Opinion
Docket No. 15605.
1948-09-28
LUCILLE H. ROGERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
George E. Beechwood, Esq., for the petitioner. William H. Best, Jr., Esq., for the respondent.
Arrangement between petitioner and other interests for participation by means of jointly owned corporation in operation of vessels under War Shipping Administration general agency agreement, held to result in relationship of stockholder rather than co-adventure; and proceeds on termination of corporation's activity under general agency agreement, received by petitioner by means of checks drawn by corporation and other interests held, further, taxable to her as ordinary income. George E. Beechwood, Esq., for the petitioner. William H. Best, Jr., Esq., for the respondent.
Respondent determined a deficiency in income tax for the calendar year 1944 in the amount of $6,627.78.
Certain issues having been abandoned by petitioner, the sole remaining question is whether the whole or any part of a sum of money received by petitioner growing out of an arrangement for the operation of vessels under a general agency agreement with the War Shipping Administration is to be treated as ordinary income or as capital gain.
Some of the facts have been stipulated.
FINDINGS OF FACT.
The stipulated facts are hereby found accordingly.
Petitioner is a resident of Wynnewood, Pennsylvania, and filed her tax return for 1944 with the collector at Philadelphia.
Prior to August 16, 1943, she was the sole owner of all of the outstanding stock of American Range Lines, Inc., a Delaware corporation organized in 1936 for the purpose of engaging in the shipping business. Hereafter it will be referred to as Range.
During the period immediately prior to August 1943 Range did not own or operate any vessels. All physical operations ceased about the middle of 1942. But commencing at about that time, Range, through its president, Jacob W. Alwine, was endeavoring to have the War Shipping Administration, hereinafter referred to as W.S.A., allocate to it some vessels under a general agency agreement.
At about the same time the American Liberty Steamship Corporation, also a Delaware corporation, hereinafter referred to as Liberty, was negotiating with W.S.A. But neither Range nor Liberty could comply fully with the requirements. It was the suggestion of W.S.A. that the two companies enter into a joint operation to secure the allocation of vessels, and a joint application was filed with W.S.A. for allocation under a general agency agreement.
On August 16, 1943, an agreement was entered into by petitioner, Range, and Liberty, providing for a merger of the personnel of the two companies and the creation of a capital of $170,000 in cash, free and clear of all debts. The agreement recited:
American Range Lines, Inc. and American Liberty Steamship Corporation have both been organized to carry on and conduct the business of shipping.
The directors of the respective corporations deem it advantageous for the respective corporations and for the benefit of their stockholders to engage in a joint venture to operate under a General Agency Assignment for the War Shipping Administration.
The mode of carrying the joint venture into effect shall be as follows: The name of American Range Lines, Inc. shall be changed to American Range-Liberty Lines, Inc. The Certificate of Incorporation of American Range Lines, Inc. shall be further amended as provided in this agreement so as to provide for an equal investment of $85,000.00 each, to carry out the business of the joint venture. The by-laws of American Range Lines, Inc. shall be amended so as to provide for equal management and control of the affairs of American Range-Liberty Lines, Inc. between American Liberty Steamship Corporation and Lucille H. Rogers.
At the termination of the General Agency Assignment, it is proposed to restore each of the two corporations, American Liberty Steamship Corporation and American Range Lines, Inc. to their former position, so that each might pursue and conduct their own business separately and individually.
The agreement provided that the name of Range was to be changed to American Range-Liberty Lines, Inc., hereinafter referred to as Range-liberty, and that its capital structure was also to be changed.
The agreement further provided:
EIGHTH: The present by-laws of American Range Lines, Inc. shall be amended in the following respects to provide for equal control and management of the affairs of American Range-Liberty Lines, Inc. during the term of this agreement between American Liberty Steamship Corporation and Lucille H. Rogers:
(a) The number of Directors shall be increased from three to six.
(b) Three members of the Board of Directors shall be persons nominated by the American Liberty Steamship Corporation, hereinafter designated as ‘Liberty Group‘, and an equal number of the Board of Directors shall be persons nominated by Lucille H. Rogers, hereinafter designated as ‘Rogers Group.
(c) In the event of the death, resignation or inability to act of any director, the vacancy occurring shall be filled by the nominee of the group of stockholders or stockholder, who originally nominated the director whose office has become vacant, so that American Liberty Steamship Corporation and Lucille H. Rogers shall have at all times equal representation upon the Board of Directors.
(d) The by-laws shall not be amended except by the affirmative vote of at least five of the whole Board of Directors.
NINTH: The Board of Directors shall elect the President and Treasurer of the corporation as designated by the ‘Liberty Group‘. The Board of Directors shall elect the Executive Vice-President and Secretary as designated by the ‘Rogers Group‘. The Board of Directors shall also elect as its Chairman such person as is designated by the ‘Rogers Group‘.
TENTH: Immediately upon the execution of this agreement and upon the amendment of the Certificate of Incorporation of American Range Lines, Inc. as above set forth, the American Liberty Steamship Corporation shall subscribe for 850 shares of preferred stock and shall pay therefor $85,000 in cash; Lucille H. Rogers shall also subscribe for 850 shares of the preferred stock and shall pay therefor $85,000 in cash. In addition to the preferred stock the American Liberty Steamship Corporation and Lucille H. Rogers shall each purchase 850 shares of the common stock, such stock to be deemed fully paid and shall be non-assessable.
The total capital of $170,000.00 thus created, shall be used solely for the operation and conduct of the business of the corporation under the General Agency Assignment with the War Shipping Administration.
At the termination of the general agency agreement, the agreement between the parties was to be terminated and there was to be restored to the respective parties the capital contributed by each, or so much as remained after deducting losses, and they were otherwise to be placed in their former positions, as provided in the latter agreement.
Petitioner invested the $85,000 required of her by having Range leave intact its existing bank balance of $78,199.99 and by executing and delivering her personal check in the amount of $6,800.01. She fully performed all other obligations imposed upon her by the August 1943 agreement, including the establishment of an escrow fund and later an additional capital contribution.
On September 8, 1943, W.S.A. entered into a general agency agreement with Range-Liberty, whereby the latter as general agent was ‘to manage and conduct the business of vessels assigned to it by the United States,‘ and was to receive reasonable compensation for such services as determined by the W.S.A.
In the course of operations, serious disputes arose between the two groups of stockholders, and on November 27, 1944, petitioner and Liberty agreed to terminate the arrangement, the consent of W.S.A. having theretofore been secured, as required by the general agency agreement. It was provided that the August 1943 agreement was to be ‘cancelled and terminated‘ as of December 1, 1944, and that:
THE AMERICAN LIBERTY STEAMSHIP CORPORATION agrees to pay to LUCILLE H. ROGERS in full satisfaction and discharge of all claims asserted by LUCILLE H. ROGERS against AMERICAN LIBERTY STEAMSHIP CORPORATION and for the promise of LUCILLE H. ROGERS to cancel and terminate the above mentioned agreement and release the AMERICAN LIBERTY STEAMSHIP CORPORATION from the obligations thereunder, the sum of Seventy-five Thousand ($75,000.00) Dollars, as follows:
(a) The sum of $20,000.00 on December 1st, 1944.
(b) The sum of $20,000.00 on March 1st, 1945.
(c) The sum of $7,500.00 on July 1st, 1945.
(d) The sum of $27,500.00 on February 1st, 1946.
IT IS FURTHER UNDERSTOOD AND AGREED that the sum of $20,000.00 to be paid to LUCILLE H. ROGERS by the AMERICAN LIBERTY STEAMSHIP CORPORATION on December 1st, 1944, shall be reduced by all sums of money received by LUCILLE H. ROGERS from the AMERICAN RANGE-LIBERTY LINES, INC. by virtue of dividends or otherwise on or after November 27, 1944 and it is understood and agreed that such sums so received by LUCILLE H. ROGERS shall be deemed credits to the AMERICAN LIBERTY STEAMSHIP CORPORATION and the amount to be paid by the AMERICAN LIBERTY STEAMSHIP CORPORATION shall be reduced accordingly.
Each party hereto releases and forever discharges the other party from all moneys, claims, demands, contracts, action, whatsoever arising under the agreement between the parties, dated the 16th day of August, 1943, and nothing herein contained shall be deemed to be a release from the obligations contained in this agreement.
On the same date Range-Liberty entered into an ‘Agreement and Bill of Sale‘ with Liberty, which provided in part that Range-Liberty was to release all its right and interest under the general agency agreement of September 8, 1943, and assent to the appointment of Liberty in its place, and thereupon assigned all of its rights to Liberty. Further, it transferred all of the property which had come into its possession since August 17, 1943, with certain specified exceptions, of which one was: ‘Cash in the sum of $125,850, representing the capital investment of Lucille H. Rogers.‘
The sum of $20,000, payable to petitioner on December 1, 1944, was paid as follows: (a) $11,293.26 was paid by check of Range-Liberty, as one-half of the 1944 earnings and profits of that company; (b) the balance, $8,706.74, was paid by check of Liberty.
In her income tax return for 1944, petitioner reported the $20,000 received on December 1, 1944, as a long term capital gain.
In his notice of deficiency, respondent determined that the sums of $8,706.74 received from Liberty and $11,293.26 received from Range-Liberty were ordinary income. His explanations were:
The amount of $8,706.74 received by you from the American Liberty Steamship Corporation, New York, N.Y., as damages paid for loss of anticipatory and past benefits has been added to gross income.
A distribution of earnings made to you, in the amount of $11,293.26 by the American Range-Liberty Lines, Inc., New York, N.Y., has been added to gross income.
OPINION.
OPPER, Judge:
Although the parties designated their combined enterprise for the operation of vessels under a general agency agreement with the W.S.A. as a ‘joint venture,‘ it seems clear the term was not used in the technical business sense, certainly not in its accepted meaning for tax purposes.
Internal Revenue Code, sec. 3797(2). The actual form adopted for the operation was that of a corporation; not merely an association taxable as such, Internal Revenue Code, sec. 3797(3)— although more nearly that than a true joint venture, Morrissey v. Commissioner, 296 U.S. 344— but an actual de jure corporation with stockholders, of which petitioner was one, directors, and officers. Burnet v. Commonwealth Improvement Co., 287 U.S. 415; Moline Properties, Inc. v. Commissioner, 319 U.S. 436. The two participating groups acquired common and preferred stock and are referred to as ‘stockholders,‘ the method of selection of directors is provided, and instructions for the designation of officers by the directors are set forth in careful language.
Even in its loose sense, the term is applied, not to petitioner, but to the two corporate participants: ‘The directors * * * deem it advantageous for the respective corporations * * * to engage in a joint venture * * * .‘
The device adopted was the temporary reconstruction of an existing corporation, but the corporate form and its consequence was no less effective than if a new corporation had been organized for the purpose.
Although petitioner contends that there was an agreement to share losses, it is evident that this was so in the corporate, rather than the joint-venture sense; that is, only the capital committed to the venture by way of contribution to the corporation was liable for any losses sustained, not petitioner nor her fellow stockholder, individually.
The assets newly acquired by this corporation were the contract with W.S.A. for operation of the vessels and the profits and other proceeds accumulated from its successful prosecution. All of these were ‘granted, bargained, sold, conveyed, transferred, assigned and set over‘
by the corporation in the transaction of November 27, 1944, when the stockholders agreed to disagree. Petitioner's participation was apparently that of stockholder. She had nothing to sell except her interest in the corporation itself, and this, far from being sold, was carefully retained. As to her, the provisions of the original agreement had been fully executed, and merged into her participation as corporate shareholder.
Petitioner attempts to explain away this language by some obscure reference to requirements of the W.S.A., but neither this, nor the suggestion that the corporation could not sell the contract because of the original agreement and of the required consent of the Government to any transfer, are persuasive. The original agreement makes no reference to such a situation, being confined to distribution after the W.S.A. contract had been concluded, which it had not been on November 27, 1944. And if the Government's consent to a sale was necessary, it was obtained.
If we are correct so far, it makes no difference whether what the corporation received for the sale of its property was capital gain or ordinary income, since the corporation's tax liability is not presently in issue. Cf. McAllister v. Commissioner (C.C.A., 2d Cir.), 157 Fed.(2d) 235; certiorari denied 330 U.S. 826; Estate of F. S. Bell v. Commissioner (C.C.A., 8th Cir.), 137 Fed.(2d) 454, with Hort v. Commissioner, 313 U.S. 28; and Swastika Oil & Gas Co., 40 B.T.A. 798; affd. (C.C.A., 6th Cir.), 123 Fed. (2d) 382; certiorari denied, 317 U.S. 639.
Petitioner's profit came through her interest in the corporation. Cherokee Motor Coach Co. v. Commissioner (C.C.A., 6th Cir.), 135 Fed(2d) 840. ‘ * * * there can be no doubt that a corporation may normally distribute its assets among its stockholders. When it undertakes to do so, its act is nonetheless a corporate act though its shareholders receive new contractual rights enforceable by them alone against the transferee. That is to say their rights to receive the proceeds on the disposal of corporate assets are strictly derivative in origin. * * * their claims to the proceeds flow from the corporation and are measured by the stake which they have in it. For the rental or purchase payments for the property conveyed by respondent (the corporation) could not lawfully be paid to another without its authority; and it could not lawfully dispose of them to others without the consent of its shareholders.‘ United States v. Joliet & Chicago Railroad Co., 315 U.S. 44, 48. ‘ * * * under the theory of the Joliet decision (supra) the rights of the stockholders were those of distributees of current dividends. ‘ Commissioner v. Western Union Tel. Co. (C.C.A., 2d Cir.), 141 Fed.(2d) 774, 777; see also Home Furniture Co. v. Commissioner (C.C.A., 4th Cir.), 168 Fed.(2d) 312.
The payment to petitioner was as much a dividend as if it had been made first to the corporation, and by it to her. ‘ * * * all sums of money and considerations agreed to be paid for the use, possession, and occupation (here, the sale) of the corporate property belongs to the corporation, the legal owner of such corporate property. It is by way of dividends that the stockholders are entitled to the earnings of the road * * * .‘ Rensselaer & Saratoga Railroad Co. v. Irwin (Dist. Ct. N. Dist. N.Y.), 239 Fed. 739, 746; affd. (C.C.A., 2d Cir.), 249 Fed. 726. ‘The application of the rent (here proceeds of sale) * * * is a mere labor-saving device, the effect being exactly the same as if it be paid to the lessor (seller) and by it paid out as far as necessary to bondholders for interest, and the surplus in dividends to its stockholders.‘ Op. c.t., 249 Fed. 726, 728. ‘There are two steps in the proceeding * * * . There is a payment of rent and there is a distribution of dividends, and the failure to enter these transactions upon the books of account or to carry them through in any physical manner cannot deprive them of their essentially separate and distinct characters.‘ American Telegraph & Cable Co., 2 B.T.A. 991, 1000, 1001; see also Blalock v. Georgia Ry. & Elec. Co. (C.C.A., 5th Cir.), 246 Fed. 387; Commissioner v. Court Holding Co., 324 U.S. 331.
There is not, and can scarcely be, any question raised as to the adequacy of the corporation's accumulated earnings to support the payment of such a dividend, particularly since the major part of the payment for the instant year represented amounts conceded to be the current year's earnings. If for subsequent years accumulated earnings and profits are shown to be inadequate to constitute any payments a distribution of dividends, that is an issue not presented here and upon which we are in no position to express an opinion.
None of the cases cited by petitioner brings this conclusion into question. Those most nearly similar, First Mechanics Bank of Trenton v. Commissioner (C.C.A., 3d Cir.), 91 Fed.(2d) 275, and Landreth v. United States (C.C.A., 5th Cir.), 164 Fed.(2d) 340, point up the distinction from this proceeding. In both, a true joint venture was found to exist, the issue being, no whether as here the participants had decided upon a corporation as the vehicle of their arrangement, but whether the relationship was one of employer and employee, rather than of coadventurers. In neither was any corporate stock owned by the participating taxpayer, and in neither was there any contention of receipt of the disputed gain by way of corporate dividend. Since we have concluded here that that was petitioner's sole claim to the payment which she concededly received and the taxability of which presents the only issue, these cases add no support to petitioner's case. We find no error in the deficiency determined.
Reviewed by the Court.
Decision will be entered for the respondent.
HARLAN, J., dissenting: The contract between petitioner American Range Lines, Inc., and the American Liberty Steamship Corporation, which initiated the business relationship between the parties, repeatedly referred to that relationship as a ‘joint venture.‘ This contract is set out in full as an exhibit to the stipulation of facts herein and, as such, is incorporated in the findings of fact. The parties to the contract agreed that one of the contracting parties, American Range Lines, Inc., should modify its structure and bylaws in such a way that each of the other two contracting parties would have exactly equal control therein and that this corporation as modified should be the agency through which the joint venture should be administered. The parties to the agreement banded together to carry out a definite project. They agreed to share all profits and losses and agreed that when the specific project was completed American Liberty Steamship Corporation would surrender all interest in American Range Lines, Inc. (renamed American Range-Liberty Lines, Inc.) and that all accumulated capital would be divided between petitioner and American Liberty Steamship Corporation.
This enterprise was called a joint venture by its participants; it had all the essential characteristics of a joint venture; and I disagree with the majority view that it was not a joint venture.
The case of First Mechanics Bank of Trenton v. Commissioner, 91 Fed.(2d) 275, containing facts practically on all fours with those at bar comes to a conclusion differing from that of the majority opinion herein, and I believe correctly states the law. In the First Mechanics Bank case the Commissioner contended that the money received by the taxpayer in settlement with the taxpayer's coventurer was merely money paid by the corporation created to carry out the joint venture as compensation for anticipated wages. The court therein held that the money received in settlement was capital gain from a joint venture. In the case at bar the Commissioner contends, under almost identical circumstances, that the money received by the taxpayer in the settlement represented in part dividends and in part ordinary income. The reasoning in the First Mechanics Bank case would seem to require the petitioner's income to be taxed as capital gains.