J. Ungar, Inc. v. Commissioner of Internal Revenue

• Citation: 244 F.2d 90
• Decision Date: 13 May 1957
• Docket Number: 272,No. 271,Dockets 24349,24350.,271
• Parties: J. UNGAR, Inc., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Jesse UNGAR (Transferee), Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Second Circuit

244 F.2d 90 (1957)

J. UNGAR, Inc., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Jesse UNGAR (Transferee), Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 271, 272, Dockets 24349, 24350.

United States Court of Appeals Second Circuit.

Argued April 5, 1957.

Decided May 13, 1957.

Adrian W. DeWind, New York City, Richard H. Paul, New York City, of counsel, for petitioners.

Melva M. Graney, Washington, D. C., (Harry Baum, Washington, D. C., with her on the brief), Charles K. Rice, Asst. Atty. Gen., for respondent.

Before CLARK, Chief Judge, and HAND and LUMBARD, Circuit Judges.

HAND, Circuit Judge.

This is a petition to review an order of the Tax Court in banco, opinion by Rice, J., 26 T.C. 331, with whose findings and conclusion we are in accord, which held that a New York corporation (which we shall call the Corporation), was liable for a deficiency of $31,957.21 for unpaid income and excess profits tax for its fiscal year, ending February 28, 1951. The only issue is as to the amount of the corporate income during the year in question. The Corporation had been doing a commission business as agent for a Spanish exporter of olives and olive oil which we shall call Exportadora, and also as broker for a New York agent of importers of dates (Balfour Guthrie & Co.). Ungar was the only shareholder of the Corporation and in absolute control of its business. The Corporation's contract with Exportadora was for a percentage upon sales procured by it, which were subject to Exportadora's confirmation and approval; it provided that all shipments should be made against buyers' letters of credit, and that the Corporation should not be entitled to commissions until the goods were shipped, all shipments being subject to the regulations of the Spanish government. Ungar became ill and wished to retire from the business. He got leave from Exportadora to sell the Corporation, but was unable to find a buyer, and in the summer of 1950 decided to continue the business as an individual until he could do so, which he did in October 1951. On September 1, 1950, Exportadora made a contract with him individually to last for ten years, in substance replacing him for the Corporation but without any change in the manner of doing business. On the 15th the Corporation followed this by formally assigning to him all its assets except such "cash as may be required as a reserve for the payment of all liabilities of J. Ungar, Inc." The assets so transferred included $18,659.75 in cash; $27,042.38 in "commissions receivable"; $57,172.77 described as the "Right to Receive Commissions on Unshipped Orders, Commissions not accrued on September 15, 1950"; and about $5,500 in chattels. The only item in dispute is that for commissions not accrued on September 15.

As a new question it is indeed hard to see why the transfer of a business for purposes of liquidation from a corporation to its single shareholder — or for that matter to its shareholders collectively — should be different for tax purposes from liquidation by a receiver, which is treated as a continuation of the corporate business.¹ In the case at bar Ungar did indeed continue the business under the contract of September 1, 1950 with Exportadora, but it is often true that a receiver continues a business awaiting a favorable sale of it as a going enterprise in order to preserve its good will and avoid disposing of the property as scrap. The shareholders have no just complaint when this is done; for the corporate rates are imposed because they have enjoyed the privilege of limited liability that incorporation gives, and liquidation is as much a part of the original venture as its active conduct. We cannot help thinking, therefore, that it would better have accorded with the underlying thesis of the Revenue Law for courts to regard an assignment in liquidation by a corporation to its shareholders, as no more than a procedural step in the corporate enterprise: that is, its termination. However, there is enough contrary authority to make it at least doubtful whether such a disposition of the case at bar would be permissible.²

So far as concerns claims against others, such assignments have been dealt with as "anticipatory assignments"; and the income is charged against the assignor, when he or it has "earned" it, and, in the case of a corporation, when it has not wholly ceased to function. In Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731, the test was first applied whether the assignor had "earned" payments that he had assigned in advance to his wife; but that was founded upon the words of the statute. In Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75, and Helvering v. Eubank, 311 U.S. 122, 61 S. Ct. 149, 85 L.Ed. 81, if we rightly understand them, the income was attributed to the assignor because, although he had parted with the claim before it was due, his gratification in the assignee's possession of the proceeds was income arising at that time. On that theory one would suppose that the doctrine would be...