15 B. T. A. 609, and in Fred A. Hellebush, 24 B. T. A. 660, twice concluded that a sale of property by the directors as trustee for a corporation in dissolution was a sale for the corporation and not the stockholders. Both cases were affirmed. In the Taylor case the resolution to dissolve was passed on January 16, 1920. It recited that the corporate existence "is hereby finally and forever dissolved." On the same date the stockholders resolved that the board of directors should act as liquidating trustees for its creditors and stockholders, and that they might, in the name of the corporation, sell the property. On January 20 the corporation was dissolved by filing papers with the secretary of state. On January 26 the directors, as trustees for stockholders and creditors, transferred the property. Thus it appears that the dissolution, both by resolution and by form of law, preceded the sale by the trustees for the corporation. In the Hellebush case the stockholders on April 20, 1927, resolved to dissolve and liquidate, and to transfer the property to the president and secretary-treasurer of the corporation as trustees with power to liquidate the assets and to sell the property and distribute to the stockholders. The same day the corporate officers delivered a bill of sale to the trustees for the personal property and did the same as to the real estate about the same day. The trustees then made an agreement, on April 20, 1927, to sell the property and conveyed the personal property on that date, and on May 14 conveyed the real estate. Dissolution under the law of Ohio took place on June 2, 1927. The trustees received about $ 270,000 and distributed the net returns to the stockholders. Quoting Taylor Oil & Gas Co. v. Commissioner, 47 Fed. (2d) 108, which affirmed the Taylor case, supra, we said, "The real owner was still a company until such time as its affairs were liquidated, the debts paid and the residue distributed to the stockholders. The profit on the transaction was earned by the corporation and the assessment of the taxes based thereon was valid." We further stated, "The trust was closed when the property was sold, the debts owing the corporation were collected, the debts of the corporation paid and the money distributed to the stockholders." We, therefore, as above stated, concluded that the sale was by the corporation and not the stockholders.

The facts here are, in my opinion, in all essential respects the same as in the above cases. Though by February 19, 1946, all of the stock had been purchased and had passed to new stockholders, the corporation's status had not changed. On February 23, 1946, the stockholders voted to dissolve the corporation, appointing all directors thereof as "the trustees of the creditors and stockholders of this corporation" to "have full power to settle the affairs, collect the debts and divide the moneys and other properties among the stockholders after paying the debts due and owing by said corporation * * *" and authorizing the president and directors to sell the property "belonging to said corporation in the name of said corporation and exercise full power and authority of said corporation over all such assets and properties." On February 26 the secretary of state dissolved the corporation. On February 28 the purchasing company resolved to purchase the property, the bank building, "from the president and directors of the Development Company (Dissolved)." Seven hundred thousand dollars ($ 700,000) had been borrowed from the Mercantile Bank in order that the new stockholders might purchase the Development Co.'s stock; and the stock certificates for all of the Development Co. stock had been pledged to secure the $ 700,000 loan. On March 8 the stock certificates were canceled and were pasted in the stock book records of the Development Co. Also, on March 8 "the Development Company Dissolved," by its president and directors and by them individually as grantors, conveyed the assets of the dissolved Development Co. to the purchaser or rather to the Investment Co., which was serving as a go-between, and on the same day the Investment Co. transferred the property to the ultimate purchaser. On March 8 the purchaser issued a $ 500,000 credit memorandum representing part of the purchase price to the "president and directors of the Development Company Dissolved and as trustee for creditors and stockholders of the Development Company."

The findings of fact made by the majority do not indicate when the affairs of the Development Co. were finally closed, any debts paid, and the residue distributed to the stockholders.

In short, under the above facts, we have here a disposition of the corporate property, by its officers and directors as trustees, in the course of liquidation. It is obvious that liquidation and distribution were not completed at the time of the passage of title to the property on March 8, for on that date the $ 500,000 was received and the deed of that date recites that $ 230,000 of the purchase price is "to be paid and is payable hereafter according to a vendor's lien note of even date * * *." With the property passing from the corporation through its officers as trustees who were specially authorized to convey the "property belonging to said corporation in the name of said corporation," it is impossible for me to understand why the corporation did not make the profit, if any. The law that corporate directors have a duty to and are trustees for that corporation is so well settled as not to require citations -- in addition to the fact that here they were specially authorized to act as trustees and acted as such in the sale. The Taylor and Hellebush cases are both merely examples of the general principle. In form, as well as in fact, the corporation sold this property. To refuse to attribute any profit made to the corporation is to refuse to recognize the corporate entity. It is clearly immaterial that a different group of stockholders had purchased the stock. The corporation subsisted as completely in the hands of one group as in the former. I can not conceive why a change of stockholders (the new stockholders thereafter proceeding to liquidate, but disposing of the property through their officers as trustees) should cause escape of the corporation from tax upon the sale of its property. That dissolution of the corporation by the state preceded the deed is immaterial, for the same was true in the Taylor case. The real test is not formal dissolution, but, as stated in the Hellebush case, is the fact that the real ownership is in the company until completion of liquidation, payment of debts, and distribution of residue. That is not the case here. Though I think , was wrongly decided, it is distinguishable from this case in that there the dissolution was not to the officers and directors as trustees, with power to sell on behalf of the corporation, as we find in this case. I would hold that the sale resulted in taxable gain to the corporation. I, therefore, respectfully dissent.

Harlan, J., dissenting: I dissent from the majority opinion herein because I am persuaded that it gives effect to appearance over reality. The courts have generally held corporations free from capital gains in the sale of corporate assets when such sale in good faith has been effected by a sale of the corporate stock or when such sale has been made after liquidation of a corporation in the absence of an agreement to sell made by authorized corporate representatives prior to any steps being taken toward liquidation. In the case at bar it would seem to be obvious that the sale of the corporate stock in January 1946 was not intended to operate as a corporate stock sale by either the purchaser or the seller of the stock, and the subsequent sale of the bank building by the liquidators of the corporation was in pursuance of an agreement to sell said bank building prior to liquidation. "The question always is whether the transaction under scrutiny is in effect what it purports to be in form." ( .)

All of the facts surrounding the supposititious sale of Development Co.'s stock to Overton, Burgher, and McCarty, when integrated, constitute in effect a sale of the bank building. Also the sale of the building by Overton, Burgher, and McCarty as liquidators of Development Co. to Investment Co. of which Overton, Burgher, and McCarty were sole stockholders and directors, was but the consummation of an agreement which Overton, Burgher, and McCarty, as sole stockholders and directors of Development Co., had concluded with themselves as directors and stockholders of Investment Co. before any steps in liquidation had been taken by Development Co., the whole being in consummation of a plan by Overton, Burgher, and McCarty as a directors' committee of Texas Bank & Trust Co., the ultimate and always intended purchaser of the bank building.

As to the pretended sale of the Development Co.'s stock, the initial negotiations were instituted by Meador, a director of Texas Bank & Trust Co. and also a heavy stockholder in Development Co., with Overton, another director in the same bank. After four proposed contracts had been drawn providing for the purchase of the bank building itself from Development Co., apparently the only point on which the parties reached agreement was that the stockholders of Development Co. demanded $ 700,000 for their interest in the building and the bank was willing to pay $ 700,000 therefor. However, the sale was not consummated and negotiations abated for 12 days. Then Meador, at a meeting of stockholders, persuaded a majority of them to sell their stock instead of the building, the stockholders thereupon obviously divided the $ 700,000 which they had formerly demanded for the building by the number of corporation shares outstanding and arrived at a quotient of $ 175, which they inserted in the offer to sell as the required price per share. Before this offer was formally made, however, at the request of Overton, Burgher, and McCarty, who acted as a committee representing the bank to negotiate the purchase of the bank building and who anticipated purchasing the stock, it was stipulated in the written offer to sell that, unless the offer was signed by at least 80 per cent of the stockholders, the purchasers were not obligated by acceptance of the offer. Thus the animus of the whole proceeding becomes obvious. An affirmative vote of 80 per cent of the stockholders was necessary for the dissolution of the corporation, and a dissolution prior to sale was necessary to avoid a capital gains tax on the increase in value of the bank building. It is thus obvious that the sellers were not in fact selling, and the buyers were not in fact buying, corporate stock, but the commodity being sold and bought was the privilege of liquidating the corporation and procuring physical possession of the bank building.

In fact, Meador, who initiated the negotiations to sell the bank building to the bank and who was a director of the bank, certainly knew that the bank was the institution interested in the purchase throughout all the negotiations. As a bank director, he certainly knew the limitations on a banking institution imposed by law against the purchase of corporation stock. He knew that Overton, Burgher, and McCarty were designated by the bank as representatives to purchase the stock as individuals for the obvious purpose of overcoming the limitations of the bank itself. He also knew that the creation of Investment Co. had but one purpose, and that was to extricate the bank building from its corporate involvement with Development Co. The mortgage which Investment Co. placed upon the bank building could just as well have been placed there by Development Co. and the only necessary function that Investment Co. performed was as a link in a complicated chain to procure the bank building under the subterfuge of buying bank stock, and this subterfuge was participated in by Development Co.'s stockholders through their agent Meador, who persuaded them to sell their stock.

The decision in , upon which the majority rely, was based upon the very nonexistence of facts in that case which are the controlling facts in the case at bar. In the Steubenville case there was no stockholder similar to Meador who was a director of the ultimate purchaser. There was no united offer to sell all the stock at a common price. There was no mutual understanding between the buyer and seller of the stock that, if the purchaser did not procure enough stock to liquidate the corporation, the purchaser was not obligated. The Steubenville stockholders did not know the purpose of the sale of their stock. Neither the corporation itself nor any of its original stockholders had ever negotiated with the State of West Virginia, the ultimate purchaser of the bridge. The stock was sold by individual contract between the purchaser and the new stock owners at prices varying from $ 1,425 a share to $ 4,333 a share. Obviously there is little basis in the facts in the Steubenville case to form a precedent for the majority opinion herein.

However, if, for argument, it is admitted that the initial sale of the stock of Development Co. was not in truth a sale of the bank building, then we approach our second conclusion herein, to wit, that the sale of the bank building by the liquidators of Development Co. was in truth and in fact the sale of the bank building by the newly constituted Development Co. If there was no sale of the bank building by the original stockholders, then, of course, Development Co., under its new stockholders, retained the building as an asset with its original cost base therefor. The new stockholders acquired 3,850 of the 4,000 shares of Development stock on January 21, 1946, and on that date Overton, Burgher, and McCarty, who had acquired all the stock except 2 qualifying shares, elected themselves as directors. Three days thereafter, on January 24, 1946, Overton, Burgher, and McCarty were designated by the bank to negotiate the purchase of the bank building on the same day that the bank directors increased the capital stock of the bank sufficiently to raise the necessary finances. Anyone who would question that Overton, Burgher, and McCarty, as directors of Development Co., the owner of the bank building, did not at once agree with Overton, Burgher, and McCarty, as a committee representing the purchaser, to sell the bank building to the purchaser, would simply be unable to distinguish between serious drama and a farce and would not be giving proper weight to the presumption of correctness of all facts essential to the Commissioner's determination. The entire proceeding herein, from its initiation through the formation of Investment Co., the purchase of Development Co. stock, the liquidation of Development Co., the sale of the bank building to Investment Co., and the subsequent resale of the bank building to the bank all constitute integrated facts leading to a prompt decision by Overton, Burgher, and McCarty, as directors of Development Co., to sell the bank at the earliest possible date immediately after liquidation. If, on January 24, 1926, when Overton, Burgher, and McCarty, representing the bank, conferred with Overton, Burgher, and McCarty, representing Development Co., and agreed to consummate the sale immediately after liquidation, we have in the case at bar facts coming directly under the law as laid down in Court . We do not have a case at all comparable with , wherein, after the purchasers of Steubenville stock acquired possession thereof and up until after liquidation had been practically completed, there was no negotiation either by the prospective purchaser of the bridge or any contact by the new stockholders of the corporation with the prospective purchaser.

Since the decision of this Court in , there has been a marked tendency in the decisions of this Court to permit greater latitude on the part of stockholders and corporate liquidators to dispose of corporate assets through stock sales and through sales in liquidation without liability on the part of the corporation for the capital gains realized from the sale of said assets. ; ;; and However, in all of these cases there has been a consistent requirement that no authorized representative of a corporation prior to liquidation should enter into any contract or agreement with the prospective purchaser of the corporate assets, the contract being consummated after liquidation. .

It is my conviction that, if the majority opinion herein becomes the law controlling sales of assets by corporations, all of the restrictions and limitations which this Court has heretofore constructed around such sales in order to excuse the corporation itself from being liable for capital gains tax will be removed and little or no artifice will be required to excuse corporations in the future from capital gains, no matter how spurious may be the sale of the stock by the corporate stockholders or how much of a farce may be involved by the corporate liquidators selling the assets to themselves as agents for other purchasers.

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Footnotes

• 1. Proceedings of the following petitioners are consolidated herewith: Estate of J. O. McReynolds, Deceased, Mary Victoria McReynolds Wozencraft, Independent Executrix and Sole Heir, Alleged Transferee; Trust Under Will of James Charles O'Connor, Deceased, Dallas National Bank, Trustee; Estate of Ivor Elizabeth O'Connor Morgan, Deceased, Dallas National Bank, Independent Executor and Trustee; Texas Bank & Trust Company of Dallas; Ballard Burgher; Justin McCarty; W. W. Overton, Jr.; Mina G. McJunkin and Fred McJunkin, Jr., Trust Under Will of Fred McJunkin, Republic National Bank of Dallas, Trustee; Estate of E. M. Kahn, Deceased, Alex Weisberg, Alex Sanger and I. S. Kahn, Trustees; Harry L. Meador; Frank O. Witchell; Estate of Mollie I. Witchell, Deceased, Frank O. Witchell, Independent Executor; Estate of Otto H. Lang, Deceased, W. J. Lang, Independent Executor; Pauline B. Seay; John M. Seay; Charles E. Seay; George E. Seay; Pauline B. Seay Trust, Under the Will of Dero E. Seay, Deceased, Pauline B. Seay and Mercantile National Bank at Dallas, Trustees; Cecil A. Keating Trust, First National Bank of Dallas, Trustee; Mary Victoria McReynolds Wozencraft, Alleged Transferee.↩

• 1. Petitioner Mollie I. Witchell, Docket No. 16732, died prior to the hearing. Subsequently, on July 12, 1948, this Court granted a motion of Frank O. Witchell, executor of the decedent's estate, reciting that decedent had died on June 5, 1948, and asking that the executor be substituted as petitioner and that caption be amended accordingly.↩

• 2. .↩