Jones v. Grinnell

• Decision Date: 16 February 1950
• Docket Number: No. 3900.,3900.
• Citation: 179 F.2d 873
• Parties: JONES v. GRINNELL
• Court: U.S. Court of Appeals — Tenth Circuit

179 F.2d 873 (1950)

JONES v. GRINNELL

No. 3900.

United States Court of Appeals Tenth Circuit.

February 16, 1950.

Carleton Fox (Theron Lamar Caudle, Assistant Attorney General, Ellis N. Slack, A. F. Prescott, Virginia H. Adams, Special Assistants to the Attorney General, and Robert E. Shelton, United States Attorney, Oklahoma City, Okl., were with him on the brief), for appellant.

Luther Bohanon, Oklahoma City, Okl. (John E. Marshall and Lynn Adams, Oklahoma City, Okl., were with him on the brief) for appellee.

Before BRATTON, HUXMAN and PICKETT, Circuit Judges.

BRATTON, Circuit Judge.

The question is whether for purposes of liability for income tax the sale of certain property was that of a corporation or of individuals who were its stockholders.

Section 22(a) of the Internal Revenue Code, 26 U.S.C.A. § 22(a), defines gross income to include among other things gains, profits, and income derived from sales or dealings in property. Section 311, 26 U.S. C.A. § 311, provides in substance that a transferee of property of a taxpayer shall be liable for the tax imposed upon the taxpayer. Section 29.22(a)-18 of Treasury Regulation III, provides that if a corporation acquires property and later sells it for an amount in excess of the cost or other basis, the gain on the sale is income. And section 29.22(a)-20, provides among other things that no gain or loss is realized by a corporation from the mere distribution of its assets in kind in partial or complete liquidation, however they may have appreciated or depreciated in value since their acquisition.

Peak Petroleum Corporation owned two mineral leases covering 320 acres of land. R. C. Grinnell was president of the corporation and its largest single stockholder. On September 20, 1944, a meeting of the stockholders was held at which a resolution was adopted which provided that the officers be authorized to proceed to dissolve the corporation; that Grinnell be appointed trustee to liquidate the assets; that the assets be transferred to Grinnell as trustee; that upon liquidation any sums obtained be deposited in a special bank account in the name of Grinnell as trustee; that one-third of the amount received from the sale of the assets be retained for the purpose of paying taxes and the necessary expenses of final closing and settling the affairs of the corporation; and that the balance of such funds be distributed ratably to the stockholders. On October 28, 1944, the leases were assigned to Grinnell; and on November 3, 1944, Grinnell assigned them to Skelly Oil Company. Skelly Oil Company paid Grinnell $35,000 in cash for the leases. The money was placed in a special bank account in the name of Grinnell, as trustee; and approximately two-thirds of it was disbursed ratably to the stockholders. Grinnell died, and Wilma Yount Grinnell was appointed executrix of his estate. The Commissioner of Internal Revenue determined that the sale of the leases to Skelly Oil Company should be treated as a sale by the Peak Corporation, and that the estate of Grinnell was liable as transferee for the resulting deficiency in tax. The executrix paid the tax with accrued interest and filed a claim for refund. No action having been taken on the claim within six months after the date of its filing, she instituted this action against the Collector of Internal Revenue to recover the amount paid. The court found that the Peak Corporation was effectively dissolved on September 20, 1944; that Grinnell as trustee for the stockholders sold the leases to Skelly Oil Company; and that the sale was not made by the Peak Corporation. Judgment was entered for plaintiff and defendant appealed.

It is a well settled principle that a taxpayer has the legal right to decrease the amount of what otherwise would be his taxes, or to avoid them altogether, by means which the law permits. Gregory v. Helvering, 293 U.S. 465, 469, 55 S.Ct. 266, 79 L.Ed. 596, 97 A.L.R. 1355; Commissioner of Internal Revenue v. Tower, 327 U.S. 280, 288, 66 S.Ct. 532, 90 L.Ed. 670, 164 A.L.R. 1135. And in some instances that may be the tax-wise result where a corporation makes a bona fide distribution of some or all of its assets as a complete or partial liquidating dividend to its stockholders and the stockholders later make a bona fide sale of the property to a third person. United States v. Cumberland Public Service Co., 70 S.Ct. 280. But the distribution as a liquidating dividend and the subsequent sale to the third person must be a bona fide reality in substance as distinguished from the stockholders merely constituting a conduit through which to channel title from the corporation to the ultimate purchaser. In such an instance, the corporation is not liable for the tax on the transaction. United States v. Cumberland Public Service Co., supra. But in determining the question of tax liability of the corporation, a transaction of that kind should be subjected to careful scrutiny. Wichita Terminal Elevator Co. v. Commissioner, 10 Cir., 162 F.2d 513.

In a case of this kind the true nature of the transaction viewed in its entirety is decisive in determining whether the sale of property is attributable to a corporation or to its stockholders or former stockholders. And the true nature of the transaction is not to be disguised by the mere formalism employed in effecting the transfer of the legal title. Tax liabilities are measured by the reality of the transaction, not the mere form employed in bringing it about. Commissioner of Internal Revenue v. Court Holding Co., 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed. 981.

The findings of fact made by the trial court that the Peak Corporation was effectively dissolved as of September 20, 1944, that the leases were transferred to Grinnell as trustee for the stockholders, that the transfer represented a liquidating dividend, that the trustee conveyed the leases to the Skelly Oil Company, and that the sale was not made by Peak Corporation are not to be disturbed on appeal unless they are clearly erroneous, due regard being had for the...