Before PHILLIPS, BRATTON, and HUXMAN, Circuit Judges.
The question presented is whether gain from the sale of certain properties was attributable to a corporation or to its former stockholders.
Section 22 of the Internal Revenue Code, 26 U.S.C.A. Int. Rev. Code, § 22, in material part, defines gross income to include gains, profits, and income derived from trades, businesses, commerce, or sales, or dealings in real or personal property, growing out of the ownership and use of such property; also from the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever; section 111, 26 U.S.C.A. Int. Rev. Code, § 111, in material part, concerns itself with the method of computing gain from the sale or other disposition of property; and section 29.22, Treasury Regulation 111, provides in material part that no gain or loss is realized by a corporation from the mere distribution of its assets in kind in partial or complete liquidation.
The Wichita Terminal Elevator Company, a corporation organized under the laws of Kansas, conducted a grain elevator business at Wichita, Kansas. It owned and operated a terminal elevator in Wichita and four country elevators at other points in Kansas. L.H. Powell was its president and general manager. Powell and members of his immediate family owned a large part of the stock of the company. Powell was advanced in age and desired to sell the elevator properties. He discussed the matter with several persons, including Paul Ross. The first discussion with Ross took place on or about June 1, 1944. Ross was then interested in purchasing only the elevator and business at Wichita, but Powell advised him that his desire was to sell the other elevators too. Ross inspected the other elevators, and on or about June 4th or 5th further discussion was had between the two respecting the sale of all the elevators. At a meeting held on June 6th, the directors of the corporation took certain action looking toward the calling of a meeting of the stockholders for the purpose of submitting to them a proposal to liquidate and dissolve the corporation, but the record fails to make clear the exact nature of the action. Between June 7th and 12th, inclusive, the stockholders executed their written consent to the dissolution of the corporation, and at the same time they signed in counterpart written instruments designating Powell as the liquidating agent. On June 12th, the president and secretary of the corporation executed a certificate of stock ownership in the corporation, specifying the number of issued and outstanding shares, the owners, and the amount owned by each. The certificate of stock ownership and the consent of the shareholders to the dissolution were filed in the office of the Secretary of State of Kansas on June 16th, and on the same day the Secretary issued a certificate of dissolution of the corporation. Notice of dissolution was published on June 21st and filed with the Secretary of State on June 23rd.
On June 16th, the date on which the certificate of stock ownership and the consent of the stockholders to the dissolution were filed in the office of the Secretary of State, the corporation executed conveyances of its properties to Powell. The deed conveying the elevator property in Wichita was to him individually, without any reference to his acting as liquidating agent. The several bills of sale conveyed the personal property to him as "agent for the former stockholders of" the corporation. By written contract reciting that it was made and entered into on June 23rd, the date on which the notice of publication of the dissolution was filed in the office of the Secretary of State, Powell agreed to sell the elevator properties to The Wichita Terminal Elevator Inc. Ross was president of the purchasing corporation and he signed the contract in that capacity. The sale price was $289,350, of which $25,000 was to be paid immediately and the balance upon delivery of conveyances and possession of the properties. On June 27th, conveyances were delivered and the purchase price paid in full. In the deed of conveyance to the terminal elevator property, Powell and his wife were the grantors; and in the bills of sale to the country elevators, Powell, designated as agent for the former stockholders of The Wichita Terminal Elevator Company, was the transferor. The check given for the purchase price was payable to L.H. Powell, agent, and was endorsed in like manner.
The Commissioner of Internal Revenue treated the transaction as a sale by the corporation, not by its stockholders. That treatment resulted in a deficiency in tax based upon capital gain to the corporation. On redetermination, the Tax Court sustained the action of the Commissioner; and the proceeding is here on review.
The transaction as a whole was cast in the form of conveyances of the properties of the corporation to Powell, as a liquidating dividend, dissolution of the corporation, and conveyances of the properties to the ultimate purchaser. The formal documents were molded in that pattern. The naked legal title passed from the corporation to Powell, and from Powell to the ultimate purchaser. And Powell was designated or referred to as agent for the former stockholders of the corporation. But in a case of this kind involving questions of liability for income taxes, the form of the transaction is not necessarily conclusive. The formal written documents are not always inflexibly binding. Helvering v. F.R. Lazarus & Co., 308 U.S. 252, 60 S. Ct. 209, 84 L. Ed. 226.Income taxes cannot be avoided by methods, devices, anticipatory arrangements, or contracts which merely give illfounded complexion to the reality of a transaction in its relation to tax liability. Lucas v. Earl, 281 U.S. 111, 50 S. Ct. 241, 74 L. Ed. 731; Griffiths v. Helvering, Commissioner, 308 U.S. 355, 60 S. Ct. 277, 84 L. Ed. 319.
The corporation was effectively dissolved for ordinary purposes under state law. And in some instances, a corporation may distribute its assets among its shareholders as a liquidating dividend and not be subject to income tax on the gain when the property is subsequently sold by the former stockholders. Commissioner v. Falcon Co., 5 Cir., 127 F.2d 277. But in determining the question of tax liability, a transaction of that kind should be scrutinized with care. Tazewell Electric Light & Power Co. v. Strother, 4 Cir., 84 F.2d 327.
Congress committed to the Tax Court authority in a controversy of this kind to determine disputed questions of fact, and its findings of fact must stand on review if supported by substantial evidence. Commissioner v. Heininger, 320 U.S. 467, 64 S. Ct. 249, 88 L. Ed. 171; Dobson v. Commissioner, 320 U.S. 489, 64 S. Ct. 239, 88 L. Ed. 248; Commissioner v. Scottish American Co., 323 U.S. 119, 65 S. Ct. 169, 89 L. Ed. 113; Commissioner v. Court Holding Co., 324 U.S. 331, 65 S. Ct. 707, 89 L. Ed. 981; Commissioner v. Tower, 327 U.S. 280, 66 S. Ct. 532, 90 L. Ed. 670. Moreover, it is the function of the Tax Court to draw inferences from the facts and circumstances, Helvering v. National Grocery Co., 304 U.S. 282, 58 S. Ct. 932, 82 L. Ed. 1346; Wilmington Trust Co. v. Helvering, 316 U.S. 164, 62 S. Ct. 984, 86 L. Ed. 1352; and to choose between conflicting inferences, Wilmington Trust Co. v. Helvering, supra; Commissioner v. Scottish American Co., supra. Too, an inference of fact drawn by that court is not to be overturned on review if it is reasonable and has substantial support in the evidence. Commissioner v. Scottish American Co., supra; Commissioner v. Flowers, 326 U.S. 456; 66 S. Ct. 250, 90 L. Ed. 203.
Here the Tax Court found that the sale and transfer of the elevator properties was made on behalf of the corporation. Petitioners denominate the finding as the ultimate conclusion of the Tax Court. It is not a conclusion. Though drawn as an inference from other facts and circumstances in the case, it is in substance a finding of fact. Looking beyond form and to substance, the Tax Court drew the inference of fact that for income tax purposes the sale and conveyance of the properties were in effect made on behalf of the corporation. Is the finding a reasonable one and is it supported by substantial evidence?Powell and members of his family owned a large part of the stock of the corporation, and he was its president and general manager. He desired to sell the properties. He and Ross conferred about a sale. Ross had in mind only the purchase of the property in Wichita, but he learned that it was Powell's desire to sell all of the elevators. Ross promptly examined the elevators located outside of Wichita, and within four or five days after the first conference, Powell and Ross discussed the matter again. Neither Powell nor Ross testified in the proceeding before the Tax Court and there was no direct evidence as to whether in the subsequent conference a definite agreement of sale was reached. But almost immediately after the second conference, steps were initiated to convey all of the properties of the corporation to Powell, and to dissolve the corporation. The several steps to that end followed in chronological order and with swiftness which seems to have significance. In addition, almost before the setting of the sun after the dissolution of the corporation became an accomplished reality under the law of the state, Powell entered into the contract for the sale of the properties, and only four days later the conveyances were delivered and the purchase price paid. The record fails to indicate that any consideration had been given to the liquidation of the corporation prior to the time of the conferences between Powell and Ross. But liquidation was begun promptly after the conferences held on June 4th or 5th. And the properties had been conveyed to Powell, the liquidation completed, and the properties conveyed to the ultimate purchaser within less than four weeks after Powell and Ross held their initial conference. Viewed rationally, the facts and circumstances as a whole reasonably lend themselves to the conclusion that from beginning to end the successive steps taken were merely integral parts of a unified operation having for its goal the sale and passing of title of the corporation through a conduit to the ultimate purchaser. We think the Tax Court acted within its authorized province in finding that for income tax purposes the sale and conveyance of the properties was made on behalf of the corporation. Meurer Steel Barrel Co. v. Commissioner, 3 Cir., 144 F.2d 282, certiorari denied, 324 U.S. 860, 65 S. Ct. 864, 89 L. Ed. 1417, rehearing denied, 325 U.S. 892, 65 S. Ct. 1182, 89 L. Ed. 2004. And where the sale of properties belonging to a corporation is effected in that manner and for that purpose, the gain accrued from the sale is taxable to the corporation. Commissioner v. Court Holding Co., supra.
The decision of the Tax Court is affirmed.
HUXMAN, Circuit Judge (concurring).
I concur in the conclusion of Judge BRATTON that the Tax Court was warranted in treating the transaction as a sale by the corporation, and therefore concur in his opinion. In addition to what Judge BRATTON has said, there are, however, some ...