Gensinger v. Commissioner of Internal Revenue, 13605.

• Decision Date: 30 November 1953
• Docket Number: No. 13605.,13605.
• Citation: 208 F.2d 576
• Parties: GENSINGER v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

208 F.2d 576 (1953)

GENSINGER v. COMMISSIONER OF INTERNAL REVENUE.

No. 13605.

United States Court of Appeals, Ninth Circuit.

November 30, 1953.

Jones, Birdseye & Grey, A. R. Kehoe, Seattle, Wash., for appellant.

H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, Robert N. Anderson, Robert B. Ross, Sp. Assts. to Atty. Gen., Charles W. Davis, Chief Counsel, Bureau of Internal Revenue, Washington, D. C., Alonzo Watson, Jr., Sp. Asst. to Atty. Gen., Washington, D. C., for appellee.

Before HEALY, BONE and POPE, Circuit Judges.

BONE, Circuit Judge.

This is a petition to review a decision of the Tax Court holding that the taxpayer, E. D. Gensinger, is liable as transferee of the assets of Columbia River Orchards, Inc., herein the corporation, for deficiencies in income taxes, excess profits taxes and declared value excess profits taxes of that corporation in the aggregate amount of $103,571.06 for the taxable year 1943.

The principal question before us is whether the proceeds of certain sales of fruit in 1943 were income of the corporation. The taxpayer's contention is that he sold the fruit after receiving it from the corporation as a liquidating dividend and that the proceeds were therefore not taxable to the corporation.

We shall sketch the facts only in broad outline, as they are fully set out in the Tax Court's opinion. See 18 T.C. 122. The taxpayer was the sole shareholder of the Washington corporation except for two qualifying shares held by his wife who was a director. The corporation produced cherries, apricots and peaches on its farm near Wenatchee, Washington. The taxpayer owned some orchard land individually. Both the corporation and the taxpayer had membership contracts with a local cooperative marketing association, known as Ninth Street Skookum Growers, Inc., herein Skookum, for the marketing of their crops. The practice of Skookum was to receive, grade, commingle and sell the fruit of its members and distribute to them their aliquot shares of the proceeds.

On May 13, 1943 the taxpayer and his wife adopted a resolution that the corporation be dissolved, that the taxpayer be appointed trustee in dissolution, and that the assets be distributed in kind to the shareholders, who were to assume the corporate liabilities. This resolution was not filed as required by a Washington statute and was apparently not intended to have any immediate effect, but only to set out the plans for a liquidation which was contemplated for the near future. July 7, 1943 was the date fixed for commencement of dissolution proceedings. A resolution for that purpose was not adopted until July 17 because of delay by the taxpayer's attorney in drafting it. This resolution named the taxpayer as trustee in dissolution and was filed in accordance with state law on July 20, 1943.

The cherry crop of the corporation was delivered to Skookum at some time prior to July 2, 1943. The apricot crop was delivered between July 7 and July 18, 1943. Prior to the delivery of the apricot crop the taxpayer advised skookum that the corporation was to be dissolved and directed that the apricot and subsequent crops from the corporate lands be handled for his individual account. Between July 22 and August 19, 1943 Skookum paid the proceeds of the sale of the cherry and apricot crops to the Regional Agricultural Credit Corporation (RACC), which had financed the operations both of the corporation and the taxpayer individually. The peach crop was delivered to Skookum and sold by it between September 7 and October 13, 1943. The record does not show to whom these proceeds were paid.

On October 11, 1943 the taxpayer, as trustee in dissolution, executed a deed transferring to himself as a shareholder the lands of the corporation and its production equipment. The existence of the corporation was terminated the following year (on May 24, 1944) with the filing of a final certificate of dissolution with the Secretary of State of Washington.

The problem here is not whether negotiation by a corporation for a sale of its assets, followed by the formality of a distribution in kind and a shareholders' sale, motivated solely by a purpose to avoid a tax to the corporation, is in substance a sale by the corporation, as in Commissioner of Internal Revenue v. Court Holding Co., 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed. 981, and United States v. Cumberland Public Service Co., 338 U.S. 451, 70 S.Ct. 280, 94 L.Ed. 251. Nor are we here concerned with an attempt of a going concern to avoid a tax on the sales of its products by the ritual of a paper transfer of such products to shareholders as dividends, followed by sales of such products in the ordinary course of the corporation's business, as in United States v. Lynch, 9 Cir., 192 F.2d 718. Here the taxpayer for some time intended to dissolve the corporation and thereafter carry on the business as an individual. If pursuant to this long-avowed intention the crops in question were distributed to the taxpayer in the course of liquidation, the circumstances afford no occasion to disregard the form of the transaction and impute subsequent sales of the fruit to the corporation. Cf. Wurtsbaugh v. Commissioner of Internal Revenue, 5 Cir., 187 F.2d 975. The problem here is simply whether the distribution was made.

The taxpayer argues that the resolutions of May 31 and July 17, in themselves, worked a complete and final dissolution of the corporation and that title to the corporate assets thereupon vested automatically in the taxpayer as sole shareholder. We think not. We agree with the Tax Court that the resolutions had no such effect under the laws of Washington, Rem.Rev.Stat. § 3803-48 et seq., and that they were clearly not intended to effect a present distribution of all the corporate assets. There remain, however, more difficult questions as to whether there was a distribution of the crops.

The appointment of the taxpayer as trustee in dissolution was effective on July 20, 1943, when the July 17 resolution was filed. Rem.Rev.Stat. § 3803-49. The taxpayer thereby obtained sole and complete control of the corporate assets for purposes of winding up, with power to sell such assets or to distribute them to himself as sole shareholder. See Rem. Rev.Stat. §§ 3803-52, 3803-56(2) (a); McDougall v. Hepden, 3 Wash.2d 603, 101 P.2d 570.

On July 20, the cherry crop of the corporation had already been sold by Skookum. This crop had never been distributed to the taxpayer and there is no evidence that any such distribution was ever intended. The proceeds of the sale of this crop, then, were clearly income of the corporation, as the Tax Court found.

This leaves for consideration the apricot and peach crops of the corporation. The Tax Court held that the taxpayer could not have distributed the apricot crop to himself. The rationale was, first, that debts of the corporation to the RACC persisted until they were discharged by payment to the RACC of the proceeds of the apricot sales in August of 1943, and that state law prohibited the taxpayer from distributing any assets to himself until all corporate debts were paid.

The taxpayer contends that the Tax Court erred in finding that the corporation had debts outstanding until August of 1943. We agree. In paragraph IV of his petition in the court below the taxpayer set out 57 allegations of fact taken almost verbatim from the findings of the Tax Court in an earlier proceeding involving these same parties and substantially the same issues. See 15 T.C. 253. Among these was the allegation that "all corporate obligations were paid on or before July 15, 1943." Contrary to the taxpayer's contention, the finding to that effect in the prior case was not res judicata, since the earlier proceeding was dismissed for want of jurisdiction and the finding was wholly unnecessary to the decision. Commissioner of Internal Revenue v. Sunnen, 333 U.S. 591, 597, 598, 68 S.Ct. 715, 92 L.Ed. 898; Cromwell v. Sac County, 94 U.S. 351, 352-353, 24 L. Ed. 681.

However the Commissioner, in his answer, unequivocally admitted the 57 allegations contained in paragraph IV of the petition, including the allegation above quoted. The taxpayer stressed this admission in his opening statement in the court below and at no point in the course of the following trial was the question of the existence of corporate debts touched upon. It is true that the record of the prior case, which dealt generally with the subject of the debts owed to the RACC, was by stipulation made a part of the record in the instant case, but the earlier proceeding involved several questions not present here. The record of that proceeding was not introduced for the purpose of raising questions closed by the pleadings in this case.

The allegation quoted was certainly not so incredible as to justify the Tax Court in ignoring the Commissioner's flat admission of it. It was supported by the testimony of the taxpayer's accountant in the prior proceeding. The Tax Court inferred that the debts discharged by payment of the proceeds of the cherry and apricot crops to the RACC were debts of the corporation. But that inference is by no means inevitable, for the RACC had financed the operations both of the corporation and the taxpayer individually. There is no evidence as to whether the debts to the RACC were owed by the taxpayer individually or by the corporation. The taxpayer had a right to rely upon the Commissioner's admission, and the record indicates that he did so. We think it was settled on the pleadings that all corporate obligations were paid on or before July 15, 1943, and that the Tax Court was bound to so find. We must therefore proceed on the premise that there were no outstanding corporate debts on July 20 which precluded the taxpayer, as trustee, from distributing the apricot crop to himself. Cf. Iowa Bridge Co. v. Commissioner of Internal Revenue, 8 Cir., 39 F.2d 777.¹

The Tax Court thought that, in any event, it was beyond the power of the...