Court Opinion

ID: 3840706
Source: CourtListenerOpinion
Date Created: 2016-07-06 08:09:53.787491+00
Date Added: 2024-06-11T13:01:31.212317
License: Public Domain

Petition for rehearing denied May 11, 1937                        ON PETITION FOR REHEARING                              (68 P.2d 474)
The petition for a rehearing and its accompanying brief, besides insisting that our decision erred when it refused to deem the dividend received by the plaintiff in 1931 from the Oregon Land and Livestock Company a liquidating dividend, calls attention to the fact that we erroneously stated that the date of that corporation's sale of some land to the Pelican Bay Lumber Company was October 1, 1931. The correct date, as the respondent points out, is October 1, 1928. While we made this error in reporting our decision, we had the correct period of time in mind in our deliberations, as is evident from other parts of the decision. The respondent contends that we erred when we stated that the Oregon Land and Livestock Company "was organized for the purpose of purchasing land, converting it into cash at an enhanced price and distributing the proceeds to the stockholders". He states: "The corporation purchased lands, protected them, leased them for profit and, as opportunity arose, sold them. The fair assumption from this course of business is that the articles of incorporation authorized the corporation to purchase and sell lands and lease them for profit." Our decision stated that the articles of incorporation were not before us, and in making the above-quoted statement we did not intend to indicate that the articles of incorporation limited the concern's activities to a single purchase of land. And we do not believe that the quoted language indicates that a single purchase only was permissible. Certainly, we did not so believe when we wrote it. We did not mention the leasing of the land because the complaint averred that *Page 322 
the income from that source was "inconsequential." Apart from these criticisms of our statement of the record, the plaintiff finds no fault with it, although he disagrees with the inferences which we draw from the facts.
In support of his contention that the above-mentioned dividend was a liquidating dividend, respondent cites Lynch v. Turrish,247 U.S. 221 (62 L.Ed. 1087, 38 S.Ct. 537); Commissioner ofInternal Revenue v. Straub, 76 F.2d 388; Gossett v.Commissioner of Internal Revenue, 59 F.2d 365; Canady,Inc., v. Commissioner of Internal Revenue, 76 F.2d 278;McNaghten v. United States, 17 F. Supp. 509; Tootle v.Commissioner of Internal Revenue, 58 F.2d 576.
Before taking further note of these decisions, we shall mention briefly two facts which we did not set forth in our previous decision because we assumed that they were of subordinate importance; but we shall now mention them for the sake of completeness. One of these is the fact to which we referred in a preceding paragraph; that is, that the Oregon Land and Livestock Company derived rent from its land after, as well as before, the time when the alleged liquidation commenced. The complaint states that some of the land was adapted for grazing purposes and that the corporation "collected annually small and inconsequential sums for grazing privileges". The other fact is the circumstance that on June 28, 1929, representatives of the Oregon Land and Livestock Company and representatives of the Weyerhaeuser Timber Company procured the formation of a third corporation entitled the Bly Timber Company. After the latter had been organized the Oregon Land and Livestock Company conveyed to it the timberlands which our previous decision *Page 323 
states were sold to the Ewauna Box Company. At the same time the Weyerhaeuser Timber Company conveyed to the new company extensive timberlands adjacent to and intermingling with the tract just mentioned. Of the total lands conveyed to the new corporation 23.290896 per cent came from the Weyerhaeuser Timber Company and 76.709104 per cent from the Oregon Land and Livestock Company. Each received stock in the new corporation in proportion to the lands conveyed. After this had been done the Bly Timber Company entered into a contract with the Ewauna Box Company at a price which yielded to the Oregon Land and Livestock Company a larger sum than its previous contract. The purpose of creating this new corporation and of executing the new contract was to avoid the inconvenience and misunderstandings which the parties believed would otherwise arise.
We shall now review the six decisions above cited. Canady v.Commissioner concerns a dividend which the taxpayer received from a corporation entitled Dealers Finance Company, of which he was a stockholder. The decision refers to the facts as "complicated" and states that their complicated nature made the case "one wholly of its own kind." The following, quoted from the decision, states the pertinent facts:
"In March, 1928, it disposed of all of its assets with which it had carried on that business and never thereafter engaged in that business. * * * From that time until it made the distributions here in question, it carried on no business but limited its activities to the conversion into cash of some of the securities received in exchange for its former assets and to the retirement of its Class B stock. Then came December 26, 1928, with the resolutions and distributions described above. Thereafter the corporation was dead so far as its old business was concerned, a mere empty shell without *Page 324 
shareholders or property. * * * Later, new stockholders refilled the shell with different property. The corporation then went into a new and totally different life. * * * The facts here show that the corporation was in the course of liquidation at the time of the distribution and that it completed its liquidation on the same day. The distribution of the $500,509.69 was a step in that process."
The court held that the distribution was a liquidating dividend. While the decision apparently does not state all of the facts, it will be observed that the liquidation stripped the corporation of all of its property, and each shareholder surrendered his certificate of stock upon receipt of his part of the distribution.
In Tootle v. Commissioner, supra, the disputed tax concerned a dividend declared by the Aunt Jemima Mills Company. Prior to November 24, 1925, the directors of that corporation received an offer from the Quaker Oats Company to purchase all of its assets except cash on hand ($146,330.19) and a claim against the federal government for a tax refund, at a price which, with the two items just mentioned, would yield to the stockholders at least $80 per share. The directors called a meeting of the stockholders and the sale was authorized. All of the assets, with the exception of the two items above mentioned, were then sold to the Quaker Oats Company for $2,000,000 cash, $1,202,077.28 upon delivery of assignments of trademarks, etc., and $1,000,000 within 15 days after delivery of deeds to the real property. The terms of the sale required the Aunt Jemima Company to liquidate, distribute its assets among its stockholders, and then either dissolve or assign its charter to the Quaker Oats Company. Next, the directors of the Aunt Jemima Company passed a resolution which, after resolving in favor of liquidating *Page 325 
the business as soon as practicable and distributing the assets to the stockholders, called a meeting of the stockholders for January 15, 1926, to determine what should be done. On the same day the directors declared a dividend of $25 per share of common stock. The resolution which declared this dividend, after reciting the terms of sale to the Quaker Oats Company, stated that it was payable out of surplus, and that it was part payment upon the expected total of $80 per share. It stated that the dividend was payable only upon presentation of stock certificates and requested all stockholders to forward their certificates to the company or to a St. Louis bank for endorsement of this and future payments. At their meeting on January 25, 1926, the stockholders authorized the directors to distribute the corporation's assets and then dissolve it. The court held that the $25 dividend was a liquidating dividend, and therefore not a part of the taxpayer's taxable income. It stated:
"The dividend was clearly intended by the directors to be a partial liquidation. * * * Here was a corporation which had sold its entire assets and business, and, as securing such results to the purchaser, had agreed to dissolve within a year. It had no future business except settlement of its tax refund claim, dissolution, and distribution. All of this had been sanctioned by the stockholders. * * * The only business for which it existed had entirely ceased, and it was obligated not to engage therein further."
In Commissioner v. Straub, supra, which is partially reviewed in our previous decision, the facts as stated by the court were, in part:
"The evidence, in our opinion, establishes that the distribution of 1928 was made in partial liquidation of the corporation's capital stock. This is true notwithstanding the fact that the method was that of reducing the face value of each outstanding share and not that of reducing the number of outstanding shares." *Page 326 
It will thus be seen that some form of corporate action was taken which reduced "the face value of each outstanding share" although the entire business was not immediately discontinued.
In Gossett v. Commissioner, supra, the controversy concerned a dividend which the taxpayer had received from a corporation entitled Brogan Mills. The difficulty had its inception on September 10, 1925, when the board of directors passed a resolution calling for a shareholders' meeting for October 13, 1925, to consider offers for all of the assets of their corporation, and also for the purpose of considering a resolution authorizing liquidation and dissolution. At the shareholders' meeting resolutions were passed authorizing the sale of the mills and dissolution upon sale. November 2, 1925, the sale was effected. December 15, 1925, the directors voted a dividend of 50 per cent which was paid out of cash received as part of the purchase price. On January 2, 1926, a "liquidating dividend" was declared and the directors advised the stockholders to surrender their certificates to the Hanover National Bank which was in charge of liquidation. December 7, 1927, a resolution of dissolution was adopted and was certified to the proper public official. The court held that the dividend of December 15, 1925 (50 per cent) was a liquidating dividend. In so holding, it stressed the importance of the fact that the commissioner of taxes had so held and pointed out that when the dividend was declared "the corporation was not a going concern".
McNaghten v. United States, supra, is a decision by the court of claims concerning a tax refund. The tax had been imposed upon a sum received by the taxpayers from trustees of a testamentary trust who held *Page 327 
69,168 shares of the capital stock of a corporation entitled Holmby Corporation. This concern had been organized by one Arthur Letts whose will created the trust just mentioned. According to the statement of facts preceding the decision, "shortly after the death of Arthur Letts, his heirs agreed among themselves that Holmby Corporation should be liquidated and its assets distributed to its stockholders as soon as the same could be done without sacrifice". The court took liquidation for granted, and held:
"The amounts received by these plaintiffs in 1925-1926 were not taxable for the reason that they were liquidating distributions by the Holmby Corporation to the trust in respect to that corporation's stock."
Lynch v. Turrish, supra, is reviewed in our previous decision. We amplify the facts there stated with the following. Before the taxpayer received the dividend which he claimed was a liquidating one, he and all of his fellow-stockholders had given to the prospective purchaser options upon their stock, but the purchaser preferred to buy the assets of the corporation rather than the stock and offered to pay for them the total of all of the options. Then the following occurred:
"The stockholders by resolution authorized this sale, and, pursuant to this and a resolution of the directors, the Payette Company transferred to the new company all of its assets, property, and franchises, and upon the completion of the transaction found itself with no assets or property, except cash to the amount of double the par value of its stock which had been paid to it by the new company. * * * The cash was distributed to the stockholders on surrender of their certificates of stock, and the company went out of business." *Page 328 
Concerning these decisions, the plaintiff states:
"In each of the cases cited the facts were strikingly similar to, if not identical with, the facts in the instant case bearing upon the question of the character of the distributions."
We shall now state what we deem to be the differences between the instant case and those upon which the plaintiff relies. In the Aunt Jemima case the transactions which indicated liquidation may be summarized as follows: (1) A call for a meeting of the stockholders to consider an offer from the Quaker Oats Company for the purchase of virtually all of the assets of the corporation; (2) a resolution by the stockholders authorizing acceptance of the offer; (3) a sale on terms which gave the purchaser the right to use the vendor corporation's name and required the vendor corporation to liquidate and either terminate its corporate existence or, at the option of the purchaser, transfer the corporate charter to the latter; (4) a resolution by the directors favoring dissolution after distribution of all assets and calling a stockholders' meeting to authorize this course; (5) a resolution by the stockholders to that effect; (6) payment of the alleged liquidating dividend only on condition that the stockholder surrender his stock certificate for eventual cancellation; and (7) cessation of business of the Aunt Jemima Company, pursuant to its contract to do so.
The transactions in the Brogan Mills case were as follows: (1) A resolution by the board of directors calling a meeting of the stockholders to consider a sale of all of the assets of the corporation, liquidation and dissolution; (2) a resolution by the stockholders authorizing that course; (3) the sale; (4) the mills ceased to be a going concern; and (5) distribution of *Page 329 
the alleged liquidating dividend pursuant to a resolution of the directors which advised the stockholders to surrender their certificates of stock for eventual cancellation. In this case the liquidating corporation actually appointed a liquidating agent — the Hanover National Bank.
In Lynch v. Turrish, supra, the transactions were: (1) An option by each stockholder to the purchaser upon his shares of stock; (2) a counter-proposal by the purchaser to purchase all of the assets at a price equivalent to the total of all of the options; (3) a resolution by the stockholders authorizing acceptance of the counter-proposal; (4) the sale; (5) distribution to the stockholders of the sums received by the buyer upon surrender of their certificates of stock; and (6) cessation of all activities by the corporation. In the other three decisions the facts are not sufficiently stated to make possible an itemized summary, but in Canady v. Commissioner it appears that a resolution had been adopted authorizing a sale and that after the sale had been consummated the corporation was "dead so far as its old business was concerned, a mere empty shell without shareholders or property". In Commissioner v.Straub the course of liquidation included "reducing the face value of each outstanding share". And in McNaghten v. UnitedStates the fact of liquidation was taken for granted.
Now let us compare the facts before us with those summarized in the preceding paragraphs. The complaint before us does not allege that either the stockholders or the directors at any meeting voted in favor of liquidation and dissolution; nor does it aver that either group adopted a resolution in favor of liquidation and dissolution. It is true that the complaint alleges *Page 330 
that "long prior to the 31st day of December, 1929, by common consent of all of its stockholders and directors, it had been agreed that said corporation should engage in no business except such as was incidental to the protection of its properties and the sale and disposal thereof, * * * and that whenever said assets should be completely disposed of said corporation should be dissolved". But, as was said in Vawter v. Rogue River ValleyCan. Co., 124 Or. 94, (257 P. 23, 262 P. 851), "as a general rule, a corporation can act only through its board of directors at a regularly called meeting. The corporation ordinarily speaks through its records." From Fletcher, Cyclopedia Corporations (Perm. Ed.), § 1996, we quote:
"The corporation is a body of individuals united as a single separate entity. Therefore, the corporate powers, when vested in the stockholders or members, are vested in them collectively, as a body, and not as individuals. They have no power to act as or for the corporation except at a corporate meeting called and conducted according to law. Action by the stockholders or members individually, and not at a corporate meeting, even though a majority may concur, and even though their consent be expressed in a writing signed by them, is not the action of the corporation, and is void."
Therefore, before the agreement mentioned in the complaint could amount to corporate action, a corporate meeting was necessary, accompanied with the adoption of a resolution authorizing liquidation and dissolution. We do not distrust the word of the stockholder who verified the complaint, but an issue of liquidation, when it affects the state's right to tax, ought not be dependent upon the oath of a stockholder. So far as the complaint discloses, the corporate records make no mention whatever of liquidation or dissolution, *Page 331 
but are the same as the records of any going concern. All of the shares of stock are still in the hands of the shareholders and no endorsements of any kind have been made thereon. The capitalization has not been altered. But the surplus account, which on December 31, 1929, was $496,949.12, amounted to $1,792,477.57 in 1931, due to increase in the value of the corporation's assets. Liquidation in that period proceeded in inverse order. As stated in our previous decision, the corporation, during the period of alleged liquidation, conducted its affairs in the same manner as it had always done, except that it purchased no new large tracts of land. It, however, continued to purchase "small intermingling tracts of land". In Lynch v.Turrish, supra, and Tootle v. Commissioner, supra, as well as in others of the aforementioned cases where the corporation was engaged in some manufacturing venture, the period of dissolution was begun, not only by the adoption of a resolution authorizing it but also by a cessation of the corporation's regular activities. In the present instance, no cessation took place except discontinuance of the purchase of large tracts of land; all other operations continued as before. Even a subsidiary corporation (Bly Timber Company) was organized. The mere fact that no further large tracts were purchased and that receipts were distributed to the stockholders does not necessarily indicate liquidation. The corporation still had a very large surplus. Unlike the Aunt Jemima Company, the Brogan Mills Company, etc., the Oregon Land and Livestock Company, at the very outset, intended to sell its capital assets and thereby make its profits. It had no other means of earning profits. Hence, when it was distributing the proceeds of these sales it was doing the *Page 332 
very thing which it was contemplated, upon organization, it should do. Distributing the proceeds was not necessarily evidence of liquidation.
For the above and other reasons stated in our previous decision, we believe that substantial distinctions exist between the facts of this case and the others upon which the plaintiff relies. We believe that the recipient of a dividend who claims that it came from a corporation in the course of liquidation ought to be required to point to a corporate record inaugurating liquidation, or to show that the corporation substituted for the course of business previously pursued one which will deprive it of all its assets and stockholders. Finding neither in this case, we are satisfied that our decision did not err, and, therefore, the petition for a rehearing must be denied.
BEAN, C.J., and BAILEY, KELLY and RAND JJ., concur.
CAMPBELL and BELT, JJ., did not participate. *Page 333