LEECH

On the record it is held that the sale and conveyance of certain properties of the corporate petitioner by a liquidating agent immediately after its dissolution became effective was a sale by or for account of such petitioner and the latter is liable for income tax on the gain realized. Robert C. Foulston, Esq., and Carl T. Smith, Esq., for the petitioners. Gene W. Reardon, Esq., for the respondent.

The petitioners request redetermination of income tax deficiencies of $5,263.16 determined by respondent for the year ended April 30, 1943, $375 for the year ended April 30, 1944, and $26,919.30 for the year ended April 30, 1945. Petitioners also ask redetermination of the corporate petitioner's excess profits tax liability for the fiscal year ended April 30, 1943. At the hearing respondent filed a motion to dismiss the petition in so far as it relates to the income tax deficiency for 1944, for the reason that the petition contains no assignment of error or statement of facts as to that deficiency, and to dismiss the petition in so far as it relates to the petitioner's excess profits tax liability for 1943, as no deficiencies in profit taxes have been determined by respondent for that year. This motion was taken under advisement and now upon consideration is found to be well grounded and is accordingly granted, and the petition in so far as it relates to the income tax deficiency for 1944 and excess profits tax liability for 1943 is hereby dismissed. The question presented is whether or not the sale of certain corporate properties after the dissolution of the corporation, such sale being effected by a liquidating agent, was in fact a sale by the corporation and the profit realized taxable to it, or was a sale by the stockholders after distribution to them of the assets.

FINDINGS OF FACT.

Petitioner Wichita Terminal Elevator Co. (hereinafter referred to as the ‘petitioner‘) is a dissolved Kansas corporation. Its returns for the taxable years were filed with the collector of internal revenue for the district of Kansas. Petitioner L. H. Powell (hereinafter referred to as Powell‘) is the former president, general manager, and trustee of the corporation and the liquidating agent appointed to sell and convey its properties. The other individual petitioners are former directors of the corporation.

Petitioner, prior to its dissolution, carried on a grain elevator business at Wichita, Kansas. It owned and operated a grain elevator at Wichita and four country elevators at other points in Kansas. At the time of the transactions hereinafter detailed the majority of the stock of petitioner was owned by Powell and members of his immediate family.

Prior to the dissolution of petitioner, as hereinafter described, Powell had expressed his intention of giving up the grain business and stated that he had been discussing with different interests the sale of petitioner's elevator properties. On or about June 1, 1944, one Ross, of Whitewater, Kansas, negotiated with Powell looking to the acquisition, by himself and associates, of petitioner's elevator at Wichita, Kansas. Ross was then advised by Powell that it was desired to sell not only this elevator, but the four country elevators as well. About three days subsequent to these negotiations, Ross, having had an opportunity to inspect the country elevator properties, negotiated further with Powell regarding the purchase of both the Wichita and the country elevators.

Immediately after the second negotiation with Ross and on June 6, 1944, a special meeting of the board of directors of petitioner was held under a waiver of notice and call dated the same day stating its purpose to be:

(a) To consider and take action upon a proposal to liquidate said corporation and to cause its assets to be turned over, delivered to, and vested in the stockholders of said corporation;

(b) To consider and take action upon a proposal to appoint and designate, for and on behalf of the stockholders, an agent in liquidation of the affairs of said corporation, and to invest such agent with power, on behalf of the stockholders, to sell, dispose of, and convert into cash all of the assets of said corporation, to pay all debts and obligations, and to distribute the proceeds of the net assets to the shareholders as their interests may appear:

At this meeting resolutions were adopted to dissolve petitioner, wind up its affairs, and distribute the net assets, after payment of all liabilities, to its shareholders, and to recommend to the shareholders that Powell be designated as the agent in charge of the liquidating of petitioner and that he be empowered to dispose of and sell its assets, to pay its debts, and to do and perform everything in connection with the liquidating of the affairs of petitioner.

Between June 7 and June 12, 1944, petitioner's stockholders gave their written consent to the dissolution of petitioner and simultaneously executed documents designating Powell as the liquidating agent, in accordance with the recommendation made by petitioner's directors. The authority thus given Powell by the stockholders empowered him to receive the property from the corporation for the purpose of converting it into cash and to sell, transfer, and convey such property, to pay all corporate liquidating expenses and expenses as liquidating agent, and to pay and receive all claims for or against the dissolved corporation, and to make final distribution to petitioner's shareholders.

The aforementioned shareholders' consents to petitioner's dissolution, together with the resolution of dissolution, were filed with the Secretary of State of Kansas on June 16, 1944, and notice of dissolution was published June 21, 1944, in a Wichita daily newspaper and notice of publication was thereafter filed with the Secretary of State of Kansas on June 23, 1944.

This action, under chapter 17, article 36, of the General Statutes of Kansas, effected for the dissolution of petitioner, and the individual petitioners herein thereafter were empowered to act for petitioner as trustees of its property in the winding up of its affairs and its corporate existence was maintained only for that purpose.

On June 16, 1944, the same date that the shareholders' consents and the resolution of dissolution were filed with the Secretary of State of Kansas, the petitioner, by N. Louise Powell, its vice president, executed a corporation warranty deed transferring legal title to its Wichita Terminal Elevator property to Powell. This deed was recorded June 20, 1944. On the same date on which this warranty deed was executed, the petitioner, by Powell as president, executed bills of sale of personal property providing for the transfer of legal title to its country elevator properties to himself. The bill of sale, in each instance, recited the conveyance to Powell to be as ‘agent of the former stockholders of The Wichita Terminal Elevator Company, a dissolved corporation.‘

On June 23, 1944, the same date that the notice of publication of the dissolution of petitioner was filed with the Secretary of State of Kansas and the dissolution was effected, Powell and one Paul Ross, the latter representing the Wichita Terminal Elevator, Inc., entered into an agreement reading as follows:

MEMORANDUM AGREEMENT

WHEREAS, the Wichita Terminal Elevator Company, a corporation, by appropriate action of the stockholders, has been dissolved, and its assets turned over and delivered to its stockholders, and for convenience of said former stockholders L. H. Powell has been designated liquidating agent for and on behalf of said former stockholders and is now vested with all of the assets of the former corporation, now dissolved, and among said assets has certain Board of Trade memberships, certain elevators in Wichita, Kansas, certain country elevators located in Leoti, Cunningham, Marienthal, and Seward, which said L. H. Powell is willing to sell; and

WHEREAS, Paul Ross and associates are in the process of forming a corporation for the purpose of acquiring certain properties with which to engage in the general grain elevator business, and are willing to purchase of the said L. H. Powell the certain property herein described, subject to the terms and conditions hereof.

THEREFORE, THIS CONTRACT, made and entered into this 23rd day of June, A.D. 1944,

BY AND BETWEEN

L. H. POWELL of Wichita, Kansas, as the agent of the former stockholders of the Wichita Terminal Elevator Company, a dissolved corporation, as the first party, hereinafter called

'Sellers'

AND

WICHITA TERMINAL ELEVATOR, INC., a Kansas corporation, as the second party, hereinafter called

'Purchaser'.

WITNESSETH: THAT

FIRST: The Seller agrees by appropriate deeds, assignments, bills of sale, and other instruments of transfer.

(a) to cause to be conveyed to the wichita Terminal Elevator, Inc. all the certain real estate located in the County of Sedgwick, State of Kansas, described as follows, to-wit:

Lots numbered 1 to 95, odd, inclusive, on Fifth Avenue; Lots numbered 1 to 95, odd, inclusive, and Lots 2 to 96, even, inclusive, on Mead Avenue, now Santa Fe Avenue, in Illinois Addition to the City of Wichita, Kansas; Lots 1 to 53, odd, inclusive, on Fourth Avenue, Morton Wollman's Addition to the City of Wichita, Sedgwick County, Kansas,

together with all buildings thereon and appurtenances thereunto belonging, and all fixtures, equipment, and personal property therein situate and used and useful in the conduct of said elevator business;

(b) To transfer by valid assignment and transfer, bills of sale, and otherwise, all the right, title, and interest of the Seller in and to certain right of way leases together with elevator buildings, fixtures, equipment, and appurtenances thereunto belonging, and used and useful in connection therewith, as relates to the country elevators located in Leoti, Cunningham, Marienthal, and Seward, Kansas;

(c) To transfer all of the office furniture, furnishings, and equipment, together with the assignment of leasehold (month to month lease) upon the office space and suite located at and commonly known as 621 Wheeler Kelly Hagny Building, Wichita, Kansas;

(d) To transfer the Board of Trade memberships heretofore used by the Wichita Terminal Elevator Company, and not owned by the Seller, to be properly transferred.

SECOND: In consideration of the transfer to the said Purchaser all of the said assets, subject, nevertheless, to the conditions hereof, Purchaser agrees to pay to the Seller the total sum of Two Hundred Eighty Nine Thousand Three Hundred Fifty Dollars ($289,350.00), of which sum Twenty Five Thousand Dollars ($25,000.00) shall be paid in cash upon the execution and delivery of this contract; Two Hundred Sixty Four Thousand Three Hundred Fifty Dollars ($264,350.00) to be paid upon the delivery of the conveyances and the possession of the assets, leasehold estates, and properties herein described.

THIRD: With reference to the titles of said property being sold hereunder the Seller agrees to furnish to the Purchaser abstracts of title and other evidences of title of which it may be possessed to adequately disclose a merchantable title to said property in the Seller and the right to sell and convey the same.

FOURTH: Notwithstanding the fact that it is herein recited that the Seller is the representative of the former stockholders of the dissolved corporation and that the funds received by him from the Purchaser constitutes a trust fund for the benefit of said former stockholders as their interest may appear, it is agreed, nevertheless, that the purchaser shall not be required to look beyond the transaction herein provided nor to the application by the trustee of the funds, but that the said Seller alone shall be responsible and liable to the said former stockholders.

IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and caused this contract to be executed and delivered in triplicate, on this 26th day of June, 1944.

(Signed) L. H. POWELL

In his own behalf and as the agent of the former stockholders of Wichita Terminal Elevator Company, a dissolved corporation, as Party of the First Part, herein called 'Seller'.

WICHITA TERMINAL ELEVATOR, INC. By PAUL ROSS President.

ATTEST:

L. L. ZIMMERMAN

Secretary.

On June 27, 1944, Powell and his wife executed a warranty deed transferring legal title to the Wichita Terminal Elevator property to the purchasing corporation and on the same date Powell, by bills of sale designating himself as ‘Agent for the former stockholders of The Wichita Terminal Elevator Company, a dissolved corporation,‘ transferred legal title to the four country elevator properties to the purchasing corporation. On the same date the purchasing corporation, by its president, Paul Ross, issued its check for $289,350 to ‘L. H. Powell, Agent.‘

The respondent treated the transaction hereinbefore detailed as a sale by the petitioner of its elevator properties and not by its stockholders, and computed a resulting capital gain to petitioner corporation in the amount of $107,677.21.

The sale and transfer of the elevator properties of the corporate petitioner, as hereinbefore detailed, was made on behalf of petitioner and the gain thereon, is taxable to that petitioner.

OPINION.

LEECH, Judge:

Although petitioner asks redetermination of deficiencies in income and excess profits taxes for two years prior to the year in which the transaction here questioned took place, the parties are agreed that the sole question presented is whether the sale of the elevator properties was in fact made by petitioner and the gain so taxable, or by its stockholders and the consequent gain taxable to them. The effect of this transaction upon the income taxes of 1943 results from the fact that petitioner reported no gain to it from the sale of these properties, but instead reported a net operating loss for that portion of the fiscal year 1945 ending on the date of its dissolution. Petitioner contends that if it is not taxable with the gain realized and did sustain the loss reported on its return, such loss would be reflected under the carryback provisions of the statute in the computation of its income tax for 1943. We accordingly have but the one question to determine, namely, whether the gain resulting from the sale of the elevator properties in 1945 was taxable to the corporation or its stockholders.

The evidence upon which the petitioner relies as sufficient to overturn the presumption of correctness attaching to respondent's determination and to establish the fact that the sale and transfer of its elevator properties was not for its account, but rather by and for the account of its stockholders after the dissolution and liquidation of its assets to its stockholders, is, to say the lease, exceedingly meager.

Petitioner has merely proven the formal documents effecting the dissolution of petitioner and the transfer of its properties to Powell under the designation of ‘liquidating agent for the stockholders‘ and the execution of the agreement for the sale of such properties by the liquidating agent to the purchaser. It is argued that the facts thus established, i.e., that petitioner's dissolution occurred prior to the execution of the formal agreement to sell the properties and the conveyances of the corporate properties to Powell, described in his agreement with the purchaser as liquidating agent for the stockholders, are sufficient to overcome the admitted burden of petitioner. It is argued that we must give full effect to these documents and accept the designation of character as true in fact. We do not agree.

If in fact the sale of petitioner's elevator properties was conceived and negotiated by its president, acting in its behalf prior to its dissolution, and such sale was carried out through an arrangement whereby petitioner was dissolved and the properties to be sold were conveyed to a liquidating agent or to its stockholders and the formal contract to sell was executed by the party or parties then holding legal title, such sale was, for tax purposes, made by the corporation. Commissioner v. Court Holding Co., 324 U.S. 331; Meurer Steel Barrel Co. v. Commissioner, 144 Fed.(2d) 282; Taylor Oil & Gas Co. v. Commissioner, 47 Fed.(2d) 108. Hellebush v. Commissioner, 65 Fed.(2d) 902; Fairfield Steamship Corporation, 5 T.C. 566.

The issue is as to the substance of the transaction. This is not answered by proof which establishes nothing more than the form in which it was carried out. In the petitioner instituting these proceedings certain facts are specifically alleged as follows:

(7) No commitment or agreement, verbal or written, was entered into by the officers or any other authorized representatives of The Wichita Terminal Elevator Company to sell any of the corporation's assets, which were later distributed in liquidation of the corporation, prior to the liquidation of The Wichita Terminal Elevator Company.

(8) L. H. Powell did not immediately after June 16, 1944, make committment or agreement for the sale of the assets, thus acquired and held by him, as agent for his beneficiaries, but considered several proposals. Finally, on the 26 day of June, 1944, he entered into a written agreement with one Paul Ross and his associates, to sell and convey to them or to a corporation to be formed by them, a portion of the assets representing approximately thirty-five (35%) percent of the total value of the assets distributed in liquidation of the corporation.

These allegations of fact are denied in the answer of respondent.

Not one scintilla of evidence was introduced by petitioner in support of these allegations. It is noted in connection with the allegation that Powell entered into a contract with Ross for the sale of the elevator properties on June 26, 1944, that the record shows that such contract was actually entered into on June 23, 1944, the same day that the dissolution of petitioner was effective under the Kansas statute.

If in fact the sale of petitioner's properties was not negotiated prior to its dissolution, the evidence of such fact is in the possession of petitioner. It that were the fact, it must have been known by petitioner's officers, who could have testified to that effect, but the only witnesses called at the hearing were its vice president, N. Louise Powell, and its secretary, C. P. Garretson, who were asked by petitioner's counsel only to identify certain exhibits consisting of minute entries and other documents whereby the dissolution of petitioner was effected and the properties in question conveyed. Petitioner's counsel invoked the rule forbidding the cross-examination of a witness except as to the matters testified to on direct examination.

Powell, who was the president of the corporation and who is shown to have actually negotiated the sale of the properties, did not testify. This is significant in view of the fact that a witness introduced by respondent testified that Powell had made the statement to him that he had, on June 1, 1944, discussed the sale with one Ross, who wished to buy the Wichita Elevator property, and that he had advised Ross that it was their plan to sell the country elevators as well, and that thereupon Ross made an investigation of these four elevators and three or four days later resumed negotiations for their purchase. Petitioner's counsel argues that this evidence is of no importance because there is no showing that the individual by the name of Ross who was negotiating for the purchase of the properties prior to petitioner's dissolution was the Paul Ross who entered into the formal contract for their purchase three weeks later on the same day that the dissolution became effective. This argument is without weight. If these negotiations were with interests other than those to whom the properties were ultimately conveyed, this fact could readily have been established by petitioner.

Petitioner has not established the factual allegations in its petition which are material and essential. Respondent was under no obligation to introduce evidence to rebut a fact alleged but not proven by petitioner. Short v. Philadelphia B. & W. R. Co., 23 Del. 108; 76 Atl. 363. The rule is well established that the failure of a party to introduce evidence within his possession and which, if true, would be favorable to him, gives rise to the presumption that if produced it would be unfavorable. Walz v. Fidelity-Phoenix Fire Ins. Co. of New York, 10 Fed.(2d) 22; certiorari denied, 271 U.S. 665; Equipment Acceptance Corporation v. Arwood Can Mfg. Co., 117 Fed. (2d) 442; Hann v. Venetian Blind Corporation, 111 Fed.(2d) 455; Bomeisler v. Jacobson & Sons Trust, 118 Fed.(2d) 261; Sears, Roebuck & Co. V. peterson, 76 Fed.(2d) 243. This is especially true where, as here, the party failing to produce the evidence has the burden of proof or the other party to the proceeding has established a prima facie case. Moore v. Giffen, 110 Cal.A. 659; 294 Pac. 730; Indianapolis & Cincinnati Traction Co. v. Montfort, 80 Ind.A. 639; 139 N.E. 677.

Upon the record, we think our finding that the sale of these elevator properties was in fact by the petitioner corporation is amply sustained.

Decision will be entered for the respondent.