Court Opinion

ID: 4482286
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:24.992803+00
Date Added: 2024-06-11T14:54:01.639556
License: Public Domain

TtsoN, J. dissenting: I can not agree with the holding of the majority opinion on the first issue to the effect that the sale of the land involved was made by the corporation rather than by its stockholders, as individuals. In my view, the evidence establishes that the 3 Howells, stockholders then owning 950 of the 1,000 shares of the Turpentine Co., informally agreed (1) not to permit the company to sell the land or to make any commitments to do so; (2) that the company would be liquidated and the assets distributed in kind; and (3) that thereafter they would sell and convey the land as individuals to National Co., as was done. The agreements stated in (1) and (2) and the fact that they were made in August 1940 are established by D. F. Howell’s' uncontradicted testimony, although the majority finds as a fact that on September 6,1940, “the three Howells informally decided not to sell the property as a corporation” and says in its opinion, “if there was any informal agreement to liquidate and that the corporation should not sell, it was not prior to September 6 * * * after the purchase of Long’s stock by the Howells.” The opinion evidently regards the dates upon which the agreements stated in (1) and (2) were made as being important, upon the idea that the joining in the agreements by Long, the other stockholder holding a small amount of the stock prior to September 6, was necessary to render these agreements operative. It is obvious that such necessity did not exist, since the Howells, owning 950 shares of the outstanding 1,000 shares of the company’s stock could, in August and thereafter, as controlling stockholders, prevent the company from selling the land or making any commitments to sell same and could also have the company liquidated. However, if Long’s joining in these agreements was necessary to make them operative and it could be said therefore that the agreements were not made until September 6,1940, such agreements would constitute factors to be considered and given equal weight as if they were made in August; since, in any event, they were made prior to the adoption, on September 6, 1940, of the resolution to dissolve, as is shown in the majority finding as a fact that Long’s 50 shares of stock were purchased by 2 of the Howells on September 6, 1940, and prior to the adoption on that date of the resolution to dissolve. The questions asked D. F. Howell and his answers establishing the facts that the'three Howells agreed in August 1940 (1) not tq permit the company to sell the land or make any commitments to do so and (2) that the company would be liquidated are as follows: , Q. Did you make any oral agreement among yourselves after the Rayonier, Inc. option was not exercised as to what you would do as to the sale of these lands? A. Yes, we did. Q. When did you make that oral understanding or agreement? A. We made it soon, some time during the month of August, soon after the Rayonier option expired. * * * ******* Q. Then some time after that extension expired, you made an oral agreement among yourselves, as the only stockholders and officers and directors of this corporation, as to how you would operate the land ? A. We definitely determined to liquidate the corporation. ******* Q. Did you and your sons at that time determine.whether as officers and directors of the corporation, you would have the corporation make any further options of sales of this land? A. Yes, we did. Q. What did you determine? A. We determined definitely that we would not permit the corporation to make any commitments to sell this land. . Q. From that time on? A. Yes. Cross Examination : Q. When did you first decide among you and your sons to liquidate the Howell Turpentine Company? A. Back in August, right after the option expired with the Rayonier. We definitely decided we would not sell that property as a corporation. We discussed it, and decided to liquidate the company. Q. Was that at a formal meeting of the stockholders? A. No. There wasn’t a meeting called for that purpose. We discussed it. The stockholders of the company, my two sons and myself. When we elected to do anything like that, we decided on it. I would tell them and we would go ahead and do it. Having disposed of the treatment of the informal agreements stated in (1) and (2) above, I will now consider the informal agreement stated in (3) above, i.e., that after distribution in liquidation the Howells would sell and convey the lands to National Co. as individuals. I think the evidence establishes that the informal agreement to sell was made by the Howell stockholders, as individuals, either prior to August 25, 1940, or, at least, not later than on that date. As to the informal agreement to sell, the majority finds as a fact that “The sale of the property, the price ‘and matters of that kind’ were substantially agreed upon on August 25 * * *.” While this finding that the informal agreement to sell was made on August 25 is made on the basis of the testimony of the attorney who represented National in the conferences and who was a witness for the respondent, it fails to make any finding from that portion of the testimony of the same witness which shows who the parties agreeing to sell were. From this portion of that witness’ testimony it is plain that there was not only an informal agreement on August 25 to sell the land, as found by the majority, but also that it was definitely understood that the land would be sold to National Co. by the three Howell stockholders as individuals. The witness not only denies that he participated in any negotiations which contemplated a sale by the corporation, but his statements show also that he understood that the Howells had determined even prior to August 25 that the corporation would be liquidated, in this latter respect corroborating the testimony of D. F. Howell. The portion of the attorney’s testimony referred to is as follows: Q. Do you recall when you were first called upon to do any work in connection with the sale of the properties which had theretofore been owned by the Howell Turpentine Company? A. My time sheet shows that the first conference in connection with that matter was held in my office on August 25,1940. Q. Do you recall what happened at that conference? A. There was present, according to my time sheet, at that conference, Mr. Howell, Mr. Milam, Mr. Kipnis, president of the company, Mr. Wesley * * * and others. * * * I don’t remember specifically what occurred at that conference other than a general discussion with respect to the sale of the property. Q. Do you know whether or not it was agreed among the parties at that time that the sale of the properties would take place? A. I think it was substantially agreed upon at that time. There was another conference on the next day, I believe, but I think it was substantially agreed at that time as to price and matters of that kind. Q. Were you then asked to draw papers with respect to putting the deal through? A. Yes sir. Q. Do you recall what papers you were asked to draw at that time? A. No, I don’t. Mr. Milam’s office, * * * drew some of the papers, * * * I don't recall which we drew. Q. You had a part in drawing the contract of sale, did you not? A. I either drew the contract or, of course, examined the contract. ******* Q. After the examination of this contract, can you state whether or not you assisted in the drafting of it? A. Yes, I did. Q. Do you know when you started that work? A. This conference was held on the 25th. We started work on the contracts. There was a contract, and also a turpentine lease and a grazing lease. We started work on the 25th after that conference.' That work went along through the 26th, 27th, and back and forth, all papers, until the contract was signed, finally signed, I think, on September 6th. Cross-Examination : Q. Throughout these negotiations, was it not definitely understood that the individuals were selling the property to your client? A. It was understood that the title was in the Howell Turpentine Company, and that a liquidation was in process, and the contracts were made with the individuals, on the understanding that the liquidation would be completed by the time of the actual conveyance of the property. Q. You had no negotiations with the corporation as such? A. No. The understanding was that they wanted to sell as individuals and were liquidating the corporation, and the entire conferences were with that understanding, as stated in the contract. As above stated, I think the testimony of the attorney establishes the fact that the informal agreement to sell to National Co. was made by the Howell stockholders, as individuals, and on or before August 25,1940. The majority opinion refers to Howell’s telegram of September 4 and his letter to the auditor in support of the conclusion that any agreement to liquidate and then sell the land as distributees could not have been made prior to September 3. This telegram and letter certainly do not prove that the parties had not previously agreed upon the plan of sale testified to by the attorney, nor do they show that the plan was changed. They show only that Kipnis, president of National Co., stated he was willing to purchase the stock instead of the land if it would accommodate the Howells in tax saving, and that the Howells were contemplating a change in the original understanding, which could of course have been made by mutual agreement of the parties. But the contemplated change was not made, the new idea was abandoned, and the original plan was adhered to, as shown by the execution of the written contract signed by the Howells on September 6, in which the Howells, as individuals, agreed to sell the land. Whatever inconsistency may be found in this correspondence does not weaken the definite and positive testimony of the attorney and Howell. In view of the foregoing, I think there is no basis for the conclusion that in carrying on the negotiations D. F. Howell was acting for the corporation so that the corporation must be regarded as having made the sale which was consummated. The facts that Howell’s two sons were not present at the conferences on August 25 and that Long was not represented in any of the negotiations are immaterial. D. F. Howell was acting for his sons as well as himself. Long had left the company and his stock was pledged to it for either the purchase price of the stock or money owed, and the Howells were in a position to completely control the corporation’s action in dissolving without the aid of Long’s small amount of stock. The situation, established by the evidence, and being as above set out, I think that the sale of the land made in pursuance of the informal agreement (afterwards reduced to writing on September 6) of the stockholders to sell, as individuals, was in reality made by them as such individuals and that the respondent erred in taxing the gain to the Turpentine Co. Cf. George T. Williams, 3 T. C. 1002; Falcon Co., 41 B. T. A. 1128, and authorities cited therein; affd., 127 Fed. (2d) 277; George S. Towne et al., Executors, 35 B. T. A. 141; Conservative Gas Co., 30 B. T. A. 552; and Fruit Belt Telephone Co., 22 B. T. A. 440. The majority opinion distinguishes Commissioner v. Falcon Co., 127 Fed. (2d) 277, in which the material facts are similar to those here, except that there the stockholders entered into a contract of sale after they had received the leases in liquidation, whereas here the stockholders entered into the agreement to sell prior to receiving the land in distribution. I do not believe the decision in that case requires, for a like result to be reached in another case similar in all other material facts to those in that case, the existence of the fact that the stockholders negotiated for sales of their interests after the distribution of those interests in liquidation. I can see no reason why the stockholders in a corporation can not negotiate and agree, as individuals, before liquidation, to sell, as individuals, the property of the corporation which they expect to receive in a liquidation that they have planned would be made by the corporation. The elementary principle applying is thus stated in 66 C. J. 511, ¶ 40: “* * * a contract of sale may be valid and enforceable if made in good faith by the vendor notwithstanding the subject matter is realty to which the vendor, at the time of entering the contract, has no title, or a less interest than he agrees to convey, at least where he is so situated as to be able to convey at the proper time * * *,” citing numerous authorities, among others, Werner v. Zintsmaster, 61 Fed. (2d) 298; Luette v. Bank of Italy Nat. Trust & Savings Assn., 42 Fed. (2d) 9; certiorari denied, 282 U. S. 884; Thomas J. Baird, Inv. Co. v. Harris, 209 Fed. 291 (C. C. A.); Gray v. Smith, 76 Fed. 525; affd., 83 Fed. 824. See also 27 R. C. L. 321, ¶ 16, citing, among other cases, Ryan v. United States, 136 U. S. 68. Here, the Howells were “so situated as to be able to convey” to themselves the land in question at any time through liquidation of the Turpentine Co. and distribution of its assets. What we said in George T. Williams, 3 T. C. 1002, is apposite here, to wit: * * * As a pure proposition of law, we think it can not be said that a stockholder can in no circumstances contract as an individual to sell property which he expects to acquire from the corporation. Suppose, for example, that one of a number of stockholders independently contracts to sell the share of the corporate assets which he expects to receive the following month as a distribution in liquidation. Is there any reason why he should be held to have acted as agent of the corporation in so contracting? Any agency relationship must find its basis in some fact other than a mere contract to sell after-acquired assets. See Motter v. Patterson, 68 Fed. (2d) 252. The majority opinion states that “We conclude, after examination of the various cases touching this question, that the • Triffett and MacQueen cases parallel the instant case, are controlling in principle and on fact * * * .” I do not so construe those cases. R. G. Trippett, 41 B. T. A. 1254; affd., 118 Fed. (2d) 764, one of the two cases referred to, is distinguishable on its facts and is not contra to my conclusion. There the stockholders in the corporation involved conducted the negotiations and agreed, as individuals, to sell the assets (an oil and gas lease) then owned by the corporation, to another, stating at the time that they wished to dissolve the corporation. In about two weeks after the agreement to sell, the corporation transferred the lease to the stockholders without the surrender or cancellation of their stock and without any other consideration, and they, in turn, in accordance with their prior agreement as individuals, conveyed the lease, on the same day, to the purchaser. We cited S. A. MacQueen Co., 26 B. T. A. 1337; affd., 67 Fed. (2d) 857, as the case “which we think comes nearest the facts of the instant case,” and held that the corporation made the sale, saying: * * * In the MacQueen case the purported consideration passing from S. A. MacQueen, president, to the corporation was $85,000. As a matter of fact no consideration at all passed from MaeQueen to the corporation, just as here no consideration passed from Meadows to Texota. And, just as we held in the MaeQueen case that the corporation made the sale to the purchaser, notwithstanding the intermediate conveyance by the corporation to MaeQueen, its president, so we think we must hold in the instant case that Texota made the sale to Eancho, notwithstanding the intermediate conveyance by Texota to Meadows, its president. As I interpret the opinion of the Board in the Trippett case, the sale was held to be the sale of the corporation by reason of the fact that the intermediate step by which the corporation’s property passed to the stockholders, i. e., the conveyance of the lease by the corporation to one of its stockholders, was ineffective and was not a sale (thus leaving the ownership of the lease in the corporation), for the reason that the corporation received no consideration for the conveyance and that the assignment of the lease by the stockholder, on the same day, to the purchaser must therefore be treated as having been made by him on behalf of the corporation. This intermediate step is characterized in the opinion as a “purported sale.” In the present case the intermediate step by which the Howell stockholders acquired the land was not a sale, either in form or substance, and did not purport to be so. The land was acquired by the Howell stockholders in a complete liquidation of the corporation authorized by proper corporate resolution adopted prior to the conveyance of the land to them, and they acquired the land in consideration of and in exchange for the surrender and cancellation of their stock. They thus acquired the land by reason of their status as stockholders and for a consideration, and not as purchasers of corporate property without consideration, as was true in the Trippett case. Having so acquired the land in their own right and having theretofore contracted to sell the land under an informal agreement requiring them to convey only after they had received the land in liquidation, there is no basis for applying the theory of the Trippett case to support a holding that they made the sale and conveyance for and on behalf of the corporation. S. A. MacQueen Co., supra, the other of the two cases referred to, is also distinguishable on its facts and not contra to my conclusion. There, the corporation taxpayer, through formal action of its stockholders and board of directors, on February 1, 1927, authorized the sale of real estate owned by it to its president, Stephen A. MacQueen, for $85,000. On February 2, 1927, MacQueen agreed to sell the real estate to another party for $150,000. On February 11, 1927, MacQueen executed a declaration of trust in the preamble of which the two transactions just mentioned were set forth, and in the trust instrument MacQueen agreed, in conformity with an understanding subsisting between the stockholders at and prior to the adoption of the formal action of the corporation on February 1, 1927, that when the two transactions were consummated the excess money received by him from the sale to the other party would be held for the benefit of the three owners of the common stock of the corporation taxpayer, including himself, and that the excess would be distributed by him to those stockholders in proportion to their respective stock holdings. On March 1, 1927, the corporation transferred the property to MacQueen, who thereupon paid the $85,000 to the corporation and, on the same day, conveyed the property to the other party, as purchaser, for $150,000. MacQueen thereafter paid to the three beneficiaries of his declaration of trust the excess of $65,000. The question presented was whether the sale was made by the corporation and the gain realized therefrom consequently taxable to it, or whether the corporation taxpayer sold the property to MacQueen in good faith in an arm’s length transaction and he, in turn, sold the property to another. We held that the sale was made by the corporation, since the sale to MacQueen by the corporation did not effect any change in the beneficial ownership of the assets involved because, through the trust agreement executed by MacQueen in favor of all three of the stockholders, and the carrying out of that agreement, MacQueen was acting as the trustee for all the stockholders, and each stockholder received the same amount from MacQueen, as their trustee, of the proceeds of the final sale as he would have received had the final sale been made by the corporation and the proceeds distributed to its stockholders. As was said in R. G. Trippett, supra, there was no consideration passing from MacQueen to the corporation for its transfer to him of the corporation’s property, and the distinction we have made just above as to the Trippett case applies equally to the MacQueen case. The MacQueen case is also otherwise distinguishable. Had the facts here shown only that Howell, as representing the other stockholders, had conducted the negotiations and made the informal agreement to sell without any specific showing or understanding as to the capacity in which the stockholders were acting, it might well be said that the agreement and the sale resulting therefrom were those of the corporation. This seems to be the rationale upon which, in cases involving a question similar to that presented here, the courts have decided that sales were those of the corporation, but the facts here do not so show. On the contrary, they show that the negotiations were conducted and the informal agreement to sell was made by the Howell stockholders acting in their individual capacities. Even if the method by which the sale was effectuated was adopted through a motive on the part of the Howell stockholders to minimize the taxes which would be finally borne .by them had the corporation sold the land and then distributed the proceeds in liquidation, they would be exercising a right given them by the statutes, since there is nothing in the whole record showing “fraud, sham, or subterfuge, or use of mere form to hide the substance of the real transaction.” Commissioner v. Falcon Co., 127 Fed. (2d) 277, at page 278. See also Gregory v. Helvering, 293 U. S. 465; Maurer Steel Barrel Co. v. Commissioner, 144 Fed. (2d) 282. I respectfully dissent from the holding of the majority opinion on the first issue. Arundell, J., agrees with this dissent.