Calley v. United States
| Decision Date | 30 July 1963 |
| Docket Number | Civ. A. No. 1044. |
| Parties | Francis D. CALLEY v. UNITED STATES of America. |
| Court | U.S. District Court — Southern District of West Virginia |
Campbell, McNeer, Woods & Bagley, Huntington, W. Va., Steptoe & Johnson, William C. Hill, Washington, D. C., for plaintiff.
Harry G. Camper, Jr., Charleston, W. Va., for defendant.
In this action the plaintiff seeks to recover income taxes which he alleges to have been erroneously assessed and collected. The case was submitted on a stipulated set of facts which are essentially as follows:
Calley and Clark Company, a former West Virginia corporation with principal offices in Huntington, functioned from 1935 to 1956 as general agent for certain insurance companies. Five of these companies, hereinafter called the Chubb Group, were managed by Chubb & Son, a New York City partnership. Calley and Clark Company also acted as general agent for Manhattan Fire and Marine Insurance Company, and for eight other companies.
As general agent, Calley and Clark Company conducted the business of these companies in various territories in Virginia, West Virginia, Ohio and Kentucky. Calley and Clark Company's representation included the writing of fire, marine, automobile and a broad field of casualty insurance. By 1956, Calley and Clark had organized a local-agency network consisting of some 56 agents, producing an annual premium volume of approximately $2,000,000 with local agents in every sizable town within its territory.
In 1956, Chubb & Son, on behalf of the Chubb Group, commenced negotiations with Calley and Clark for the purchase of substantially all of the operating assets of Calley and Clark Company, and on March 13, 1956, the stockholders of Calley and Clark adopted a plan of liquidation calling for complete liquidation within twelve months. On March 27, 1956, Calley and Clark sold to the Chubb Group its property rights in the expirations and renewals respecting policies of insurance issued by the purchasers together with all books and records, dailies, bills, binders, maps and other papers relating to such insurance for a total consideration of $100,000. On the same date the general agency agreements between Calley and Clark and the members of the Chubb Group were terminated. On May 3, 1956, Calley and Clark sold to Manhattan Fire and Marine Insurance Company its property rights in expirations and renewals respecting certain insurance policies issued by Manhattan for $8,000, and the parties terminated the general agency agreement between them.
On December 10, 1956, Calley and Clark began a series of distributions which were completed on March 9, 1957.
In its 1956 income tax return Calley and Clark reported the $108,000 received as a result of the sale of expirations and renewals as tax free proceeds derived from the sale of property under the provisions of Section 337 of the Internal Revenue Code of 1954, 26 U.S.C.A. § 337. On May 11, 1960, the director of Internal Revenue concluded that the $108,000 received by Calley and Clark Company as a result of the above mentioned sales was not income derived from the sale of property within the meaning of Section 337 of the Code and proposed a deficiency of $54,037.61 in corporation income taxes for the year 1956. A timely protest was filed and rejected and the proposed deficiency was assessed against Calley and Clark Company on June 17, 1960, a date subsequent to its liquidation.
On July 20, 1960, Calley and Clark having no assets with which to meet the deficiency, the defendant proposed a deficiency against the plaintiff as a stockholder-transferee in liquidation of Calley and Clark Company. This proposed deficiency of $54,037.61 was paid by plaintiff to the defendant on August 3, 1960, together with interest of $10,976.06.
The principal question presented by this case is whether a sale by a general insurance agent of expirations and renewals is a sale or exchange of property within the meaning of Section 337 of the Internal Revenue Code of 1954, 26 U.S.C.A. § 337 (1955). Section 337(a) provides as follows:
Section 337 was enacted to avoid double taxation at both corporate and shareholder levels where a corporation sells its assets at a profit and completely liquidates within one year. See Hawaiian Trust Co. Ltd. v. United States 291 F.2d 761 (9th Cir., 1961). Prior to its enactment there was some uncertainty in determining whether such a sale was in fact made by the corporation or the shareholders. United States v. Cumberland Public Service Co., 338 U.S. 451, 70 S.Ct. 280, 94 L.Ed. 251 (1950); Commissioner of Internal Revenue v. Court Holding Co., 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed. 981 (1945). See H.Rep. 1337, 83rd Cong., 2d Sess. 1954, pp. 38-39 (U.S.Code Cong. & Adm.News, 1954, p. 4064).
The defendant contends that in reality what was sold here was the right to future income which would be excluded from the meaning of property under Section 337, Family Record Plan, Inc. v. Commissioner, 36 T.C. 305 (1961). This contention is not supported by either the facts of this case or by the law in regard to expirations. The contract between Calley and Clark Company and the insurance companies, which created the general agency relationship, clearly provides that either party may terminate the agency agreement by a written notice sixty days prior to termination, and that the agent shall have no right to future commissions. It is a stipulated fact that the Chubb Group believed it would have been prohibited from soliciting renewals of expiring insurance contracts by direct solicitation of the insured, by reappointing local agents supervised by Calley and Clark Company or by appointing new agents, without incurring a liability in law or equity to Calley and Clark Company.
This belief on the part of Chubb was well founded. In V. L. Phillips & Co., Inc. v. Pennsylvania Threshermen & Farmers' Mut. Cas. Co., 199 F.2d 244, p. 246 (4th Cir., 1952), the court defined expirations as follows:
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