Opinion
Docket Nos. 51039 51040.
1956-05-25
J. UNGAR, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.JESSE UNGAR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Adrian W. DeWind, Esq., and Richard H. Paul, Esq., for the petitioners. Ellyne E. Strickland, Esq., and Charles B. Markham, Esq., for the respondent.
Adrian W. DeWind, Esq., and Richard H. Paul, Esq., for the petitioners. Ellyne E. Strickland, Esq., and Charles B. Markham, Esq., for the respondent.
J. Ungar, Inc., was a sales agent for foreign exporters. Its regular practice was to accrue commissions on sales arranged by it only after the merchandise had been shipped. On August 29, 1950, the Corporation resolved to liquidate and dissolve as soon as practicable. On September 15, 1950, it distributed to its sole stockholder, as a liquidating dividend, all of its assets except an amount of cash deemed necessary to pay its remaining liabilities. Included among the distributed assets was the right to receive brokerage commissions on various unshipped orders which had been negotiated by the Corporation in the regular course of its business. A total of $57,172.77 in commissions was subsequently received by the Corporation's sole stockholder with respect to such orders. The Corporation did not report such commissions as income since the merchandise had not been shipped at the time the right to receive such commissions was distributed as a liquidating dividend. All such merchandise was shipped prior to the end of the Corporation's fiscal year on February 28, 1951, and, on that date, the Corporation was still in the process of liquidation since it had not completed the payment of its liabilities. Held, the brokerage commissions distributed by the Corporation to its sole stockholder, as a liquidating dividend, matured into realized income prior to the end of the fiscal year here in issue and are, therefore, taxable to it as an anticipatory assignment of income.
These consolidated proceedings involve a deficiency in income and excess profits taxes determined against petitioner J. Ungar, Inc., for the taxable year ended February 28, 1951, in the amount of $31,957.21, and a deficiency in like amount against petitioner Jesse Ungar, as transferee of said corporation.
The sole issue to be decided is whether petitioner J. Ungar, Inc., having distributed the right to receive certain brokerage commissions as a liquidating dividend to its sole stockholder, petitioner Jesse Ungar, must report as income for its final fiscal period such commissions in the amount of $57,172.77 which were subsequently collected by Jesse Ungar.
Petitioner Jesse Ungar concedes that he is liable as transferee for any deficiencies in tax which may be due from petitioner J. Ungar, Inc.
Some of the facts were stipulated.
FINDINGS OF FACT.
The stipulated facts are so found and are incorporated herein by this reference.
Petitioner J. Ungar, Inc. (hereinafter sometimes referred to as the Corporation), was organized on August 9, 1939, under the laws of the State of New York. It kept its books and filed its income tax returns on an accrual basis of accounting, and its taxable year was a fiscal year beginning on March 1 and ending on February 28 or 29. The Corporation filed a return for the fiscal year ended February 28, 1951, with the former collector of internal revenue for the second district of New York. This return was designated as the ‘FINAL RETURN’ of the Corporation and, alongside its name, appeared the statement '(In Liquidation).'
Petitioner Jesse Ungar (hereinafter referred to as Ungar) was the sole stockholder of the Corporation throughout its existence. From 1939 until it filed its certificate of dissolution in 1950, he was its principal executive officer, acted as its president and managed its business. The Corporation was engaged in the business of acting as exclusive sales agent in the United States and Canada for Compania Exportadora Espanola (hereinafter referred to as Exportadora), a Spanish exporter of olive oil, olives, and other products. It also acted as commission broker for Balfour Guthrie & Co., a New York agent of foreign shippers of dried fruits, principally dates. During the taxable year involved, it conducted its business from an office in New York City.
Ungar had been engaged in the import business since 1923. From 1932 until 1939, he headed his own firm which acted as a commission agent, or broker, for foreign exporters. This firm was incorporated in 1939 as J. Ungar, Inc. Commencing in 1934, Ungar also engaged in importing wines and brandies from Spain. As a result of a heart attack suffered in 1942, he decided to withdraw from the wine import business and reduce his activities, and he sold this business in July 1945. Despite the fact that his health was not good, Ungar continued to operate his brokerage business, J. Ungar, Inc. He visited his principals in Spain twice during world War II, and once or twice a year thereafter. He was the dominant personality of the business until December 1945, and thereafter employed a general manager who directed the firm under his continuing policy supervision.
The majority of the total commissions earned by the Corporation during the years of its existence was derived from sales arranged by it in behalf of Exportadora. The Corporation's business with Exportadora was governed by a written agency agreement which had been executed in New York City during a visit of the Spanish shipper to the United States. Under this agreement, the Corporation was appointed exclusive agent for Exportadora for the sale of olives, olive oil, anchovies, and cosmetics in the United States and Canada. The contract provided, in part, as follows:
On all sales which are consummated by us (Exportadora), and as a result of which the commodities sold are imported into your territories, you shall be entitled to the following rates of commission which shall be payable to you immediately upon receipt of payment by us:— Olives 3%— Olive Oil 3%— Anchovies 5%— Cosmetics 10%
All sales arranged by you shall be upon such terms as to payment and delivery, and as to other conditions of sale, as we shall from time to time indicate to you. Except as we may otherwise specify from time to time hereafter, all sales arranged by you shall be subject to our confirmation and approval.
The Corporation and Exportadora followed an established business procedure with regard to the orders obtained by the Corporation. The shipper, Exportadora, would name its price, and the Corporation would then secure orders at that price from customers in its territory or obtain a counterproposal. The order or the counterproposal would be forwarded to Exportadora by cable. The final approval of Exportadora, representing a meeting of the minds as to shipping dates, qualities and prices of goods, was evidenced by a return cable. Upon receipt of such a cable from Exportadora, the Corporation would execute in triplicate, as agent for Exportadora, a formal sales contract with the buyer. Under a typical contract, merchandise traveled at the buyer's risk and Exportadora was not responsible for loss or damages resulting from delay of steamers, loss of goods at sea, boycott, failure of crops, governmental restrictions, or other contingencies beyond its control; the contract was expressly subject to all rules and regulations of the Spanish Government, it was severable as to all goods sold, and non-delivery, delayed delivery, or non-conformity with contract requirements as to any part or lot did not release the buyer from its obligation to accept and to pay for any other part or lot. The standard contract between Exportadora and American buyers of olives contained identical provisions to those contained in olive oil contracts, with the addition of this provision: ‘DELIVERIES GUARANTEED TO PASS REQUIREMENTS OF U.S. DEPARTMENT OF AGRICULTURE. NO RELEASE SELLER AGREES TO REPLACEMENT OR REFUND AT ITS OPTION.’
Execution of the contract of sale generally concluded the services performed by the Corporation as agent of Exportadora. All that was required thereafter was the mailing of a printed form, a notice of shipment to the buyer. Occasionally the Corporation would follow up a transaction by urging the shipper to complete an order.
Exportadora did not extend credit to buyers. Under the established procedure, each buyer was required to establish a letter of credit prior to the time of shipment. After shipping the merchandise, Exportadora would present to the bank with which the letter of credit was established the bill of lading received by it on the loading of the goods, a draft on such bank for the full invoice value, and a certificate issued by the Spanish Institute of Foreign Exchange. Exportadora would then receive credit for 100 per cent of the invoice value in pesetas, and would apply to the Spanish Institute of Foreign Exchange for a certificate authorizing payment to the Corporation, in dollars, of the commission due to it. Upon approval of such application, Exportadora advised a correspondent bank in the United States to send a check in the amount of the commission to the Corporation. The Corporation never received a commission from Exportadora until the merchandise had been shipped. Commissions could not be paid, under Spanish law, until after shipment. Ungar's understanding of the Corporation's contract with Exportadora was that no commissions in respect of olives and olive oil would be earned or payable unless and until shipment had been made.
In its dealings with Balfour Guthrie & Co., the Corporation acted under an oral contract as a ‘spot broker’ for the sale of dried fruits, mainly dates. The contracts for the sales of dates arranged by it stated that the goods were sold subject to passing the requirements of the Federal Pure Food and Drug Administration, and if such requirements were not met, the contracts would be void for such quantity without replacement by the seller. Under the typical contract for the sale of dates, the seller reserved the right to reduce the stated quantity in the event of the nonavailability of suitable quality of fruit and/or any other contingencies affecting the procurement or shipping of dates. No commission would be paid to the Corporation for any shipment or part thereof where such shipment or part had not arrived at a port in the United States and had not passed an inspection by the Federal Pure Food and Drug Administration.
The Corporation reported the following gross income from commissions on sales and the following net income in its Federal income tax returns:
+----------------------------------------------------------------------+ ¦Year ended ¦Gross income from ¦ ¦ +----------------------------------+----------------------+------------¦ ¦Feb. 28 or 29 ¦commissions on sales ¦Net income ¦ +----------------------------------+----------------------+------------¦ ¦ ¦ ¦ ¦ +----------------------------------+----------------------+------------¦ ¦1940 (6 mos.) ¦$23,078.64 ¦$2,087.95 ¦ +----------------------------------+----------------------+------------¦ ¦1941 ¦72,869.49 ¦1,980.61 ¦ +----------------------------------+----------------------+------------¦ ¦1942 ¦50,165.17 ¦2,770.92 ¦ +----------------------------------+----------------------+------------¦ ¦1943 ¦32,626.87 ¦1,392.89 ¦ +----------------------------------+----------------------+------------¦ ¦1944 ¦45,217.94 ¦721.51 ¦ +----------------------------------+----------------------+------------¦ ¦1945 ¦40,890.38 ¦4,536.13 ¦ +----------------------------------+----------------------+------------¦ ¦1946 ¦55,575.48 ¦9,374.57 ¦ +----------------------------------+----------------------+------------¦ ¦1947 ¦90,691.40 ¦11,594.54 ¦ +----------------------------------+----------------------+------------¦ ¦1948 ¦98,687.95 ¦13,734.52 ¦ +----------------------------------+----------------------+------------¦ ¦1949 ¦77,407.30 ¦4,704.46 ¦ +----------------------------------+----------------------+------------¦ ¦1950 ¦93,256.70 ¦2,037.30 ¦ +----------------------------------+----------------------+------------¦ ¦1951 (year beginning Mar. 1, 1950)¦65,687.40 ¦11,219.30 ¦ +----------------------------------------------------------------------+
In keeping its books and filing its Federal income tax returns, the Corporation followed the consistent practice of accruing as income only such commissions on orders were the merchandise had actually been shipped within the taxable year, whether or not payment therefor had been received. It did not accrue as income commissions on orders obtained by it during the taxable year where the goods had not been shipped prior to the end of such year. This practice was advised and approved as proper accounting treatment by the Corporation's certified public accountants, who were fully conversant with the business conditions in Spain affecting olives and olive oil and the Corporation's agency contracts.
In 1948, Ungar decided to sell the Corporation and he went to Spain to ask Exportadora to release the Corporation from its agency contract. Exportadora agreed to transfer the business to a successor firm and Ungar returned to New York to negotiate with a prospective purchaser for the sale of the Corporation. The negotiations were unsuccessful since the prospective purchaser was unwilling to purchase the stock of a small corporation. Early in 1949, Ungar started negotiations with Balfour Guthrie & Co., for the sale of the Corporation, but these negotiations also terminated unsuccessfully.
From 1946 through 1950, Ungar rented and occupied a residence in California for the winter months. In December 1949 and January 1950, Ungar came to New York from California to advise a representative of Exportadora, who was then present in New York, that he was determined to retire from business because of the adverse effects it was having on his health. After assurances of cooperation, Ungar returned to California. Ungar again came to New York in the summer of 1950 in order to liquidate the Corporation. Ungar first made arrangements with Exportadora to permit him, as an individual, to continue to represent Exportadora until such time as he could finally sell the business. Ungar's prior inability to dispose of the stock of his incorporated wine and brandy business convinced him that the simplest way to find a buyer for the Corporation would be to liquidate it and to sell the business as an individual. Ungar consulted his tax adviser in regard to the liquidation of the Corporation and the liquidation at that particular time was pursuant to the advice of the tax consultant.
On August 29, 1950, at a special meeting of the Corporation, a resolution was adopted providing for the immediate discontinuation of operations and for its liquidation and dissolution as soon as practicable. Pursuant to such resolution the Corporation, on September 15, 1950, assigned and distributed to Ungar, in liquidation, all of its assets except an amount of cash deemed necessary to meet its remaining liabilities. On October 26, 1950, a certificate of dissolution of the Corporation was filed with the office of the secretary of state of New York. As of February 28, 1951, the Corporation had assets remaining in the amount of $6,954.66, and liabilities aggregating $6,600.25.
On September 1, 1950, Ungar began to conduct as an individual, under the trade name of J. Ungar Company, the business in which the Corporation had formerly been engaged. Later he conducted the business as an individual under the name of Comex Sales Company. In both firms he retained the personnel formerly employed by the Corporation, operated under a similar agency contract with Exportadora, and occupied the offices that had been used by the Corporation. For all practical purposes, the operation of the business was the same when carried on individually by Ungar as when carried on by the Corporation. During this period in which he conducted the business as a sole proprietor, Ungar continued to actively negotiate for its sale. He liquidated his business interests in New York and retired completely on October 1, 1951, thus culminating his previous efforts to dispose of the business in 1948, 1949, and 1950. Until his retirement, he had managed his firm, while in California, by daily telephonic contact with the New York office.
Included in the assets of the Corporation, which were distributed in liquidation to Ungar as of September 15, 1950, and which were ultimately received by him, were the following:
+-------------------------------------------------------------+ ¦Cash ¦$18,659.75 ¦ +-------------------------------------------------+-----------¦ ¦Furniture and fixtures ¦3,022.33 ¦ +-------------------------------------------------+-----------¦ ¦Automobile ¦2,502.73 ¦ +-------------------------------------------------+-----------¦ ¦Commissions receivable ¦27,042.38 ¦ +-------------------------------------------------+-----------¦ ¦Right to receive commissions on unshipped orders,¦ ¦ +-------------------------------------------------+-----------¦ ¦commissions not accrued at Sept. 15, 1950 ¦57,172.77 ¦ +-------------------------------------------------+-----------¦ ¦Total ¦$108,399.96¦ +-------------------------------------------------------------+
The cash portion of the distribution in liquidation was paid to Ungar on the following dates:
+--------------------------------+ ¦September 1, 1950 ¦$6,000.00 ¦ +---------------------+----------¦ ¦September 1, 1950 ¦49.57 ¦ +---------------------+----------¦ ¦September 19, 1950 ¦5,000.00 ¦ +---------------------+----------¦ ¦October 10, 1950 ¦425.00 ¦ +---------------------+----------¦ ¦October 13, 1950 ¦5,000.00 ¦ +---------------------+----------¦ ¦After January 1, 1951¦2,185.18 ¦ +---------------------+----------¦ ¦Total ¦$18,659.75¦ +--------------------------------+
The commissions receivable, in the amount of $27,042.38, which were distributed to Ungar upon the liquidation of the Corporation, were commissions on sales of goods which had been shipped prior to September 15, 1950. Such commissions were reported as income by the Corporation on the final return which it filed for the fiscal year beginning March 1, 1950.
The item designated as ‘Right to Receive Commissions on Unshipped Orders, Commissions Not Yet Accrued’ represented commissions arising from various sales of olive oil, olives, dates, and anchovies arranged by the Corporation. Orders for such goods had been placed on varying dates between January 30, 1950, and August 26, 1950, but, as of September 15, 1950, the merchandise had not been shipped. In accordance with the Corporation's system of accounting, the anticipated commissions with respect to such orders had not been accrued on the Corporation's books on September 15, 1950, the date of the assignment of such assets to Ungar. The amount of unshipped orders on hand at the date of such assignment was not abnormal in the Corporation's experience.
On September 15, 1950, when the Corporation distributed, in liquidation, the right to receive commissions on its unshipped orders, it was impossible to ascertain the exact amount of the commissions which would eventually be derived from such orders. There was, at that time, some uncertainty as to whether the entire amounts of merchandise on order would be shipped. Most of these unshipped orders related to purchases of olive oil to be shipped from Spain by Exportadora. All such olive oil orders had been placed with Exportadora prior to July 28, 1950, at a price of $46 per hundred kilos. The export of olive oil was controlled by the Spanish Government. Because of scarcities, all exports of olive oil had been prohibited, at various times, after the Spanish Civil War and during World War II. By 1950, conditions in the industry had improved to the extent that olive oil was again made available for export to the United States. However, on July 28, 1950, the Spanish Government suspended issuance of export licenses of olive oil since speculative buyers had entered the market and flooded it with orders as a result of the outbreak of hostilities in Korea. Orders for olive oil had reached 30,000 tons, nearly three times the amount the government had intended for export. In the first week of September, it was learned that new applications for export licenses might be granted at a price of $65 per hundred kilos. Agreements were obtained from important customers of the Corporation to extend and increase their letters of credit to meet the increased price. On or prior to September 15, 1950, new letters of credit at the increased price of $65 per hundred kilos were established by purchasers as to all orders for olive oil then pending.
The embargo was lifted as of September 12, 1950, but this did not resolve all problems with respect to making actual shipment of the olive oil. The fact that the embargo had been lifted gave no assurance that it would not be reimposed. In addition, there remained the question of obtaining supplies of olive oil and the required permits from the government. The problem of fulfilling the contracts by obtaining supplies of olive oil was the responsibility of Exportadora as was the problem of obtaining government permits.
During the latter part of September and during October, Ungar engaged in negotiations with Exportadora for the filling of the orders prior to the expiration of the renewed letters of credit. The letters of credit had been extended for only 1 or 2 months and that the export licenses were valid for 45 days. Ungar was afraid that if the shipments were not made prior to the expiration of the letters of credit or the export licenses, the purchasers would no longer be obligated to buy. Events at any time, particularly termination of hostilities in Korea, could have adversely affected the market price of olive oil. He believed that if a break in the market price below $65 had occurred between October and the end of December, as to any letters of credit then expired, that such contracts would not be fulfilled and that he would lose the commissions thereon.
Export licenses for approximately one-half of the olive oil on order were issued on September 14, 1950, and Ungar ultimately realized $29,593.34 in commissions on the orders covered by such export licenses. By September 23, 1950, substantial shipments of olive oil were made and such shipments accounted for commissions received by Ungar amounting to $21,497.39. Shipments made during October and November were so small in quantity that Ungar obtained permission from Exportadora to prorate them among its various customers. All shipments of olive oil involved herein were completed by December 31, 1950. Ungar received a total of $50,195.50 in commissions with respect to such shipments. Of this amount, $17,630.50 was received by him prior to December 31, 1950, and the balance was received in 1951.
It was also impossible, on September 15, 1950, to determine the exact amount of commissions which would ultimately be derived from the Corporation's unshipped orders for olives. Shipments of less than the amount of olives ordered were frequently made because of crop shortages and the resultant inability to obtain the sizes and grades required. In such situations, the Corporation's commissions from Exportadora were proportionately reduced. Export licenses were also required for olives and, as of September 15, 1950, no export licenses had been issued for the Corporation's unshipped orders for olives. Ungar subsequently received a total of $4,274.66 in commissions on such unshipped orders. The greater part of such commissions was earned on orders shipped prior to December 31, 1950.
Among the various unshipped orders with respect to which Ungar acquired the right to receive commissions thereon were two orders for dates. If performed in full, these contracts would have yielded commissions totaling approximately $3,375. As in the case of olives, a shipper of dates is never sure that the crop will yield sufficient quantities of high grade fruit to enable American orders to be completely filled. In addition, all sales were subject to the release of the dates by the Department of Agriculture in this country. Approximately 80 per cent of the dates covered by these two contracts were ultimately shipped and the commissions received by Ungar totaled $2,503.01.
Ungar received an over-all total of $21,404.76 in commissions in 1950, and $35,768.01 in 1951 from the orders for olive oil, olives, dates, and anchovies arranged by the Corporation, on which shipments had not been made as of September 15, 1950. On the joint Federal income tax returns which he filed with his wife for the year 1950, such commissions were treated as capital gains realized on the liquidation of the Corporation. Such commissions, totaling $57,172.77, were not included in the gross income reported by the Corporation for the fiscal year ended February 28, 1951, the period covered by its final income tax return. The Corporation, following its consistent practice, included in its gross income for that fiscal year only commissions on goods shipped on or after March 1, 1950, and on or before September 15, 1950.
On September 15, 1950, the exact amount which would be ultimately derived as commissions on the unshipped orders arranged by the Corporation could not be ascertained. In the opinion of a commercial banker, a bank would not have extended credit on the basis of the commissions receivable on such unshipped orders. All shipments subsequently made on such orders were made prior to February 28, 1951, the end of the fiscal year here in issue.
In his notice of deficiency, dated July 23, 1953, the respondent included the sum of $57,172.72
in the gross income of the Corporation for the fiscal year ended February 28, 1951. This adjustment, together with others which are not disputed by the petitioners, resulted in a deficiency in income and excess profits tax of the Corporation in the amount of $31,957.21 for the taxable period involved herein.
A mathematical error of $.05.
OPINION.
RICE, Judge:
We must decide whether a corporation reporting income on an accrual basis, which consistently accrued income from brokerage commissions only after the merchandise had been shipped, is required to report as income for the year in which it was liquidated the amount of $57,172.77, which was received by its sole stockholder as the result of the Corporation's distribution to him, as a liquidating dividend, of the right to collect commissions on various unshipped orders.
The Corporation was engaged in the business of acting as a commission broker for foreign exporters. In 1950, its sole stockholder decided to terminate this business and, in the belief that it would be easier to sell its assets rather than the corporate stock, he caused the Corporation to be liquidated. A formal resolution and a plan of liquidation were adopted by the Corporation on August 29, 1950. In accordance with such plan, the Corporation made an initial liquidating distribution of cash, amounting to $6,049.57, on September 1, 1950. On September 15, 1950, it distributed to its stockholder all its assets other than cash, retaining its remaining cash in order to satisfy its liabilities. On October 26, 1950, it filed a Certificate of Dissolution with the office of the secretary of state of New York. Further liquidating distributions of cash were made during 1950 and 1951, and it appears that the final cash distribution was made sometime in July 1951. The stockholder continued to operate the business as an individual proprietor from September 1950 until it was sold approximately a year later.
Included among the assets which were distributed by the Corporation on September 15, 1950, as a liquidating dividend, was the right to collect various brokerage commissions on orders which it had secured for its foreign exporters. Certain of such commissions, aggregating $27,042.38, were due on merchandise shipped prior to September 15, 1950, and the balance related to various orders which had not yet been shipped as of that date. Following its usual accounting practice, the Corporation accrued as income the $27,042.38 in commissions receivable on the orders which had been shipped prior to the date such uncollected commissions were assigned to its stockholder as a liquidating distribution, but it did not report as income the amount of $57,172.77, which was subsequently collected by its stockholder as commissions on the unshipped orders. Respondent determined that such $57,172.77 constituted income to the Corporation.
Respondent's principal argument herein is that despite the Corporation's practice of accruing commissions only upon the shipment of the merchandise from the foreign ports, under the terms of its agency contracts with its foreign exporters, as interpreted under the law of the State of New York where the contracts were executed, the Corporation's rights to the $57,172.77 in commissions had become fixed prior to their distribution as a liquidating dividend and that they were, therefore, accruable as income by the Corporation. However, we need not decide whether or not the commissions were accruable by the Corporation prior to the assignment for we think that, even if not accruable then, they are nevertheless taxable to it, under respondent's alternative argument, as an anticipatory assignment of income.
It is well established that where an individual assigns to another the right to receive the income from future services to be rendered by the assignor, such income, when earned and received, will nevertheless be taxed to the assignor. Lucas v. Earl, 281 U.S. 111 (1930). Similarly, if a taxpayer makes a gift of the right to receive all or a portion of the income from property, such property being retained by the taxpayer, the income will be taxable to the assignor when received by the assignee. Helvering v. Horst, 311 U.S. 112 (1940). And, if an individual who has negotiated certain contracts assigns his right to receive the commissions from such contracts as they are performed, he will be taxed upon the commission income as it is realized by the assignee. Helvering v. Eubank, 311 U.S. 122 (1940). While most of the anticipatory assignment of income cases have related to donative assignments by individuals, the doctrine is equally applicable to corporations which may attempt to escape tax liability by directing that income properly payable to them be paid, instead, to their stockholders. United States v. Joliet & Chicago R. Co., 315 U.S. 44 (1942).
The Corporation contends that the anticipatory assignment of income doctrine is inapplicable to the instant situation, arguing that it had liquidated and was no longer in existence at the time its sole stockholder acquired a fixed right to the commissions here in issue. However, a careful examination of the record discloses that although the Corporation had terminated the active conduct of its brokerage business by September 1, 1950, it appears to have continued as an active business entity well past the time the income from commissions was realized by its stockholder. It is true that the Corporation resolved to discontinue operations and to liquidate on August 29, 1950; that on September 15, 1950, it assigned and distributed all its assets, other than cash, to its sole stockholder; and that on October 26, 1950, a certificate of dissolution of the Corporation was filed with the office of the secretary of state of New York. But after the filing of its certificate of dissolution, the Corporation continued the process of liquidation for it had liabilities to pay and had retained the assets with which to pay them. So long as this process continued, it remained a taxable entity. The filing of a certificate of dissolution did not terminate its taxable status.
See Elgin Compress Co., 31 B.T.A. 273 (1934); and Mrs. Grant Smith, 26 B.T.A. 1178 (1932). Although not engaged in the active conduct of its business, a corporation may nevertheless incur gains or losses during this period and such gains or losses are reportable on the returns which it must file. Regulations 111, section 29.52-1, in effect during the year here in issue, imposed the following requirements for the filing of corporation returns:
We note that under the law of New York the corporate existence of petitioner had not terminated despite the filing of the certificate of dissolution. New York Stock Corporation Law, section 105, provides that, after the filing of the certificate of dissolution:8. Such corporation shall continue for the purpose of paying, satisfying and discharging any existing liabilities or obligations, collecting and distributing its assets and doing all other acts required to adjust and wind up its business and affairs, and may sue and be sued in its corporate name.10. At any time after three years from the filing of the certificate of dissolution of a corporation heretofore or hereafter dissolved pursuant to this section, the surviving directors or a majority of them, may give notice of the time and place for the presentation of all claims and demands against the corporation, which notice may require all creditors of and claimants against the corporation to present in writing and in detail at the place specified their respective accounts and demands to the directors by a day therein specified, which shall not be less than forty days from the first publication of such notice. * * *
SEC. 29.52-1. CORPORATION RETURNS.— Every corporation not expressly exempt from tax must make a return of income, regardless of the amount of its net income. * * * A corporation having an existence during any portion of a taxable year is required to make a return. If a corporation was not in existence throughout an annual accounting period (either calendar year or fiscal year), the corporation is required to make a return for that fractional part of a year during which it was in existence. A corporation is not in existence after it ceases business and dissolves, retaining no assets, whether or not under State law it may thereafter be treated as continuing as a corporation for certain limited purposes connected with winding up its affairs, such as for the purpose of suing and being sued. If the corporation has valuable claims for which it will bring suit during this period, it has retained assets, and it continues in existence. * * *
This regulation clearly indicates that so long as a corporation retains assets it is to be treated as a continuing taxable entity. See United States v. Kingman, 170 F.2d 408 (C.A. 5, 1948); Union Bus Terminal, Inc., 12 T.C. 197 (1949), affirmed per curiam 179 F.2d 399 (C.A. 5, 1950). Though, in the instant situation the only asset retained by the Corporation after September 15, 1950, was an undisclosed amount of cash, such cash was to be used for the fulfillment of a very vital corporate function, the satisfaction of its liabilities. This process, itself, could conceivably result in gain or loss reportable on its return for it is entirely possible that a corporation in the process of liquidation might satisfy some of its liabilities for less than the amounts set forth on its books. A corporation might well continue to incur various expenses during this period which would be deductible on its final return. See Commissioner v. Wayne Coal Mining Co., 209 F.2d 152 (C.A. 3, 1954), affirming a Memorandum Opinion of this Court, dated March 31, 1953; United States v. Arcade Co., 203 F.2d 230 (C.A. 6, 1953), certiorari denied 346 U.S. 828 (1953); E. C. Laster, 43 B.T.A. 159 (1940), reversed on other grounds 128 F.2d 4 (C.A. 5, 1942); and Pacific Coast Biscuit Co., 32 B.T.A. 39 (1935).
Although the record does not show at what date the last of the Corporation's liabilities had been paid, a series of cash distributions were made to its stockholder after September 15, 1950, amounting to $13,610.18, and it appears that the last of such distributions was not made until July 1951. As of February 28, 1951, the end of its fiscal year, the Corporation had assets in the amount of $6,954.66 and liabilities aggregating $6,600.25. Therefore, for tax purposes, this was not a dissolved corporation but, rather, a continuing taxable entity, a corporation in the process of liquidation. The entire $57,172.77 in commissions here in issue had matured into realized income prior to the end of this fiscal year and we, therefore, hold that the Corporation, having performed all the services necessary to earn such income and having remained in existence at the time such income was realized, is to be taxed thereon as an anticipatory assignment of income. See Cold Metal Process Co., 25 T.C. 1333 (1956).
The Corporation contends that had it distributed all its assets, including cash, to its stockholder as a liquidating dividend on September 15, 1950, and had it provided that the stockholder was to assume all liabilities of the Corporation as of that date, there would be no question regarding the termination of its existence on September 15, 1950. The Corporation argues that its decision to retain part of its cash and pay its liabilities itself resulted in a distinction without a difference. We do not so regard it for, as we have said above, a corporation may continue to realize gain or loss during the process of liquidating its liabilities and it, therefore, remains a taxable entity throughout this period. It is to be noted that the Corporation itself filed a final return under the heading ‘J. Ungar, Inc. (In Liquidation)‘ for its fiscal year ended February 28, 1951. It should have reported on this return the $57,172.77 in commissions which had accrued prior to the end of that fiscal year.
The Corporation also contends that in no case has a corporation been taxed on income from property distributed in complete liquidation to its shareholders, citing United States v. Horschel, 205 F.2d 646 (C.A. 9, 1953); Pat O'Brien, 25 T.C. 376 (1955); and Herbert v. Riddell, 103 F.Supp. 369 (S.D., Cal., 1952). However, these three cases are readily distinguishable since it appears that, in each, the corporation was no longer in existence at the time the income was realized by its stockholders. It is now firmly established that a corporation may distribute appreciated property as a liquidating dividend and that any gain realized upon the subsequent sale of such property by its stockholders is not taxable to the corporation. United States v. Cumberland Pub. Serv. Co., 338 U.S. 451 (1950). But where a corporation has performed all the services required to earn the income in question, and all that remains to be done before its efforts ripen into a fixed right to the income is to await the resolution of contingencies which will determine the amount of income accruable by the corporation, the assignment of the right to receive such income to its stockholder as a liquidating dividend does not bar the application of the anticipatory assignment of income doctrine. The fact that a corporation is in the process of liquidation does not exempt it from taxation on income which it has earned.
By the foregoing discussion, we do not decide or imply that if the Corporation ceased its existence on September 15, 1950, a different result would be required. That is not this case.
Reviewed by the Court.
Decisions will be entered for the respondent.