Before AUGUSTUS N. HAND, CLARK and WOODBURY, Circuit Judges.
These consolidated petitions for review of three decisions rendered by the Tax Court of the United States in consolidated proceedings involve the income tax and declared value excess-profits tax liability of the Borall Corporation for its taxable year ending March 31, 1940, and the liability for those taxes of two of its stockholders as transferees of its assets.
The Borall Corporation was organized under the laws of Delaware for the purpose of engaging in the general investment business. Its office, while it had one, was located in the City and State of New York and its tax return for the period under consideration was filed with the Collector for the Second District of New York. It had an authorized capital stock of 8,000 shares of $10 par value preferred and 5,800 shares of $1 par value common.
At its organization Borall issued 7,700 shares of its preferred stock and 4,640 shares of its common stock to the petitioner Hall in exchange for: (1) 16,500 shares of the common stock of the Thompson Automatic Arms Corporation; (2) a contract between Hall and Federal Screw Works allowing the former a commission on certain orders which he might obtain for the latter, and (3) 3,500 shares of the $1 par value common stock of M.J. Hall & Co., Inc. At the same time it also issued 580 shares of its common stock to one Mortimor S. Gordon in return for legal services and blocks of 75 shares of its preferred and 290 shares of its common to both the petitioner Ungerleider and to one Lowell A. Mayberry for which each paid $750. Hall promptly transferred 350 shares of his preferred stock to Gordon and 2,500 shares of his preferred stock to Ungerleider in payment of personal obligations to them, and subsequently he transferred 120 more of his preferred shares to one Aaron Sapier. As a result Borall's preferred stock was then owned as follows: Hall 4,730 shares, Ungerleider 2,575 shares, Gordon 350 shares, Sapier 120 shares, and Mayberry 75 shares, leaving 150 shares of preferred which apparently were never issued.
Hall, Ungerleider, Mayberry and Gordon constituted Borall's board of directors from its organization to its dissolution, and its officers during that interval were Hall, president; Mayberry, treasurer; and Gordon, secretary.
During April and May 1939 Borall maintained an office and paid Hall a salary. But its affairs did not prosper and in June its original cash capital of $1,500 contributed by Ungerleider and Mayberry was virtually exhausted. Under these circumstances the board of directors at a meeting held on June 28, 1939, voted to discontinue the salary to Hall and to give up the corporation's office, the minutes of that meeting containing the notation "After some further discussion it was the consensus of opinion that unless satisfactory arrangements could be worked out, the corporation be liquidated and dissolved."
Borall was inactive after this meeting, but Hall personally undertook to provide it with working capital by a sale of its Thompson stock and to this end induced a brokerage firm to agree to purchase that stock for marketing purposes. Hall reported the result of his negotiations with the brokers to Borall's directors but two of them believed the Thompson stock to be worth more than the brokerage firm would pay for it and refused to allow the corporation to sell. As a result of this deadlock the directors decided to dissolve Borall and liquidate its assets.
To accomplish this the board of directors held a meeting on September 9, 1939, the original minutes of which recite that "After considerable discussion and due to the uncertainty of market conditions, it was determined in order to permit individual shareholders to act in accordance with their individual views, to declare a liquidating dividend on the outstanding preferred shares of this corporation payable to holders of record as of September 11, 1939, of $8.00 a share payable in cash or in two (2) shares at the valuation of $4.00 per share of Thompson Automatic Arms Corporation Stock." At this meeting it was then resolved: (1) That Borall "distribute" its 16,500 shares of Thompson stock "as a liquidating dividend" to the holders of Borall's issued and outstanding preferred stock; (2) "that such shares be delivered to or sold for the account of said shareholders as full and final payment of such dividend and as set forth in these resolutions"; (3) that Borall "declare and pay" to its preferred stockholders of record as of the close of business September 11, 1939, "a liquidating dividend of $8.00 per share payable in cash or in two (2) shares of Thompson Automatic Arms Corp. stock at the valuation of $4.00 per share, free of tax and delivery charges at the election of such shareholder, such election to be designated in writing by letter addressed to this corporation on or before September 11, 1939"; and (4) that Hall be authorized on behalf of Borall to enter into a contract with the brokerage firm of Clokey & Miller for the sale at $4.00 per share of "so many of the shares of this corporation as shall be required to satisfy the election of preferred shareholders in accordance with the above resolution."
Ungerleider and Mayberry duly elected to take shares of Thompson stock "in full payment, discharge and satisfaction of the Eight Dollar ($8.) liquidating dividend declared" by Borall, and Hall, Gordon and Sapier elected "to receive the liquidating dividends in cash."
Thereupon, at a meeting of Borall's directors held on September 14, 1939, it was voted to deliver all 16,500 shares of Borall's Thompson stock to a New Jersey bank as custodian, and to authorize the sale of 11,200 shares of that stock by Clokey & Miller at $4.00 per share. On September 22, 1939, the bank delivered 5,150 shares of Thompson stock to Ungerleider and 150 shares to Mayberry, that being two shares of Thompson stock for each preferred share of Borall held by them, and the remaining 11,200 shares were subsequently sold, under modifications of the agreement with Clokey & Miller, by that brokerage firm and by another, at prices ranging from $4.00 down to $3.00 per share. The proceeds of the sales of the first 10,400 shares of Thompson stock sold were distributed ratably to Hall, Gordon and Sapier on various dates between September 23, 1939, and February 6, 1940, but the proceeds of the sale of the remaining 800 shares were for some unexplained reason later distributed ratably to all of Borall's five preferred shareholders, including Ungerleider and Mayberry, although the latter had elected to take Thompson stock in lieu of cash in full payment of Borall's liquidating dividend. This distribution of cash and the fact that part of the Thompson stock was sold for less than $4.00 per share resulted in a distribution to the three stockholders of Borall who elected to take their liquidating dividend in cash of only $7.00 per share for their stock. None of them appear to have complained, however, or to have made any demand upon Borall.
Borall was officially dissolved early in July 1940, and its remaining assets (the contract between Hall and Federal Screw Works and the stock of M.J. Hall & Co., Inc.) which the Tax Court found had no fair market value, were transferred to Hall for a nominal consideration a few days later. Thus when Borall's liquidation was complete it was left without any assets whatever.
Borall reported no income for its fiscal year beginning with its organization on April 1, 1939, and ending March 31, 1940, but the Commissioner after an examination of its books and records determined otherwise. He took the view that the 11,200 shares of Thompson stock sold though brokers had been sold by Borall on its own behalf and that it had realized a taxable gain from the transaction of $24,837 during the taxable year in question. Therefore he determined deficiencies in Borall's income tax and declared value excess-profits tax for that period of $3,255 and $2,797.50 respectively, and, since it was a dissolved corporation without assets and both Ungerleider and Hall as former stockholders had received more than the amount of the above taxes as liquidating dividends, he held that they were liable for those taxes as transferees.
The petitioners did not contend before the Tax Court and do not contend here that the Commissioner's computations of tax were erroneous. They have taken the position from the outset that there was no basis for the imposition of any tax at all for the reason that the 11,200 shares of Thompson stock were not sold by Borall on its own account but were sold by it as the agent for Hall, ...