Opinion · United States Tax Court
Henry Hess Co. v. Commissioner
Henry Hess Co. v. Comm’r, 16 T.C. 1363 (T.C. 1951)
- Type
- Opinion
- Court
- United States Tax Court
- Jurisdiction
- Federal
- Date
- 1951-06-18
- Topic
- general
OPINION. Van Fossan, Judge: the first matter of moment in this case is the determination whether or not Christenson Steamship Company realized gain in the year 1942 from the requisition for title in that year by the War Shipping Administration of the S. S. Jane Christenson. There is little dispute as to the facts but there was a wide divergence between the parties in the conclusions drawn therefrom.
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HENRY HESS CO. v. COMMISSIONER OF INTERNAL REVENUE,16 T.C. 1363(1951)
HENRY HESS CO., PETITIONER, ET AL.,1v. COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT.
Docket Nos. 15870, 19457.1
United States Tax Court.
Promulgated June 18, 1951.
2.Held, further,Christenson Steamship Company, though dissolved, was still in existence during the taxable years for the purpose of winding up its affairs and that it received taxable gain from payments on account of just compensation made in the years 1943 and 1944.
3.Held, further,that petitioners are liable as transferees for taxes of Christenson Steamship Company for the years 1943 and 1944.
4.Held, further,as to the year 1943 Christenson Steamship Company was liable for declared value excess-profits tax.
January 1- December 23, 1943 1944 1942
Income tax ....................... $137,787.11 $77,694.67 $61,922.50 Declared value excess-profits tax 482.43 41,022.79 822.87 Excess profits tax ............... 25,991.17
The respondent asserted transferee liabilities against the petitioners herein as transferees of the assets of Christenson Steamship Company on dissolution upon the basis of the above-mentioned deficiencies. In the cases involving Edwin A. Christenson and Charles E. Christenson only the year 1942 is involved. No liability as transferee was asserted against either of them for the years 1943 or 1944.Page 1364
Income tax ....................... $137,787.11 $77,694.67 $61,922.50 Declared value excess-profits tax 482.43 41,022.79 822.87 Excess profits tax ............... 25,991.17
The questions presented by the pleadings are as follows:
(1) Did Christenson Steamship Company realize gain in 1942 from the requisition for title in that year of one of its steamships by War Shipping Administration? Only in the event this question should be answered in the negative are the following questions numbered (2) and (3) to be considered.
(2) Did the Christenson Steamship Company realize taxable gain during the years 1943 and 1944 in the amounts of $310,778.68 and $248,508.42, respectively or in any amounts, on account of the requisition for title of the. S. S. Jane Christenson by the War Shipping Administration?
(3) Are the petitioners liable as transferees of the assets of Christenson Steamship Company for any deficiencies in taxes due from that corporation for either of the taxable years 1943 and 1944?
(4) Is Christenson Steamship Company liable for declared value excess-profits tax for 1943 and 1944?
FINDINGS OF FACT.
Part of the facts are stipulated and they are so found.
Prior to 1942 the Christenson Steamship Company (hereinafter sometimes referred to as Christenson), a California corporation, was engaged in the operation of ocean-going vessels. On November 12, 1942, it was the owner of three such vessels. On that date Sudden Christenson, another California corporation, was the sole stockholder of Christenson and, in turn, the petitioners herein were the shareholders of Sudden Christenson.
Christenson filed its tax returns for the taxable year ended December 23, 1942, with the collector of internal revenue for the northern district of California.
On November 2, 1942, Christenson received a telegram from the War Shipping Administration (hereinafter referred to as WSA) notifying it of the requisition for title under section 902 of the Merchant Marine Act, 1936, as amended, of one of its vessels, the S. S. Jane Christenson. On November 12, 1942, a formal notice of requisition for title was served on Christenson. On the same day Sudden Christenson delivered the certificates of registry and other certificates and documents relating to the S. S. Jane Christenson to WSA.
Title to the vessel passed as of the time when the formal notice of requisition was delivered. The WSA in no case effected a conversion of a requisition for title into a requisition for use.
On November 12, 1942, the directors of Christenson signed a waiver of notice and consent to the holding of a directors' meeting. That meeting was duly held on November 13, 1942, and a resolution to dissolvePage 1365the corporation was adopted. On the same day the sole shareholder, Sudden Christenson, signed a consent to the dissolution. On the same day the directors also resolved that the S. S. Charles Christenson, the S. S. Edwin Christenson, and the claim to proceeds of or payment for the requisition of the S. S. Jane Christenson be transferred to its shareholder as a "Partial Transfer of Assets of Christenson Steamship Co. to Sudden and Christenson Pursuant to Plan of Liquidation and Dissolution." On that day these assets were transferred by Christenson to Sudden Christenson, its shareholder, and the stock of Christenson held by the latter was cancelled. On December 23, 1942, a certificate of dissolution of Christenson Steamship Company was filed with the Secretary of State of the State of California and was certified by him on December 30, 1942. The books of the corporation were closed out on December 31, 1942.
In December 1941 the directors of Sudden Christenson had resolved and the shareholders had consented to the dissolution and liquidation of Sudden Christenson, the liquidation to be completed within three years. Before November 1942 partial distributions had been made to its stockholders by Sudden Christenson. On November 17, 1942, the directors of Sudden Christenson resolved to distribute the assets received on November 13, 1942, from Christenson Steamship Company to its shareholders. Distributions of the remaining assets of Sudden Christenson were made by the corporation to its shareholders on December 15, 1942, December 7, 1943, and during the month of December 1944. Complete liquidation of the corporation was effected by December 1944. By these distributions Sudden Christenson distributed all of its assets and other properties to its shareholders, including the assets it received from Christenson Steamship Company and the payment of just compensation for the S. S. Jane Christenson. The distributions above mentioned were made by Sudden Christenson to its stockholders in exchange for the cancellation of their stock, thus leaving Sudden Christenson without any assets with which to satisfy the liability herein asserted against Christenson Steamship Company.
Each of the petitioners received cash and other property of the transferor, Christenson Steamship Company, a corporation, by the transfers described above, having a fair market value equivalent to the transferee liability determined by the respondent against each petitioner herein for the deficiencies in taxes heretofore determined by the respondent to be due from the transferor, together with interest thereon as provided by law.
The above-mentioned resolution of Sudden Christenson dated November 17, 1942, reference resolution to distribute the assets, was in the following form:Page 1366
PARTIAL TRANSFER OF ASSETS OF SUDDEN CHRISTENSON
WHEREAS, Sudden Christenson, a California corporation, has commenced proceedings for voluntary dissolution under California Civil Code Sections 400 et seq., and pursuant thereto has made certain distributions of assets; and
WHEREAS, all of the known debts and liabilities of Sudden Christenson have been paid or adequately provided for in the opinion of the directors of said corporation;
NOW, THEREFORE, said Sudden Christenson hereby grants, transfers, assigns, and distributes all of its right, title and interest in and to
1. The whole of the American Steamship CHARLES CHRISTENSON,
2. The whole of the American steamship EDWIN CHRISTENSON,
3. The whole of the claim to proceeds or payment of the steamship JANE CHRISTENSON, requisitioned for title by the United States Maritime Commission,
to the stockholders (trust certificate holders) of Sudden Christenson in the shares or proportions hereinafter set forth:
Henry Hess Co., a corporation ................ 820/9000 Eleanor L. Cates ............................. 5235/9000 Arthur B. Cahill ............................. 240/9000 Frank C. Lawler .............................. 60/9000 Louis C. Stewart ............................. 60/9000 Imogene Chandler ............................. 60/9000 Edna Christenson Herlofson ................... 153/9000 Louis S. Cates ............................... 1680/9000 Charles E. Christenson ....................... 173/9000 Edwin A. Christenson ......................... 173/9000 Eleanor de Guigne ............................ 173/9000 Jane de Tristan .............................. 173/9000
Petitioners designated A. B. Cahill as "Managing Owner" to act for them and on their behalf in the collection of the claim against the Government. His books as managing owner contained the following entry:
ARTHUR B. CAHILL, MANAGING OWNER
December 31, 1942
U.S. of America Claim Acct. SS Jane Christenson ..................... $510,000.00 Investment — SS Charles Christenson ..................... 510,000.00 Investment — SS Edwin Christenson ....................... 510,000.00
Cr.
Joint Venture Investment ................................ $1,530,000.00
To record value of vessels and claims turned over to Arthur B. Cahill, Managing Owner, at market value determined by owners, as of Nov. 17, 1942.Page 1367
CLAIMS ACCOUNT — SS JANE CHRISTENSON
Dr.
Dec. 31, 1942 — Owners valuation as of 11/17/42 .......... $510,000.00 Dec. 31, 1944 — Adjusted valuation — per USA ............ 73,180.00 Dec. 31, 1944 — Interest received 10/19/44 ............... 6,688.42 ----------- $589,868.42 ===========
By November 1942 a conflict had developed between WSA and the Comptroller General as to the method of calculating values of vessels which had been requisitioned by WSA. Under date of November 24, 1942, the Administrator of WSA addressed a letter to the Comptroller General in which he requested the latter's opinion on specific questions in respect of section 902 of the Merchant Marine Act, 1936, as amended. Three of these questions were as follows:
December 31, 1942
U.S. of America Claim Acct. SS Jane Christenson ..................... $510,000.00 Investment — SS Charles Christenson ..................... 510,000.00 Investment — SS Edwin Christenson ....................... 510,000.00
Cr.
Joint Venture Investment ................................ $1,530,000.00
To record value of vessels and claims turned over to Arthur B. Cahill, Managing Owner, at market value determined by owners, as of Nov. 17, 1942.Page 1367
CLAIMS ACCOUNT — SS JANE CHRISTENSON
Dr.
Dec. 31, 1942 — Owners valuation as of 11/17/42 .......... $510,000.00 Dec. 31, 1944 — Adjusted valuation — per USA ............ 73,180.00 Dec. 31, 1944 — Interest received 10/19/44 ............... 6,688.42 ----------- $589,868.42 ===========
(1) Is it your opinion that the enhancement clause in section 902 requires the Administrator to fix values for all vessels including passenger ships, freight ships, fishing vessels, tugs, barges, small craft, and other water craft as of a specific calendar date or may the Administrator fix such valuation under the ordinary rules of law applicable to the subject of valuations after deducting all "enhancements" which he finds to have been proximately caused by the necessity of the taking or use?
(2) If it is your opinion that values must be based on a specific calendar date, is the Administrator in a position to reach his own determination as to the appropriate date or is it mandatory under the law for him to pick a specific date such as the date of the President's proclamation of the limited emergency (September 8, 1939) or the date of the unlimited emergency (May 27, 1941)?
(3) If in your opinion the Administrator is required to fix values as of a specific date, please advise as to the date which in your opinion the Administration is required by law to adopt for this purpose.
(The enhancement clause referred to is a portion of Section 902, Merchant Marine Act of 1936, as amended.)
On November 28, 1942, the Comptroller General replied. His answer to the above questions, in part, was as follows:
* * * the enhancement clause in said section 902 (a) prohibits the payment of compensation for such vessels to the extent that it may be based upon values in excess of the values existing on September 8, 1939, provided such excess be determined as due to economic conditions directly caused by the national emergency. * * *
Upon the receipt of this opinion the Administrator on December 17, 1942, issued a notice directed "To the Owners of all Vessels Purchased, Chartered or Requisitioned for Use or Title by the War Shipping Administration." A copy of that notice was mailed to Christenson. It stated, in part, as follows:Page 1368
In view of recent developments with respect to the interpretation of section 902 of the Merchant Marine Act, 1936, as amended, we find it necessary to advise you of the following:
During the latter part of this year, the Administrator learned for the first time that certain of the officials of the Office of the Comptroller General of the United States were of the opinion that under section 902 of the Merchant Marine Act, 1936, as amended, it was unlawful for the Administrator to pay for vessels requisitioned under section 902 of the act sums in excess of the values of these vessels as of the date of the President's proclamation of limited emergency dated September 8, 1939. Section 902 had been administered by the War Shipping Administrator and prior thereto by the United States Maritime Commission, in a manner that was inconsistent with such interpretation.
As soon as the view of the subordinate officials of the Comptroller General were made known to the Administrator, conferences were held with the Comptroller General, but no solution to the problem developed therefrom. The Comptroller General then offered to state his views upon receipt of a formal request for an opinion which could be transmitted to Congress for such action as it deemed appropriate. Accordingly, the Administrator directed a request to the Comptroller General of the United States for formal opinion under date of November 24, 1942, on 15 specific questions, and on November 28, the Comptroller General replied on all points. * * *
You will note that, in the opinion of the Comptroller General, values of all vessels, including both large and small craft — freighters, passenger ships, tugs, barges, fishing vessels, and other watercraft — were, in effect, frozen by the President's proclamation of limited emergency on September 8, 1939, except for vessels built or rebuilt after that date, as to which the Comptroller apparently would allow payment of actual cost less depreciation, and that, in his opinion, the Administrator may not lawfully pay for use or title to vessels at higher rates or values than those prevailing on September 8, 1939. It will be noted that the 1989 values apply notwithstanding the fact that the vessels were purchased after that date at substantially higher cost and even though replacement vessels cannot now be obtained at 1939 prices. Charter rates also would be reduced under this ruling to September 8, 1939, levels, except for additional allowances for increases in expenses since that time.
Immediately upon receipt of this opinion, the Administrator ordered that payments for vessels purchased or requisitioned for the War Shipping Administration under section 902 of the Merchant Marine Act, 1936, as amended, be discontinued. Payments for vessels lost from marine or war casualties under charters made under this section were also stopped pending a clarification of the situation.
The Administrator promptly transmitted copies of the Comptroller General's opinion to the chairman of the Senate Committee on Commerce and the chairman of the House Merchant Marine and Fisheries Committee. There was at that time pending in the Senate Committee on Commerce legislation affecting the War Shipping Administration known as the omnibus bill and designated H. R. 7424. After considering the Comptroller's ruling, the Senate Committee on Commerce on December 4, 1942, reported out H. R. 7424 with an amendment to section 902 which would have the effect of eliminating the enhancement clause contained in the existing provision of law, thus confirming the Administrator's application of the law. The reason for this action was explained in a report submitted on behalf of the Committee (No. 1813, 77th Cong., 2d sess.), pertinent excerpts of which are attached herewith. [Attachment omitted]Page 1369
However, although the bill was placed on the Senate Calendar, it did not come to a vote prior to adjournment of this Congress, leaving the entire question open for the next Congress — see Congressional Record of December 15, 1942.
During the interim, unless the Administrator applies the statute in accordance with the Comptroller General's ruling, he will be in a position of administering the law in a manner inconsistent with the interpretation of the Government's accounting officers. Under the circumstances, the Administrator feels that it is incumbent upon him, in view of the large sums of money involved in this problem and the public interest relating thereto, to apply the Comptroller General's ruling and accordingly to take the following action:
I. WITH RESPECT TO PAYMENT FOR VESSELS PURCHASED OR LOST.
(a) To withhold payments for all vessels previously requisitioned for title by the War Shipping Administration or purchased by the War Shipping Administration pursuant to the provisions of section 902 of the Merchant Marine Act, 1936, as amended, except in cases where the value of the vessel as determined by the Administrator does not exceed the value of the same vessel on September 8, 1939, or, with respect to vessels constructed or reconstructed subsequent to that date, where the value of the vessel is determined at an amount not in excess of actual construction or reconstruction cost less depreciation.
This means that with few exceptions — principally yachts which have been valued at 1939 values — payments will be withheld on all vessels heretofore taken for title, including freighters, tankers, passenger ships, tugs, barges, fishing vessels of all kinds, and all other watercraft, even though a determination of value has been reached and the owner has been notified thereof.
(b) To withhold all payments for total loss of vessels from marine or war risk assumed by the War Shipping Administration to the same extent as noted in paragraph (a). Claims for total loss of such vessels will be treated in the same manner as claims for vessels requisitioned for title by the War Shipping Administration.
(c) In cases where the application of the rules set forth in (a) and (b) result in hardship to any owner, the Administrator is prepared to determine the value of such vessel in accordance with the decision of the Comptroller General of the United States upon request for such determination from the owner, and to tender the amount so determined to the owner. The owner would then have the election of accepting the amount tendered in full settlement or of accepting 75 percent thereof and instituting suit in the appropriate court for just compensation under section 902.
* * * * * * *
II. WITH RESPECT TO VESSELS CHARTERED BY THE WAR SHIPPING ADMINISTRATION.
* * * * * * *
(d) Consideration is being given to the desirability of cancelling all or certain classes of outstanding charters.
WSA sought to prevail upon the Comptroller General to change his position in letters dated December 31, 1942, and April 27, 1943, but in letters dated January 7, 1943, and May 17, 1943, the Comptroller General maintained his previous position.
Throughout 1943 representatives of petitioners requested of WSA payment on account of the S. S. Jane Christenson on the valuation of $640,000 fixed in the War Risk Insurance contract.Page 1370
On July 25, 1943, the War Shipping Administrator wrote a form letter to all claimants offering payments on account, without prejudice to rights of either the United States or claimants. The offer was to pay $20 a dead-weight ton in the case of freighters and $25 a deadweight ton in the case of tankers, or 75 per cent of the valuation computed under Maritime Commission General Order No. 24, whichever was higher.
Petitioners resolved to take advantage of this offer. WSA insisted that the name "Christenson Steamship Company" appear on all agreements and documents. This attitude of WSA was caused by the belief of its general counsel that the Federal Assignment of Claims Act prohibited the assignment of a claim against the United States to shareholders in liquidation of a corporation. Accordingly, the directors in liquidation of Christenson resolved on September 2, 1943, that having been informed by counsel that they had power to act to facilitate the carrying out of the dissolution, they should execute the necessary papers in the name of the company as demanded by WSA as a condition precedent to payment being made. Accordingly, the form of agreement tendered by WSA was signed on September 2, 1943. On that same day a letter was written to WSA explaining that Christenson had been dissolved and that petitioners were the owners of the claim, and setting forth the amounts due to each, and asking that the checks be sent to petitioner A. B. Cahill at his office in San Francisco.
On receipt of this letter WSA, under date of September 13, 1943, wrote a letter addressed to Christenson reiterating its position that a statute prohibited assignment of the claim in liquidation, but demanding, for the full protection of the United States, the signature of a waiver agreement by petitioners. This waiver agreement was duly signed by petitioners and by Sudden Christenson. By it the signatories authorized payment of the claim to Christenson Steamship Company on their behalf. Accordingly, part payment in the amount of $170,680 was made by warrant dated August 19, 1943, all of which was promptly transmitted in the name of Christenson Steamship Company to petitioners. This payment was entered on the books of "Arthur B. Cahill, Managing Owner." No entry was made on the books of "Christenson Steamship Company."
On October 15, 1943, the President of the United States issued Executive Order No. 9387. This order established a board of three members, to be known as the "Advisory Board on Just Compensation," and authorized the board to establish, in accordance with the applicable provisions of the Constitution and laws of the United States, fair and equitable standards, rules and formulae of general applicability for the guidance of WSA in determining the just compensationPage 1371to be paid for all vessels requisitioned, purchased, chartered, or insured by WSA.
In December 1943, by documents similar to those executed in September of that year, petitioners accepted the second part payment in the amount of $170,680. This payment was also entered on the books of "Arthur B. Cahill, Managing Owner," and no entry was made for "Christenson Steamship Company."
After public hearings, the Advisory Board submitted its report to WSA on December 7, 1943, in which various rules and standards for the determination of just compensation to the owners of vessels were fixed.
On August 9, 1944, WSA made an offer of $583,180, plus interest, in full payment for the S. S. Jane Christenson. This offer was accepted by telegram on August 14, 1944, signed by Christenson Steamship Company and A. B. Cahill. Petitioners, as above indicated, had designated A. B. Cahill as "managing owner" to act for them and on their behalf in the collection of this claim and in the management of the two remaining vessels. The remaining payment of $248,508.42 was duly made by warrant dated August 20, 1944, and was transmitted in the name of Christenson to petitioners. This payment was also entered on the books of "Arthur B. Cahill, Managing Owner," and no entry was made for "Christenson Steamship Company."
The bill of sale for the conveyance of the S. S. Jane Christenson was executed September 21, 1944. It provides, in part, as follows:
BILL OF SALE
(Contract No. W.S.A. 5791, Addendum No. 2)
TO ALL TO WHOM THESE PRESENTS SHALL COME, GREETING:
KNOW YE, That Christenson Steamship Co., a Corporation organized and existing pursuant to the laws of the State of California, (hereinafter referred to as the "Seller"), sole owner of the vessel called the
JANE CHRISTENSON
(Official No. 216,223), (a copy of the latest Permanent Register of which vessel is attached hereto and made a part hereof), for and in consideration of the sum of Ten ($10.00) Dollars, and other good and valuable considerations, to it in hand paid by the United States of America, represented by the War Shipping Administrator, receipt of which is hereby acknowledged by the Seller, has, effective as of November 12, 1942, assigned, transferred, and conveyed, and by these presents does hereby assign, transfer, and convey unto the United States of America, represented by the War Shipping Administrator, and assigns, the whole of the said vessel, together with all spare parts, appurtenances and equipment thereunto appertaining and belonging, whether on board or on shore (excepting and excluding leased equipment, if any).
* * * * * * *Page 1372
IN TESTIMONY WHEREOF, the said Seller, the abovementioned Owner, has caused this Bill of Sale to be signed and sealed in its name and for and on its behalf by its proper officer thereunto duly authorized, this 21st day of September, 1944.
(SEAL) CHRISTENSON STEAMSHIP CO. By A. B. Cahill (Signed) -------------- Title __________ President
ATTEST: (Signed)
F. C. Lawler
— Secretary
A waiver was again signed by petitioners and Sudden Christenson and an agreement was signed in the name of Christenson Steamship Company accepting the tendered payment. As required by this agreement the above bill of sale to the S. S. Jane Christenson was signed by A. B. Cahill as president of Christenson.
After December 31, 1942, no books were maintained for Christenson. All entries thereafter were made on the books of "Arthur B. Cahill, Managing Owner."
The excess of the amount received by petitioners as just compensation over the adjusted basis of the S. S. Jane Christenson to Christenson was $552,598.68. Respondent assessed taxes on this amount against the corporation for 1942.
Payments were made by the United States on account of the requisition for title of the S. S. Jane Christenson as follows:
August 19, 1943 ............................. $170,680.00 November 27, 1943 ........................... 170,680.00 August 20, 1944 ............................. 241,820.00 ------------ $583,180.00 Award for delayed payment, August 20, 1944 .... $6,688.42
The residual basic book cost of the S. S. Jane Christenson at the date of requisition for title was $30,581.32. The excess of the amount received on account of just compensation for the S. S. Jane Christenson amounted to $552,598.68.
Christenson kept its books and filed its tax returns on the accrual basis and on the calendar year basis.
Petitioners individually reported gain on the distribution in liquidation of Christenson and paid a tax thereon.
The respondent, in determining the deficiencies as above mentioned, held that the gain of $552,598.68 was properly includible in the income of Christenson for its taxable year from January 1 to December 23, 1942. He determined, in the alternative, that the amounts which were paid in 1943 and 1944 for the taking of the S. S. Jane Christenson were properly taxable to Christenson for those years. He also determined that since the assets of Christenson were transferred to petitioners herein, they were liable as transferees.Page 1373
Subsequent to the filing of the petitions herein the petitioners paid the entire tax assessed against Christenson Steamship Company for the taxable year January 1, 1942-December 23, 1942. The amounts so paid by each petitioner are:
Tax deficiency Interest Total
Henry Hess Co. .............. $14,965.96 $4,284.98 $19,250.94 Arthur B. Cahill ............ 4,380.34 1,254.16 5,634.50 Louis C. Stewart ............ 1,095.13 313.55 1,408.68 Charles E. Christenson ...... 3,157.42 904.02 4,061.44 Edwin A. Christenson ........ 3,157.42 904.02 4,061.44 Imogene Chandler ............ 1,095.13 313.55 1,408.68 Frank C. Lawler ............. 1,095.13 313.55 1,408.68 Edna C. Hitchcock ........... 2,792.43 799.52 3,591.95 Eleanor de Guigne ........... 3,157.42 904.02 4,061.44 Jane de Tristan ............. 3,157.42 904.02 4,061.44 Louis S. Cates .............. 30,662.05 8,779.01 39,441.06 Eleanor L. Cates ............ 95,544.86 27,355.92 122,900.78 ----------- ---------- ----------- Total ................... $164,260.71 $47,030.32 $211,291.03
The parties also stipulated that Docket Nos. 15870, 15871, 15872, 15873, 15874, 15875, 15876, 15877, 15878, 15888, 15889, and 15904 shall be deemed amended to allege the above payments, to assert that they constitute overpayments, and to pray that the Court find them to be overpayments. It was also agreed that in those docket numbers the answers shall be deemed amended to deny these allegations.
Henry Hess Co. .............. $14,965.96 $4,284.98 $19,250.94 Arthur B. Cahill ............ 4,380.34 1,254.16 5,634.50 Louis C. Stewart ............ 1,095.13 313.55 1,408.68 Charles E. Christenson ...... 3,157.42 904.02 4,061.44 Edwin A. Christenson ........ 3,157.42 904.02 4,061.44 Imogene Chandler ............ 1,095.13 313.55 1,408.68 Frank C. Lawler ............. 1,095.13 313.55 1,408.68 Edna C. Hitchcock ........... 2,792.43 799.52 3,591.95 Eleanor de Guigne ........... 3,157.42 904.02 4,061.44 Jane de Tristan ............. 3,157.42 904.02 4,061.44 Louis S. Cates .............. 30,662.05 8,779.01 39,441.06 Eleanor L. Cates ............ 95,544.86 27,355.92 122,900.78 ----------- ---------- ----------- Total ................... $164,260.71 $47,030.32 $211,291.03
OPINION.
In the cited case we held that the ruling of the Supreme Court inContinental Tie Lumber Co. v.United States,286 U.S. 290, on which respondent relies heavily here, and other cases of similar purport, were distinguishable and do not impel a contrary result. The same considerations are present here. The amount of just compensation to be received was not fixed or reasonably ascertainable in the year 1942. It is not enough to state that the Fifth Amendment toPage 1374the Federal Constitution guarantees just compensation and thereby fixes taxpayer's right. To this it might, with equal assurance, be rejoined that under our system of jurisprudence and the law as adjudicated by all American courts, every litigant is guaranteed ultimate justice or "equal justice under law." These principles are basic in our system of government. So to state, however, does not devitalize the considerations leading to the holding in innumerable cases that before an amount can be accrued, not only must the right to receive the amount be fixed, but the amount must be reasonably ascertainable.
We hold on the facts that no amount was fixed or reasonably ascertainable by Christenson in 1942 and that, therefore, respondent erred in taxing any of the gain as income in that year.Luckenbach Steamship Co., supra; United Statesv.SafetyCar Heating Lighting Co.,297 U.S. 88. SeeApex ElectricalManufacturing Co.,16 T.C. 1171. Since there were no taxes due for 1942, it follows that petitioners had no transferee liability in that year.
The next question is whether the Christenson Steamship Company realized taxable gain in the years 1943 and 1944 on account of the requisition for title of the S. S. Jane Christenson. This issue is readily disposed of.
Petitioners argue that Christenson having assigned the inchoate claim to just compensation in 1942 to its stockholder (Sudden Christenson) and the stockholder having distributed all assets, including the claim, to petitioners, Christenson had no right or interest in such claim thereafter and accordingly had no beneficial interest in the payments made in 1943 and 1944. They contend that the corporation ceased to exist on dissolution. From this they argue that the corporation was not taxable on the payments so made. We disagree. The corporation was not dead but moribund. Under the law of California, as in most states, a dissolved corporation is continued after such dissolution "for the purpose of winding up its affairs," etc. (sections 399, et seq., Civil Code of California). It is specifically provided that the directors of such dissolved corporations shall have power,inter alia,to sue in the name of the corporation, to carry out contracts, collect, pay, compromise and settle debts and claims, sell the assets and "to do any and all things in the name of the corporation which may be proper and convenient for the purposes of winding up, settling and liquidating the affairs of the corporation." Here there is no doubt of the continuing existence of the corporation. The liquidating directors frequently employed the corporate name, wrote letters, executed agreements and received payments in the name of Christenson, and otherwise, in many respects, negatived petitioners' present contention throughout the years 1943 and 1944. The waiverPage 1375agreement, signed by all of the petitioners, authorized payment of the claims to Christenson and the two payments of $170,680 each in 1943 and the final payment of $248,508.42 in 1944 were all made in the name of Christenson Steamship Company. The closing bill of sale was executed in September 1944 in the name of Christenson Steamship Company by A. B. Cahill, as president, and F. C. Lawler, as secretary. This document recites, in part, "Christenson Steamship Company, a corporation, organized and existing pursuant to the laws of the State of California." Similar language was used in various other documents executed in behalf of the corporation during 1943 and 1944. All of the payments received from WSA in the name of Christenson Steamship Company were promptly delivered to petitioners.
It is the holding of this Court that Christenson Steamship Company, although dissolved, was nonetheless existing for the purpose of winding up its affairs, chief among which was the collection in its own name of the payments on account of the claim for just compensation and the distribution of the proceeds to petitioners. In such capacity it received in its own name payments aggregating $583,180, with interest of $6,688.42. The excess of the sums paid over the adjusted basis of the S. S. Jane Christenson to the corporation was $552,598.68, which represented taxable gain to the corporation. Respondent assessed taxes based on such sum against the corporation.
We thus find no merit in petitioners' contention that the gain was not taxable to Christenson Steamship Company in 1943 and 1944 when it received payment and distributed the same through its sole stockholder to petitioners. A corporation which possessed enough life to perform all of the above functions, and many others not above listed, possessed sufficient vitality to be taxable on the gains incident to such winding up of its affairs. SeeCommissionerv.Court HoldingCo.,324 U.S. 331, affirming2 T.C. 531, andFairfieldSteamship Corporation,5 T.C. 566, affd.,157 F.2d 321. Taxable gain may not be avoided under the circumstances here present.
Petitioners advance as a third contention that the petitioners are not liable as transferees in respect to 1943 and 1944. They admit transferee liability as to any taxes due for 1942. We have considered this argument carefully and have consulted the cases cited but we are not convinced that petitioners' position is in any sense tenable. The rights of the parties are to be fixed by the realities of the situations involved, not by blind reference to the calendar. SeeCommissionerv.Court Holding Co., supra,andHigginsv.Smith,308 U.S. 473. The stipulated facts reveal that the assets of Sudden Christenson were distributed during the years 1942, 1943, and 1944, complete liquidation of the corporation being accomplished by December 1944. These distributions included all of the assets received by the corporationPage 1376from Christenson and the payments of just compensation for the S. S. Jane Christenson, leaving Sudden Christenson without any assets with which to satisfy the liability herein asserted against Christenson Steamship Company. It was further stipulated that "Each of the petitioners received cash and other property of the transferor, Christenson Steamship Company, a corporation, by the transfers described [above], having a fair market value equivalent to the transferee liability determined by the respondent against each petitioner herein for the deficiences in taxes heretofore determined by the respondent to be due from the said transferor, together with interest thereon as provided by law." These distributions occurred throughout the years 1942, 1943, and 1944. We are unable, in the face of these stipulated facts, to perceive any merit in petitioners' argument that they are not liable as transferees as to the years 1943 and 1944. The petitioners are accordingly liable as transferees for all unpaid taxes falling due in the years 1943 and 1944.
There remains for consideration the question whether Christenson was liable, in the fiscal years 1943 and 1944, for the declared value excess-profits taxes (section 600, I. R. C.) The determination of this issue depends on whether Christenson was "carrying on or doing business" in 1943 and 1944 and, accordingly, whether it was liable for capital stock tax under section 1200, I. R. C. The answer to the stated question is to be found in the facts. There would seem to be no doubt that Christenson was "carrying on or doing business" during the year ended June 30, 1943. During part of this year it was engaged in operating its steamship line and later in making distribution to its stockholder. We hold that Christenson was doing business in the year in question and accordingly that petitioners are liable as transferees for declared value excess-profits taxes due for 1943. The facts are different as to 1944. While we have held above that Chistenson was still in existence during the year 1944 and received income on which it is taxable, it does not necessarily follow that it was "carrying on or doing business" under section 1200, I. R. C. Different criteria apply. We are of the opinion, and hold, that Christenson was not "carrying on or doing business" in 1944 as that phrase is used in section 1200, I. R. C., and accordingly that for the year 1944 there is no liability on petitioners as transferees for declared value excess-profits taxes.
Reviewed by the Court.Decisions will be entered under Rule 50.
We do not have here a case where there is no fixed or determined right to receive payment, as was true inSecurity Flour Mills Co. v.Commissioner,321 U.S. 281,DixiePine Products Co. v.Commissioner,320 U.S. 516, andLucasv.American Code Co.,280 U.S. 445. To say that no amount was known or could be reasonably estimated or ascertained at the time of the taking of the vessel in 1942, is to turn one's back on the facts or to play the ostrich and stick one's head in the sand. Regardless of the differences between the General Accounting Office and the War Shipping Administration, there was at all times an acknowledgment on the part of the United States that the Christenson Steamship Company was entitled to receive an amount equal to the value of the ship on September 8, 1939. This case, on its facts, is no different from cases arising daily throughout the business world where the right to payment becomes fixed but the amount is not definitely known and must await ultimate work-out or computation. In such cases, it would be wholly unrealistic and would result in a complete distortion of income and the financial condition of the participants using an accrual method of accounting to fail or refuse to enter an estimate of the amount of the payment upon their books, particularly where there is no question but that a substantial amount is owing and will be paid. The fact that the estimate, even though made objectively and resulting from the exercisePage 1378of the best judgment possible, will in all likelihood vary from the amount ultimately computed or determined, is no excuse and does not relieve a taxpayer from entering the results of the exercise of such judgment upon its books; and the fact that the ultimate work-out may be, and probably will be, different and require proper adjusting entries on the books in the year of ultimate determination or payment, not only is no bar to accrual, but rather, is a common and normal occurrence.
As to the amount which properly should have been accrued, it is sufficient for the purposes of this dissent merely to point out that even the Comptroller General acknowledged liability of the United States at the time the S. S. Jane Christenson was requisitioned, in an amount equal to the value of the ship on September 8, 1939, and that Cahill, who took over on November 17, 1942, as "Managing Owner" for Christenson Steamship Company, did estimate and accrue on his books a receivable of $510,000 as the amount due and owing for the ship as of the date requisitioned. As some indication that this amount was regarded as conservative, it may be noted that throughout 1943 the petitioner's representatives were claiming $640,000 as the amount due.
In further refutation of the conclusion that it was not reasonable to ascertain and accrue any amount in 1942, it is to me of some significance that as early as July 25, 1943, the Christenson Steamship Company was advised that it would be privileged at that time to accept payments based on the deadweight tonnage of the vessel, or up to 75 per cent of the value which had been computed under a general order of the Maritime Commission, whichever was higher or, without any prejudice to its rights to continue its demands for the payment of an amount greater than the value of the ship at September 8, 1939.
For the reasons stated, it is my opinion that the pronouncements by the Court of the law in this case and its application of the law to the facts herein are in error.
HILL, DISNEY, and HARRON,JJ.,agree with this dissent.
- Proceedings of the following petitioners are consolidated herewith: Arthur B. Cahill, Docket Nos. 15871, 19456; Frank C. Lawler, Docket Nos. 15872, 19458; Louis Stewart, Docket Nos. 15873, 19459; Eleanor de Guigne, Docket Nos. 15874, 19461; Jane de Tristan, Docket Nos. 15875, 19478; Edwin A. Christenson, Docket No. 15876; Charles E. Christenson, Docket No. 15877; Imogene Chandler, Docket Nos. 15878, 19607; Eleanor L. Cates, Docket Nos. 15888, 19460; Louis S. Cates, Docket Nos. 15889, 19516; Edna C. Hitchcock, Docket Nos. 15904, 19462. ↩