Cold Metal Process Co. v. Commissioner of Int. Rev.

• Decision Date: 10 September 1957
• Docket Number: 13048.,No. 13047,13047
• Citation: 247 F.2d 864
• Parties: The COLD METAL PROCESS COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. The LEON A. BEEGHLY FUND, The Union National Bank of Youngstown, Ohio, Trustee, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

247 F.2d 864 (1957)

The COLD METAL PROCESS COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

The LEON A. BEEGHLY FUND, The Union National Bank of Youngstown, Ohio, Trustee, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 13047, 13048.

United States Court of Appeals Sixth Circuit.

September 10, 1957.

Howard F. Burns, Cleveland, Ohio (William H. Fleming and Alan G. Rorick, Cleveland, Ohio, on the brief), for petitioners.

Melva M. Graney, Dept. of Justice. Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., and Harry Baum, Atty., Dept. of Justice, Washington, D. C., on the brief), for respondent.

Before SIMONS, Chief Judge, and ALLEN and MILLER, Circuit Judges.

SHACKELFORD MILLER, JR., Circuit Judge.

The petitioners, The Cold Metal Process Company, hereinafter referred to as Cold Metal, and The Leon A. Beeghly Fund, The Union National Bank of Youngstown, Ohio, Trustee, hereinafter referred to as Trustee, seek review of the judgment of the Tax Court which adjudged an income tax deficiency for the year 1949 against Cold Metal in the amount of $3,931,174.37 and in the same amount against the Trustee as a transferee of Cold Metal. The stipulated facts are stated by the Tax Court in its Findings of Fact and Opinion reported at 25 T.C. 1333, to which reference is made for the facts in detail. We will restate here what we believe to be sufficient for an understanding of the issue.

The question involved is the 1949 income tax liability of a corporation, which was dissolved in 1945, on income received in 1949 by its sole stockholder arising from assets received by the stockholder in dissolution in 1945. The income under consideration resulted from transactions by the corporation prior to dissolution but was not accruable to the corporation prior to dissolution because of litigation instituted by the Government which strenuously contested the legal right of the corporation to such income until the termination of the litigation in 1949.

Cold Metal, an Ohio corporation, was incorporated in 1926 with 2000 shares of outstanding common stock. It kept its books on an accrual basis of accounting. Its principal assets consisted of United States patents No. 1,744,016 and No. 1,779,195, hereinafter referred to as the patents, relating to the hot and cold rolling of metals. The process covered by the patents gained wide usage in the metals industry, and beginning in 1928 Cold Metal granted nonexclusive licenses to certain manufacturers. Various other manufacturers, not licensed, installed rolling mills which Cold Metal claimed embodied its inventions and infringed its patents. Cold Metal brought suits for infringement against several large producing companies.

In Cold Metal Process Company v. Carnegie-Illinois Steel Corporation, 3 Cir., 108 F.2d 322, certiorari denied and petition for rehearing denied 309 U.S. 665, 667, 60 S.Ct. 590, 84 L.Ed. 1012, the Court of Appeals held the patents valid and infringed. The suit was settled for $3,850,000 and the granting by Cold Metal of non-exclusive licenses on a royalty basis. See also: Cold Metal Process Co. v. Republic Steel Corp., 6 Cir., 233 F.2d 828, certiorari denied 352 U.S. 891, 77 S.Ct. 128, 1 L.Ed.2d 86, a recent opinion of this Court, for a thorough discussion of the validity of the patents.

In 1943 the United States started a suit, hereinafter referred to as the Cancellation suit, in the United States District Court for the Northern District of Ohio against Cold Metal seeking cancellation of the patents on the ground of fraud or a mutual mistake of fact in the granting of them. On the motion of the United States, the District Court entered an interlocutory order on October 10, 1944, hereinafter referred to as the impounding order, which enjoined Cold Metal until final judgment in the suit from receiving any further moneys by way of royalties or damages for infringement under the patents and from transferring the patents in any manner whatsoever. The order directed that royalty payments and damages for infringement be deposited with the Clerk of the Court. Final judgment in the District Court dismissing the complaint was entered for Cold Metal on September 20, 1945. The impounding order was restored pending the Government's appeal to the Court of Appeals. Before this case was finally terminated there was paid into court and impounded under the provisions of the order the sum of $9,749,000, which was eventually released and paid in 1949 to the Trustee, who, as sole stockholder of Cold Metal, had acquired all its assets in dissolution. This money and other payments received by the Trustee in 1949, following the proceedings and litigation hereinafter referred to, constitute the basis for the deficiency assessment against Cold Metal for the year 1949, herein in controversy.

In 1940 Leon A. Beeghly, who was one of Cold Metal stockholders and Chairman of its Board of Directors, transferred 150 shares of Cold Metal stock to The Union National Bank of Youngstown, Ohio, in trust for certain charitable purposes, herein referred to as the Trustee. In 1944 he transferred one additional share to the Trust.

In 1942 and 1943 Cold Metal brought several suits for alleged infringement of the patents against a number of steel companies. Thereafter, negotiations were entered into, looking to the settlement of these suits. A plan was suggested by several of their attorneys that the way to settle the controversy was for the stockholders of Cold Metal to sell their stock to the steel companies or to an unnamed banker. This plan appealed to the stockholders because of the impounding order which resulted in the discontinuance of dividends and also because Cold Metal became pressed for money to continue prosecution of its claims. However, neither the steel companies nor the unnamed banker would have been willing to purchase the stock until the termination of the Cancellation suit. The steel companies wished to settle within the taxable year of 1945 as the excess profit tax was due to expire at the end of 1945. They were not concerned with whom they settled as long as the settlement was binding. An alternate plan was worked out by which the stockholders of Cold Metal would sell all of their shares to the Trustee, Cold Metal would be liquidated with the Trustee as sole stockholder acquiring all its assets, and the infringement claims would then be settled with the steel companies. Under this plan the Trustee assumed a risk that the assets acquired through the dissolution of Cold Metal would not produce sufficient funds to meet its obligations to pay the debts and taxes of Cold Metal, the purchase price of the stock, and the future expenses to be incurred in connection with pending litigation. On the other hand, the stockholders who sold at the price offered by the Trustee, thus limiting the amount they would receive, would receive a partial cash payment immediately and very substantial payment later if and when litigation was successfully terminated.

While the negotiations were being conducted with the steel companies, negotiations were also taking place among the stockholders of Cold Metal with respect to the sale of their shares to the Trustee. On December 28, 1945, the Trustee entered into a separate agreement with each of the other stockholders whereby it purchased all of their shares in Cold Metal for a total of $11,131,000 at prices varying from $4250 to $7500 per share. $200 per share was to be paid in cash upon delivery of the certificates. The balance was to be paid at a later time in accordance with the plan looking to the dissolution of Cold Metal and to the payment to the Trustee, who would acquire its assets, by the Clerk of the Court of the impounded funds in the Registry of the Court and the payment to the Trustee by sundry licensees of royalties under patents formerly owned by Cold Metal. On December 29, 1945, certificates for the 1849 shares were delivered duly endorsed to the Trustee. In accordance with a pre-arranged plan between certain former stockholders of Cold Metal, The Union National Bank of Youngstown, Ohio, and the Trustee, the Trustee acquired $375,000 in cash which it used to make the cash payments totaling $369,800 to the transferring stockholders of Cold Metal. Following delivery by the Trustee to Cold Metal of the certificates covering the 1849 shares, three certificates were delivered to the Trustee making it the record owner of all the 2000 shares of outstanding stock.

While the above transactions were taking place a meeting of the stockholders of Cold Metal was called and a resolution to dissolve the corporation was adopted. A further resolution was adopted directing the distribution of all of its assets to the Trustee, subject to the impounding order in the Cancellation suit.

On December 29, 1945, following the stockholders meeting, a certificate of dissolution of Cold Metal was filed with the Secretary of State of Ohio, and the officers of Cold Metal executed an instrument entitled "Assignment and Distribution in Kind" transferring to the Trustee all of the assets of Cold Metal, subject, however, to the impounding order in the Cancellation suit. This was accepted in writing by the Trustee.

By contracts executed December 29, 1945, six of the steel companies settled with Cold Metal and the Trustee claims against them for past infringement for a total of $9,000,000 and took license agreements under the patents. On December 31, 1945, a settlement was reached with Inland Steel Company in the amount of $600,000. On March 19, 1946, a settlement was reached with Signode Steel Strapping Company in the amount of $39,000. On September 30, 1946, a settlement was reached with Crucible Steel Company in the amount of $110,000. The amounts called for by these settlements were paid to the Clerk of the District Court in the Cancellation suit. This brought the total amount impounded in that suit to $9,749,000.

On December 29,...