West Street-Erie Boulevard Corp. v. United States, 378

• Decision Date: 01 April 1969
• Docket Number: No. 378,Docket 32967.,378
• Citation: 411 F.2d 738
• Parties: WEST STREET-ERIE BOULEVARD CORPORATION, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

411 F.2d 738 (1969)

WEST STREET-ERIE BOULEVARD CORPORATION, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 378, Docket 32967.

United States Court of Appeals Second Circuit.

Argued February 20, 1969.

Decided April 1, 1969.

Bennet N. Hollander, Washington, D. C. (Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Harry Baum, Attys., Washington, D. C., Justin J. Mahoney, U. S. Atty., of counsel), for defendant-appellant.

John F. Lawton, Syracuse, N. Y. (Mackenzie, Smith, Lewis, Michell & Hughes, Syracuse, N. Y., Dennis R. Baldwin, Syracuse, N. Y., of counsel), for plaintiff-appellee.

Before Mr. Justice CLARK,^* and WATERMAN and FRIENDLY, Circuit Judges.

FRIENDLY, Circuit Judge:

This is an appeal by the United States from a judgment of the District Court for the Northern District of New York in a tax refund action tried before the late Judge Brennan and decided after his death, pursuant to stipulation of the parties, by Judge Ryan of the Southern District sitting by designation. Decision turns on a narrow question relating to § 337 of the Internal Revenue Code of 1954, which provides for nonrecognition of gain or loss from the sale or exchange of certain corporate property if the corporation has adopted a plan of complete liquidation before the sale or exchange and distributes all its assets within 12 months of the adoption.¹

Plaintiff West Street-Erie Boulevard Corporation (the taxpayer) is a closely held New York corporation. Its principal asset was a warehouse and office building at the corner of Erie Boulevard West and North West Street in Syracuse, N. Y., known as the Bartell property, having a basis of $379,708. It also owned a one-third beneficial interest in a one-story garage at 218-226 North West Street, known as the Forsythe property, having a basis of $21,442. Record title to the Forsythe property was in an unrelated company, Hawley Court Corporation.

On January 7, 1960, the stockholders of the taxpayer adopted a resolution which, after reciting that it had come to their attention "that real property representing their chief asset is to be taken by condemnation," resolved that the directors be authorized to take such action as might be necessary for the dissolution of the corporation and distribution of its assets. Taxpayer promptly filed with the Commissioner Form 966, as provided by I.R.C. § 6043, and a copy of this resolution. The condemnation, however, did not proceed so speedily as had been expected. On December 1, 1960, the State of New York filed an appropriation map of the Forsythe property, thereby acquiring title to that parcel, but nothing occurred with respect to the much more valuable Bartell property, to which the resolution had referred. The taxpayer's stockholders met again on December 27, 1960, and took further action. After referring to the resolution of January 7, 1960, the new minutes recited that "the anticipated taking of its taxpayer's property in condemnation by the State of New York has not as yet been effected, however the taking by the State of New York is imminent," but that such taking "will not allow ample time within the year from January 7, 1960 to effect complete liquidation and distribution of its assets." In light of this the stockholders adopted two resolutions. One revoked the resolution of January 7, 1960; the other authorized the directors to take such action as might be necessary to effect a complete dissolution of the taxpayer, sell its properties, pay its obligations and distribute the remaining assets to its stockholders in complete redemption of their stock. A new Form 966 was duly filed with the Commissioner, along with a copy of the December 27 resolutions. On June 21, 1961, the State filed an appropriation map with respect to the bulk of the Bartell property. The State paid for the Forsythe property in August 1961 and for the Bartell property in late December. On December 22, 1961, taxpayer distributed to its stockholders all its assets, most importantly the claim arising out of the condemnation of the Bartell property.

In its income tax return for 1961, taxpayer reported an operating loss of $14,431 and showed capital gains of $13,731 for the Forsythe property and $329,829 for the Bartell property, a total of $343,560. While this resulted in income of $329,129, the return reported no tax to be due, reciting

"Corporation dissolved 12/6/61 under § 337 of the I.R.C. All assets distributed. Non Taxable."

The Commissioner did not agree. He viewed the January 7, 1960, resolution as the start of the 12-month period, and ruled that taxpayer had failed to meet the requirement of liquidation within it. Accordingly he asserted a deficiency of $85,890, the alternative 25% tax on the capital gains. Plaintiff paid the tax and sued for a refund. Holding that the January 7, 1960 resolution had been effectively rescinded and that liquidation had been completed within 12 months from December 27, 1960, the court directed judgment in plaintiff's favor.² The United States has appealed.

As is well known, the purpose of § 337 of the 1954 Code was to provide a fairer and surer way for dealing with the problems of corporate sales and liquidations that had given rise to CIR v. Court Holding Co., 324 U.S. 331, 65 S. Ct. 707, 89 L.Ed. 981 (1945), and United States v. Cumberland Public Service Co., 338 U.S. 451, 70 S.Ct. 280, 94 L.Ed. 251 (1950). The Court Holding case had ruled that when a corporation sold assets at a profit and then liquidated, taxes were payable both by the corporation on the excess of the sale price over the basis of the assets and by the shareholders on the excess of the distribution over the basis of their stock. In contrast Cumberland had held that the tax at the corporate level could be avoided if the corporation first liquidated and the shareholders made the sale. As stated by the House Committee on Ways and Means:

Accordingly, under present law, the tax consequences arising from sales made in the course of liquidation depend primarily upon the formal manner in which transactions are arranged. The possibility that double taxation may occur in such cases results in causing the problem to be a trap for the unwary.

Your committee intends * * * to provide a definitive rule which will eliminate any uncertainty.³

The "definitive rule" enacted was, as indicated above, that if a corporation adopted a plan of complete liquidation and then distributed all its assets within 12 months, no gain or loss to the corporation on sales or exchanges of defined assets during the 12 months would be recognized. On the other hand, a corporation failing to qualify for the new dispensation would be taxed as theretofore on sales of corporate property even though a complete liquidation was accomplished.

The statutory scheme, doubtless framed with conventional sales primarily in mind, has raised problems in cases where the timing of "sales or exchanges" is beyond the corporation's control. Condemnation is a prime example. If a declaration of taking is made before a plan of complete liquidation is adopted, and title passes under the applicable law, the taxpayer is back in the Court Holding situation. See Dwight v. United States, 328 F.2d 973 (2 Cir. 1964); Keller & Goetz, Inc. v. United States, 337 F.2d 858 (2 Cir. 1964), cert. denied, 380 U.S. 962, 85 S.Ct. 1105, 14 L.Ed.2d 153 (1965); Covered Wagon, Inc. v. CIR, 369 F.2d 629 (8 Cir. 1966); Note, Tax-Free Sales in Liquidation under Section 337, 76 Harv.L.Rev. 780, 784-86 (1963). Under New York law the State acquires title to land condemned for highway purposes when it files an appropriation map with the clerk of the county in which the property is located, N. Y. Highway Law McKinney's Consol. Laws, c. 25, § 30(6); see Wendell's Estate v. CIR, 326 F.2d 600 (2 Cir. 1964). Contrast United States v. Morton, 387 F.2d 441, 446 (8 Cir. 1968) (Missouri law; title passes upon payment). An understandable desire of the plaintiff to avoid the problem that would thus arise from the filing of a map by the State without advance notice led it to adopt the resolution of January 7, 1960.⁴ For the same reason, when twelve months had nearly elapsed without the State's having acted with respect to the taxpayer's major asset, it rescinded the earlier resolution and adopted another.

We perceive no reason why it should not be possible under certain circumstances for a corporation that has once adopted a plan of liquidation later to adopt another.⁵ When the corporation has taken some steps to carry out the original plan of liquidation but abandons it in good faith, the subsequent adoption of a new plan, under different circumstances, should commence a new 12-month period for liquidation under the new plan. The Commissioner has permitted this in a case where there was a significant time interval between the revocation of the old plan and the adoption of a new one and disappearance of the first potential purchaser and appearance of a different one. Rev.Rul. 67-273, 1967-2 Cum.Bull. 137. As against this, "a corporation that has been engaged in a leisurely process of disposing of all of its assets under a plan that is more than 12 months old can hardly expect to get the benefit of § 337 for its final sale by purporting to call off the old plan in favor of an allegedly new one." Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders 396 (2d ed. 1966), citing Malcolm C. Howell, 40 T.C. 940 (1963). A second situation, where neither the language nor the purpose of the statute precludes allowing the corporation to commence a new 12-month period by...