Pridemark, Inc. v. CIR

• Decision Date: 23 April 1965
• Docket Number: No. 9707.,9707.
• Citation: 345 F.2d 35
• Parties: PRIDEMARK, INC. (formerly, Prefab Homes and Suppliers, Inc.,), Pridemark, Inc. of Connecticut, Eugene Blitz and Eleanor Blitz, Jules E. Blitz and Barbara J. Blitz, and Gershan K. Thiman and Joan G. Thiman, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fourth Circuit

345 F.2d 35 (1965)

PRIDEMARK, INC. (formerly, Prefab Homes and Suppliers, Inc.,), Pridemark, Inc. of Connecticut, Eugene Blitz and Eleanor Blitz, Jules E. Blitz and Barbara J. Blitz, and Gershan K. Thiman and Joan G. Thiman, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 9707.

United States Court of Appeals Fourth Circuit.

Argued February 5, 1965.

Decided April 23, 1965.

COPYRIGHT MATERIAL OMITTED

Jack C. Merriman, Baltimore, Md. (Howard B. Miller and Weinberg & Green, Baltimore, Md., on brief), for petitioners.

Karl Schmeidler, Atty., Dept. of Justice (Louis F. Oberdorfer, Asst. Atty. Gen., and Lee A. Jackson and David O. Walter, Attys., Dept. of Justice, on brief), for respondent.

Before SOBELOFF, BRYAN and J. SPENCER BELL, Circuit Judges.

SOBELOFF, Circuit Judge:

This petition for review principally challenges the determination of the Tax Court¹ sustaining the Commissioner's application of the "reincorporation" doctrine, and his denial of an exemption from taxation to proceeds from the sale of certain sales contracts by liquidating corporations. The facts are fully set forth in Judge Pierce's opinion and we shall here state only those we deem essential.

Pridemark, Inc., one of the petitioners in this case, was incorporated in 1946 under the laws of Maryland, with a paid-in capital of $6,000 represented by 5,000 shares of common stock. From that date until February, 1958, Pridemark was the exclusive dealer for prefabricated homes designed and manufactured by Golden Key Homes, Inc.

In 1950, Eugene Blitz, another petitioner, became president and sole shareholder of Pridemark. A new contract was signed with Golden Key whereby Pridemark was granted the exclusive right to sell Golden Key homes. Pridemark, in turn, was required to submit all contracts to Golden Key for approval and to purchase prefabricated homes solely from that manufacturer.

The second corporate petitioner, Pridemark, Inc. of Connecticut, was formed in 1952 by Eugene Blitz with a capital investment of $5,000 to act as Pridemark's selling agent in Connecticut. The two selling corporations maintained their principal offices at the same Baltimore location and were managed by the same personnel. They will be treated as one corporation for the purposes of this opinion.

The gross receipts of these petitioner corporations reached a peak of $3,178,042 in the fiscal year in 1956, then declined until gross receipts were only $1,791,266 in 1958. Less than $6,000 in total dividends was paid out during the 12 years of the corporation's existence preceding the year of liquidation.

As sales decreased the relationship between the petitioners and their supplier, Golden Key, steadily worsened. Controversies arose concerning the resale price at which the homes were to be sold and the emphasis to be placed in Pridemark's advertising campaigns on the respective trade names of the manufacturer and the dealer corporations. Several meetings were held during 1956 and 1957 to resolve these differences. In one of these conferences Eugene Blitz stated that he thought Pridemark would "do better" if it obtained another supplier. Finally, during a particularly heated discussion in the middle of 1957, Eugene Blitz suggested that the dealership be terminated so that another supplier could be obtained.

After several offers and counteroffers it was agreed that Golden Key would select and purchase those assets owned by Pridemark which the manufacturer thought valuable. Golden Key would then proceed to carry on its own selling operations. By an agreement dated February 3, 1958, Golden Key contracted to purchase all of Pridemark's customer contracts on which no deliveries had been made, leases on branch offices, customer lists and good will. Pridemark retained its Baltimore office and its corporate name because Golden Key did not think them worth purchasing. The purchase price was $174,866, $134,400 of which represented uncompleted contracts.

Before the sale, in January, 1958, the Board of Directors of Pridemark voted to dissolve the corporation. Eugene Blitz then held all the common stock as trustee for a voting trust of which he was an 80% beneficial owner. He also held all of the Class B preferred, with a par value of $100,000. Various employees held the Class A preferred, having a par value of $8,600. The A preferred was redeemed in July, 1958, and is not in issue here.

During the last half of 1958 approximately $108,000 was distributed to beneficiaries of the voting trust. The B preferred, held solely by Eugene Blitz, was redeemed in January, 1959, for $127,167, and the remaining assets, mostly uncollected accounts receivable, were conveyed directly to the five voting trust beneficiaries. They in turn reconveyed them to Eugene Blitz as trustee to dispose of as he saw fit. There was no testimony that the stockholders were under any legal or moral compulsion to reconvey their assets to Blitz. The only evidence indicates that this was done in order to enable him to collect the debts owed Pridemark.

Pridemark, Inc. of Connecticut, the common stock of which Eugene Blitz owned approximately 74%, was liquidated in the same manner. Articles of dissolution for the two corporations were filed in Maryland and Connecticut.

I

If, when the individual petitioners dissolved Pridemark, they had permanently abandoned the selling of prefabricated homes it would have been clear that there had been a "complete liquidation" within the meaning of sections 331 and 337.² The distributions to the shareholders would then be treated as a redemption of stock rather than a dividend, and sales of capital assets by the liquidating corporation would be tax exempt. The shareholders of Pridemark, the old corporation, decided, however, in November, 1958, to form a new corporation to be called Pridemark Enterprises, Inc. This corporation eventually signed a dealership contract with Hilco Homes, Inc., and began to sell prefabricated homes in the spring of 1959. The formation of this new corporation, several months before the final dissolution of the old, prompted the Commissioner to invoke the "reincorporation" doctrine, thereby denying the tax exempt status of the corporate sales during the year of liquidation and taxing the distributions to the shareholders as dividends. This approach, adopted by the Tax Court, is the subject of the present appeal.

Before considering the intricacies of the "reincorporation" doctrine it is necessary to elaborate upon the circumstances surrounding the death of the old corporation and the birth of the new. The motivation of Eugene Blitz, the controlling shareholder of both corporations, in liquidating Pridemark is of particular relevance. As we have seen, in late 1957 he expressed a desire to terminate business relations with Golden Key but still hoped to become agent for another manufacturer. Efforts made at that time to find a suitable substitute for Golden Key were to no avail. Decreasing sales and his own advancing age prompted Eugene Blitz to get out of the prefabricated home business and to plan investing in some new business to be conducted by his son. Consequently, Pridemark sold all of its branch offices and customer lists to Golden Key in February, 1958. As part of the transaction Golden Key was allowed to hire away any of Pridemark's personnel that it desired, Pridemark and its owners promising not to rehire any of these employees until a year had passed. As a result Pridemark lost its entire sales force, some of whose members had been with the organization as long as 12 years. The sales manager left to supervise Golden Key's selling activities. The business built up by Eugene Blitz was thereafter carried on by Golden Key without interruption.

The old corporation engaged in no active selling for the remainder of its corporate life. The inactivity continued from February, 1958, to the corporation's dissolution in February, 1959. During this period funds distributed to the shareholders were invested in companies manufacturing kitchen cabinets and "three-wheeled vehicles," and in several land development ventures. When these investments proved disappointing, the Blitzes, father and son, and the petitioners associated with them in the old corporation began to weigh the advisability of returning to the business they knew best, the retailing of prefabricated homes.

In October or November, 1958, a representative of Hilco Homes, Inc., a manufacturer of prefabricated homes, came to the head office of the old corporation on business unrelated to this case. In the course of his visit the possibility of Blitz representing Hilco was discussed. There is no indication in the record as to who broached this topic of conversation, but it was agreed that the subject should be explored at greater length at some future date. Negotiations followed in December, 1958, and finally, on February 9, 1959, a dealership arrangement was entered into between Hilco and Pridemark Enterprises, the new corporation.

In the meantime, the articles of the new corporation were executed on November 26, 1958, and it was incorporated under the laws of Maryland on January 2, 1959. Eugene Blitz, as trustee of the old corporate assets conveyed to him by the shareholders, transferred the lease on the Baltimore office and the right to use the name "Pridemark" to the new corporation. Both of these assets had been rejected by Golden Key the preceding year. During 1959, Eugene Blitz, still acting as trustee, contributed $39,000 in nine installments to the new corporation. Gershan Thiman, a petitioner here and an accountant for the old corporation, was made president of the new. Jules Blitz, son of Eugene, became treasurer in the new corporation as he had been in the old. Eugene Blitz, who had been president of the old corporation, was named secretary and Samuel Hoffman, an office worker in the old concern, vice-president. At various times after a year had passed from the sale...