Rogers v. Comm'r of Internal Revenue
| Decision Date | 28 September 1948 |
| Docket Number | Docket No. 15605. |
| Citation | 11 T.C. 435 |
| Parties | LUCILLE H. ROGERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Arrangement between petitioner and other interests for participation by means of jointly owned corporation in operation of vessels under War Shipping Administration general agency agreement, held to result in relationship of stockholder rather than co-adventure; and proceeds on termination of corporation's activity under general agency agreement, received by petitioner by means of checks drawn by corporation and other interests held, further, taxable to her as ordinary income. George E. Beechwood, Esq., for the petitioner.
William H. Best, Jr., Esq., for the respondent.
Respondent determined a deficiency in income tax for the calendar year 1944 in the amount of $6,627.78.
Certain issues having been abandoned by petitioner, the sole remaining question is whether the whole or any part of a sum of money received by petitioner growing out of an arrangement for the operation of vessels under a general agency agreement with the War Shipping Administration is to be treated as ordinary income or as capital gain.
Some of the facts have been stipulated.
The stipulated facts are hereby found accordingly.
Petitioner is a resident of Wynnewood, Pennsylvania, and filed her tax return for 1944 with the collector at Philadelphia.
Prior to August 16, 1943, she was the sole owner of all of the outstanding stock of American Range Lines, Inc., a Delaware corporation organized in 1936 for the purpose of engaging in the shipping business. Hereafter it will be referred to as Range.
During the period immediately prior to August 1943 Range did not own or operate any vessels. All physical operations ceased about the middle of 1942. But commencing at about that time, Range, through its president, Jacob W. Alwine, was endeavoring to have the War Shipping Administration, hereinafter referred to as W.S.A., allocate to it some vessels under a general agency agreement.
At about the same time the American Liberty Steamship Corporation, also a Delaware corporation, hereinafter referred to as Liberty, was negotiating with W.S.A. But neither Range nor Liberty could comply fully with the requirements. It was the suggestion of W.S.A. that the two companies enter into a joint operation to secure the allocation of vessels, and a joint application was filed with W.S.A. for allocation under a general agency agreement.
On August 16, 1943, an agreement was entered into by petitioner, Range, and Liberty, providing for a merger of the personnel of the two companies and the creation of a capital of $170,000 in cash, free and clear of all debts. The agreement recited:
American Range Lines, Inc. and American Liberty Steamship Corporation have both been organized to carry on and conduct the business of shipping.
The directors of the respective corporations deem it advantageous for the respective corporations and for the benefit of their stockholders to engage in a joint venture to operate under a General Agency Assignment for the War Shipping Administration.
The mode of carrying the joint venture into effect shall be as follows: The name of American Range Lines, Inc. shall be changed to American Range-Liberty Lines, Inc. The Certificate of Incorporation of American Range Lines, Inc. shall be further amended as provided in this agreement so as to provide for an equal investment of $85,000.00 each, to carry out the business of the joint venture. The by-laws of American Range Lines, Inc. shall be amended so as to provide for equal management and control of the affairs of American Range-Liberty Lines, Inc. between American Liberty Steamship Corporation and Lucille H. Rogers.
At the termination of the General Agency Assignment, it is proposed to restore each of the two corporations, American Liberty Steamship Corporation and American Range Lines, Inc. to their former position, so that each might pursue and conduct their own business separately and individually.
The agreement provided that the name of Range was to be changed to American Range-Liberty Lines, Inc., hereinafter referred to as Range-liberty, and that its capital structure was also to be changed.
The agreement further provided:
EIGHTH: The present by-laws of American Range Lines, Inc. shall be amended in the following respects to provide for equal control and management of the affairs of American Range-Liberty Lines, Inc. during the term of this agreement between American Liberty Steamship Corporation and Lucille H. Rogers:
(a) The number of Directors shall be increased from three to six.
(b) Three members of the Board of Directors shall be persons nominated by the American Liberty Steamship Corporation, hereinafter designated as ‘Liberty Group‘, and an equal number of the Board of Directors shall be persons nominated by Lucille H. Rogers, hereinafter designated as ‘Rogers Group.
(c) In the event of the death, resignation or inability to act of any director, the vacancy occurring shall be filled by the nominee of the group of stockholders or stockholder, who originally nominated the director whose office has become vacant, so that American Liberty Steamship Corporation and Lucille H. Rogers shall have at all times equal representation upon the Board of Directors.
(d) The by-laws shall not be amended except by the affirmative vote of at least five of the whole Board of Directors.
The total capital of $170,000.00 thus created, shall be used solely for the operation and conduct of the business of the corporation under the General Agency Assignment with the War Shipping Administration.
At the termination of the general agency agreement, the agreement between the parties was to be terminated and there was to be restored to the respective parties the capital contributed by each, or so much as remained after deducting losses, and they were otherwise to be placed in their former positions, as provided in the latter agreement.
Petitioner invested the $85,000 required of her by having Range leave intact its existing bank balance of $78,199.99 and by executing and delivering her personal check in the amount of $6,800.01. She fully performed all other obligations imposed upon her by the August 1943 agreement, including the establishment of an escrow fund and later an additional capital contribution.
On September 8, 1943, W.S.A. entered into a general agency agreement with Range-Liberty, whereby the latter as general agent was ‘to manage and conduct the business of vessels assigned to it by the United States,‘ and was to receive reasonable compensation for such services as determined by the W.S.A.
In the course of operations, serious disputes arose between the two groups of stockholders, and on November 27, 1944, petitioner and Liberty agreed to terminate the arrangement, the consent of W.S.A. having theretofore been secured, as required by the general agency agreement. It was provided that the August 1943 agreement was to be ‘cancelled and terminated‘ as of December 1, 1944, and that:
THE AMERICAN LIBERTY STEAMSHIP CORPORATION agrees to pay to LUCILLE H. ROGERS in full satisfaction and discharge of all claims asserted by LUCILLE H. ROGERS against AMERICAN LIBERTY STEAMSHIP CORPORATION and for the promise of LUCILLE H. ROGERS to cancel and terminate the above mentioned agreement and release the AMERICAN LIBERTY STEAMSHIP CORPORATION from the obligations thereunder, the sum of Seventy-five Thousand ($75,000.00) Dollars, as follows:
(a) The sum of $20,000.00 on December 1st, 1944.
(b) The sum of $20,000.00 on March 1st, 1945.
(c) The sum of $7,500.00 on July 1st, 1945.
(d) The sum of $27,500.00 on February 1st, 1946.
IT IS FURTHER UNDERSTOOD AND AGREED that the sum of $20,000.00 to be paid to LUCILLE H. ROGERS by the AMERICAN LIBERTY STEAMSHIP CORPORATION on December 1st, 1944, shall be reduced by all sums of money received by LUCILLE H. ROGERS from the AMERICAN RANGE-LIBERTY LINES, INC. by virtue of dividends or otherwise on or after November 27, 1944 and it is understood and agreed that such sums so received by LUCILLE H. ROGERS shall be deemed credits to the AMERICAN LIBERTY STEAMSHIP CORPORATION and the amount to be paid by the AMERICAN LIBERTY STEAMSHIP CORPORATION shall be reduced accordingly.
Each party hereto releases and forever discharges the other party from all moneys, claims, demands, contracts, action, whatsoever arising under the agreement between the parties, dated the 16th day of August, 1943, and nothing herein contained shall be deemed to be a release from the obligations contained in this agreement.
On the same date Range-Liberty entered into an ‘Agreement and Bill of Sale‘ with Liberty, which provided in part that Range-Liberty was to release all its right and interest under the general agency agreement of September 8, 1943, and assent to the appointment of Liberty in its place, and thereupon assigned all of its rights to...
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