Motter v. Patterson

• Decision Date: 18 December 1933
• Docket Number: No. 705.,705.
• Parties: MOTTER, Collector of Internal Revenue, v. PATTERSON.
• Court: U.S. Court of Appeals — Tenth Circuit

68 F.2d 252 (1933)

MOTTER, Collector of Internal Revenue, v. PATTERSON.

No. 705.

Circuit Court of Appeals, Tenth Circuit.

December 18, 1933.

John A. McCann, of Pittsburgh, Pa. (Sardius M. Brewster, U. S. Atty., and L. E. Wyman, Asst. U. S. Atty., both of Topeka, Kan., and C. M. Charest, A. T. Clark, and Eldon O. Hanson, all of Washington, D. C., on the brief), for appellant.

Charles G. Yankey, of Wichita, Kan., and H. M. Langworthy, of Kansas City, Mo. (Albert F. Hillix, of Kansas City, Mo., on the brief), for appellee.

Before LEWIS, PHILLIPS, and BRATTON, Circuit Judges.

BRATTON, Circuit Judge.

A tax of $108,261.01 was levied against F. H. Patterson as transferee of Fredonia Portland Cement Company, a New Jersey corporation, under section 280 of the Revenue Act of 1926 (26 USCA § 1069 and note). He paid it under protest and applied for its refund. The application was denied. He instituted this action to recover the sum thus exacted and to review the determination of the Commissioner in refusing to allow as a deduction certain losses asserted to have resulted from the sale of capital stock of Rea-Patterson Milling Company. Patterson died pending appeal, and the action was revived in the name of Daisy Patterson, executrix.

A jury was waived in writing, and the case was submitted to the court. In a written opinion and in formal findings of fact contained in the judgment, the court found specifically that Fredonia Portland Cement Company did not make a sale of its corporate assets; also that the Commissioner improperly refused to allow the deduction claimed on account of losses sustained in connection with the sale of stock of Rea-Patterson Milling Company. Judgment was rendered for plaintiff.

The collector concedes that the court's determination of the second question was correct and both parties concede that the single question now presented for decision is whether Fredonia Portland Cement Company made a sale of its corporate assets during the year 1925.

The collector brings forward at the outset the contention that the assessment is presumptively correct. We agree with that view. United States v. Anderson, 269 U. S. 422, 46 S. Ct. 131, 70 L. Ed. 347; Niles Bement Pond Co. v. United States, 281 U. S. 357, 50 S. Ct. 251, 74 L. Ed. 901. But that presumption is a rebuttable one which may be overcome by evidence. Walls v. Commissioner (C. C. A. 10) 60 F.(2d) 347; Pittsburgh Hotels Co. v. Commissioner (C. C. A. 3) 43 F.(2d) 345; Lunsford v. Commissioner (C. C. A. 6) 62 F.(2d) 740. The Commissioner necessarily found that there was a sale. The trial court found contrariwise; the definite finding being that the corporation made no sale of its corporate assets. Plaintiff urges that the decisive fact thus found is supported by substantial evidence and consequently the judgment should be affirmed. A finding of fact made by the trial court in a case at law in which trial by jury has been waived is not reviewable on appeal if it is supported by substantial evidence. Harrison v. United States (C. C. A. 10) 42 F.(2d) 736. There is little conflict in the evidence. It is almost without dispute or contradiction. The precise question involved is the legal effect of the evidence to support the finding rather than its substantiality; hence we review it briefly.

Fredonia Portland Cement Company, a New Jersey corporation, operated a cement factory at Fredonia, Kan. F. H. Patterson and members of his immediate family owned all of its capital stock, consisting of 2,820 shares, except one share, which was issued to F. C. Doggett, a qualifying director, and it had been reassigned to Patterson. The other members of the family were subservient to Patterson with respect to conducting the business of the corporation. Patterson, during the month of June, 1925, decided to dispose of the business and property. He wished to avoid the double tax which would be incurred if the corporation sold its corporate assets and distributed the proceeds among the shareholders of stock. With that desire in mind and before beginning negotiations, he consulted a firm of auditors that had done work for him during several years and was advised to sell the corporate stock of the company, not its corporate assets. Two illustration returns were prepared showing the difference in tax between the two methods. He subsequently entered into a contract with Robert L. Cochrane, dated June 23, 1925, for the sale of the entire capital stock at the agreed purchase price of $1,200,000. Wiles conducted the negotiations on behalf of the purchaser. The contract was prepared by an attorney in Chicago named Barnes. Patterson advised all parties during the negotiations and while the contract was in process of preparation that, on account of the income tax feature, he desired to sell the capital stock, not the corporate assets. Barnes advised him that the tax would be the same if the corporation were dissolved, its assets distributed, and the distributees then made conveyance of the physical property. Patterson, unwilling to act upon that advice, sought and obtained an opinion from Arthur Anderson, a public accountant of high standing in Chicago, at a cost of $1,500. His opinion was given to Wiles and by him conveyed to Patterson. It coincided with that of the attorney preparing the contract. After such careful investigation and being thus advised, Patterson executed the contract. It accorded Cochrane the option to purchase the assets instead of the stock. That option was to be exercised by the purchaser giving the seller written notice mailed to him at Fredonia within three days after the execution of the contract. It was never exercised in that manner. Wiles telephoned Patterson that it was desired to purchase the plant instead of the stock, but the record fails to indicate that he suggested a corporate conveyance. There is nothing in the record tending to show that anything was said which would conflict with Patterson's declared intention to dissolve the corporation, distribute its assets, and have the stockholders make conveyance if the purchaser exercised the privilege of acquiring the property instead of the stock. The corporation was not a party to the contract. It was exclusively between Patterson and Cochrane as individuals.

Patterson fell seriously ill with prostate complication and went to St. Louis, where he subsequently underwent two major operations. While there he wrote Doggett, secretary of the company, directing the manner in which the transaction was to be handled, and telling him that, in the event the purchaser desired the assets, to cause a dissolution of the corporation, a distribution of its assets, and conveyance by the stockholders to the purchaser; he further instructed Doggett to engage a firm of tax attorneys at Kansas City for the purpose of effecting the details in the manner desired, that is to say, in the manner provided in the contract, but Doggett failed to do so. In violation of the understanding with respect to the manner of making the sale, and despite the definite instructions given Doggett, an attorney for the purchaser, prepared conveyances from the corporation to Fredonia Portland Cement Company, a Delaware corporation, obviously formed to accept title in lieu of Cochrane, also minutes of a stockholders' meeting and of a directors' meeting authorizing such conveyances. Wiles and the attorney for the purchaser both advised Doggett that the documents were in conformity with the contract, and he believed their statements. He thereupon signed the purported minutes and secured the signature of Mrs. Patterson and that of her daughter at their residence. They did not read the minutes. Doggett merely told them that they were a part of the transaction in disposing of the stock and property. Such minutes, both stockholders' and directors', recite that Patterson was present in Fredonia and acted as chairman. He was in St. Louis at the time. No such meetings were held, and no resolutions authorizing disposition of the corporate assets were adopted. The facts recited were untrue.

Cooper, attorney for the cement company at Fredonia, had not read the contract, but Patterson told him before leaving for St. Louis that the sale was to be effected in the manner to incur the least tax. Cooper read the letter from Patterson to Doggett, and he believed that the contract was being carried out, also that the attorneys suggested in the letter were being consulted. With that understanding, he took the minutes and conveyances to St. Louis to be signed by Patterson. Doggett had already signed them. Patterson was in the operating room undergoing a serious and extremely painful operation at the time Cooper arrived at his room; within fifteen or twenty minutes he was brought into the room on a stretcher, suffering intensely and under the influence of drugs. Cooper told him the papers were for the transfer of the property. He signed them while in bed, without reading them and without knowing their contents. Their execution was merely a matter of form. They were subsequently delivered and the check covering the purchase price was made payable to the corporation. Doggett, as secretary, immediately indorsed it, and the money was deposited to Patterson's credit in the bank. It never was covered into the treasury of the corporation. Patterson made trips to Florida, California, Minnesota, and the Hawaiian Islands in the interest of his health. On account of such absence, he did not learn until late in November or early in December, following his operation in July, that in consummating the transaction his desires had not been effected and his instructions had been violated. A meeting of the stockholders was called and held immediately, at which a resolution was adopted reciting that the pretended previous meeting was never held and that all acts done under such pretended authority were null and void. Cochrane was notified of such action, and a tender of...