Court Opinion

ID: 4633540
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:14:08.546244+00
Date Added: 2024-06-11T07:58:04.202371
License: Public Domain

Armored Tank Corporation (N. Y.), Petitioner, et al., * v. Commissioner of Internal Revenue, RespondentArmored Tank Corp. v. CommissionerDocket Nos. 9768, 9769, 9770, 9771, 9772, 11916, 11919, 11920, 11927United States Tax Court11 T.C. 644; 1948 U.S. Tax Ct. LEXIS 54; October 20, 1948, Promulgated *54 Decisions will be entered for the petitioners.  Held, that payments received by stockholders for their stock in a corporation constituted the purchase price of the stock by the payor rather than payment of an aggregate amount to the corporation.  Edward L. Steckler, Esq., William Massar, Esq., and Richard L. Davisson, Esq., for the petitioners.Henry C. Clark, Esq., for the respondent.  Harron, Judge.  HARRON *645  The deficiencies in taxes and penalties in each one of these proceedings result from a determination of the respondent that a corporation realized income of $ 375,000 in the fiscal year ended July 31, 1942, as the result of payments aggregating that sum which were made by Pressed Steel Car Co. on October 15, 1941.Originally the respondent made identical determinations of deficiencies in liability for taxes of two corporations, the stock of each being owned by the same persons, to wit, Max and Siegfried Bechhold, Philip H. Steckler, and Hamilton Allen.  Both of the corporations have been dissolved. They were Armored Tank Corporation, a New York corporation, which was organized in 1939 and was dissolved on September 11, 1941, and Illinois Armored*55  Tank Co., a Delaware corporation, which was organized on August 20, 1941, and was dissolved on November 22, 1941.The first corporation, Armored Tank Corporation (N. Y.), Docket No. 9768, transferred all of its assets in a tax-free reorganization to a new corporation organized in Delaware under the name of Armored Tank Corporation, in September 1941, which corporation changed its name to Illinois Armored Tank Co. on October 14, 1941.  Illinois Armored Tank Co. filed a petition in this Court under Docket No. 11935, but the proceeding was dismissed for lack of jurisdiction, respondent offering no objection.  However, the question which is now before this Court relates to a transaction which grew out of a contract which was executed in July 1940 by the New York corporation named Armored Tank Corporation and the Pressed Steel Car Co., which was transferred to the new Delaware corporation known as Illinois Armored Tank Co.Certain stockholders of each corporation were determined to be transferees, liable for the tax deficiencies of each corporation, as follows: Transferees of Armored Tank Corporation (N. Y.), Docket No. 9768: Philip H. Steckler, Docket No. 9769.Siegfried Bechhold, *56  Docket No. 9770.Hamilton Allen, Docket No. 9771.Max Bechhold, Docket No. 9772.Transferees of Illinois Armored Tank Co. (Del.), Docket No. 11935 (dismissed): Hamilton Allen, Docket No. 11916.Philip H. Steckler, Docket No. 11919.Siegfried Bechhold, Docket No. 11920.Max Bechhold, Docket No. 11927.At the hearing in this proceeding, and upon brief, the respondent abandoned his contention that the New York corporation, Armored Tank Corporation, Docket No. 9768, realized income of $ 375,000 in *646  the fiscal year ended July 31, 1942.  Thereby respondent has admitted that he erred in his determination that there are deficiencies and penalties in the tax liability of the above named corporation.  Accordingly, decision will be entered for the petitioner in Docket No. 9768.  It follows that there is no transferee liability in any of the stockholders of Armored Tank Corporation (N. Y.).  Accordingly, decisions for petitioners will be entered in Docket Nos. 9769, 9770, 9771, and 9772.The issue which remains for consideration relates, therefore, to the alleged transferee liability of certain stockholders of Illinois Armored Tank Co. (which is no longer before this Court), the*57  petitioners in Docket Nos. 11916, 11919, 11920, and 11927.  The liability of these alleged transferees turns upon the question whether the corporation, Illinois Armored Tank Co., realized income in the amount of $ 375,000 during the fiscal year ended July 31, 1942.  The specific question in the four proceedings mentioned above is whether the individual petitioners in these proceedings are liable as transferees.The respondent determined deficiencies and penalties in the tax liability of Illinois Armored Tank Co., Docket No. 11935, which has been dismissed for lack of jurisdiction, for the fiscal year ended July 31, 1942, in the total amount of $ 390,144.91, as follows:TaxDeficiencyPenaltyIncome tax$ 50,302.41$ 12,575.60Declared value excess profits tax49,544.9912,386.25Excess profits tax212,268.5353,067.13The respondent determined that certain stockholders of the above corporation were liable for certain amounts of the deficiencies in taxes and penalties of the corporation, as transferees, as follows:DeclaredIncomevalueDocketIncometaxexcessNameNo.taxpenaltyprofitstaxPhilip H. Steckler11919$ 4,351.48$ 1,087.87$ 4,285.95Siegfried Bechhold1192031,427.337,856.8330,954.12Hamilton Allen119162,900.98725.252,857.30Max Bechhold119275,801.971,450.495,714.61Total44,481.7611,120.4443,811.98*58 DeclaredvalueExcessexcessExcessprofitsNameprofitsprofitstaxTotaltaxtaxpenaltypenaltyPhilip H. Steckler$ 1,071.49$ 18,362.57$ 4,590.64$ 33,750Siegfried Bechhold7,738.53132,618.5533,154.64243,750Hamilton Allen714.3312,241.713,060.4322,500Max Bechhold1,428.6524,483.426,120.8645,000Total10,953.00187,706.2546,926.57345,000The record in these proceedings consists of a stipulation of certain facts, exhibits, and testimony.*647  FINDINGS OF FACT.Some of the facts have been stipulated by the parties.  The stipulation of facts is incorporated herein by reference and adopted as part of our findings of fact.Armored Tank Corporation (N. Y.), hereinafter referred to as the New York corporation, was incorporated on July 25, 1939, under the laws of the State of New York.  Its authorized capital stock consisted of 100 shares of common stock, of which 30 shares were designated as class A and 70 shares as class B, each share having a par value of $ 50.  Although both classes of stock shared equally in the distribution of earnings and assets, only the class A stock enjoyed voting privileges. *59  The purposes of the New York corporation were to acquire a full sized working model of a high speed armored tank, developed by Walter Christy and herein called the Christy tank, and to exploit this or other tanks, principally through the contacts of Siegfried Bechhold, one of the corporation's organizers.  On July 31, 1939, the Christy tank was obtained by the New York corporation from William and Alfred Christ, partners of the Hempstead Welding Co., who were in possession of the tank by virtue of the foreclosure of a mechanic's lien.  In return therefor, the New York corporation gave its promissory note to cover the sum unpaid under the mechanic's lien, and, in addition, issued its stock to the nominees of the vendors as follows:Class AClass BNamesharessharesSiegfried Bechhold1050William Christ1017Marcus Christ40Alfred Christ03Total2470Marcus Christ, an attorney, received the remaining six shares of class A stock in payment for the legal services rendered in connection with the organization of the corporation.In December 1939 and January 1940 draftsmen were retained by the New York corporation, under contract, to prepare blueprints*60  and drawings of the Christy tank, with certain modifications.  At about the same time, a nonexclusive licensing agreement was entered into with Ateliers de Construction de Familleureux, a Belgian company, for the manufacture of this tank. Although the New York corporation received advance royalties of $ 10,000 thereunder, it does not appear that this agreement was further effectuated.*648  Subsequently, in June 1940, Siegfried Bechhold interested J. R. MacEnulty, president of Pressed Steel Car Co., hereinafter referred to as Pressed Steel, in undertaking the manufacture of armored tanks. Pressed Steel at this time was engaged mainly in the production of cars for railroads and mines.  Negotiations ensued between the representatives of the New York corporation and Pressed Steel, and on July 23, 1940, a contract was executed, to extend for an initial period of five years and renewable, under certain conditions, for an additional period of two years.  Under the terms of this agreement, the New York corporation granted Pressed Steel an exclusive license to use the former's rights with respect to the manufacture of armored tanks, subject to the nonexclusive license previously issued*61  to the Belgian company, and, in addition, the New York corporation agreed to furnish Pressed Steel with plans and drawings covering the former's tank design, technical advice, and, if requested, a skilled tank mechanic to be paid by Pressed Steel.  Pressed Steel, in return, agreed to pay the New York corporation certain specified sums for each order received from the United States Government or foreign governments for tanks of the New York corporation's design; and, as to orders received by Pressed Steel for tanks of other designs, the contract provided:5. It is understood and agreed that with respect to the completion of all orders received and accepted by the company [Pressed Steel] for tanks of a design other than that of Armored [New York corporation], Armored will be paid by the company, as compensation for technical advice, the sum of $ 750.00 per tank, such compensation not to be payable until the company receives payment of, or payments on account of, each such order.This contract was not assignable by the New York corporation, except with the written consent of Pressed Steel.Several months later, on October 25, 1940, Pressed Steel, through the aid of Siegfried Bechhold, *62  who had a separate employment contract with Pressed Steel, entered into an agreement with the British Purchasing Commission for the manufacture and delivery of 501 tanks of a design other than that of the New York corporation.  An advance of $ 500,000 was received by Pressed Steel under this agreement, and in November 1940 Pressed Steel made a part payment of $ 75,000 to the New York corporation under the terms of the July 23, 1940, contract.  This left approximately $ 300,000 which would become due to the New York corporation when the remaining payments were received by Pressed Steel from the British Purchasing Commission.In January 1941 certain changes were made in the capital stock structure of the New York corporation.  The number of shares of class A and of class B stock was increased to 3,000 and 7,000, respectively, and the par value of each share was reduced to $ 1.  The necessary book entries were made to reflect these changes, and the new *649  stock was distributed to the stockholders in the proportion of 50 shares of new stock for each share of old.  However, the voting rights continued to be vested exclusively in the class A stock, which, since October 1940, had *63  been held entirely by Siegfried Bechhold.In February 1941 the Christy tank itself was sold for $ 3,500, and, having no other corporate property in the state, the board of directors of the New York corporation, on August 18, 1941, decided to reorganize into a Delaware corporation in order to eliminate the payment of New York franchise taxes.  To accomplish this reorganization, the following steps were taken: On August 20, 1941, the Armored Tank Corporation, sometimes hereinafter called Delaware No. 1, was incorporated under the laws of the State of Delaware, with the same capital stock structure as that of the New York corporation, except that the number of shares of class A stock was reduced to 100 and the number of shares of class B stock was increased to 9,900.  The exclusive voting privileges of the class A stock remained unchanged.  On and between September 2 and 4, 1941, the New York corporation, having previously received the written consent of Pressed Steel to the assignment of the July 23, 1940, contract, assigned all its assets and liabilities to Delaware No. 1, and received, in return, all the capital stock of Delaware No. 1.  Thereupon, on September 11, 1941, the New York*64  corporation was dissolved, and its stockholders received the Delaware No. 1 stock in the following amounts:Shares ofShares ofStockholderclass Aclass BstockstockSiegfried Bechhold1006,400Daniel S. Sickles1,000Philip H. Steckler900Hamilton Allen600Harriet D. Steckler200Carolyn T. Allen200Marian B. Aubert200Edward L. Steckler100Clarence M. Wilson100Philip H. Steckler, Jr100Perkins & Co100Total1009,900The officers and directors of the New York corporation continued to serve in the same capacities for Delaware No. 1, namely: Siegfried Bechhold, president and director.Philip H. Steckler, vice president and director.Clarence M. Wilson, treasurer and director.Edward L. Steckler, secretary.Meanwhile, on September 4, 1941, Siegfried Bechhold received a letter from Pressed Steel, signed by MacEnulty, its president, and *650  addressed to the New York corporation (now Delaware No. 1), which stated that the July 23, 1940, contract was "cancelled" due to alleged misrepresentations by Bechhold, failure of performance, and refusal by the board of directors of Pressed Steel to approve the *65  contract.  Bechhold immediately requested MacEnulty and E. F. Reed, attorney for Pressed Steel, to retract this letter, which request was refused.  Subsequently, on September 7 or 8, Bechhold and Edward L. Steckler, who, in addition to serving as secretary of Delaware No. 1, was counsel for this company and for Bechhold, met with Lester Seelig, chairman of the board of directors of Pressed Steel, at his office in Chicago.  Seelig refused to interfere with the decision of his board on the matter, but indicated his willingness to attend a further meeting with the representatives of Delaware No. 1 in New York City later in the month.  Shortly thereafter, by letter dated September 10, 1941, Bechhold, as president of Delaware No. 1, formally advised Pressed Steel that his corporation had "no intention of acquiescing in this purported cancellation" by Pressed Steel of the July 23, 1940, contract.On September 25, 1941, a meeting was held at Seelig's apartment in New York City, attended by Seelig, MacEnulty, Reed, Bechhold, and Steckler.  At this meeting, the representatives of Pressed Steel offered to pay Delaware No. 1 approximately $ 300,000 to cancel the contract in dispute, which amount*66  represented the sum that would become due to Delaware No. 1 by reason of the British Purchasing Commission agreement.  Stickler replied, after conferring with Bechhold, that the exact amount which his company would accept in settlement of the contract would depend, in part, upon the computation of the taxes incident to the transaction, and he estimated that his company would require approximately a million and a half dollars.  Pressed Steel's representatives declined to consider such amount.  However, before the meeting was concluded, Reed suggested that Pressed Steel might buy all the stock of Delaware No. 1 from the latter's stockholders, as individuals, which procedure he believed would obviate the payment of taxes by Delaware No. 1 on the transaction.  Bechhold and Steckler indicated that they would consider this suggestion.Bechhold and Steckler thereupon contacted the other stockholders of Delaware No. 1, who decided that they would accept $ 50 per share, provided they could retain the name of their company and all its assets other than the contract in question.  The additional assets included an Aero tank design, a full sized model of a hook and release mechanism for releasing*67  a tank from an airplane, designs of other tanks and of flame throwers, and cash.A second meeting was thereafter held on October 3, 1941, again attended by Seelig, MacEnulty, Reed, Bechhold, and Steckler.  After *651  some negotiations, the representatives of Pressed Steel offered to pay $ 37.50 per share for all the stock of Delaware No. 1, subject to the condition requested by the stockholders, namely, that the transferred company should consist of nothing but the disputed contract.  This offer was transmitted to and accepted by the Delaware No. 1 stockholders within the next few days, and a tentative closing date of October 15, 1941, was established.In order to effectuate the above agreement, on October 14, the name of Delaware No. 1 was changed from Armored Tank Corporation to Illinois Armored Tank Co., and on the same date a new corporation, named Armored Tank Corporation and sometimes hereinafter called Delaware No. 2, was incorporated under the laws of the State of Delaware.  The latter company had the same capital stock structure as Illinois Armored Tank Co. By an instrument of assignment, dated October 15, 1941, Illinois Armored Tank Co. assigned all its assets, subject*68  to its liabilities, to Delaware No. 2, excepting only the Pressed Steel contract.  In return, Delaware No. 2 issued and delivered all its capital stock to Illinois Armored Tank Co., which stock was thereupon distributed proportionally to the latter's stockholders. These stockholders then transferred their stock in Illinois Armored Tank Co. to Pressed Steel, receiving checks therefor, dated October 15, 1941, in the following amounts:NameShares ofShares ofAmount receivedclass A stockclass B stockSiegfried Bechhold1006,400$ 243,750Clarence M. Wilson* 1,300* 48,750Philip H. Steckler90033,750Hamilton Allen60022,500Harriet D. Steckler2007,500Carolyn T. Allen2007,500Perkins & Co1003,750Philip H. Steckler, Jr1003,750Blanche B. Frank501,875Dorothy B. Steckler501,875Total1009,900375,000On and after October 15, 1941, Pressed Steel, or its nominees, were the sole stockholders *69  of Illinois Armored Tank Co., and new officers and directors were elected.  No payments were made thereafter by Pressed Steel to Illinois Armored Tank Co. under the July 23, 1940, contract.  On November 22, 1941, Illinois Armored Tank Co. was dissolved. No income tax, declared value excess profits tax, or excess profits tax returns for the fiscal year ended July 31, 1942, were filed by Illinois Armored Tank Co.In the course of the war years, Pressed Steel manufactured and delivered the following approximate number of tanks, all of a design other than that of the New York corporation: In 1941, 15 tanks; in *652  1942, 1,575 tanks; in 1943, 3,600 tanks; in 1944, 3,600 tanks; and in 1945, 10 or 12 tanks per day until the war ended.The individual petitioners herein reported in their Federal income tax returns for the calendar year 1941 the following amounts as costs of their stock in Illinois Armored Tank Co. and as gains from the transfer of that stock to Pressed Steel:PetitionerCostGainPhilip H. Steckler$ 9,150.00$ 24,600.00Siegfried Bechhold14,560.26229,189.74Hamilton Allen15,500.007,000.00Max Bechhold(*)    24,600.00*70  Respondent determined that the aggregate sum of $ 375,000 paid by Pressed Steel to the stockholders of Illinois Armored Tank Co. was includible in the gross incomes of the New York corporation (dissolved) and of Illinois Armored Tank Co. (dissolved), and that each of these corporations was liable for certain deficiencies in taxes and penalties.  Respondent further determined that the individual petitioners herein were liable for these deficiencies as transferees of the New York corporation (dissolved) or of Illinois Armored Tank Co. (dissolved), to the extent of the respective amounts received by the individual petitioners directly from Pressed Steel.OPINION.The respondent has determined that a settlement agreement was made on or about October 15, 1941, by the Illinois Armored Tank Co. with Pressed Steel to settle and liquidate the disputed contract of July 23, 1940, so that the payments by Pressed Steel Co. resulted in income to Illinois Armored Tank Co. upon which it was liable for income and other taxes and penalties.  Under this theory, the respondent has determined that the individual petitioners in Docket Nos. 11916, 11919, 11920, and 11927, the former stockholders of Illinois*71  Armored Tank Co., are liable as transferees for the taxes and penalties due from the corporation.The petitioners contend that Pressed Steel purchased their stock in Illinois Armored Tank Co. in October 1941, so that payments aggregating $ 375,000 by Pressed Steel were payments made in purchase of stock. Petitioners assert that the payments can not be construed to be a payment in liquidation and settlement of the contract, and that, therefore, respondent erred in determining that Illinois Armored Tank Co. received payments aggregating $ 375,000, upon which it became liable for certain taxes.  Under the theory of the petitioners, the individual stockholders were not transferees and have no liability as transferees.*653  The question in this proceeding is whether or not, on the facts presented, there were sales of stock in Illinois Armored Tank Co. by its stockholders, and purchases of the stock by Pressed Steel, as petitioners contend; or whether there was collection by Illinois Armored Tank Co. of a claim against Pressed Steel.The evidence shows clearly that, although negotiations looking toward the settlement of the disputed royalty contract of July 23, 1940, were commenced*72  by representatives of Armored Tank Corporation (the former name of Illinois Armored Tank Co.), these negotiations failed to result in any agreement with Pressed Steel Car Co. because of the amount of money which Armored Tank Corporation demanded as adequate payment in settlement of the contract.  The negotiations between the representatives of Armored Tank Corporation and the representatives of Pressed Steel Car Co. thus ended without any agreement between these corporations, which distinguishes this proceeding from Court , relied upon by respondent.  The evidence shows clearly that the negotiations which then ensued were solely between Pressed Steel Car Co. and the individual stockholders of Armored Tank, or their representatives.  In these subsequent negotiations, the bargaining was limited almost exclusively to the price per share which Pressed Steel would pay to the stockholders for the stock of Armored Tank. The agreement which was ultimately concluded was one for the purchase of the stock of Armored Tank by Pressed Steel from the stockholders at a price of $ 37.50 per share. The evidence clearly shows*73  that Armored Tank Corporation (Illinois Armored Tank Co.), was not a party to that agreement.Accordingly, no sound basis exists for taxing to Illinois Armored Tank Co. the aggregate amounts of the separate payments made by Pressed Steel to the stockholders for the transfer of their shares of stock in that corporation.  See .Decisions will be entered for the petitioners.  Footnotes*. Proceedings of the following petitioners are consolidated herewith: Philip H. Steckler, Transferee; Siegfried Bechhold, Transferee; Hamilton Allen, Transferee; Max Bechhold, Transferee; Hamilton Allen, Transferee; Philip H. Steckler, Transferee; Siegfried Bechhold, Transferee; and Max Bechhold, Transferee.↩*. Max Bechhold was the beneficial owner of 1,200 of the 1,300 shares held in the name of Clarence M. Wilson, and a check from Pressed Steel in the amount of $ 45,000 was endorsed by Wilson to Max Bechhold.↩*. The record does not disclose the cost reported by Max Bechhold.↩