Westover v. Smith, 12019.
| Citation | 173 F.2d 90 |
| Decision Date | 21 February 1949 |
| Docket Number | No. 12019.,12019. |
| Parties | WESTOVER et al. v. SMITH. |
| Court | United States Courts of Appeals. United States Court of Appeals (9th Circuit) |
Theron Lamar Caudle, Asst. Atty. Gen., Ellis N. Slack, Robert N. Anderson, Homer R. Miller and S. Walter Shine, Sp. Assts. to Atty. Gen., and James M. Carter, U. S. Atty., George M. Bryant and Edward H. Mitchell, Asst. U. S. Attys., all of Los Angeles, Cal., for appellants.
Gibson, Dunn & Crutcher and Bert A. Lewis, all of Los Angeles, Cal., for appellee.
Before HEALY, BONE and ORR, Circuit Judges.
This is an appeal from a decision of the district court holding that income received by Smith, the taxpayer, in 1941 and 1943 was taxable as capital gain rather than as ordinary income, and ordering a refund to the taxpayer of certain taxes erroneously collected.
The taxpayer was owner of all the stock of Quickwork Company, a corporation engaged in the manufacture and sale of machine tools. In 1940 Quickwork Company sold all of its assets to Whiting Corporation in exchange for cash and the right to receive 10% of the gross sales price of machinery to be manufactured and sold by Whiting Corporation, pursuant to patents theretofore held by Quickwork Company. Following this transaction Quickwork Company liquidated and dissolved. The distribution in liquidation netted the taxpayer $39,204.26 in cash and the assignment of the contract under which Whiting Corporation was required to make future royalty payments.
Since the adjusted basis of the taxpayer's stock on the date of liquidation was $34,000, she paid a capital gain tax on the $5,204.26 cash profit. While the contractual right she held had a very substantial value, there was, owing to future business contingencies, no way of ascertaining its fair market value. Thus, no value was assigned to it in the liquidation distribution. When payments were made by Whiting Corporation to the taxpayer in 1941 and 1943 under the contract, such payments were treated as ordinary income and income tax payments were made accordingly. Taxpayer contends that the receipt of moneys from Whiting Corporation was an integral part of the liquidation distribution, and therefore such sums are to be treated as payments in exchange for stock under § 115(c) of the Internal Revenue Code, and taxed as a capital gain in the amount determined pursuant to § 111 of the Internal Revenue Code.1
Doubtless the value of the contract would be computed as a capital gain were it found to have an ascertainable market value at the time of Quickwork Company's liquidation. The taxpayer insists that the rule is the same in the present situation, where the value of the contract depends on uncertain future payments; that the transaction remains open until all payments are completed. Burnet v. Logan, 283 U.S. 404, 51 S.Ct. 550, 75 L.Ed. 1143, is cited. The Supreme Court of the United States, in that case, dealt with the sale of stock for cash plus a contractual right given by the purchaser to receive unascertainable amounts payable annually based on future production of iron ore. The cash consideration was less than the taxpayer's stock investment. It was held that the amounts received under the contract were not to be taxed until the taxpayer's capital investment had been paid off. The transaction was not a closed one because, as the Supreme Court of the United States said, "As annual payments on account of extracted ore come in they can be readily apportioned first as return of capital and later as profit."
Appellant seeks to distinguish the Logan case in that it involved a direct sale and not a corporate distribution, as here. It is pointed out that § 115(c) of the Internal Revenue Code states, "Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, * * *" and that in the instant case the taxable sums were not distributed in liquidation, but were paid because of the obligation of a third party. Hence, it is argued, the facts of this case do not permit the money received to be treated as a sale or exchange, which is the statutory foundation for the rule in Burnet v. Logan, supra. We do not agree.
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