Cherry-Burrell Corporation v. United States

• Decision Date: 07 December 1966
• Docket Number: No. 18110.,18110.
• Citation: 367 F.2d 669
• Parties: CHERRY-BURRELL CORPORATION, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

367 F.2d 669 (1966)

CHERRY-BURRELL CORPORATION, Appellant, v. UNITED STATES of America, Appellee.

No. 18110.

United States Court of Appeals Eighth Circuit.

October 5, 1966.

Rehearing Denied December 7, 1966.

Paul A. Teschner, of Pope, Ballard, Uriell, Kennedy, Shepard & Fowle, Chicago, Ill., for appellant. Frank H. Uriell, Chicago, Ill., was with him on the brief.

Edward Lee Rogers, Atty., Dept. of Justice Washington, D. C., for appellee. C. Moxley Featherston, Acting Asst. Atty. Gen., Lee A. Jackson, David O. Walter, Attys., Dept. of Justice, Tax Division, Washington, D. C., and Donald E. O'Brien, U. S. Atty., Sioux City, Iowa, were with him on the brief.

Before JOHNSEN and BLACKMUN, Circuit Judges, and YOUNG, District Judge.

BLACKMUN, Circuit Judge.

This action for refund of corporate income taxes paid for fiscal years ended October 31, 1955 and 1956 concerns the tax-free distribution provisions of § 112 (b) (6) (A) and (D) and (i)¹ of the Internal Revenue Code of 1939 and the impact of intervening ligation upon the three-year requirement of that section. There appears to be little helpful precedent.

The facts are established in their entirety by a stipulation and the exhibits which accompany it. They are not in controversy. The issue, therefore, is one of law.

The taxpayer, Cherry-Burrell Corporation, is a Delaware corporation which files its federal income tax returns on the accrual basis and for the fiscal year ended October 31. For some time prior to March 1952 the taxpayer owned all (2800) the outstanding preference shares and 80% of the ordinary or common shares of Cherry-Burrell Limited, an English corporation, which we shall call "Limited". The other 20% of the ordinary shares were held by the then managing director of Limited.

In November 1951 the Commissioner of Internal Revenue issued a letter-ruling that the liquidation of Limited proposed by the taxpayer was "not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income taxes", within the meaning of § 112(i). This meant that Limited could be "considered as a corporation" under § 112(b) (6).

On March 10, 1952, Securities Agency Limited, an English corporation having no relationship to the taxpayer, acquired those ordinary shares of Limited theretofore held by the managing director.

On March 12 Limited's board adopted a resolution for the sale of that company's assets to Securities Agency Limited on behalf of Clarke-Built Limited, another English corporation, for 188,110 English pounds. Limited's shareholders met five days later and voted to wind up the company voluntarily in accordance with the provisions of § 278 et seq. of the English Companies Act of 1948, 11 & 12 Geo. 6, c. 38. They appointed V. L. Norris, the then London partner of taxpayer's retained accounting firm, as Liquidator of the company under § 245 of that Act.

The shareholders of Limited, including the taxpayer, forwith surrendered their share certificates to the Liquidator. The buyer promptly paid the full purchase price. On March 17, 1952, this payment was deposited in the London branch of a New York bank, subject to withdrawal by Norris as Liquidator, under the account name "Cherry-Burrell Limited (In Liquidation)". The taxpayer, also in March, agreed to hold Norris harmless with respect to claims arising out of his acting as Liquidator. It also guaranteed payment by the Liquidator to Securities Agency Limited of a designated amount per share for its minority holding in Limited.

The Liquidator learned, and advised taxpayer, of the existence of substantial claims against Limited. These had been known to Limited's managing director and not to the taxpayer. On April 4 the Liquidator paid taxpayer £2800 as a distribution in full on the preference shares of Limited. On April 7 he distributed £146,250 on the ordinary shares. Of this amount £117,000 was paid to the taxpayer and £29,250 to the minority shareholder. These 1952 payments to the taxpayer were shown as receipts in its books for fiscal 1952. Because of the claims which were being asserted against Limited, Norris retained at that time a balance of approximately £39,000 in the London bank account.

About the end of March 1953 Clarke-Built Limited instituted suit in the High Court of Justice, London, against Limited and the taxpayer for declaratory and injunctive relief and damages. The defendants in that suit in due course filed their common Defence and Counterclaim. In January 1954 the Liquidator transferred £31,000 of the £31,218.15.8 then remaining in the liquidating account to the "Companies Liquidating Account" in the Bank of England. This transfer of funds to that bank was specifically required by § 343(1) of the Companies Act.²

In May 1955 the last of the claims, other than the Clarke-Built lawsuit, asserted against Limited was settled. In August 1958, approximately six years and four months after the April 1952 distributions had been made, the parties to the Clarke-Built lawsuit agreed on settlement terms. Documents were sealed on September 29, 1958, and the action was withdrawn. The Liquidator made his final payment in October to Limited's ordinary shareholders. This amounted to £7800 for the minority shareholders pursuant to the taxpayer's guaranty, and £18,156.16.8 (or $55,157.67) for the taxpayer. The latter amount was shown as a receipt in the taxpayer's books for fiscal 1958.

It is particularly stipulated that

"Under British law, Mr. Norris was unable to pay out to the shareholders of Cherry-Burrell Limited the balance of the funds withheld by him as Liquidator until disposition of all claims against Cherry-Burrell Limited, including the Clarke-Built Limited lawsuit."

Interest accrued on the fund held by the Liquidator from 1952 to 1958. None of this interest was reported by the taxpayer for federal income tax purposes; British income tax, however, was paid upon it.

Taxpayer's fiscal 1952 and 1958 returns did refer to Limited's liquidation and to receipts thereunder, but did not reflect the receipts as income. Taxpayer's returns for its fiscal years 1953-57, inclusive, contained no information or reference to Limited or its liquidation.

The taxpayer did not file with its return for any of the fiscal years 1952-58, inclusive, any waiver of assessment or any bond of the kind described and required by Treas.Regs. 118 § 39.112(b) (6)-3(2) and (3) (1953), and by Treas. Regs. § 1.332-4(a) (2) and (3) (1954).

The taxpayer's fiscal 1958 return as filed showed a loss of $746,664.02 and no tax. Upon audit this loss was reduced by the $55,157.67 amount in United States funds which the taxpayer received that year from the Liquidator. This adjustment of course meant that the Internal Revenue Service regarded the distribution as one not entitled to tax-free treatment. Because of the carryback provisions of § 172 of the 1954 Code, the adjustment resulted in asserted income tax deficiencies of $23,720.25 for the taxpayer's fiscal year 1955 and $4,773.85 for its fiscal year 1956. These were paid. The payments were then made the subject of appropriate claims for refund duly filed and disallowed. The present suit is for the recovery of those deficiency payments.

The district court held that the 1958 distribution was one of a series by Limited in complete cancellation or redemption of all its stock in accordance with a plan of liquidation; that, however, the transfer was not completed within three years from the close of the taxable year during which the first of the series of distributions under the plan was made; and that, therefore, the requirements of § 112(b) (6) (D) for tax-free treatment were not fulfilled. Judgment dismissing the action on the merits was entered accordingly. The taxpayer appeals.

Although the taxes in controversy here are for years governed by the 1954 Code, § 7851(a) (1) (A) of that Code, the 1939 Code was in effect when the plan of liquidation was adopted in 1952 and controls the plan's tax character. See § 7851(b) of the 1954 Code. In any event, § 112(b) (6) of the 1939 Code and the corresponding § 332(b) of the 1954 Code have no differences which are of significance here.

No question is raised as to the taxpayer's full compliance with all tax-free conditions of § 112(b) (6) (A) and (D) and (i) other than the three-year provision. The requirements as to (a) taxpayer's continuing unchanged percentage ownership of shares of Limited; (b) the distributions' being a complete cancellation or redemption of all Limited's stock; (c) their being made in accordance with an appropriate plan of liquidation; (d) their contemplated completion within three years; and (e) prior establishment that Limited's liquidation did not have avoidance of federal income taxes as a principal purpose, concededly were all satisfied. The issue, thus, is the narrow one of the effect of the Liquidator's not making his final payment of cash to the taxpayer by October 31, 1955, that is, within three years from October 31, 1952, the close of the taxable year during which the first distribution was made.

The government argues that all the activities of the Liquidator here "are typical of the steps usually involved in carrying out the liquidation of a corporation"; that while they are being carried out the liquidation is in progress and has not terminated (citing among others, our year-of-loss case of Northwest Ban-corporation v. Commissioner of Internal Revenue, 88 F.2d 293, 296 (8 Cir. 1937)); and that as provided in Treas.Regs. 118 § 39.112(b) (6)-1(d) (1953), "no liquidation is completed until the liquidating corporation and the receiver or trustees in liquidation are finally divested of all the property (both tangible and intangible)". It further argues that distributions here were effected only in 1952 and 1958; that the three-year requirement therefore was not fulfilled; that there is no justification for the taxpayer's not complying with that requirement; and that, in...