Howell Turpentine Co. v. Commissioner of Internal Rev.

• Decision Date: 04 June 1947
• Docket Number: No. 11845.,11845.
• Citation: 162 F.2d 319
• Parties: HOWELL TURPENTINE CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fifth Circuit

162 F.2d 319 (1947)

HOWELL TURPENTINE CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 11845.

Circuit Court of Appeals, Fifth Circuit.

June 4, 1947.

Robt. R. Milam, of Jacksonville, Fla., for petitioner.

Newton K. Fox and Lee A. Jackson, Sp. Assts. to Atty. Gen., Sewall Key, Acting Asst. Atty. Gen., and J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and C. R. Marshall, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for respondent.

Before SIBLEY, HUTCHESON, and LEE, Circuit Judges.

SIBLEY, Circuit Judge.

The question for decision is whether the Tax Court's holding that a sale in 1940 of 53,488 acres of land in Baker and Union Counties. Florida to National Turpentine and Pulpwood Corporation was made by Howell Turpentine Company and resulted in realizing a taxable gain to it, is according to law. The case is reported 6 T. C. 364. On this question the court divided, the majority opinion arguing for several legal theories, mistaking as we think some principles of law, and culminating in a disregard of the unimpeached testimony presented both by the taxpayer and the Commissioner. The minority opinion we regard as correct and unanswerable. As factfinders the minority judges ordinarily would be controlled by the majority, and this reviewing court need not regard their views; but here they say there is no substantial evidence to support the majority conclusion and that the evidence is all to the contrary, thus raising a question proper for our consideration.

The evidence consists of documents and the testimony of D. F. Howell presented by the taxpayer and of Harry W. Reinstein presented by the Commissioner. There is no contradiction or attempt at impeachment. The questions are as to the effect of the documents and whether they and the testimony are overridden by the circumstances.

In brief outline the facts are these. Howell Turpentine Company was incorporated in Florida in 1926 with a capital of $100,000 and thereafter conducted on pine lands which it owned the business of making turpentine and rosin at a distillery in Baker County and another in Union County. Besides the 5000 acres thus used the Company acquired about 45,500 acres of cutover lands which were unproductive, but on which it was conducting reforestation by the process of nature and by artificial planting of trees. The Company was not making money and in 1937, in 1939, and in 1940 it granted successively options to different prospective buyers for the purchase of all its lands, at a reduced price each year. The last option was to Rayonier, Inc., and it expired Aug. 9, 1940. No document and no testimony purports to show any effort thereafter on the part of the Company to sell.

D. F. Howell, who had been president of the Company from the beginning and who owned 85 per cent of its stock, his two sons each owning 5 per cent and a former employee, Long, owning 5 per cent, testifies that shortly after August 9, 1940, he conferred with his sons, the three being the directors, and reached a decision not to permit the corporation again to try to sell the lands, but to liquidate it. Thereafter on August 25, Howell, having approached National Turpentine and Pulpwood Corporation offering to sell the land at a price lower than any before offered, met its president and its attorney Reinstein with his own attorney Milam, and an agreement was reached, and Reinstein was asked to draw the papers, Milam cooperating. Both Howell and Reinstein testified positively that it was understood that the title was in Howell Turpentine Company but that a liquidation was in process, and the contract was to be made with the individual stockholders on the basis that the liquidation would be accomplished by the time fixed for the conveyance of title. Reinstein, the Commissioner's witness, was asked, "You had no negotiations with the corporation as such?" and he answered, "No, the understanding was that they wanted to sell as individuals and were liquidating the corporation, and the entire conferences were with that understanding, as stated in the contract." The contract, not executed till September 6, clearly and explicitly so states and is signed by the three Howells individually.

Pending the preparation of this contract, on Sept. 4, Howell sent a telegram and a letter¹ to a public accountant who acted as auditor for the Turpentine Company, stating that the buyer's president had assured Howell that he would buy all the stock of the Turpentine Company instead of the land if it would save Howell income taxes, and Howell wished the auditor to come down and assist him in working out a proper method of selling the stock. Nothing came of this however; the stock was not sold, the contract was made as first agreed on.

On Sept. 6 the younger Howells acquired from Long his 5 percent of the stock and had it transferred into their names. Howell testified that Long's stock was pledged as collateral for its purchase price, and Long had previously said he would sell it for the debt, he having left the Company. On this date the three Howells, now owning all the stock, in formal stockholders meeting resolved that the Turpentine Company should dissolve and wind up its affairs and collect its assets and discharge its obligations and completely liquidate, and if the liquid assets should be insufficient to pay the mortgage on the physical properties, such property should be distributed subject to the mortgage, and that all assets be distributed in kind to the stockholders in full payment and exchange for their stock. Actual dissolution was directed to be withheld till distribution should be accomplished. Also on September 6, at a later hour, the three Howells met with Reinstein at his office and duly executed the written contract which on August 25 had been agreed on and directed to be prepared. Some special provisions of this contract will be adverted to later. It concluded with a provision that if the Howells were unable to convey fee simple title to 80 per cent of the lands, the contract should terminate. On October 3, 1940, the Commissioner was advised pursuant to Internal Revenue Code, § 148(d), 26 U.S.C.A. Int.Rev.Code § 148(d), of the proposed liquidation of the Turpentine Company and a copy of the stockholders' resolution was annexed.

Turpentine and Rosin Factors, Inc., of Jacksonville, which handled the products of the Turpentine Company and also acted as banker for it and D. F. Howell, held the mortgage on the lands, on which $249,745 was owing, but subject to a credit on account of $114,303, leaving a balance of $139,442. D. F. Howell owed the Turpentine Company a sum of $120,502. An additional sum of $27,056 interest was then supposed to be due but was held not to be owing in Howell v. Commissioner, 5 Cir., 162 F.2d 316. On December 26, 1940, he gave Factors, Inc., his personal note for $180,500 and was given credit for that amount. He thereupon gave the Turpentine Company a draft on Factors, Inc., for $170,198, which was indorsed over by Turpentine Company to Factors, Inc. The mortgage and all other indebtedness of the Company was thereby discharged and was cancelled. Also on December 26, 1940, the Turpentine Company by formal corporate action conveyed to the three Howells in proportion to their respective stock holdings, 53,448 acres of land in Baker and Union Counties. By a separate conveyance and bill of sale it conveyed all the remaining assets to them. On the next day their stock certificates, which had been surrendered, were marked cancelled. On that day, too, the three Howells, joined by their respective wives, conveyed the 53,448 acres of land to the Pulpwood Corporation, which made payment according to its contract, the cash part of which payment was applied by D. F. Howell on his $180,500 note given to Factors, Inc. The following day, December 28, 1940, the Turpentine Company formally declared its affairs completely liquidated, and resolved that the corporation be dissolved, and the directors were instructed to do all things necessary to dissolve it and surrender the charter. The Secretary of State declared it dissolved October 14, 1941. The income tax return of the Turpentine Company did not report any gain to it from the sale of the land. The Howells reported capital gains on their stock arising from the dividend in liquidation. The Commissioner charged to the corporation a gain in the sale of $207,261, and assessed additional taxes accordingly. The Tax Court sustained the assessment substantially.

We address ourselves first to some misconceptions of law.

1. It was not necessary to a contract of sale by the Howells as stockholders that they should by a prior action have agreed to a dissolution of the corporation and thereby have become "equitable owners" of the lands. A stockholder as such has no title, legal or equitable, to the corporation's property. His interest in it is a pro rata part of the residuum on a liquidation, much like the interest of a partner in partnership property, which we discussed, citing the authorities, in Bahr v. Commissioner, 5 Cir., 119 F.2d 371. He can sell his interest by selling his stock, but he cannot effectively convey any particular property of the corporation prior to a liquidation.

But he may validly contract to sell it before any steps are taken towards liquidation, if he has a reasonable prospect of obtaining title to it within the time fixed by the contract for the conveyance. This is true of stockholders as it is of people in general who have a prospect of obtaining title and are willing to assume a personal liability if they should fail. "It is not unusual for persons to agree to convey by a certain time notwithstanding they have no title to the land at the time of the contract, and the validity of such agreements is upheld. In such cases the vendor assumes the risk of acquiring the title and making the conveyance, or responding in damages for the vendee's loss of his bargain. * * * Whenever one...