Opinion
Docket Nos. 6523-65— 6525-65.
1969-06-16
SIDNEY MESSER, TRANSFEREE, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Julius G. Hirsch, for the petitioners. Frank N.Panza, for the respondent.
Julius G. Hirsch, for the petitioners. Frank N.Panza, for the respondent.
Tel-O-Tube Corp. was dissolved under New Jersey law in 1960, but retained inter alia four interest-bearing notes and an antitrust claim until July 1961. Held, that the corporation continued in existence as a taxable entity through Sept. 30, 1961, Pursuant to sec. 1.6012-2(a)(2), Income Tax Regs., and is taxable on the interest income earned with respect to the notes for the period from Sept. 30, 1960, to Aug. 1, 1961, and on the proceeds from the settlement of the antitrust claim. Held, further, that the petitioners, its shareholders, are liable as transferees of the assets of the corporation under sec. 6901, I.R.C. 1954.
DAWSON, Judge:
Respondent has asserted against petitioners transferee liability for an income tax deficiency determined to be due from Tel-O-Tube Corp. of America, transferor, for the taxable year ended September 30, 1961, in the amount of $39,158.43 and an addition to tax under section 6651(a), I.R.C. 1954,
All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.
We are confronted with one issue: Did Tel-O-Tube Corp. of America, subsequent to its dissolution under State law, retain four interest-bearing notes and an antitrust claim and thereby remain a continuing entity, taxable on the interest earned with respect to the notes and the proceeds from the settlement of the claim?
If the corporation is liable for any deficiency, each of the petitioner concedes that he is liable as a transferee, pursuant to section 6901, for the full amount of any deficiency determined to be due, plus interest as provided by law.
Respondent concedes that the addition to tax under section 6651(a) was not incurred by Tel-O-Tube Corp. of America and is not payable by the petitioners.
FINDINGS OF FACT
Some of the facts have been stipulated. The stipulation of facts are exhibits attached thereto are incorporated herein by this reference.
Sidney Messer (herein called Messer) is an individual whose address at the time of the filing of the petition herein, and at all times material hereto, was 277 West End Avenue, New York, N.Y.
Nat Malamuth (herein called Malamuth) is an individual whose address at the time of the filing of the petition herein, and at all times material hereto, was 2 Horizon Road, Fort Lee, N.J.
At the time of the filing of the petition herein, Jack Antkies, executor of the Estate of Samuel Antkies, deceased, resided at 4 Dogwood Lane, Lawrence, N.Y., and Shirely Antkies, executrix of the Estate of Samuel Antkies, deceased, resided at 399 East 72d Street, New York, N.Y. The date of death of Samuel Antkies was July 10, 1960. Messer, Malamuth, Jack Antkies, and Shirely Antkies will be referred to herein collectively as petitioners.
Tel-O-Tube Corp. of America (herein called either the corporation or Tel-O-Tube) maintained its books and records and filed its Federal income tax returns on an accrual method of accounting. Since 1953 it has used the fiscal year ending September 30 as its annual accounting period. The income tax return for the fiscal year ended September 30, 1960, filed with the district director of internal revenue at Newark, N.Y., bears the notation ‘final return.’ The corporation has filed no income tax return for any period subsequent to the fiscal year ended September 30, 1960.
Tel-O-Tube was incorporated on January 27, 1948, under the laws of the State of New Jersey to engage in the manufacture and sale of television picture tubes. At all relevant times subsequent to July 10, 1960, Messer, Malamuth, and Samuel Antkies each owned one-third of the corporation's common and preferred stock.
Royalties due to the Radio Corp. of America (herein called RCA for the fiscal years 1953 through 1957 were accrued and deducted by the corporation, as follows:
+-----------------------------+ ¦FYE Sept. 30— ¦Amount ¦ +------------------+----------¦ ¦1953 ¦$20,032.15¦ +------------------+----------¦ ¦1954 ¦23,757.49 ¦ +------------------+----------¦ ¦1955 ¦28,439.19 ¦ +------------------+----------¦ ¦1956 ¦22,249.20 ¦ +------------------+----------¦ ¦1957 ¦17,727.62 ¦ +------------------+----------¦ ¦Total ¦112,205.65¦ +-----------------------------+
On April 1, 1957, the corporation, having paid none of the royalties listed above, issued a series of promissory notes in favor of RCA, covering its liability to RCA for the royalties. The notes were due beginning April 1, 1962, and annually thereafter through April 1, 1974, as follows:
+--------------------------------------------------+ ¦ ¦ ¦Total ¦ +-----------------------------+---------+----------¦ ¦Apr. 1, 1962 and Apr. 1, 1963¦$5,000.00¦$10,000.00¦ +-----------------------------+---------+----------¦ ¦Apr. 1, 1964 ¦7,500.00 ¦7,500.00 ¦ +-----------------------------+---------+----------¦ ¦Apr. 1, 1965—Apr. 1, 1973 ¦9,500.00 ¦85,500.00 ¦ +-----------------------------+---------+----------¦ ¦Apr. 1, 1974 ¦9,205.65 ¦9,205.65 ¦ +-----------------------------+---------+----------¦ ¦Total ¦ ¦112,205.65¦ +--------------------------------------------------+
During its fiscal year ended September 30, 1957, the corporation terminated its manufacturing and sales operations and disposed of all of its operating assets. A portion of the proceeds from the sale of its fixed assets and collections from trade accounts were invested, to the extent of $100,000, in four income-producing notes of the Manufacturers Credit Corp.
One of the purposes for Tel-O-Tube's investment in the notes in 1957 was to create a funded reserve for its liability to RCA.
The corporation's income, as reported on its Federal income tax returns for the fiscal years 1958, 1959, and 1960 was as follows:
+-----------------------------------------------------------------------------+ ¦ ¦FYE Sept. 30— ¦ +-----------------------------------------+-----------------------------------¦ ¦ ¦1958 ¦1959 ¦1960 ¦ +-----------------------------------------+-----------+-----------+-----------¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------+-----------+-----------+-----------¦ ¦Interest ¦$19,283.65 ¦$19,750.98 ¦$19,269.91 ¦ +-----------------------------------------+-----------+-----------------------¦ ¦Sales of equipment ¦1,516.00 ¦ ¦ +-----------------------------------------+-----------+-----------------------¦ ¦Insurance premium refunds ¦1,926.59 ¦ ¦ +-----------------------------------------+-----------+-----------------------¦ ¦Total gross income ¦22,726.24 ¦19,750.98 ¦19,269.91 ¦ +-----------------------------------------+-----------+-----------+-----------¦ ¦Deductions ¦4,373.19 ¦3,090.72 ¦8,755.44 ¦ +-----------------------------------------+-----------+-----------+-----------¦ ¦Taxable income before net operating loss ¦18,353.05 ¦16,660.26 ¦10,514.47 ¦ ¦deduction ¦ ¦ ¦ ¦ +-----------------------------------------+-----------+-----------+-----------¦ ¦Net operating less deduction ¦(82,307.13)¦(63,954.08)¦(47,293.82)¦ +-----------------------------------------+-----------+-----------+-----------¦ ¦Taxable income ¦(63,954.08)¦(47,293.82)¦(36,779.35)¦ +-----------------------------------------+-----------+-----------+-----------¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+
Of the amounts of interest reported, $15,000 in each year represented the payments made by Manufacturers on the notes which the corporation owned.
The minutes of a special meeting of the board of directors of the corporation, dated September 19, 1960, contain a resolution providing, inter alia:
RESOLVED, that the corporation be dissolved forthwith and that its assets be distributed to the stockholders, subject to the payment of the claim of Radio Corporation of America.
FURTHER RESOLVED, that the officers of the corporation take all action necessary to effectuate the foregoing.
The corporation's directors at the time of the adoption of the plan of liquidation and dissolution were Ida Lipschitz, Mae Alman, and Shirley Kaplan, none of whom were shareholders in the corporation.
On October 4, 1960, the corporation filed information Form 966 with the district director of internal revenue at Newark, N.J. Forms 1096 and 1099-L were also timely filed with the district director.
The secretary of state of the State of New Jersey issued a certificate of dissolution, dated December 6, 1960, certifying that the corporation had filed in his office on that date a duly executed and attested consent in writing to its dissolution, executed by all its stockholders.
Adjusting journal entries dated September 30, 1960, were made on the books of the corporation, reflecting each petitioner's distributive share of the corporate assets, as follows:
+-----------------------------------------------------------------------------+ ¦Assets ¦Total ¦Malamuth ¦Messer ¦Estate of¦ +------------------------------------+----------+---------+---------+---------¦ ¦ ¦ ¦ ¦ ¦S. ¦ ¦ ¦ ¦ ¦ ¦Antkies ¦ +------------------------------------+----------+---------+---------+---------¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------------------+----------+---------+---------+---------¦ ¦Accounts receivable: ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------+---------+---------+---------¦ ¦Tel-O-Tube Sales Corp, and T. & T. ¦ ¦ ¦ ¦ +-----------------------------------------------+---------+---------+---------¦ ¦Investment Corp ¦$10,588.73¦$3,529.58¦$3,529.57¦$3,529.58¦ +------------------------------------+----------+---------+---------+---------¦ ¦Due from officers ¦99,898.56 ¦36,211.03¦31,899.04¦31,788.49¦ +------------------------------------+----------+---------+---------+---------¦ ¦Automobile (less ¦ ¦ ¦ ¦ ¦ +------------------------------------+----------+---------+---------+---------¦ ¦depreciation) ¦1,896.89 ¦ ¦1,896.89 ¦ ¦ +------------------------------------+----------+---------+---------+---------¦ ¦Note of Manufacturers Credit ¦ ¦ ¦ ¦ ¦ +------------------------------------+----------+---------+---------+---------¦ ¦Corp ¦100,000.00¦31,054.12¦33,469.22¦35,476.66¦ +------------------------------------+----------+---------+---------+---------¦ ¦Total ¦212,384.18¦70,794.73¦70,794.72¦70,794.73¦ +------------------------------------+----------+---------+---------+---------¦ ¦Less: Liability note payable—RCA ¦112,205.65¦37,401.89¦37,401.88¦37,401.88¦ +------------------------------------+----------+---------+---------+---------¦ ¦Net liquidating dividend ¦100,178.53¦33,392.84¦33,392.84¦33,392.85¦ ¦distribution on 9/30/60 ¦ ¦ ¦ ¦ ¦ +------------------------------------+----------+---------+---------+---------¦ ¦Add: Cash liquidation distributions ¦41,400.00 ¦13,800.00¦13,800.00¦13,800.00¦ +------------------------------------+----------+---------+---------+---------¦ ¦Total liquidating dividends during ¦141,578.53¦47,192.84¦47,192.84¦47,192.86¦ ¦F.Y.E. 9/30/60 ¦ ¦ ¦ ¦ ¦ +------------------------------------+----------+---------+---------+---------¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+
After the foregoing journal entries, the accounts remaining on the books of Tel-O-Tube appeared as follows:
+----------------------------------------------------------------------+ ¦Assets ¦ ¦ ¦ +---------------------------------------------------+--------+---------¦ ¦Cash ¦ ¦$7,979.80¦ +---------------------------------------------------+--------+---------¦ ¦Accrued interest receivable T. & T. Investment Corp¦$206.67 ¦ ¦ +---------------------------------------------------+--------+---------¦ ¦Officers ¦4,090.74¦4,297.41 ¦ +---------------------------------------------------+--------+---------¦ ¦Total assets ¦ ¦12,277.21¦ +----------------------------------------------------------------------+
Liabilities Accrued taxes payable (N.J. State franchise) $500.00 Accrued expenses payable (legal and audit) 4,000.00 Total liabilities 4,500.00 Capital—Earned surplus 7,777.21 Total liabilities and capital 12,277.21
Manufacturers Credit Corp. paid the corporation $1,250 per month for the months of October, November, and December 1960, and January through July 1961. These payments represented the interest due from Manufacturers to the corporation pursuant to its obligations on the notes issued by it to the corporation in 1957.
The corporation continued to maintain a bank account in its name with the New Jersey Bank, Paterson, N.J., until November 6, 1961. The balance in the account as of September 30, 1960, was $7,979.80. Subsequent to that date, the following deposits were made to the account:
+-----------------------------------------------------------------------------+ ¦Payments made by Manufacturers—$1,250 per month, in the months of ¦ ¦ ¦October, November, December 1960; and January, February, March, ¦$12,500.00¦ ¦April, May, June, and July 1961 ¦ ¦ +------------------------------------------------------------------+----------¦ ¦Payments made by Manufacturers to Tel-O-Tube during the months of ¦677.08 ¦ ¦August, September, and October 1961 ¦ ¦ +------------------------------------------------------------------+----------¦ ¦Collection of accrued interest receivable due from stockholders— ¦4,090.74 ¦ ¦December 1960 ¦ ¦ +------------------------------------------------------------------+----------¦ ¦Collection of accrued interest receivable due from T. & T. ¦206.67 ¦ ¦Investment Co.—October 1960 ¦ ¦ +------------------------------------------------------------------+----------¦ ¦Refunds of N.J. franchise tax—Feb. 24, 1961 ¦30.00 ¦ +------------------------------------------------------------------+----------¦ ¦Refunds of excess liquidating dividends from stockholders—Oct. 26,¦359.64 ¦ ¦1961 ¦ ¦ +------------------------------------------------------------------+----------¦ ¦Total ¦17,864.13 ¦ +-----------------------------------------------------------------------------+
From September 30, 1960, until November 6, 1961, the corporation made total disbursements of $25,843.93 from this account.
The corporation promptly distributed to each of the petitioners the interest income received from Manufacturers on the day after receiving it, as follows:
+-----------------------------------------+ ¦ ¦Sidney ¦Nat ¦Estate of¦ +-------------+--------+--------+---------¦ ¦ ¦Messer ¦Malamuth¦Samuel ¦ +-------------+--------+--------+---------¦ ¦ ¦ ¦ ¦Antkies ¦ +-------------+--------+--------+---------¦ ¦ ¦ ¦ ¦ ¦ +-------------+--------+--------+---------¦ ¦October 1960 ¦$400.00 ¦$400.00 ¦$400.00 ¦ +-------------+--------+--------+---------¦ ¦November 1960¦400.00 ¦400.00 ¦400.00 ¦ +-------------+--------+--------+---------¦ ¦December 1960¦450.00 ¦450.00 ¦450.00 ¦ +-------------+--------+--------+---------¦ ¦January 1961 ¦400.00 ¦400.00 ¦400.00 ¦ +-------------+--------+--------+---------¦ ¦February 1961¦400.00 ¦400.00 ¦400.00 ¦ +-------------+--------+--------+---------¦ ¦March 1961 ¦450.00 ¦450.00 ¦450.00 ¦ +-------------+--------+--------+---------¦ ¦April 1961 ¦400.00 ¦400.00 ¦400.00 ¦ +-------------+--------+--------+---------¦ ¦May 1961 ¦400.00 ¦400.00 ¦400.00 ¦ +-------------+--------+--------+---------¦ ¦June 1961 ¦450.00 ¦450.00 ¦450.00 ¦ +-------------+--------+--------+---------¦ ¦July 1961 ¦400.00 ¦400.00 ¦400.00 ¦ +-------------+--------+--------+---------¦ ¦August 1961 ¦242.36 ¦242.36 ¦242.36 ¦ +-------------+--------+--------+---------¦ ¦Total ¦4,392.36¦4,392.36¦4,392.36 ¦ +-------------+--------+--------+---------¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------+
On October 28, 1958, RCA had entered into a consent decree with the United States in antitrust litigation wherein the United States had challenged RCA's licensing structure.
On May 5, 1960, at a meeting of Messer, Malamuth, and Samuel Antkies, the corporation's accountant, and the corporate attorneys a discussion ensued as to whether the corporation should institute an antitrust suit against RCA.
On May 6, 1960, the corporation retained Malcolm Hoffman, an attorney, to institute suit against RCA for violation of the antitrust laws and misuse of patents. The retainer agreement indicated that the corporation had executed notes to RCA totaling $112,205.65 for royalties, and that should a settlement or recovery be obtained in the action to be instituted releasing it from all or part of the notes, Hoffman agreed to receive as his free 10 percent of the amount so released. The agreement further provided for an additional fee in the event that a cash recovery was obtained in excess of $112,000. Approximately 1 month after entering into the agreement, Hoffman withdrew from the case for personal reasons.
Sometime in the spring of 1961, the corporation notified Robert Werner, the executive vice president and general counsel of RCA, that it should return the notes which the corporation had executed on April 1, 1957, because RCA had violated the antitrust laws and ‘the royalties were not properly payable.’ The corporation threatened to bring suit at that time.
The corporation's intent to bring suit against RCA was genuine and it was the opinion of one of the corporate attorneys that ‘there was a strong basis for an action against RCA.’
The same attorneys, Maurice Danson and Sydney Hut, represented the corporation in the course of the liquidation and dissolution. They continued to represent the corporation even after September 30, 1960, and in June 1961, they conducted settlement negotiations with RCA respecting the antitrust claim held by the corporation.
The corporation was successful in negotiating settlement of its claim against RCA. It executed a general release of any claim which it might have had against RCA in exchange for RCA'S return of the notes in the amount of $112,205.65 and cancellation of the indebtedness for royalties in the same amount. The release was executed in the corporation's name by Messer, its secretary-treasurer, and stated that the corporation was organized and existing under the laws of New Jersey. Hut, the attorney, in a notarized statement on the reverse side of the release, stated that Messer had sworn that he was secretary-treasurer of Tel-O-Tube, the corporation described in the release, that the corporate seal was affixed to the release by order of the corporation's board of directors, and that Messer was ordered by the directors to sign his name on the release.
Werner, general counsel for RCA, had not been informed at any stage of the discussion that the corporation had assigned the claim or that the debt had been assumed by anyone. Had he been so informed, he would not have advised his client to accept a release only from the corporation, and he would have attempted, if he had known of an assignment, to obtain a release from the parties to whom the claim had been assigned.
On July 18, 1961, the attorneys presented two bills to the corporation. The first bill in the amount of $209.25 was for professional services rendered on January 3, 1961, in connection with the dissolution, including disbursements. The second bill in the amount of $11,239 was for professional services rendered in connection with obtaining the release from RCA and the cancellation of notes executed by Tel-0-Tube. That bill also referred to the making and cancellation of the retainer agreement with Hoffman.
Subsequently, the attorneys presented a bill in the amount of $5,000 for professional services rendered, dated November 3, 1961, to Tel-O-Tube. A statement on the face thereof indicated that the bill was a corrected one to replace those sent to the corporation on January 3 and July 18, 1961.
On November 6, 1961, the corporation gave the attorneys a check drawn on its account on the New Jersey Bank in the amount of $5,000 for services rendered in conjunction with its dissolution and settlement of the antitrust claim against RCA.
Upon being notified that RCA had canceled the corporation's indebtedness to it, the accountant, London, mailed a letter dated July 12, 1961, to each of the petitioners. This letter stated, inter alia:
In order to complete the liquidation of Tel-O-Tube * * * the $100,000.00 invested in the notes of Manufacturers Credit Corp. are to be disbursed as follows:
+---------------------------------------+ ¦The Estate of Samuel Antkies¦$35,476.66¦ +----------------------------+----------¦ ¦Nat Malamuth ¦31,054.12 ¦ +----------------------------+----------¦ ¦Sidney Messer ¦33,469.22 ¦ +----------------------------+----------¦ ¦Total ¦100,000.00¦ +---------------------------------------+
The corporation retained title to the notes until July 1961, at which time it notified Manufacturers Credit Corp. that it no longer held the beneficial interest in the notes and that they were to be canceled and new ones issued to the petitioners. The original notes issued by Manufacturers were never endorsed by the corporation to the petitioners.
Manufacturers issued new notes dated August 1, 1961, in the amounts of $35,000, $35,000, and $30,000 to the Estate of Samuel Antkies, Malamuth, and Messer, respectively. The new notes were labeled ‘exch. Tel-O-Tube.’
Prior to September 30, 1960, and at all times subsequent thereto until they were exchanged for new notes on or about August 1, 1961, the notes were held by Messer.
On their Federal income tax returns for the taxable year 1960, Malamuth and Messer each reported a long-term capital gain of $38,859.51 alleged to be a liquidating distribution of $47,192.84 made to him by the corporation. And on their returns for 1961, Malamuth and Messer each reported $39,087.03 as a liquidating distribution from the corporation.
The interest of the Estate of Samuel Antkies in the corporation was reported as follows:
+---------------------------------------------------------------+ ¦Date of death value ¦$84,594.73¦ +----------------------------------------------------+----------¦ ¦Long-term capital gain received in fiscal year ended¦ ¦ +----------------------------------------------------+----------¦ ¦June 30, 1962 ¦1,685.14 ¦ +---------------------------------------------------------------+
In his notice of deficiency dated August 17, 1965, respondent determined that the corporation realized income of $94,478.03 from the cancellation of its indebtedness to RCA and earned interest of $13,177.08 on its notes receivable investment in Manufacturers Credit Corp. which it received and deposited in the corporate bank account.
OPINION
Petitioners contend that the corporation gave the Internal Revenue Service notice of the corporate liquidation, complied with the requirements of New Jersey law for de jure dissolution, closed its accounts and distributed all its assets, and terminated its existence on September 30, 1960. The corporation, they assert, retained no assets, received no income, and was not required to file an income tax return for any period thereafter. Respondent, on the other hand, argues that Tel-O-Tube continued in existence after the date of its dissolution under New Jersey law because it retained assets, namely, the notes and the claim against RCA, and that Tel-O-Tube is taxable on the interest from the notes for the period from September 30, 1960, until August 1, 1961, and on the proceeds from the settlement of the claim against RCA.
Petitioners' contention that the existence of Tel-O-Tube for Federal income tax purposes terminated as of September 30, 1960, is not supported by the record. Section 1.6012-2(a)(2), Income Tax Regs., provides, in pertinent part, as follows:
(2) Existence of corporation. A corporation in 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 therefore continues in existence. A corporation does not go out of existence if it is turned over to receivers or trustees who continue to operate it. * * *
These provisions of the regulation clearly indicate that if a corporation retains assets, it is to be treated as a continuing taxable entity for Federal income tax purposes, even though it is in the process of liquidation and has terminated its legal existence under State law. See J. Ungar, Inc., 26 T.C. 331 (1956), affd. 244 F.2d 90 (C.A. 2, 1957).
The facts herein closely parallel those present in Hersloff v. United States, 310 F.2d 947 (Ct. Cl. 1962), where it was held that the corporation continued in existence by reason of the continued business activities of the trustees in dissolution, although dissolution under State law had occurred many years earlier. Here, as in Hersloff, the corporation was not dead and buried. It had and claimed assets; it made efforts to realize on its claim; it had certain debts; and it regularly distributed moneys to attorney-creditors as well as to stockholders. Specifically, Tel-O-Tube retained assets of $12,277.21, exclusive of the notes and claim now in issue, and liabilities of $4,500, exclusive of the $112,205.65 indebtedness to RCA; it continued to maintain a bank account until November 6, 1961, and from September 1960 until November 1961 it made deposits of $17,864.13. These facts are sufficient to establish that the corporation was a viable entity through November 1961 for Federal income tax purposes.
The corporation's retention of its claim against RCA and its activities in negotiating its settlement further support the conclusion that it continued in existence within the purview of section 1.6012-2(a)(2), Income Tax Reg. The weight of the evidence shows that the corporation never, in fact, assigned the claim. It was the corporation, and not the petitioners, that retained the attorneys to prosecute the claim against RCA, that executed the general release of any claim it might have against RCA, and that was billed by and paid the attorneys for negotiating the settlement of the claim. Moreover, the corporation never informed RCA that it had assigned the claim. These facts establish to our satisfaction that the corporation retained the claim and did not assign it to its stockholders.
Petitioners argue that the fact that the corporation ‘may or may not have had a claim against RCA is disregarded under section 1.6012-2(a)(2), as its continuance under State law for the purpose of suing or being sued is nullified by the holding of the regulation.’ In our opinion this argument completely misses the essential point of the regulation. In substance, section 1.6012-2(a)(2) provides that a corporation which ceases business, dissolves, and distributes all its assets will not be considered as a continuing taxable entity merely because its existence is continued by State law for certain limited purposes, such as for the purpose of suing or being sued; but that, if the corporation has a valuable claim for which it will bring suit during the period of winding up, then it has retained assets and continues in existence for Federal income tax purposes. In short, the regulations predicate continued corporate existence on the corporation's retention of assets, and not on its ‘qualified’ existence under State law. See J. Ungar, Inc., supra. Likewise, we predicate our conclusion that Tel-O-Tube continued in existence after September 1960 on its retention of the valuable claim against RCA and not on the fact of its limited existence under New Jersey law. See N.J. Stat. Ann, sec. 14:13-4.
Petitioners state in their brief that ‘respondent stipulated * * * that the total assets on September 30, 1960, were $12,277.21, consisting of cash in the amount of $7,979.80 and $4,297.41 of interest receivable; and that liabilities consisted of $4,500 of accrued expenses.’ It is clear that respondent did not make such a stipulation. The stipulation in question, contained on pages 6-8 of the stipulation of facts, shows respondent agreed that the books reflected that the above assets and liabilities were the only ones retained by the corporation and not that these were in fact the only assets and liabilities retained.
Petitioners rely on several cases in which dissolved corporations were held no longer liable for income taxes. Cf. James Poro, 39 T.C. 641 (1963); Novo Trading Corporation v. Commissioner, 113 F.2d 320 (C.A. 2, 1940); Commissioner v. Henry Hess Co., 210 F.2d 553 (C.A. 9, 1953); and Herbert v. Riddell, 103 F.Supp. 369 (S.D. Cal. 1952). These cases, however, are readily distinguishable from the instant case for the reason that all the corporate assets had been distributed to the stockholders, and the corporations were completely liquidated and were not engaged in any of the substantial activities of the kind here being carried on by the trustees in dissolution. Rev. Rul. 61-191, 1961-2 C.B. 251, cited by petitioners, similarly does not apply to the facts of this case.
Next, we turn to petitioners' argument that an assignment of all of the corporate assets, including the notes and the claim, was effected by one of three alternative methods: (1) By the resolution adopted by the directors to dissolve; (2) by operation of law; or (3) by the closing journal entries dated September 30, 1960. Respondent determined that the corporation did not effectively assign either the notes or the claim until July 1961. The burden of proving otherwise falls on the petitioners. Welch v. Helvering, 290 U.S. 111 (1933).
Whether the corporation assigned the notes and claim presents a factual question to be determined according to the law of New Jersey. Lang v. Commissioner, 304 U.S. 264 (1938). The Supreme Court of New Jersey in Brokaw v. Brokaw's Ex'rs., 4 Atl. 66,68 (N.J. Ch. 1886), made the following comments with respect to the requirement of a valid equitable assignment:
Courts of equity * * * pay very little attention to form; their great desire being to give effect to the intention of the parties, and if that can be clearly discerned, they carry it into effect regardless of the method by which it is expressed. Any order, writing, or act which clearly indicates that the assignor intended to make over a fund belonging to him amounts in equity to an assignment of the fund.
While the rule of the Brokaw case is that no particular words of art are necessary to effect an equitable assignment, there nevertheless must be some clearly discernible manifestation of intention by the owner to transfer property instantly. Additionally, the owner must also divest himself of all title, interest, and control over the property being assigned. See Weaver v. Atlantic Roofing Co., 40 Atl. 858 (N.J. Ch. 1898).
After a careful examination of the entire record, we conclude that the petitioners have not sustained their burden of proving that the notes and claim were assigned prior to the date determined by respondent.
Relying on Novo Trading Corporation v. Commissioner, supra, petitioners claim that the corporate resolution of dissolution constituted an assignment of all assets to the stockholders. In that case the corporation's three stockholders, who were also its only officers and directors, entered into a formal written agreement which provided that they had ‘agreed to dissolve said corporation and liquidate its affairs' as set forth therein. The agreement further provided that certain enumerated assets ‘shall remain the property of and belong to’ the three parties to the agreement, ‘each of them to share in the net proceeds equally.’ Among such assets was a claim against the United States. The Court of Appeals, in holding that the agreement operated to assign the claim, said that ‘It is immaterial that formal words of assignment are not used, if the intention to make a present transfer is clear.’ The Novo Trading Corporation case is distinguishable from this case because here there is not a shred of evidence that the resolution herein was intended as an assignment. The court in Novo Trading Corporation specifically found that the agreement was intended to operate as an assignment and that it ‘represented all the evidence of transfer which the shareholders thought necessary.’ 113 F.2d at 322. From the language of the resolution in this case directing the officers to ‘take all necessary action to effectuate’ the dissolution, we infer that the directors contemplated further action by the officers to effectuate an assignment and that the directors did not intend to effect a present transfer of all the assets by the adoption of the resolution. Thus, on these facts, we view the resolution as no more than a mere mandate to the officers to assign and distribute the assets and not an assignment itself.
Petitioners assert that, under New Jersey law, the stockholders' proprietary interests in the corporation's assets, upon dissolution, are transformed into equitable rights, similar to those of a beneficiary of a trust to a prorata distributive share of the assets of the corporation and that they— not the corporation— are taxable on the income received with respect to the notes and claim after the date of dissolution. In support of this contention, they cite that portion of 16A Fletcher, Cyclopedia of Corporations, sec. 8134 (perm. ed.), which provides:
On the dissolution of * * * a corporation, whether by expiration of its charter, by a judgment of forfeiture, or otherwise, it is considered in equity, even in the absence of any statute, that its assets are held for the benefit of its stockholders or members, after payment of its debts, and will be so distributed by a court of equity when no other mode of distribution is provided by statute.76 * * *
On dissolution, the legal title to land passes to the stockholders,78 and title to the corporate property vests in the stockholders are tenants in common 79 * * *
(Footnotes omitted.)
Petitioners appear to argue, at least by implication, that the rule, set forth above, relating to the passage of title to the corporation's property upon dissolution, is followed in New Jersey. We do not agree. It is well established in New Jersey that legal title to the corporate assets, other than real property, passes on dissolution to the corporation's trustees in dissolution, i.e., the directors. N.J. Stat. Ann. sec. 14:13-5; State v. Fidelity Union Trust Co., 136 A.2d 636 (N.J. 1957); Fox v. Radel Leather Mfg. Co., 189 Atl. 366, 368 (N.J. Err. & App. 1937). Title to the corporation's real property remains in the corporation during the process of winding up. Joachim v. Belfus, 152 Atl. 161, 163 (N.J. 1930).
Section 14:13-5, N.J. Stat. Ann., as applicable for the year 1960, provided:
14:13-5. Directors as trustees for winding up; powers
Upon the dissolution in any manner of any corporation, the directors shall be trustees thereof, with full power to settle the affairs, collect the outstanding debts, sell and convey the property and divide the moneys and other property among the stockholders, after paying its debts, as far as such moneys and property shall enable them. They may meet and act under the by-laws of the corporation, and, under regulations made by a majority of such trustees, prescribe the terms and conditions of sale of such property, and may sell all or any part for cash, or partly on credit, or take mortgages and bonds for part of the purchase price for all or any part of such property. They may sell, exchange or invest in bonds of the home owners' loan corporation or other agencies of the federal government for cash, securities or other instruments held by them as such trustees.
In case of a vacancy or vacancies in the board of directors of the corporation existing at the time of dissolution or occurring subsequent thereto, the remaining directors or director shall be the trustees or trustee thereof, as the case may be with all of the above powers, and may do and perform all such other acts as shall be necessary to carry out the provisions of this title relative to the winding up of the affairs of the corporation and the distribution of its assets.
This provision gives the directors, as trustees, the authority to do those acts necessary to wind up the affairs of the corporation, such as the authority to sell the corporate assets and distribute the proceeds or distribute the assets directly to the stockholders, after all the corporate creditors are paid. We see nothing in the statute to indicate that a dissolution of a New Jersey corporation automatically accomplishes a distribution or assignment of all of the corporate assets to the stockholders of the corporation. Nor do we think State v. Fidelity Union Trust Co., supra, cited by petitioners, supports such a proposition. The statute and the Fidelity Union Trust case relate to the question of the fiduciary relationship between the directors and stockholders rather than the passage of title.
Petitioners have cited no authority, and we have found none, which supports the proposition that the interest which the stockholders of a dissolved corporation have in the corporate assets under New Jersey law, prior to the actual distribution of the assets to the stockholders in liquidation, is sufficient to shift the incidence of Federal income taxation on income earned with respect to the assets from the corporation to the stockholders. See Taylor Oil & Gas Co. v. Commissioner, 47 F.2d 108 (C.A. 5, 1931), certiorari denied 283 U.S. 862 (1931); and United States v. C. T. Loo, 248 F.2d 765 (C.A. 9, 1957), certiorari denied 356 U.S. 928 (1958). See also Mrs. Grant Smith, 26 B.T.A. 1178, 1184 (1932), where we said:
It is well established that the mere dissolution of a corporation does not effect a distribution of its assets among its stockholders, and furthermore that such a distribution is not effected by the turning over of the assets of the corporation to trustees in liquidation who may also be stockholders of the corporation.
Nor have petitioners pointed to any authority that dissolution, in and of itself, effects a distribution or assignment of corporate assets to stockholders under New Jersey law.
Finally, petitioners refer to the adjusting book entries as evidence that the corporation assigned all its assets to the stockholders. We fail to see how the book entries could in any way operate as an assignment of the antitrust claim, when they contain absolutely no reference to it. Accordingly, such entries did not constitute an assignment of the claim.
With respect to the notes, the book entries are some evidence of an assignment and are entitled to some weight; however, they are determinative. See Eli D. Goodstein, 30 T.C. 1178, 1190 (1958). There is no direct testimony in the record that the book entries were intended to operate as an assignment of the notes. Hence, we believe the presence of contrary circumstances, giving rise to the inference that no assignment of the notes was in fact made, outweighs the significance of the book entries.
The evidence plainly shows that the corporation continued to exercise dominion and control over the notes. It retained title to the notes and the right to bring suit for collection in the event of default; it continued to collect and deposit the interest income in its account; it continued to distribute such income to each of the petitioners equally in accordance with their respective stockownership. Such continuous exercise of dominion and control over the notes by the corporation is inconsistent with the notion that it assigned them and indicates that it did not divest itself of control over the notes, as required by Weaver v. Atlantic Roofing Co., supra, for a valid equitable assignment thereof. In addition, the fact that the corporation distributed the interest income to the petitioners equally in accordance with their stockownership, and not in accordance with their respective unequal interests in the notes as recorded in the journal entries, creates the strong inference that the petitioners received the distributions because of their status as stockholders and not as transferees of the notes.
Another factor inconsistent with petitioners' position is the letter of July 12, 1961, by London, the accountant, to each of the petitioners. It reads, in pertinent part, as follows:
In order to complete the liquidation of Tel-O-Tube * * * the $100,000.00 invested in the notes of Manufacturers Credit Corp. are to be disbursed as follows:
+---------------------------------------+ ¦The Estate of Samuel Antkies¦$35,476.66¦ +----------------------------+----------¦ ¦Nat Malamuth ¦31,054.12 ¦ +----------------------------+----------¦ ¦Sidney Messer ¦33,469.22 ¦ +----------------------------+----------¦ ¦Total ¦100,000.00¦ +---------------------------------------+
We agree with respondent that ‘had the notes been distributed and the corporation liquidated on September 30, 1960, there would have been no need for any instruction on July 12, 1961, respecting the proper manner of their distribution in order to complete the liquidation.’ It is difficult to believe that the notes could have been assigned prior to July 12, 1961, and London not be aware of it. London played an essential part in winding up the affairs of the corporation, and he was the one who made the entries now alleged to constitute an assignment of the notes. Despite his active participation in bringing about the corporation's dissolution and liquidation, he was not aware of any assignment of the notes. The inference we draw from this is that the entries were not intended by the parties to operate as an assignment. This is supported by London's testimony. At one point on crossexamination he testified that a decision was made not to assign the notes until the corporation's liability to RCA was discharged. Although this testimony was somewhat equivocal, petitioners' counsel made no effort to clarify it on redirect examination.
Furthermore, the actual face amount of the notes received by each petitioner on August 1, 1961, differed from their respective interests in the notes, as recorded on the corporation's books:
+--------------------------------------------------------+ ¦ ¦Interests in ¦Actual amounts ¦ +------------------------+--------------+----------------¦ ¦ ¦notes per ¦of notes ¦ +------------------------+--------------+----------------¦ ¦Petitioner ¦book entries ¦received ¦ +------------------------+--------------+----------------¦ ¦Estate of Samuel Antkies¦$35,476.66 ¦$35,000 ¦ +------------------------+--------------+----------------¦ ¦Nat Malamuth ¦31,054.12 ¦35,000 ¦ +------------------------+--------------+----------------¦ ¦Sidney Messer ¦33,469.22 ¦30,000 ¦ +--------------------------------------------------------+
Such unexplained discrepancies fortify our view that the book entries were not intended to constitute an assignment of the notes.
Petitioners rely on Gensinger v. Commissioner, 208 F.2d 576, 582 (C.A. 9, 1953), where the Court of Appeals, in holding that the taxpayer, the sole stockholder, adequately manifested his intention to distribute to himself certain crops as liquidating dividends, stated:
Where both the power to distribute property and the sole equitable right to it are held by a single person, who is both ‘distributor’ and ‘distributee’, and the only person with any interest in the matter, we see no reason why any more should be required to prove a ‘distribution’ than that the person intended to presently take the property as his own, and that this intention was manifested in some manner.4
We note that the ‘power to distribute property’ and the ‘equitable right to it’ are not held herein by a single person or even by the same persons, that petitioners are not the only persons ‘with any interest in the matter,‘ and that the intention to effect an assignment of the notes and claim has not been adequately manifested. The directors, as statutory trustees, held the power to distribute the property and had a substantial ‘interest in the matter,‘ because they are personally liable to a creditor of the corporation if they distribute all the assets without making provision for his debt. See Chorpenning v. Yellow Cab Co., 167 Atl. 12 (N.J. Ch. 1933). Since RCA was a creditor of the corporation, it also had an equitable right to its property. State v. Fidelity Union Trust Co., supra at 640. Given these facts and the law of New Jersey, petitioners have failed to convince us that the directors, as statutory trustees, ever intended to distribute the notes and claim to the stockholders prior to July 1961. Consequently, we sustain respondent's determination that the corporation retained title to, and ownership of, the notes until July 1961 and that the interest income of $13,177.08 earned with respect to the notes was taxable to it.
Our determination that the corporation retained the claim raises the further question of the tax consequence to the corporation of the proceeds from the settlement thereof. Petitioners, for the first time in their brief, advance the alternative argument that the corporation is not taxable upon the proceeds from the settlement of the claim by reason of the nonrecognition-of-gain provision contained in section 337. In our judgment section 337 is inapplicable to the facts of this case for a number of reasons, only two of which we need mention. It is well settled that issues not raised by the pleadings, but argued for the first time in the briefs, should not be considered. William Greenberg, 25 T.C. 534 (1955). Respondent takes the position in his reply brief that this issue has not been properly raised. We agree. Rule 7 of the Court's Rules of Practice requires that the petition contain clear and concise assignments of each and every error alleged and statements of the facts upon which the petitioner relies to sustain each assignment of error. The petition herein contains no assignment of error based on the application of section 337. The facts upon which petitioners rely to sustain the assignment of error, as set out in the petition, are vastly different from those necessary to sustain the contention that section 337 is applicable as to the proceeds from the settlement of the claim. To permit petitioners to raise the issue at such a late date would obviously result in unfairness and surprise to respondent. Therefore, we think the issue has not been properly raised. See Eleanor C. Shomaker, 38 T.C. 192, 201 (1962); George R. Kemon, 16 T.C. 1026, 1034 (1951). But, in any event, petitioners have failed to establish that the corporation distributed all of its assets within the 12-month period required by section 337(a)(2).
There is no evidence as to the date of the final liquidating distribution; and there is no evidence as to the assets retained to pay liabilities or the nature of the liabilities. We do not infer, as petitioners do, that ‘respondent in his statutory notice of liability had admitted and set forth the substantive statutory requirements' of section 337.
SEC. 337. GAIN OR LOSS ON SALES OR EXCHANGES IN CONNECTION WITH CERTAIN LIQUIDATIONS.
(a) GENERAL RULE.— If—
(1) a corporation adopts a plan of complete liquidation on or after June 22, 1954, and
(2) within the 12-month period beginning on the date of the adoption of such a plan, all of the assets of the corporation are distributed in complete liquidation, less asserts retained to meet claims,
then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within such 12-month period.
The proper tax treatment of amounts received a settlement of an antitrust claim ‘depends upon the nature of the claim and the actual basis of recovery.’ Ralph Freeman, 33 T.C. 323, 327 (1959). As we said in Estate of Mabel K. Carter, 35 T.C. 326 (1960), affd. 298 F.2d 192 (C.A. 8, 1962), certiorari denied 370 U.S. 910:
The starting point in cases involving the taxability of amounts received as the result of litigation or the settlement thereof is, in general, the answer to the question.' In lieu of what were the amounts paid under the settlement received?‘
See also Raytheon Production Corporation v. Commissioner, 144 F.2d 110 (C.A. 1, 1944). Generally, an important consideration is the nature of the basic claim from which the compromise settlement is realized. If the settlement proceeds are for lost profits or earnings, they are taxable as ordinary income on the theory that the earnings and profits themselves would have been fully taxable. On the other hand, if the proceeds are for the destruction of the taxpayer's business or goodwill, then they represent a return of capital and are taxed accordingly.
Respondent determined that the corporation realized taxable income from the return of the notes and the cancellation of indebtedness to the extent that it received a tax benefit from the accruals and deductions of the royalties from 1953 through 1957. See Tygart Valley Glass Co., 16 T.C. 941, 951 (1951); Buck Glass Co. v. Hofferbert, 176 F.2d 250, 253 (C.A. 4, 1949). This determination is, of course, presumptively correct, and petitioners have the burden to show error therein by a preponderance of the evidence. They have failed to do so. The record contains no evidence as to what the proceeds from the settlement of the claim were given in lieu of. Accordingly, we uphold respondent's determination.