Opinion
Docket No. 19560.
1951-02-20
ESTATE OF CHARLES FEARON, DECEASED, MARGARET H. FEARON, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Stephen T. Dean, esq., and Donald McDonald, Esq., for the petitioner. W. Morgan Hunter, Esq., for the respondent.
Stephen T. Dean, esq., and Donald McDonald, Esq., for the petitioner. W. Morgan Hunter, Esq., for the respondent.
Where a corporation in 1919 conveyed all of its assets to independent assignees for liquidation pursuant to a court order obtained in a suit instituted by minority stockholders and the assignees, operating under the court's supervision, made every reasonable effort to dispose of the corporation's assets, the greater part of which consisted of timber and coal lands which were not readily salable, and made no additions to the nonliquid assets of the corporation, held, that under the circumstances here shown the time consumed by the assignees in liquidating the corporation was not excessive and a distribution received by the decedent in 1942 as a shareholder of the corporation was taxable as a distribution in complete liquidation within the meaning of section 115(c) of the Internal Revenue Code.
Respondent has determined a deficiency in decedent's income tax for the period January 1 to April 12, 1943, in the amount of $5,017.34. The deficiency results from respondent's determination that the sum of $7,380 received by the decedent in 1942 from the Louisville Property Company (hereinafter referred to as Property Company) was taxable as an ordinary dividend rather than a distribution in complete liquidation as reported by the decedent.
FINDINGS OF FACT.
Petitioner is executrix of the estate of Charles Fearon, (hereinafter referred to as decedent) who died on April 12, 1943, a resident of Philadelphia, Pennsylvania. Decedent's individual income tax returns for the taxable year 1942 and the taxable period beginning January 1 and ending April 12, 1943, were filed with the collector of internal revenue for the first district of Pennsylvania, at Philadelphia, Pennsylvania.
Prior to 1942, decedent acquired 492 shares of common stock of Property Company, a corporation organized under the laws of the Commonwealth of Kentucky. During his life, decedent received from Property Company or its assignees the following distributions amounting to $12.82 per share in 1929; $10 per share in 1940; and $15 per share in 1942:
+------------------------------------------------------------------------+ ¦Blocks of shares ¦Distributions ¦ +------------------------------------------------+-----------------------¦ ¦Number¦Date acquired ¦Cost ¦Date ¦Amounts ¦ +------+------------------------------+----------+-------------+---------¦ ¦413 ¦Feb. 24, 1922 to Feb. 9, 1929 ¦$31,984.36¦Apr. 20, 1929¦$5,294.66¦ +------+------------------------------+----------+-------------+---------¦ ¦ ¦ ¦ ¦1940 ¦4,130.00 ¦ +------+------------------------------+----------+-------------+---------¦ ¦ ¦ ¦ ¦1942 ¦6,195.00 ¦ +------+------------------------------+----------+-------------+---------¦ ¦64 ¦June 20, 1929 to July 31, 1930¦2,485.48 ¦1940 ¦640.00 ¦ +------+------------------------------+----------+-------------+---------¦ ¦ ¦ ¦ ¦1942 ¦960.00 ¦ +------+------------------------------+----------+-------------+---------¦ ¦15 ¦Feb. 14, 1935 to June 16, 1936¦47.50 ¦1940 ¦150.00 ¦ +------+------------------------------+----------+-------------+---------¦ ¦ ¦ ¦ ¦1942 ¦225.00 ¦ +------------------------------------------------------------------------+
Property Company was organized in 1898 by the Louisville & Nashville Railroad Company (hereinafter referred to as L. & N.) under a charter by which it was authorized to buy, own, hold, lease, and sell property. The purpose of Property Company was to act as a holding company of real estate for the convenience of L. & N.
In 1908, Property Company's capital stock was increased from $50,000 to $600,000 consisting of 6,000 shares of common stock of a par value of $100 a share. All of such $550,000 increase in stock was distributed to the stockholders of L. & N. The Atlantic Coast Line Railroad Company (hereinafter referred to as A.C.L.) was the majority stockholder of L. & N. and received a majority of the shares of Property Company. Thereafter through 1942, A.C.L. owned a controlling stock interest in both companies.
Prior to 1919, the minority stockholders of Property Company instituted a suit seeking to oust the directors, annul a conveyance of certain property, and wind up its affairs. The Court of Appeals of Kentucky ordered that the conveyance be annulled, the assets of Property Company be sold and its affairs wound up. It directed the Court to assume control of the company's affairs through a receiver until the properties could be disposed of and its indebtedness to L. & n. paid off. The proceeds remaining after satisfaction of L. & n.'s claim were to be distributed to persons entitled to such funds upon a final settlement of the affairs of the corporation.
On November 5, 1919, the board of directors of Property Company resolved that its business be closed and its affairs wound up. On November 6, 1919, Property Company entered into an agreement with Clayton B. Blakey to pay him and other attorneys who represented minority stockholders a sum equal to 15 per cent of the excess over $255,000 ($42.50 for each of 6,000 shares) of funds available for distribution to stockholders. On the same day, Property Company executed a deed of assignment to United States Trust Company, of Louisville, Kentucky (hereinafter referred to as the Trust Company, of all its property
In trust for the payment of the debts of the assignor and the expenses of administration and the distribution of the remainder, if any, of the proceeds of the sale of the assignor's property to its stockholders ratably according to their holdings at the time such distribution is made; the assignee, its assignee, its successors and assigns being hereby specifically authorized to sell all of the property herein conveyed at public or private sale, and in such parcels and upon such terms as it may deem most advantageous.
Immediately thereafter Property Company published notice to the public that is was closing its business and winding up its affairs. Since that time Property Company, acting through its officers and directors as opposed to its assignee or its successor assignee, has neither bought, sold, nor held property, nor carried on any business, but has continued its corporate existence.
On November 6, 1919, the real estate owned by Property Company was worth approximately $2,500,000 and consisted of properties in Kentucky, Georgia Indiana, Missouri, Alabama, and Tennessee. The Kentucky holdings were worth approximately $1,800,000. After receiving the assets of Property Company, the Trust Company proceeded to sell and dispose of them and to disburse the proceeds as provided in the deed of November 6, 1919.
By the end of 1925, the Trust Company had disposed of all real property and fixtures acquired from the Property Company except mineral and coal rights in 17,166.3 acres in Hopkins, McLean, and Muhlenberg Counties in western Kentucky. In 1928 the Trust Company sold oil and gas rights in 9,920 of these acres.
In 1924 the Trust Company sold 28,551.9 acres of land in Bell County, Kentucky, to Log Mountain Coal Company (hereinafter referred to as Log Mountain) for $1,350,000, taking as consideration $50,000 in cash, $200,000 in short term notes, and $1,100,000 in mortgage bonds of Log Mountain. On payment of the $200,000 in notes in 1924, the lien on the merchantable timber was released and Log Mountain thereupon created a new issue of bonds in the total amount of $200,000 secured by the time on the Bell County properties. The mortgage bonds in the amount of $1,100,000 being in default, the Trust Company in 1930 reacquired the land on foreclosure, subject to the outstanding mortgage lien on the timber. This acreage is coal and timber land, partly mountainous and cut with a great number of streams and short valleys. It is not to any extent suitable for agriculture, is timbered, and possibly might be grazed. Incident to the foreclosure the Trust Company also acquired certain mining machinery.
During the period from November 6, 1919, through october 22, 1926, the Trust Company paid $1,478,702.76 as principal and interest on a debt owed to L. & N.
On September 26, 1924, the Trust Company filed Action No. 148390 in the Jefferson Circuit Court of Jefferson County, Kentucky, against L. & N. and certain of its officers and directors asking damages for alleged mismanagement of Property Company, for an accounting of payments by Property Company to L. & N. on principal and interest of its indebtedness, calculation of proper interest on such indebtedness, and the proper application of refund and other credits thereon.
L. & N. made an offer in compromise of $50,000, and Trust Company brought Action No. 5484 in the Whitley Circuit Court of Whitley County, Kentucky, in which it joined L. & N. and the stockholders of Property Company as defendants, praying that the court advise the Trust Company whether it should accept the offer; that the court administer and settle up the assigned estate of Property Company, and that the court advise and instruct the Trust Company concerning the same and approve and confirm its actions theretofore taken as assignee. I. W. Bernheim was appointed to defend such action on behalf of the minority stockholders, expressly including the decedent.
Certain minority stockholders objected to the proposed settlement, but in 1928 an agreement was reached whereby L. & N. paid $55,000 to the Trust Company, of which $5,000 was to be paid to attorneys for the Trust Company and $50,000, less expenses, distributed among stockholders of Property Company other than A.C.L. On April 20, 1929, decedent received $12.82 per share on his stock. It was specifically agreed that the $55,000 payment was in discharge of the claim for mismanagement of Property Company, and that the settlement reserved for future consideration and action the question of the amount due on the indebtedness to L. & N. Action No. 148390 was thereupon continued and remained dormant until 1942.
Following approval of the 1928 settlement, the Whitley Circuit Court retained jurisdiction of Action No. 5484 for purposes of further advising Trust Company as to the administration of the assigned estate.
Pursuant to the agreement with Property Company, date November 6, 1919, Trust Company during its tenure as assignee was allowed compensation computed as a percentage of cash and securities received as principal and income.
On May 11, 1935, the Whitley Circuit Court accepted the resignation of the Trust Company as assignee and, pursuant to the nomination of L. & N., A.C.L., and Bernheim, appointed H. C. Williams of Middlesboro, Kentucky, successor assignee, under the same deed of assignment. The court directed Trust Company to transfer to Williams all the property which it then held under the deed of November 6, 1919, and further ordered that the action should be retained on the docket of the court for such further proceedings as might be necessary and for settlement of the accounts of Williams. The court instructed Williams to continue to dispose of the assets which were turned over to him in an orderly manner and to report from time to time to the court the receipts and disbursements. Williams has since reported to the court at the close of each year.
From some time prior to 1905 until 1920, Williams had been a railroad construction engineer. From 1920 to 1926, he was associated as an officer with a number of Tennessee coal mining companies. He retired in 1926.
Williams was paid a monthly salary for his services as assignee. He has devoted about three hours daily to his duties as assignee and has had no other occupation since 1935; Williams was not a stockholder, director, or officer of Property Company on May 11, 1935, when he was appointed successor assignee, nor has he been at any time since. He has had no business connections or dealings with Property Company since May 11, 1935, except as successor assignee of its properties; he has made no reports to it, and it has made no demands upon him with respect to his operations. Whatever reports Williams makes as to his dealings with the properties are made to the Whitley Circuit Court.
On becoming successor assignee on May 11, 1935, Williams proceeded to liquidate and dispose of the properties as and when he could do so advantageously and without sacrificing their value. He disposed of the following property interests in Kentucky:
1. By the end of 1940, he sold 10,309 of the 28,551.9 acres of Bell County surface land to the United States Government, reserving coal and other minerals thereunder. The Government insisted that the lien on the outstanding timber represented by the timber bonds, be released since the property was being purchased for a reforestation project. Williams thereupon purchased the entire $200,000 bond issue instead of obtaining a release of the lien on the acreage to be sold to the United States because he believed each bond ran against the whole property. By the end of 1948, he had sold an additional 3,200 acres of surface rights in Bell County.
2. By the end of 1948, he disposed of 17,830.9 of the total 28,551.9 acres of mineral (oil and gas) rights underlying Bell County land. Included in these 17,830.9 acres were 15,510 acres leased in 1942 for $7,454.94 and a royalty of one-eighth of all oil and gas produced.
3. By the end of 1948, he disposed of 17,736,790 of the total 17,742,504 board feet of standing timber, 16 inches and upwards on hand in 1933, on the Bell county land. The timber was sold standing and Williams never cut or manufactured any timber. Williams never planted any trees on the property and there is much less merchantable timber now on the property than in 1935. The remaining timber is suitable principally for mining purposes. This inferior timber represents the chief value of the surface land.
4. By the end of 1948, Williams sold 7,557,969.06 (or 15.57 per cent of the 48,538,792.22 tons of coal estimated to underlie the Bell County land. Williams has tried to interest a number of prospective purchasers but has been unable to obtain anyone who would purchase the entire Bell County lands outright.
5. In 1945, Williams sold the coal in place in 5,995.3 of the 8,710.79 acre; in Muhlenburg County, Kentucky. Coal rights were the only interest owned in that land. The same purchaser had an option until July 1950 to purchase the balance of western Kentucky property interest in two other counties. The coal and/or mineral rights in the western Kentucky land have not been readily salable.
6. By the end of 1948, Williams sold the mining equipment that was acquired by Trust Company when it foreclosed under the sale to Log Mountain referred to above for $30,365.66.
From January 1, 1920, to December 31, 1942, the two assignees had disposed of real property and fixtures for a total sales price of $2,214,988.82,
leaving on hand undisposed of at the latter date non-liquid assets valued at $471,922.49. By December 31, 1948, the properties disposed of amounted to $2,353,540.50, or 87.3 per cent. From May 11, 1935, through 1948, Williams had reduced the non-liquid assets in his hands by 43.52 per cent from $606,095.38 to $342,326.74. When Williams became assignee in 1935, total liquid assets represented 10 per cent of the total assets. By the end of 1942, they represented 29 per cent, and by end of 1946 they represented 54 per cent.
Decision will be entered under Rule 50. Exclusive of rents, royalties, and the proceeds of sale of standing timber, and inclusive of the $1,100,000 bonds of Log Mountain. These bonds were defaulted after being accepted as part of the purchase price of the Bell County land.
Williams would have preferred to sell all the property outright and repeatedly attempted to do so. He was never able to obtain an offer for the Bell County lands since there was practically no market. He negotiated with a number of parties including the American Coal Association which operates coal mines on adjacent lines, but has never been able to interest them in the Bell County land.
Williams has never operated any coal mines or purchased any mining equipment, nor has he carried on oil and gas operations. A weighing scale was purchased for $800 only because the old one had burned and a new one was required for checking trucked coal.
Williams has never planted trees on the properties nor purchased any building or land. As assignee, Williams has an office in Middlesboro, Kentucky, where his only employees are a bookkeeper-stenographer paid $200 per month and a field man who acts as watchman for the Bell County property and is paid $36 per week.
When Williams first became assignee, he invested surplus cash in short-term notes of General Motors Corporation but since such notes matured, he has invested virtually all surplus funds in United States Savings Bonds, Series E and F.
Action No. 148390 relating to proper computation of principal and interest due L. & N. continued in litigation as follows:
(a) On January 16, 1942, a second amended petition was filed by Williams as successor assignee in the Jefferson Circuit Court.
(b) Answer was filed February 20, 1942.
(c) The action was continued on November 24, 1942.
(d) On June 14, 1946, Williams filed a third amended petition.
(e) On January 20, 1947, the Whitley Circuit approved a settlement whereunder Williams, as successor assignee, paid to L. & N. $114,210.48.
In 1947, Williams settled for $17,272.31 the claim of the Clayton B. Blakey heirs and assigns for attorneys' fees pursuant to a contract between Blakey and Property Company dated November 6, 1919. This settlement was approved by the Whitley Circuit Court.
No distributions were made to stockholders for 1919 through 1928. All distributions by Williams have been made only after authorization of the Whitley Circuit Court. No distribution is made to a shareholder until the stock certificate is surrendered for an endorsement showing that the amount authorized has been paid to the holder of the certificate. Both the 1940 and 1942 distributions were made only after agreement of the attorneys for the minority stockholders and for the Louisville & Nashville Railroad Company, the major creditor.
Gross receipts of the assigned estate for the years 1920 to 1948, inclusive, may be summarized as follows (thousands of dollars):
+----------------------------------------------------------------------+ ¦ ¦Jan. 1, 1920¦Jan. 1, 1926¦May 12, 1935¦ +-------------------------------+------------+------------+------------¦ ¦ ¦to Dec. 31, ¦to May 11, ¦to Dec. 31, ¦ +-------------------------------+------------+------------+------------¦ ¦ ¦1925 ¦1935 ¦1948 ¦ +-------------------------------+------------+------------+------------¦ ¦Rents ¦$127 ¦$7 ¦$35 ¦ +-------------------------------+------------+------------+------------¦ ¦Coal royalties weighing charges¦$119 ¦$55 ¦$636 ¦ +-------------------------------+------------+------------+------------¦ ¦Sales of standing timber ¦ ¦ ¦$128 ¦ +-------------------------------+------------+------------+------------¦ ¦Interest and other receipts ¦$111 ¦$11 ¦$21 ¦ +--------------------------------------------+------------+------------¦ ¦Total operating ¦ ¦ ¦ +--------------------------------------------+------------+------------¦ ¦receipts ¦$357 ¦$73 ¦$820 ¦ +----------------------------------------------------------------------+
(15%) (71%) (76%) Sales of real estate and fixtures 1 $2,061 2 $30 3 $262
(85%) (29%) (24%) Total receipts $2,418 $103 $1,082
(100%) (100%) (100%)
+--------------------------------------------------------------+ ¦ ¦Out-of-pocket¦Net profit¦ +-------------------------------------+-------------+----------¦ ¦ ¦expense ¦(or loss) ¦ +-------------------------------------+-------------+----------¦ ¦1935 (after May 11) ¦$12 ¦($4) ¦ +-------------------------------------+-------------+----------¦ ¦1936 ¦13 ¦4 ¦ +-------------------------------------+-------------+----------¦ ¦1937 ¦15 ¦7 ¦ +-------------------------------------+-------------+----------¦ ¦1938 ¦12 ¦2 ¦ +-------------------------------------+-------------+----------¦ ¦1939 ¦14 ¦4 ¦ +-------------------------------------+-------------+----------¦ ¦1940 ¦17 ¦23 ¦ +-------------------------------------+-------------+----------¦ ¦1941 ¦16 ¦35 ¦ +-------------------------------------+-------------+----------¦ ¦1942 ¦19 ¦50 ¦ +-------------------------------------+-------------+----------¦ ¦Sub-total, May 12, 1935—Dec. 31, 1942¦118 ¦121 ¦ +-------------------------------------+-------------+----------¦ ¦1943 ¦20 ¦45 ¦ +-------------------------------------+-------------+----------¦ ¦1944 ¦28 ¦38 ¦ +-------------------------------------+-------------+----------¦ ¦1945 ¦27 ¦55 ¦ +-------------------------------------+-------------+----------¦ ¦1946 ¦26 ¦18 ¦ +-------------------------------------+-------------+----------¦ ¦1947 ¦33 ¦38 ¦ +-------------------------------------+-------------+----------¦ ¦1948 ¦36 ¦44 ¦ +-------------------------------------+-------------+----------¦ ¦Sub-total, Jan.1, 1943—Dec. 31, 1948 ¦170 ¦238 ¦ +-------------------------------------+-------------+----------¦ ¦Total, May 12, 1935—Dec. 31, 1948 ¦288 ¦359 ¦ +--------------------------------------------------------------+
Cash and United States securities held by Williams during his tenure were as follows (thousands of dollars):
+---------------------------------------------------+ ¦ ¦ ¦United States ¦ ¦ ¦ +------------+----+--------------+------------+-----¦ ¦ ¦ ¦savings bonds ¦Other United¦ ¦ +------------+----+--------------+------------+-----¦ ¦ ¦Cash¦series “E” and¦States bonds¦Total¦ +------------+----+--------------+------------+-----¦ ¦ ¦ ¦“F” ¦and notes ¦ ¦ +------------+----+--------------+------------+-----¦ ¦May 11, 1935¦$16 ¦ ¦$55 ¦$71 ¦ +------------+----+--------------+------------+-----¦ ¦Dec. 31: ¦ ¦ ¦ ¦ ¦ +------------+----+--------------+------------+-----¦ ¦1935 ¦5 ¦ ¦55 ¦60 ¦ +------------+----+--------------+------------+-----¦ ¦1936 ¦19 ¦ ¦11 ¦30 ¦ +------------+----+--------------+------------+-----¦ ¦1937 ¦114 ¦8 ¦1 ¦123 ¦ +------------+----+--------------+------------+-----¦ ¦1938 ¦112 ¦15 ¦1 ¦128 ¦ +------------+----+--------------+------------+-----¦ ¦1939 ¦113 ¦23 ¦1 ¦137 ¦ +------------+----+--------------+------------+-----¦ ¦1940 ¦94 ¦30 ¦1 ¦125 ¦ +------------+----+--------------+------------+-----¦ ¦1941 ¦140 ¦30 ¦1 ¦171 ¦ +------------+----+--------------+------------+-----¦ ¦1942 ¦102 ¦45 ¦31 ¦178 ¦ +------------+----+--------------+------------+-----¦ ¦1943 ¦172 ¦45 ¦41 ¦258 ¦ +------------+----+--------------+------------+-----¦ ¦1944 ¦193 ¦97 ¦26 ¦316 ¦ +------------+----+--------------+------------+-----¦ ¦1945 ¦83 ¦200 ¦26 ¦309 ¦ +------------+----+--------------+------------+-----¦ ¦1946 ¦139 ¦200 ¦11 ¦350 ¦ +------------+----+--------------+------------+-----¦ ¦1947 ¦37 ¦74 ¦1 ¦112 ¦ +------------+----+--------------+------------+-----¦ ¦1948 ¦35 ¦67 ¦1 ¦103 ¦ +---------------------------------------------------+
Property Company has been in the process of complete liquidation since November 6, 1919. Although even as late as the years 1942 or 1943 it had been impossible completely to dispose of all of its extensive holdings, the assignees have conducted the liquidation in good faith by proceeding to sell and dispose of the assets as fast as they could advantageously, and without sacrificing their value.
The distribution by the assignee of $15 per share, authorized by the Whitley Circuit Court on October 14, 1942, was one of a series of distributions in a complete liquidation of all the stock of Property Company.
OPINION.
ARUNDELL, Judge:
The sole issue is whether the distribution in 1942 by the Louisville Property Company to petitioner and other stockholders was an ordinary dividend taxable at ordinary income tax rates, or an amount distributed in complete liquidation ;taxable at capital gains rates pursuant to section 115(c) of the Internal Revenue Code.
SEC. 115. DISTRIBUTIONS BY CORPORATIONS.(c) DISTRIBUTION IN LIQUIDATION.— Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112.
Petitioner, an individual stockholder of Property Company, received $7,380, or $15 per share, upon this distribution, which he reported as an amount received in complete liquidation. Respondent contended it was an ordinary dividend and determined a deficiency accordingly.
In T. T. Word Supply Co., 41 B.T.A. 965, 980, we held that:
* * * The liquidation of a corporation is the process of winding up its affairs by realizing upon its assets, paying its debts, and appropriating the amount of its profit and loss. It differs from normal operation for current profit in that it ordinarily results in the winding up of the corporation's affairs, and there must be a manifest intention to liquidate, a continuing purpose to terminate its affairs and dissolve the corporation, and its activities must be directed and confined thereto. A mere declaration is not enough, and the question whether a corporation is in liquidation is one of fact. (see also Fred T. Wood, 27 B.T.A. 162; Rollestone corp., 38 B.T.A. 1093.)
The disagreement between the parties is whether there has been a continuing purpose to liquidate and a confinement of the activities of the assignees of Property Company to that end.
The liquidation of Property Company was not self-imposed. It had its origin in an adversary proceeding instituted by minority stockholders to oust the directors, annul conveyance of certain property, and to wind up the affairs of Property Company. An appeal was taken to the Court of Appeals of Kentucky which in the year 1919 ordered that Company's property be sold, its affairs wound up and to that end a receiver be appointed, to be under the control of the court. All property was assigned to a trustee,
the U.S. Trust Company of Louisville, Kentucky, which immediately set out to liquidate the company and by the end of 1925 had disposed of nearly all property assigned to it. The only property not disposed of at this time consisted of mineral and coal rights in about 17,000 acres in Hopkins, McLean, and Muhlenburg Counties in western Kentucky.
A subsequent Kentucky decision approved the use of a trustee instead of a receiver.
It is clear, and respondent does not deny, that at this time Property Company was in process of complete liquidation. Disagreement arises mainly from the manner in which Williams, the successor assignee, disposed of the remaining property, particularly the land in Bell County, Kentucky, which the Trust Company had repossessed in 1930 upon the default of the Log Mountain Mining Company on its mortgage bonds given as part of the consideration for the purchase of those lands in 1924.
The Bell County holdings, consisting of 28,551.9 acres, were disposed of by Williams in the following manner: by the end of 1940, he had sold 10,309 acres of surface land and by the end of 1948 he had sold an additional 3,200 acres of surface rights. In 1942, he disposed of 15,510 acres of oil and gas rights, and by the end of 1948 he had disposed of an additional 2,320.9 acres of oil and gas rights; nearly all of the standing timber; 15.57 per cent of the estimated coal, and all the mining equipment acquired by foreclosure in 1930.
According to respondent, these dispositions related more to the conduct of regular business operations than to the liquidation of a corporation and, therefore, he contends that the distribution of profits earned from these operations constituted an ordinary dividend instead of a distribution in liquidation. We can conceive of circumstances in which Williams' activities could be viewed as regular business operations but in the circumstances of this case we do not believe that they should be so regarded.
Williams has testified that he would have preferred to sell the Bell County lands outright rather than sell or lease merely the mineral rights, and had repeatedly attempted to do so but could never obtain an offer since there was practically no market. He has negotiated with a number of parties, including the American Association, a coal company operating an adjacent lands, but has been unable to interest them in the property. He expressed the view that such a purchase is too large a project for people who are in the coal business in that section of the country.
Williams' disposition of the coal and mineral rights in western Kentucky was also in keeping with a continuing purpose to liquidate. The Trust Company had not sold these lands and Williams testified that they were not readily salable. He was able to sell a sizable portion of the mineral rights and the purchaser was given an option to purchase similar rights in the unsold sections.
Williams has not added to or in any way expanded the non-liquid assets of Property Company. From 1935 to 1942, he has steadily increased the proportion of liquid assets to total assets. He has never planted trees to replace the standing timber cut, nor has he purchased any mining equipment or property
With the exception of a necessary $800 item.
We have no reason to doubt the testimony of Williams, who was in the best position to know the facts and who was not a stockholder or associated with the corporation in any way. The Whitley Circuit Court has maintained continuous supervision over the activities of Williams who, as trustee, was holding and operating the property for the benefit of creditors as well as shareholders. Annual reports of receipts and disbursements to creditors and stockholders were made under express authorization of the court, and there is no reason to believe that Williams has been derelict in performing his duties or that the Whitley Circuit Court has been lax in its supervision of the liquidation.
Nor is the length of time consumed fatal to a determination that the corporation was in the process of complete liquidation. The Commissioner may well expect the liquidation to be conducted in good faith but not that it be conducted in haste. That the liquidator's first responsibility is to the creditors and shareholders, was recognized in R. D. Merrill Co., 4 T.C. 955, wherein we stated at page 969:
We should not, without good reason, overrule the judgment of the liquidators of such an enterprise. The length of time which may reasonably be required to liquidate the assets of the corporation as well as the determination of the manner of liquidation are matters soundly left to the discretion of the liquidators, who are charged with a duty of effecting a liquidation in such time and in such manner as will inure to the best interest of the corporation's stockholders.
There was adequate reason for the consumption of a lengthy period of time, and we do not believe that by the end of 1942 it was excessive. The assets were not readily marketable. The large holdings in Bell County at one time disposed of had been reacquired by foreclosure. Moreover, there were outstanding two claims, one by the Louisville & Nashville Railroad Company and another by the heirs and assignees of Clayton B. Blakey, which had not been settled before the end of 1942 and in fact were not settled until 1947. When considered with these factors in the background, the length of time consumed as of the end of 1942 does not appear unreasonable. It follows that the sum of $7,380 received by the decedent in 1942 was taxable as a distribution in complete liquidation within the meaning of section 115(c) of the Internal Revenue Code.