Abegg v. Commissioner of Internal Revenue
| Decision Date | 14 July 1970 |
| Docket Number | 623,No. 622,Dockets 34136,34146.,622 |
| Citation | 429 F.2d 1209 |
| Parties | Werner ABEGG, Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Appellant. CRESTA CORPORATION, S.A., Transferee, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. |
| Court | U.S. Court of Appeals — Second Circuit |
Emilio A. Dominianni, New York City (John E. McDermott, Jr., Michael Keating and Coudert Brothers, New York City, of counsel), for Werner Abegg and Cresta Corporation.
Paul M. Ginsburg, Atty., Department of Justice, Washington, D. C. (Johnnie M. Walters, Asst. Atty. Gen., Lee A. Jackson and Thomas L. Stapleton, Attys., Dept. of Justice, Washington, D. C., of counsel), for Commissioner of Internal Revenue.
Before WATERMAN, FRIENDLY and HAYS, Circuit Judges.
These two appeals from a decision of the Tax Court, 50 T.C. 145, one by the taxpayer and the other by the Commissioner, concern a series of transactions in which Werner Abegg, a Swiss citizen, liquidated one wholly-owned personal holding company and transferred all its assets, plus other securities in substantial amount, to another personal holding company. Although the appeals relate to different tax years and present independent legal issues, there is a sufficient identity in the dramatis personae to make it convenient to state all the facts at the outset.
Hevaloid Corporation was organized under the laws of Delaware in 1938. All its issued stock, 250 shares, was held by Abegg. It owned industrial patents and machinery which it leased to various American corporations. In 1955 the patents expired and it sold the machinery. In 1956 and 1957 it was a personal holding company; its assets consisted exclusively of cash, securities, receivables, and rights in a motion picture "Guest in the House." In 1957, Robert A. Cavin, a close associate and business adviser of Abegg for many years, was its president.
On March 28, 1957, Hevaloid adopted a plan of complete liquidation and dissolution. A certificate of dissolution was filed on April 18. During April and May it sold stock in four publicly owned corporations for $1,671,341, which it deposited in the New York Trust Company. These sales represented a gain of $932,701. Hevaloid reported them in its 1957 income tax return but claimed that the gain was not to be recognized under I.R.C. § 337. On May 1 and 2 it drew checks to Abegg on its account at New York Trust Company aggregating $1,660,936. On May 7 it delivered to Laird & Co., a New York brokerage firm, for Abegg's account, certificates and stock powers for 7,470 shares of Brazos River Gas Company, 2,720 shares of Medallion Petroleum Limited, and 13,692 shares of Producing Properties, Inc. On May 23 it directed Laird & Co. to transfer from the account of Hevaloid to the account of Abegg 1,945 shares of Magma Copper Company and 2,600 shares of Signal Oil and Gas Company; on the same day it also transferred to Abegg its interest in a loan receivable from Perosa Corporation and in the motion picture. The final step in its liquidation was taken in December 1957 by drawing to Abegg a $32,156 check on another bank. Abegg deposited all these checks in his account at Bankers Trust Company.
Cresta Corporation, S.A., originally known as Suvretta Corporation, S.A., was incorporated in Panama in 1941 but remained inactive. On May 7, 1957, it issued 1,000 shares of stock to Abegg in return for cash and other assets, as follows: On May 7, 1957, Abegg issued to it a $1,500,000 check on his account at Bankers Trust Company, $250,000 of which was considered a demand loan and $1,250,000 as part payment for stock. On May 24, Laird & Co., on Abegg's instruction, transferred to Cresta in further payment the five securities that Hevaloid had ordered it to transfer to him earlier that month. The fair market value of each security exceeded its adjusted basis; the aggregate excess was $262,520. The same day Abegg transferred stock of Illinois Central R. R., Olin Mathiesen Chemical Corporation, additional common shares and a note of Brazos River Gas Company, preferred stock and bonds of Producing Properties, Inc., 1,000 shares of Perosa Corporation, which were regarded as valueless, and 3,000 shares of Meridan Corporation, a Rhode Island corporation in which he owned 50% of the stock and Cavin 10%. Meridan had a net worth of $2,510,673 as of December 31, 1957. Nearly sixty per cent of this represented a piano business in Michigan; it also had an interest in an operating company in Chicago and later acquired one in a company in Tacoma, Washington. On June 8 Abegg transferred to Cresta the interest in "Guest in the House" and in the debt from Perosa Corporation which Hevaloid had assigned.
The directors of Cresta, including Abegg and Cavin, met on February 6, 1958, in New York and resolved to qualify to do business in that state, to accept cash and securities from Abegg as contributions to capital, and to borrow an additional $250,000 from him on open account. Abegg drew a check for $400,000 and on February 26, 1958, contributed stock as follows:
Fair
Adjusted Market
Basis Value
50,680 shares
Brazos River Gas Co. $ 55,850 $101,360
4,250 shares
General American Oil Co. 91,653 110,578
12,650 shares
Magma Copper Co. 1,300,971 449.075
_________ ________
$1,448,474 $661,013
Cavin was Cresta's sole employee in its fiscal years ending February 28, 1958 and 1959 and February 29, 1960. He maintained watch over its holdings, especially those in Meridan, and investigated at least a dozen opportunities for investing Cresta's funds with a view to acquiring the stock or assets of a going business, although no acquisitions were made. In these years Cresta paid salaries to Cavin aggregating $46,750, and also some $50,000 in legal, accounting, travel and other business expenses.1 Cresta filed income tax returns as a personal holding company.
Only a few further facts need be stated: Abegg was not engaged in trade or business within the United States. In 1957 he was in the country only from January 1 to March 27. He was here more than 90 days in 1958. At the time when the Commissioner sent a notice of deficiency to Cresta as Hevaloid's transferee, Abegg had net assets in the United States more than sufficient to pay the tax allegedly owing from Hevaloid.
Viewed alone the liquidation of Hevaloid meets the requirements of I.R.C. § 337(a).2 The Commissioner does not dispute this, nor its corollary that if § 337 is applied, the $932,701 gain realized by Hevaloid on the sale of securities and Abegg's gain on the liquidation would escape United States taxation altogether. Hevaloid would not be taxable because of § 337(a). Abegg would not be taxable on the gain from the liquidation of Hevaloid because as a nonresident alien, not engaged in trade or business within the United States, who was present in the United States for fewer than 90 days in 1957, he was subject to United States taxation only on capital gains from sales or exchanges of personal property in the United States while he was present here,3 and Hevaloid's liquidating distributions were carried out during his absence.
On February 19, 1962, the Commissioner mailed to Cresta as transferee a notice of deficiency reading as follows:
The gains from Hevaloid's sales of securities amounted, as previously indicated, to $932,701; the gains from the transfers to Cresta of property which Abegg had received from Hevaloid were $262,519 with respect to securities stated above, plus $4,725 with respect to "Guest in the House." The Tax Court sustained the Commissioner.
Cresta does not dispute that if the result of the 1957 transactions had been achieved by a straightforward reorganization under § 368(a) (1) (D), the gains realized by Hevaloid on sales of securities would not come under the non-recognition shelter of § 337 and the gains realized on transfers of appreciated securities would likewise be taxable since they would qualify for non-recognition only by virtue of §§ 351 and 354(a) (1), and that protection was lost by failure to obtain a ruling under § 367. It nevertheless contested the determination of deficiency on three grounds. It claimed that the reorganization provisions are not applicable to corporations that are mere personal holding companies; that if that position were rejected, the judicially created "liquidation-reincorporation" doctrine on which the Commissioner relied should not be applied when what has come to be a personal holding company as a result of the cessation of an active business distributes liquid assets to its sole stockholder; and, in any event, that, since the transfer from Hevaloid to Cresta was routed through Abegg and he was financially able to pay any tax owed by Hevaloid, Cresta was not liable as a transferee. The Tax Court rejected all three contentions. Although Cresta's arguments are not without force, ...
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