Neill v. Phinney

• Decision Date: 10 June 1957
• Docket Number: No. 16532.,16532.
• Citation: 245 F.2d 645
• Parties: James P. NEILL et al., Appellants, v. Robert L. PHINNEY, District Director of Internal Revenue, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

245 F.2d 645 (1957)

James P. NEILL et al., Appellants, v. Robert L. PHINNEY, District Director of Internal Revenue, Appellee.

No. 16532.

United States Court of Appeals Fifth Circuit.

June 10, 1957.

Edward L. Wilson, W. C. Gowan, Carrington, Gowan, Johnson, Bromberg & Leeds, Dallas, Tex., for appellants.

Marvin W. Weinstein, Ellis N. Slack, Robert N. Anderson, Grant W. Wiprud, Lee A. Jackson, Attys., Dept. of Justice, Charles K. Rice, Asst. Atty. Gen., Washington, D. C., Russell B. Wine, U. S. Atty., San Antonio, Tex., for appellee.

Before HUTCHESON, Chief Judge, and JONES and BROWN, Circuit Judges.

John R. BROWN, Circuit Judge.

Appellants, starting with the truism that nothing is certain save death and taxes, seek to hasten the former to reduce the latter. For seizing upon that considerable body of law¹ delivered by us and others when the shoe was generally on the other foot, they insist that the rule is the rule whosoever's ox is being gored. With that approach, if not in their proposed result, we are in general accord for, adding a third figure, our job is to assure that what was once the goose's sauce shall for the gander now be the same, National Rag & Waste Co. v. United States, 5 Cir., 237 F.2d 846.

This all comes about this way: to meet the cost of the Korean expedition, Congress on January 3, 1951 and October 20, 1951 following its own earlier mandate,² first by the Excess Profits Tax Act of 1950 and later the Revenue Act of 1951, 26 U.S.C.A. Int.Rev.Acts, pages 158, 249, established a corporate excess profits tax retroactive to July 1, 1950. The question basically was: did Price Constructors, Inc., an Oklahoma corporation, depart this (tax) life, if not on December 13, 1950 when it signed its own death warrant, at least³ by December 31, 1950 when, it is urged, with all assets and demands, claims and obligations determined and generally well in hand, there was no point in prolonging the inevitable end, or did it somehow carry on a few more months to April 30, 1951 to round out its last and fiscal year?

The Commissioner's answer was April 30, 1951. The Appellants, stockholders distributees from this dissolution by death who bear unwillingly a transferee's vicarious pro rata liability for the corporation's obligations, by their unsuccessful suit for refund claimed the earlier⁴ dates. They also claim that whatever the corporate liability for excess profits tax may have been, when, on December 13, 1950, they received the sole liquidating dividend of $1,850,000, the value of assets retained was then ample to meet all of the corporate debts including specifically an estimate of $1,114,011.76 for 1950 (May 1 to December 31, 1950) corporate income tax⁵ figured without any anticipated retroactive excess profits tax. That being so, the corporation was not insolvent at the moment after distribution, and hence under Section 311 (26 U.S.C.A. § 311), there is no transferee liability whatsoever since, under the local Oklahoma law which is controlling, United States v. Truax, 5 Cir., 223 F.2d 229, the transferee of property is liable only for conveyances in fraud of creditors, that is, which are made when the transferor is insolvent or which makes him insolvent.⁶

Price Constructors, Inc. (Constructors) was organized November 3, 1949, to enable Neill, LeNoir and Gallery, officers with Harold C. Price in his familyheld company, H. C. Price Company, to acquire an equity ownership in a pipe line construction enterprise. So successful was the plan that Neill and LeNoir, the principal stockholders and driving force of Constructors, by early fall of 1950 became dissatisfied since Harold C. Price, with little personal contribution, was sharing equally with them. By conferences in September-October 1950, an amicable decision was reached to liquidate and dissolve Constructors.

To effectuate this decision, a special joint meeting of stockholders and directors of Constructors was held December 1, 1950, at which time resolutions were unanimously passed adopting the proposed complete liquidation and dissolution and directing the officers to take all necessary steps, including specifically that "* * * distribution of all assets of the company be made to the shareholders pro rata * * * reserving only such sums sufficient to pay obligations accrued and accruing." The expressed purpose was that Constructors cease all business activity except that necessary to close up all current jobs and wind up the company.

Of four jobs undertaken in this short but spectacular life, one was entirely completed, two joint ventures with H. C. Price Company were entirely settled and closed by December 13, 1950, leaving only the fourth, a joint venture with Morrison Construction Company, for construction of a pipe line project for Tennessee Gas Transmission Company still open. On it, all field work had been completed by December 13, 1950, and the work thereafter done by Constructors and its associate, Morrison, concerned the orderly closing of that job, payment of outstanding bills, collection from Tennessee Gas, and distribution of profits between the joint ventures. The ultimate amount receivable by Constructors was not, and could not, have been then determined on December 13, 1950. But in the view we take, much of the controversy below and in the briefs on just when, or how, it was evaluated is now unimportant.

On December 13, 1950, the officers, pursuant to the prior dissolution authority, intending conscientiously, we believe, adequately to provide for all of the company's debts known or likely to accrue, but forthrightly indifferent to the probable retroactive excess profits taxes which Congressional handwriting on the wall (note 2, supra,) foretold, made the first (and final) liquidating dividend of $1,850,000 in cash upon the basis of this estimate.⁷

About the same time the officers executed and subsequently filed (December 27, 1950) with the Secretary of State a notice of intention to dissolve. Constructors was proceeding under the Oklahoma⁸ alternative route of dissolution by decree of a district court. However, not until May 23, 1951, was the petition filed and the ex parte decree of dissolution was not entered until July 16, 1951.

Of course, formal legal termination is not decisive, so the question remains whether Constructors' expiration was de facto.

On the basic principles reflected by the cases, note 1, supra, we think it remained very much alive.

First, it was in no sense a mere shell, or semblance of its former self. Constructors, through its partner Morrison, was still engaged on a pipe line project. It is true that there were no bulldozers, trench diggers, pipe wrappers or welders at work in the field. But a multimillion dollar project of this type hardly ends when the foreman hangs up his steel hat.⁹ There was yet much to do and much done. The retainage of the contract price had yet to be collected. Before this was due, the manager (Morrison) of the joint venture had to verify that all outstanding bills for labor and material had been paid, and the work satisfactorily performed. The retainage in the amount of $525,382.67 was not paid by Tennessee Gas to Morrison until December 28, 1950. And, once collected by the joint ventures, much remained in the final adjustment and distribution of the venture's earnings. This included verifying the amounts of outstanding accounts due to suppliers of material, and vendors, the return of materials, the adjustment of contingent claims, disposition of insurance matters and calculation of the division of profits (80% to Constructors, 20% to Morrison). It took nearly a month from the date Morrison received the retainage to make distribution on January 26, 1951, to Constructors of the amount of $598,384.11. Retrospectively this was an essential ingredient in the reconstructed estimate of the company's position as of December 13, 1950 (note 7, supra). The settlement receipt contract between the two joint venturers covering this payment and by which Constructors assumed its portion of contingent liabilities of the venture was not signed until February 9, 1951. And even this was not final in fact. For as late as February 9, 1951, the joint venture checking account was $149,821.01 and the account, though markedly reduced, was not closed out until December 24, 1954. Deposits totaling $22,903.35 were made on February 6, and the venture put at the disposal of Foster, the designated settling agent, nearly $27,000. The partnership federal income tax return for the Morrison joint venture had yet to be prepared and this was not completed and filed until March 2, 1951.

Second, in December and the following months of early 1951, the corporation was very much engaged in the activity of its planned dissolution. Paraphrasing more spectacular language: it had just begun to liquidate. Its plan, upon the basis of which $1,850,000 had been distributed, required that a substantial sum of unliquidated receivables be reduced to a liquid state. This was to come largely from its share of the retainage collections made by its joint venture partner from Tennessee Gas. But there was the further sum¹⁰ of nearly $179,000 representing Constructors' portion of undistributed inventory, equipment and accumulated earnings of the venture. Changing a receivable or claimed receivables from an uncertain amount subject to many variables and contingencies into an item of over one-half million dollars in cash is, of course, a substantial accomplishment and represents like activity. The result was that by February 9, 1951, the corporation had liquid assets totaling $1,166,862.52.

Dissolution contemplates more than the garnering together of assets for distribution. It requires as well the ascertainment and discharge, not of the mere tag ends which may never be closed, but of the company's major liabilities. This included, of course, preparation of routine employer's tax returns for the previous, last, quarter, the...