Court Opinion

ID: 9636746
Source: CourtListenerOpinion
Date Created: 2023-08-22 14:41:34.352332+00
Date Added: 2024-06-11T18:09:48.824674
License: Public Domain

HANEY, Circuit Judge
(concurring).
Review of a decision of the Board of Tax Appeals that “petitioners are jointly and severally liable as transferees * * * for a deficiency of $14,976.55 in the income tax” of Western Oxygen Company for 1929, is sought by the petition before us.
Petitioners were, at the material times herein, stockholders of the Western Oxygen Company, hereinafter called Western Oxygen, a Delaware corporation, which had both common and preferred stock outstanding. The Board found: “ * * * The preferred stock was redeemable on any dividend date at $105 per share plus all accumulated and unpaid dividends thereon. In the event of dissolution of the company holders of the preferred stock were entitled to receive par value or $100 per share plus all accumulated and unpaid dividends thereon before any assets should be applied to the common stock.”
Prior to March 6, 1929, Western Oxygen entered into a contract with Air Reduction Company, a New York corporation,, hereinafter called Air Reduction. By that contract, Air Reduction agreed to transfer to Western Oxygen 16,000 shares of the stock of Air Reduction, and to assume and pay obligations of Western Oxygen set forth in two schedules, and obligations “incurred or assumed by it in the regular conduct of its business since December 31, 1928.7 Western Oxygen agreed to transfer its assets to Air Reduction, and upon delivery thereof to enter into an agreement with Air Reduction, .agreeing to indemnify Air Reduction against all claims against Western Oxygen including state and federal taxes, except those set forth in the schedules. The schedules contained no reference to federal taxes for the year 1929.
It was' either provided in such agreement, or was a part of Western Oxygen’s reorganization plan that the stock received by it in Air Reduction would be distributed to Western Oxygen’s stockholders.
A special meeting of Western Oxygen’s stockholders was called for the purpose of considering the reorganization, and was held on March 6, 1929. The stockholders ratified and approved the contract. On the same day a special meeting of the directors of Western Oxygen was held. Because a preferred stockholder had refused to accept Air Reduction stock for his Western Oxygen preferred stock, a resolution was adopted calling for redemption on May 31, 1929, all Western Oxygen preferred stock at $105 per share plus accrued dividends. Another resolution was adopted authorizing sale of a sufficient quantity of Air Reduction stock to redeem the preferred stock. In addition, another resolution was adopted authorizing transfer to petitioner Peir, the president of Western Oxygen of 342 shares of Air Reduction stock “as a commission for consummating the contract * * * and as a reward for his activities in connection with [Western Oxygen] and in appreciation for his loyalty to it.”
On March 28, 1929, Western Oxygen transferred its assets, the depreciated cost of which was -$393,582.45, to Air Reduction, *648and received therefor 16,000 shares of Air Reduction stock, the market value of which at the time of the transfer is not disclosed by the record.
Thereafter, Western Oxygen sold 1,811 shares of Air Reduction stock, receiving therefor $184,922.61, all of which was used in redeeming the preferred stock ,• it transferred the 342 shares of Air Reduction stock to Peir, the value of the stock at the time of the transfer being $107.50 per share, or a total value of $36,765; it paid an attorney $1500 “for his services in handling the local affairs of [Western Oxygen], dissolving it and handling the distribution of” Air Reduction stock; and it distributed the remaining 13,847 shares of Air Reduction stock to Western Oxygen’s common stockholders. All those “transactions were in liquidation of the capital stock of [Western Oxygen], which liquidation and dissolution was completed in 1929.”
In its income tax return for the year 1929, Western Oxygen reported no profit from the sale of 1,811 shares of Air Reduction stock, claimed a deduction for the $1,500 attorney’s fee, and the $36,765 paid Peir. Respondent audited the return, disallowed the two deductions mentioned, adjusted the income to include $140,204.22 as profit on the sale of the 1811 shares of Air Reduction stock, and determined a deficiency in the tax owing by Western Oxygen in the sum of $14,976,551 He assessed the deficiency on October 11, 1930, and issued notice thereof to Western Oxygen on October 27, 1930.
Payment of the deficiency was not made prior to April 4,1931. On that day respondent issued a deficiency notice to Air Reduction and to petitioners, seeking to recover from Air Reduction under section 311 of the Revenue Act of 1928, 26 U.S.C.A. § 311 and note which provides in part: “(a) * * * The amounts of the following liabilities shall * * * be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this title. * * * (1) * * * The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax * * * imposed upon the taxpayer by this title [chapter].”
Thereafter petitioners filed a petition with the Board of Tax Appeals for a redetermination of the deficiency. Air Reduction, however, did not file such a petition, and respondent assessed it for the deficiency. In March, 1932, Air Reduction paid under protest the amount of the deficiency, and at the same time submitted a claim for refund, contending that it was “a purchaser for value” and therefore was not liable as a “transferee.”
On December 5, 1935, the Board held that the deficiency could be collected only once, and since it had been collected “the liability of the petitioners was extinguished.” On February 19, 1936, respondent filed a motion with the Board to reconsider the decision, and to submit evidence .that “refund of the full amount of the payment made by Air Reduction * * * has been authorized and is in course of transmission to * * * Air Reduction. * * * ” The Board vacated its decision, and on reconsideration of the proceeding, rejected the evidence offered, and held that the payment made “under protest and accompanied by a claim for refund, does not serve to discharge any liability which these petitioners have.” The Board also approved respondent’s determination without explanation. Petitioners have filed a petition to review that decision.
Petitioners first contend that if there was any tax liability it was extinguished and discharged by the Air Reduction payment.
The “trust-fund” doctrine, partially noticed in Mumma v. Potomac Company, 33 U.S. 281, 286, 8 Pet. 281, 286, 8 L.Ed. 945, was stated in Curran v. State of Arkansas, 56 U.S. 304, 15 How. 304, 307, 14 L.Ed. 705. The assets of an insolvent corporation are impressed with a trust in favor of such corporation’s creditors, who may enforce such trust on such assets against anyone having possession thereof, except bona fide creditors or purchasers. That principle may be invoked by the government with respect to unpaid corporate taxes. Phillips v. Commissioner, 283 U.S. 589, 592, 51 S.Ct. 608, 609, 75 L.Ed. 1289; Hulburd v. Commissioner, 296 U.S. 300, 303, 56 S.Ct. 197, 199, 80 L.Ed. 242; Phillips-Jones Corp. v. Parmley, 302 U.S. 233, 235, 236, 58 S.Ct. 197, 82 L.Ed. -. The liability of each of the transferees, and the corporation, is said to be several (Phillips v. Commissioner, supra, 283 U.S. 589, 603, 51 S.Ct. 608, 614, 75 L.Ed. 1289; Phillips-Jones Corp. v. Parmley, supra, 302 U.S. 233, 237, 58 S.Ct. 197, 82 L.Ed. -), but it is also joint, since the government may pursue all of them, or only one. Phillips v. Commissioner, supra, 283 U.S. 589, 603, 51 S.Ct. 608, 614, 75 L.Ed. 1289; *649Phillips-Jones Corp. v. Parmley, supra, 302 U.S. 233, 236, 237, 58 S.Ct. 197, 82 L.Ed. -. Since the liability is joint and several, payment by one so liable would discharge all who were jointly and severally liable with him. Phillips-Jones Corp. v. Parmley, supra, 302 U.S. 233, 237, 58 S.Ct. 197, 82 L.Ed. -.
The payment by Air Reduction would discharge petitioners if both Air Reduction and petitioners were jointly and severally liable. The Board in its last opinion said: “Thus it would appear that * * * Air Reduction * * * was a purchaser for value, with no liability either at law or in equity for the payment of such tax.” Ordinarily, the burden of proving discharge is on the one asserting it. Whether that rule as applicable here, was changed by section 912 of the Revenue Act of 1924, as added by section 602 of Act of 1928, 26 U.S.C.A. § 619(a), it is unnecessary to decide. That section provides: “In proceedings before the Board the burden of proof shall be upon the Commissioner to show that a petitioner is liable as a transferee of property of a taxpayer, but not to show that the taxpayer was liable for the tax.” Under the facts as found by the Board, we see no basis on which Air Reduction might be liable with petitioners under the “trust-fund” rule. While it was a “transferee” in one sense, it was not a “transferee” liable under the “trust-fund” rule. Its stock which it transferred to Western Oxygen being of a ready market value and, based on the value of that which was sold, far exceeded the cost of the assets transferred to it by Western Oxygen. As a purchaser for value, Air Reduction, we think, was not liable.
The payment by Air Reduction is in the same category as a payment by a stranger. It would not discharge the liability unless such was the intention of the government and Air Reduction. Adams v. Napa Cantina Wineries, 9 Cir., 94 F.2d 694, 699. Here, no such intention on behalf of the government is shown. In fact, it is shown that there was a contrary intention, because respondent is still pursuing petitioners before us.
Petitioners assert that this court has held that section 311 of the act, 26 U.S.C.A. § 311 and note, “does not by its terms exclude transferees who have paid full consideration for the property transferred.” California Iron Yards Corp. v. Commissioner, 9 Cir., 82 F.2d 776, 779. In fact, however, such question was expressly left undecided. (at page 779 of 82 F.2d). In addition, liability of Air Reduction would not arise from the statute or the assessment thereunder, but from the “trust-fund” doctrine. Phillips-Jones Corp. v. Parmley, supra, 302 U.S. 233, 235, 58 S.Ct. 197, 82 L.Ed. -. Petitioner further contends that Air Reduction was liable because it had assumed Western Oxygen’s obligations. The facts found do not sustain the contention, but even if they did, the “existence of that possible remedy did not bar the government from following * * * the assets of the corporation into the stockholder’s hands.” Pierce v. United States, 255 U.S. 398, 405, 41 S.Ct. 365, 368, 65 L.Ed. 697.
One further question pertaining to election of remedies shbuld be noticed. The right of the government, under the “trust-fund” theory, in the absence of statute, could be asserted either by an action at law (Phillips v. Commissioner, supra, 283 U.S. 589, 592, 51 S.Ct. 608, 609, 75 L.Ed. 1289; Hulburd v. Commissioner, supra, 296 U.S. 300, 303, 56 S.Ct. 197, 199, 80 L.Ed. 242), or by suit in equity. Id.; Leighton v. United States, 289 U.S. 506, 509, 53 S.Ct. 719, 720, 77 L.Ed. 1350. By section 311, above quoted, a third remedy was extended to the government by way of summary proceeding. Phillips v. Commissioner, supra, 283 U.S. 589, 594, 51 S.Ct. 608, 610, 75 L.Ed. 1289; Hulburd v. Commissioner, supra, 296 U.S. 300, 303, 56 S.Ct. 197, 199, 80 L.Ed. 242; Phillips-Jones Corp. v. Parmley, supra, 302 U.S. 233, 237, 58 S.Ct. 197, 82 L.Ed. —. Plowever, the other remedies continue also. Leighton v. United States, supra, 289 U.S. 506, 509, 53 S.Ct. 719, 720, 77 L.Ed. 1350; Phillips-Jones Corp. v. Parmley, supra, 302 U.S. 233, 237, 58 S.Ct. 197, 82 L.Ed. —. The fact that respondent proceeded against Air Reduction did not, we think, amount to an election of remedies preventing assertion of the remedy against petitioners. Pierce v. United States, supra, 255 U.S. 398, 405, 41 S.Ct. 365, 367, 65 L.Ed. 697.
Section 22(a) of the Revenue Act of 1928, 26 U.S.C.A. § 22(a) and note, provides in part: “ ‘Gross income’ includes gains, profits, and income derived from * * * sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property.”
Section 22(e), 26 U.S.C.A. § 22(e) note, provides: “In the case of a sale or other disposition of property, the gain or loss shall be computed as provided in sections 111, 112, and 113.”
*650In computing the amount of the gain, which by section 111 (a), 26 U.S.C.A. § 111 note, is “the excess of the amount realized therefrom over the adjusted basis provided in section 113(b),” the amount realized is “the sum of any money received plus the fair market value of the [other] property * * * received,” section 111 (c) , 26 U.S.C.A. § 111 (b) and note, and the basis provided in section 113 is “the last inventory value” of the property disposed of. Section .113(a) (1), 26 U.S.C.A. § 113 note.
Here Western Oxygen’s property was inventoried at- $393,582.45, after deducting depreciation. The gain would be the fair market value of Air Reduction stock received, less $393,582.45, and it would be taxable, were it not for section 112(b) (4), 26 U.S. C.A. § 112(b) (4) and note, which provides: “No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.”
The gain was not therefore taxable to Western Oxygen.
Inasmuch as Western Oxygen then exchanged the stock it received from Air Reduction for its own stock, the gain, so far as the stockholders of Western Oxygen who received Air Reduction stock were concerned, was not taxable because of section 112 (b) (3), 26 U.S.C.A. § 112(b) (3) and note, which provides: “No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.”
With respect to the preferred stockholders, however, they received no distribution of Air Reduction stock but money obtained from sale of such stock by Western Oxygen. Petitioners contend that section 112 (d) , 26 U.S.C.A. § 1.12(d) and note, is applicable, which provides: “If an exchange would be within the provisions of subsection (b) (4) of this section if it were not for the fact that the property received in exchange consists not only of stock or securities permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then — (1) If the corporation receiving süch other property or money distributes it in pursuance of .the plan of reorganization, no gain to the corporation shall be recognized from the exchange.”
I believe this section means that if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization for stock or securities in another corporation a party to the reorganization, and money, and distributes such money in pursuance‘of the plan of reorganization, then no gain to the corporation shall be recognized. If the plan of reorganization contemplated exchange of assets for stock only, and not the sale, then the profit on the sale is taxable, because the transaction would not come within the statute. On the other hand, if the plan of reorganization actually contemplated exchange of assets for stock and sale of part of the stock for distribution to . stockholders, I believe it would make no difference whether the stock was sold by the transferor, the transferee, or a third person not a party to the reorganization on behálf of either or both. In other words, it is the substance of what was done which is controlling. Actually, if the plan of reorganization contemplated.' receipt by the stockholders of stock and money, I believe that to be the substance of the transaction. Had the stock been sold by Air Reduction and the proceeds received by Western Oxygen with the remainder of the stock, then under the express terms, of section 112(d) (1), 26 U.S.C.A. § 112(d) (1) and note, Western Oxygen would not have been liable for the tax. See Minnesota Tea Co. v. Helvering, 58 S.Ct. 393, 82 L.Ed. -, January 17, 1938. If, actually, the plan contemplated sale of stock and distribution of the money to the stockholder, I think that, however the transaction was carried out, was a mere incident — a matter of form which should be disregarded. Cf. Minnesota Tea Co. v. Helvering, supra; Gregory v. Helvering, 293 U. S. 465, 55 S.Ct. 266, 79 L.Ed. 596, 97 A.L.R.. 1355; Pinellas Ice Co. v. Commissioner, 287 U.S. 462, 53 S.Ct. 257, 77 L.Ed. 428.
The Board has made no finding as to what the plan actually was. It finds what the contract between Western Oxygen and Air Reduction “contemplated” but not what the plan was. The contract itself probably would not express the “plan” because the plan would undoubtedly have many details about which Air Reduction would' not be interested. The contract would be a part of the execution of the plan, but not the plan. ‘ I see nothing to prevent modification of the original plan prior to transfer of'the assets, as here.
*651However, if we assume that the plan contemplated receipt of stock and money by the common stockholders and holders of preferred stock respectively, I think that the distribution was not to stockholders but to creditors, and that therefore Western Oxygen was taxable for the gain realized under Minnesota Tea Co. v. Helvering, supra.
The relation between both common and preferred stockholders and the corporation is described in Elko Lamoille Power Co. v. Commissioner, 9 Cir., 50 F.2d 595, 596, and as there said, ordinarily a “preferred stockholder is not a creditor of the company.” See, also, 11 Fletcher Cyclopedia Corporations, Perm.Ed., 708 § 5290.
The question before us is rather limited in scope. There is here no conflict between the preferred stockholders and general creditors prior to issuance of notice of redemption, where ordinarily the preferred stockholder is not a creditor as against the general. Cf. Armstrong v. Union Trust & Savings Bank, 9 Cir., 248 F. 268. Likewise, we need make no choice between provisions regarding redemption, and provisions regarding preference on liquidation, where both are invoked. See Vanden Bosch v. Michigan Trust Co., 6 Cir., 35 F.2d 643; Mathews v. Bradford, 6 Cir., 70 F.2d 77; 28 Mich.L. Rev. 764, 765; cf. In re Culbertson’s, 9 Cir., 54 F.2d 753. Finally, there is here no claim of fraud by the redemption as to cither general creditors or stockholders.
The contract to which the preferred stockholders became a party, provided1 that the “preferred stock was redeemable on any dividend date” as found by the Board. A's a part of such contract, Western Oxygen could by its notice, exercise the option, and (hereby become indebted to the preferred stockholders for the amount provided in the contract. It was not an option to purchase the slock, but an option to reduce its capital by retiring the stock. I think that upon notice of acceptance of the option, the preferred stockholders became creditors.
There are, I think, several analogous situations. Upon declaration of a dividend by a corporation, the stockholder becomes a creditor. Commissioner v. Scatena, 9 Cir., 85 F.2d 729, 731. One holding a policy on the life of a third person, in a mutual company, prior to the death of the third person, is ordinarily considered the same as a stockholder in a corporation, 37 C.J. 370, § 21, but after the death he becomes a creditor. Closer analogies arc found in cases where preferred stock is redeemable at the option of either the corporation or stockholder, and general creditors’ rights are not involved. Westerfield-Boute Co. v. Burnett, 176 Ky. 188, 195 S.W. 477; F. T. Gunther Grocery Co. v. Hazel, 179 Ky. 775, 201 S.W. 336; compare Vent v. Duluth Coffee & Spice Co., 64 Minn. 307, 67 N.W. 70. Finally, there are the cases where the preferred stock is issued under a provision that it is redeemable at a fixed date. When such date arrives, the holder becomes a creditor. Savannah Real Estate, Loan & Bldg. Co. v. Silverberg, 108 Ga. 281, 33 S.E. 908; Allen v. Northwestern Mfg. Co., 189 Iowa 731, 179 N.W. 130; Burt v. Rattle, 31 Ohio St. 116; Best v. Oklahoma Mill Co., 124 Okl. 135, 253 P. 1005; Keyes v. Blue Bell Medicine Co., 34 S.D. 297, 148 N.W. 505.2 I do not believe that, because it is left to the directors to fix the date of redemption, there is any distinction, since once the date is fixed, the relation is the same.3
Therefore, since the preferred stockholders were creditors at the time of distribution of the proceeds, the rule in Minnesota Tea Co. v. Helveriug, supra, is applicable.
The judgment should be affirmed.

 I think the Board’s finding, although inaptly stated, is to that effect. Actually, the certificate, charter or articles of association, by-laws, resolutions under which tiie stock was issued, and applicable statutes are to be consulted in determining what the contractual rights of the holders of preferred stock are. Continental Ins. Co. v. Minneapolis, St. P. & S. S. M. Ry. Co., 8 Cir., 290 F. 87, 91, 31 A.L.R. 1320; 11 Fletcher, supra, 18, 727, §§ 5294, 5295; Jones, Redeemable Corporate Securities, 5 So.Cal.L. Rev. 83.

 Compare Cring v. Sheller Wood Rim Mfg. Co., 98 Ind.App. 310, 183 N.E. 674; Crimmins & Peirce Co. v. Kidder Peabody Accept. Corp., 282 Mass. 367, 185 N.E. 383, 88 A.L.R. 1122; Ammon v. Cushman Motor Works, 128 Neb. 357, 258 N.W. 649; Koeppler v. Crocker Chair Co., 200 Wis. 476, 288 N.W. 130.

 On the general proposition, see Jones, Redeemable Corporate Securities, 5 So. Cal.L.Rev. 83, 97; 28 Mich.L.Rev. 764, 765.