Messer v. CIR

• Decision Date: 10 February 1971
• Docket Number: No. 18731-18733.,18731-18733.
• Citation: 438 F.2d 774
• Parties: Sidney MESSER, Transferee, Appellant in No. 18,731 Nat Malamuth, Transferee, Appellant in No. 18,732 Estate of Samuel Antkies, Deceased, Transferee, Jack Antkies and Shirley Antkies, Executors, Appellant in No. 18,733 v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Third Circuit

438 F.2d 774 (1971)

Sidney MESSER, Transferee, Appellant in No. 18,731 Nat Malamuth, Transferee, Appellant in No. 18,732 Estate of Samuel Antkies, Deceased, Transferee, Jack Antkies and Shirley Antkies, Executors, Appellant in No. 18,733 v. COMMISSIONER OF INTERNAL REVENUE.

Nos. 18731-18733.

United States Court of Appeals, Third Circuit.

Argued October 22, 1970.

Decided February 10, 1971.

Michael S. Feinman, New York City (Stuart M. Berkman, New York City, on the brief), for appellants.

Gary R. Allen, Tax Division, Department of Justice, Washington, D. C. (Johnnie M. Walters, Asst. Atty. Gen., Lee A. Jackson, Meyer Rothwacks, Attys., Dept. of Justice, Washington, D. C., on the brief), for appellee.

Before McLAUGHLIN, FREEDMAN and VAN DUSEN, Circuit Judges.

OPINION OF THE COURT

McLAUGHLIN, Circuit Judge.

This is a joint appeal by two individuals and an estate, as transferees of the assets of Tel-O-Tube Corporation of America (Tel-O-Tube), the transferor, from decisions of the Tax Court entered October 10, 1969. The court below found that Tel-O-Tube owed federal income tax in the amount of $39,158.43 for its taxable year ending September 30, 1961 and asserted income tax liabilities against each of the appellants, as transferees of the assets of the dissolved corporation, in the same amount. The Findings of Fact and Opinion of the Tax Court are reported at 52 T.C. 440 (1969).¹ Jurisdiction in this Court is conferred by 26 U.S.C. § 7482.

The facts, as stipulated in part and as found by the Tax Court, are as follows:

Tel-O-Tube was incorporated in 1948 under the laws of New Jersey to engage in the manufacture and sale of television picture tubes. Commencing in 1953, it filed its federal income tax returns on an accrual basis for fiscal years ending September 30. Until July 10, 1960, Sidney Messer, Nat Malamuth and Samuel Antkies were the corporation's sole stockholders, each owning one-third of its stock. On July 10, 1960, Samuel Antkies died, and his estate, with Jack Antkies and Shirley Antkies acting as co-executors, succeeded to his one-third interest in Tel-O-Tube.

Tel-O-Tube conducted its manufacturing operations under a patent licensing arrangement with Radio Corporation of America (R.C.A.), and for each of its fiscal years 1953 through 1957 accrued and deducted the following royalties due R.C.A.:

                  1953 .................  $20,032.15
                  1954 .................   23,757.49
                  1955 .................   28,439.19
                  1956 .................   22,249.20
                  1957 .................   17,727.62
                                         ___________
                      Total              $112,205.65
                

These royalties were not actually paid and in April, 1957, the corporation issued a series of promissory notes, covering the obligation, payable to R.C.A. and becoming due beginning April 1, 1962 and annually thereafter through April 1, 1974.

In 1957, the corporation terminated its manufacturing and sales operations and disposed of its operating assets. $100,000 of the proceeds of this sale was utilized to purchase four income-producing notes of the Manufacturers Credit Corporation. One of the purposes of this investment was to create a funded reserve for Tel-O-Tube's indebtedness to R.C.A. In the years 1958, 1959 and 1960, the income of the corporation consisted only of interest on the Manufacturers notes and small amounts from the sale of equipment and refund of insurance premiums.

A special meeting of the directors of the corporation, none of whom were shareholders, was held on September 19, 1960 and the following resolution passed:

"Resolved, that the corporation be dissolved forthwith and that its assets be distributed to the stockholders, subject to the payment of the claim of Radio Corporation of America.

"further

"Resolved, that the officers of the corporation take all action necessary to effectuate the foregoing."

Adjusting journal entries, dated September 30, 1960, reflecting each stockholder's distributive share of corporate assets were entered on the corporation's books.² On October 4, 1960, an information form 966, regarding the dissolution, was filed with the district director of internal revenue as were forms 1096 and 1099-L. The federal income tax return for the year ending September 30, 1960 was marked "Final Return." On December 6, 1960, a Certificate of Dissolution was issued by the Secretary of State of the State of New Jersey.

Manufacturers Creditor Corporation paid Tel-O-Tube interest on its notes through July, 1961. These payments were deposited in Tel-O-Tube's bank account and promptly distributed to each of the shareholders, equally. The notes remained in Tel-O-Tube's name until July, 1961, at which time Manufacturers Credit Corporation was advised to cancel the notes and issue new ones to the three shareholders. This was accomplished on August 1, 1961.³

On October 28, 1958, R.C.A. had entered into a consent decree with the United States as a result of a government challenge to R.C.A.'s licensing structure. In May, 1960, a meeting of Tel-O-Tube's stockholders was called for the purpose of discussing whether an antitrust action should be brought against R.C.A. An attorney was retained to institute suit for violation of the antitrust laws and patent misuse.⁴ This attorney withdrew approximately one month later and although no suit was ever commenced, negotiations with R.C.A. continued through other counsel. These negotiations were pending when the dissolution resolution was passed. In the spring of 1961, Tel-O-Tube advised R.C.A. that the promissory notes should be returned because "the royalties were not properly payable" due to violations of the antitrust laws. A settlement agreement was executed on June 15, 1961, under which R.C.A. returned the notes of Tel-O-Tube and cancelled the indebtedness for royalties. In return the corporation executed a general release of any claim it might have had against R.C.A. This release was executed in Tel-O-Tube's name by Sidney Messer, acting in his capacity as secretary-treasurer, and recited that the corporation was organized and existing under the laws of New Jersey.⁵ R.C.A. was never advised that Tel-O-Tube had assigned its claim and had it been so advised, R.C.A. would have insisted upon releases from the parties to whom the claim had been assigned.⁶

On July 18, 1961, Tel-O-Tube received a bill from counsel for services rendered which it subsequently paid on November 6, 1961. In addition, on July 12, 1961, upon being advised of the cancellation of the indebtedness to R.C.A., the corporation's accountant wrote to each of the shareholders. Each letter, in pertinent part, stated:

"In order to complete the liquidation of Tel-O-Tube * * * the $100,000.00 invested in the notes of Manufacturers Credit Corp. are to be disbursed as follows:

                   The Estate of
                     Samuel Antkies ..  $35,476.66
                   Nat Malamuth ......   31,054.12
                   Sidney Messer .....   33,469.22
                                       ___________
                                       $100,000.00"
                

This led to the issuing of new notes previously referred to.

The Commissioner of Internal Revenue determined that Tel-O-Tube was subject to federal corporate income tax on the interest received by it on the Manufacturers Credit Corporation notes and on the discharge of its indebtedness to R.C. A. to the extent that the previous deductions for royalties had resulted in a tax benefit to the corporation. The taxpayers stipulated that they were liable for any taxes which Tel-O-Tube owed.

The Tax Court sustained the Commissioner. It concluded that Tel-O-Tube did not distribute the potential claim against R.C.A. or the Manufacturers notes prior to July, 1961. The court found that the corporation remained a viable entity for federal income tax purposes through November, 1961 and thus, was taxable on the interest received subsequent to September 30, 1960. The Court went on to find that the discharge of its indebtedness to R.C.A. was taxable to the corporation as ordinary income, holding that Taxpayers' alternative claim under § 337 of the Internal Revenue Code of 1954 was not properly before it and further that § 337 was not applicable. We affirm the Tax Court.

A corporation is subject to federal corporate income tax liability as long as it continues to do business in a corporate manner, despite the fact that its recognized legal status under state law is voluntarily or involuntarily terminated. National Metropolitan Bank of Washington v. United States, 345 F.2d 823, 170 Ct.Cl. 617 (1965); Hersloff v. United States, 310 F.2d 947, 159 Ct.Cl. 366 (1962), cert. denied, 373 U.S. 923, 83 S.Ct. 1524, 10 L.Ed.2d 422 (1963); Ochs v. United States, 305 F.2d 844, 158 Ct.Cl. 115 (1962), cert. denied, 372 U.S. 968, 83 S.Ct. 1093 (1963); Coast Carton Co. v. Commissioner, 149 F.2d 739 (9 Cir. 1945); Poplar Bluff Printing Co. v. Commissioner, 149 F.2d 1016 (8 Cir. 1945). A liquidating corporation continues its federal tax existence so long as it retains valuable assets. Treas.Reg. on Income Tax § 1.6012-2;⁷ J. Ungar, Inc. v. Commissioner, 244 F.2d 90 (2 Cir. 1957).

Appellants do not challenge this rule but contend that the corporate resolution of September 19, 1960, requiring forthwith dissolution and distribution of assets and the subsequent closing journal entries manifested an intention to distribute the Manufacturers' notes and the legal claim against R.C.A. and, thus, was sufficient to operate as an assignment of all corporate assets, prior to the receipt of the income in question. While it is true that it is not always necessary to utilize formal assignments where closely held corporations are involved, Novo Trading Corp. v. Commissioner, 113 F.2d 320 (2 Cir. 1940); Gensinger v. Commissioner, 208 F.2d 576 (9 Cir. 1953), an informal distribution must appear from objective conduct, reflecting an intention by the shareholders to take the assets in their own right and to dispense with further use of the corporate form with respect to such assets.⁸ Book entries,...