American Range Lines Inc. v. Comm'r of Internal Revenue

• Decision Date: 08 November 1951
• Docket Number: Docket No. 25160.
• Citation: 17 T.C. 764
• Parties: AMERICAN RANGE LINES, INC. (FORMERLY AMERICAN RANGE-LIBERTY LINES, INC.), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

17 T.C. 764

AMERICAN RANGE LINES, INC. (FORMERLY AMERICAN RANGE-LIBERTY LINES, INC.), PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 25160.

Tax Court of the United States.

Promulgated November 8, 1951.

1. Transfer of property of petitioner corporation simultaneously with payment by transferee to petitioner's shareholder held to result in capital gain to petitioner notwithstanding payment was not made to petitioner.

2. Lucille H. Rogers, 11 T.C. 435,revd. (C.A. 3) 180 F.2d 720, held, further, not res judicata although facts were identical, parties not being the same or in privity.

George E. Beechwood, Esq., for the petitioner.

Ellyne E. Strickland, Esq., for the respondent.

Respondent determined a deficiency in income tax for 1944 in the amount of $20,625.90. The remaining question, an issue relating to a net operating loss deduction having been abandoned at trial, is whether petitioner is taxable on $63,706.74 which was paid to its sole stockholder.

FINDINGS OF FACT.

Petitioner, a Delaware corporation, organized in 1936 for the purpose of engaging in the shipping business, has its principal office and place of business in Philadelphia, Pennsylvania. Its return for the calendar year 1944 was filed with the collector at New York, New York.

Prior to June 1941 petitioner was engaged in the business of operating ships chartered from the owners. By August 1943, because of war conditions, petitioner had ceased to own or operate any vessels.

At about that time petitioner, through its president, Jacob L. Alwine, was endeavoring to have the War Shipping Administration, hereinafter referred to as W.S.A., allocate to it some vessels under a general agency agreement.

Contemporaneously American Liberty Steamship Corporation, hereinafter referred to as Liberty, was also negotiating with W.S.A. As neither petitioner nor Liberty was successful in satisfying its requirements, W.S.A. suggested that the companies come to some agreement in order to qualify for an agency contract.

Negotiations to that end were undertaken between petitioner, petitioner's sole stockholder, Lucille H. Rogers, hereinafter referred to as Mrs. Rogers, and Liberty. The services of a lawyer were engaged to work out an agreement. Mrs. Rogers paid one-half of a $3,500 lawyer's fee thus incurred, and Liberty paid the other half. She also paid $90 to Price Waterhouse & Company as her half of audit charges for examining petitioner's books.

On August 16, 1943, these negotiations were culminated in an agreement between petitioner, Mrs. Rogers, and Liberty. It was subscribed to by Jacob L. Alwine, petitioner's president, by A. D. Rissmiller, Liberty's president, by Mrs. Rogers, and the companies' respective boards of directors. The agreement provided, inter alia:

American Range Lines, Inc. and American Liberty Steamship Corporation have both been organized to carry on and conduct the business of shipping.

The directors of the respective corporations deem it advantageous for the respective corporations and for the benefit of their stockholders to engage in a joint venture to operate under a General Agency Assignment for the War Shipping Administration.

Both corporations have heretofore filed a joint application with the War Shipping Administration for a General Agency Assignment, which offer, as submitted to the War Shipping Administration, proposed a merger of the personnel of the respective corporations and the creation of a capital of $170,000.00 in cash, free and clear of all debts and liabilities.

The mode of carrying the joint venture into effect shall be as follows: The name of American Range Lines, Inc. shall be changed to American Range-Liberty Lines, Inc. The Certificate of Incorporation of American Range Lines, Inc. shall be further amended as provided in this agreement so as to provide for an equal investment of $85,000.00 each, to carry out the business of the joint venture. The by-laws of American Range Lines, Inc. shall be amended so as to provide for equal management and control of the affairs of American Range-Liberty Lines, Inc. between American Liberty Steamship Corporation and Lucille H. Rogers.

At the termination of the General Agency Assignment, it is proposed to restore each of the two corporations, American Liberty Steamship Corporation and American Range Lines, Inc. to their former position, so that each might pursue and conduct their own businesses separately and individually.

As part of the agreement, and in order to persuade Liberty to enter into and observe its terms, Mrs. Rogers, joined by petitioner, represented and warranted to Liberty that petitioner was a legally constituted corporation and that its financial conditions and contractual obligations were as represented, and agreed to save and hold harmless Liberty by reason of any breach of the representations. Mrs. Rogers further agreed to pay and contribute to petitioner any money necessary to discharge ‘ * * * all losses, expenses, claims, damages or liabilities arising out of or based upon any matter, cause, thing or transaction whatsoever, initiated or had prior to the date of this agreement by American Range Lines, Inc., it being the intention of the parties that the sum of $170,000.00 to be contributed by the American Liberty Steamship Corporation and Lucille H. Rogers for the conduct of the joint venture above described, shall not be impaired or diminished or charged with any claim, debt or liability, which has resulted or which may accrue as the result of any act or transaction which occurred prior to the date of this agreement or which may result from any act or transaction which is unconnected with the operation of the joint venture.‘

To secure performance of these provisions of the agreement Mrs. Rogers further agreed to deposit the sum of $36,168.99 with a designated escrow agent under terms obligating the escrow agent to pay over such sums to Liberty or to petitioner under the name of American Range-Liberty Lines, Inc., as would be necessary to discharge liabilities or claims resulting from the breach of any representations.

The agreement further provided:

EIGHTH: The present by-laws of American Range Lines, Inc. shall be amended in the following respects to provide for equal control and management of the affairs of American Range-Liberty Lines, Inc. during the term of this agreement between American Liberty Steamship Corporation and Lucille H. Rogers:

(a) The number of Directors shall be increased from three to six.

(b) Three members of the Board of Directors shall be persons nominated by the American Liberty Steamship Corporation, hereinafter designated as Liberty Group ‘, and an equal number of the Board of Directors shall be persons nominated by Lucille H. Rogers, hereinafter designated as ‘Rogers Group‘.

(c) In the event of the death, resignation or inability to act of any director, the vacancy occurring shall be filled by the nominee of the group of stockholders or stockholder, who originally nominated the director whose office has become vacant, so that American Liberty Steamship Corporation and Lucille H. Rogers shall have at all times equal representation upon the Board of Directors.

(d) The by-laws shall not be amended except by the affirmative vote of at least five of the whole Board of Directors.

(e) The by-laws shall provide that a quorum of the Board of Directors shall consist of at least five directors, but less than a quorum may adjourn any meeting, which may be held on a subsequent date without further notice, provided a quorum be present on such deferred meeting.

NINTH: The Board of Directors shall elect the President and Treasurer of the corporation as designated by the ‘Liberty Group‘. The Board of Directors shall elect the Executive Vice-President and Secretary as designated by the ‘Rogers Group‘. The Board of Directors shall also elect as its Chairman such person as is designated by the ‘Rogers Group‘.

TENTH: Immediately upon the execution of this agreement and upon the amendment of the Certificate of Incorporation of American Range Lines, Inc. as above set forth, the American Liberty Steamship Corporation shall subscribe for 850 shares of preferred stock and shall pay therefor $85,000 in cash; Lucille H. Rogers shall also subscribe for 850 shares of the preferred stock and shall pay therefor $85,000 in cash. In addition to the preferred stock the American Liberty Steamship Corporation and Lucille H. Rogers shall each purchase 850 shares of the common stock, such stock to be deemed fully paid and shall be nonassessable.

The total capital of $170,000.00 thus created, shall be used solely for the operation and conduct of the business of the corporation under the General Agency Assignment with the War Shipping Administration.

FOURTEENTH: This agreement shall end and terminate simultaneously with the termination of the General Agency Assignment, under which this corporation proposes to conduct its business. Upon the termination of this agreement, the parties covenant and agree to take such steps as may be necessary to terminate this joint venture and to restore to the respective parties the capital contributed by each party or so much of it as may remain after losses, if any, of operations during the terms of this agreement, which losses shall be borne equally by the American Liberty Steamship Corporation and Lucille H. Rogers, plus a division of all other assets acquired by American Range-Liberty Lines, Inc. since the date of this agreement and all undivided profits. * * *

The foregoing plan was carried out. Petitioner was reorganized and under amendments to its charter its name was changed to American Range-Liberty Lines, Inc. Mrs. Rogers invested the $85,000 required of her by having petitioner leave intact its existing bank balance of $78,199.99 and by executing and delivering to petitioner her personal check in the amount of $6,800.01 for the balance. Rissmiller and Schneider, the president and...