Before CLARK, MOORE and KAUFMAN, Circuit Judges.
The appellant, Wood Harmon Corporation, brought an action in the District Court to obtain a tax refund, but suffered an adverse judgment on cross-motions for summary judgment. Wood Harmon, as transferee of United Cities Realty Corporation (hereinafter called United), contests on appeal only that part of the District Court's judgment holding United liable for a capital gains assessment on one of the payments from the City of New York resulting from the condemnation of certain property owned by United. The essential facts are not in dispute, and the court below disposed of the motions on stipulated facts.
United, the appellant's transferor, was a New York corporation which at one time owned an undivided five-sixths interest in premises commonly known as 71 Washington Square South in the City of New York. The City had commenced condemnation proceedings against the Washington Square property in January 1955 by filing a petition in the New York State Supreme Court. Realizing that any condemnation payments would probably result in a substantial liability for capital gains tax, United's Board of Directors, on July 18, 1955, resolved to call a special meeting of stockholders on August 8, 1955, "for the purpose of considering a proposal of dissolution of the corporation and the adoption of a plan of liquidation of its assets." By the adoption of such a plan, the directors intended to avail themselves of the tax benefits bestowed by section 337 of the Internal Revenue Code of 1954,*fn1 which provides that a corporation adopting a plan of complete liquidation and distributing all of its assets within twelve months thereafter shall recognize no gain or loss "from the sale or exchange by it of property within such 12-month period." The stockholders' meeting was held on August 8, 1955, at which time a resolution to liquidate United was duly adopted.
Unfortunately for United, its well conceived plan was frustrated. On August 5, 1955, three days before the effective adoption of the plan of liquidation,*fn2 an ex parte order was entered in the New York Supreme Court condemnation proceeding, which vested legal title to the Washington Square property in the City of New York. On March 8, 1956, United received from the City an advance payment of $225,000, on account of the then undetermined amount of the award for United's interest in the condemned Washington Square property. Apparently believing that this payment, which exceeded the cost basis of the property by more than $45,000, fell within the terms of section 337, United reported this gain as nontaxable on its "short" tax return filed for the period January 1, 1956 to July 30, 1956.
On June 28, 1956 United assigned to the Commercial State Bank, purportedly as trustee for United's shareholders, all of United's right, title, and interest in any further payments to be made by the City of New York relating to the condemnation. Shortly after, and prior to July 30, 1956, United delivered to the Commercial State Bank all of its assets other than $2,436.93 which United retained to pay liabilities. On July 30, the Bank distributed to United's shareholders all of the assets transferred from United other than the right to the proceeds from the sale of the Washington Square property.
The corporation having distributed its assets, and the City having made the initial payment on the condemnation award, all that remained undone was for the court to ascertain the exact value of the property condemned and to pay the balance (with interest on the entire award from August 5, 1955, the date title passed from United to the City) to United. The value of the property was fixed by court decree at $425,000, on September 29, 1956, and on December 3, 1956, the City of New York executed and delivered to United warrants covering the balance owing for United's interest in the Washington Square property - $129,166.67 was attributable to principal and $12,131.51 to interest. United endorsed the warrants to the order of the Commercial State Bank.
On October 14, 1960, the Commissioner of Internal Revenue levied against Wood Harmon, as transferee of United, an assessment of $54,874.08 (consisting of a tax of $44,302.72 and deficiency interest of $10,571.36) based on the gain allegedly realized by United from the condemnation payments of $225,000 on March 8, 1956 and the total payments of $141,298.18 on December 3, 1956.The assessment was paid by Wood Harmon, which then commenced the action in the court below for a refund.*fn3
It should be noted that throughout the period from July 30, 1956, when United's assets were distributed to its shareholders, until December 3, 1956, when United received the final condemnation payments, the corporation retained a bank account in order to meet its liabilities. Starting with the $2,436.93, retained to pay liabilities and expenses, United's balance was in excess of $1,000 on January 1, 1957, and the final check in liquidation was not drawn on this account by United until April 30, 1957.
In the District Court, Judge Dawson held that the condemnation proceeding did not fall within the sheltering provisions of section 337, because the condemnation decree, which vested title in the City and which therefore constituted a "sale",*fn4 was handed down prior to the adoption of the plan of liquidation and not within the twelve-month period following the adoption of the plan of liquidation.He therefore granted the Government's motion for summary judgment, holding Wood Harmon liable for the capital gains tax resulting from the payments of March 1956 and December 1956. On appeal, Wood Harmon concedes the nonapplicability of section 337 to the sale of the Washington Square property and does not contest the fact that United was properly taxable on the March 1956 payment from the City. It contends simply that the court below erred as to its tax liability regarding the December payment.This contention is not based upon the applicability of section 337 but upon the theory that United escaped liability for two reasons: (1) its claim to the balance of the condemnation payments - as fixed in September 1956 and paid in December 1956 - was assigned to its stockholders, and the incidence of the tax was properly upon them as transferees rather than upon the transferor corporation; and (2) United was nonexistent as a corporate entity after July 30, 1956, and could not be subject to tax on sales proceeds received after that date.
We find both these contentions to be without merit, and we accordingly affirm the judgment of the District Court entered on defendant's cross motion for summary judgment.
Once we recognize that there are no problems confronting us on appeal which concern the uniquely corporate aspects of section 337, we find that the first assertion of error merely raises the problem, familiar in tax litigation, of the anticipatory assignment of rights to income.We hold that United, having consummated a sale of its property prior to the transfer of its assets in liquidation, was entitled immediately and fully to the proceeds of that sale; all that it assigned to its shareholders was the right to receive those proceeds, and this alone is not sufficient to relieve United of the tax burden resulting from the capital gain on the condemnation sale. United had "earned" the proceeds of the sale by surrendering its property, and it had a fully matured and enforceable claim thereto, despite the fact that the actual amount of the proceeds was undetermined on the date of the sale and on the date of the assignment. These circumstances bring this case well within the many cases upholding a tax upon the transferor who merely transfers the right to receive compensation from a sale of property already consummated or from services already rendered.
In the tax lawyer's primer are the cases of Lucas v. Earl, 281 U.S. 111, 50 S. Ct. 241, 74 L. Ed. 731 (1930); Helvering v. Horst, 311 U.S. 112, 61 S. Ct. 144, 85 L. Ed. 75 (1940); Helvering v. Eubank, 311 U.S. 122, 61 S. Ct. 149, 85 L. Ed. 81 (1940), and Harrison v. Schaffner, 312 U.S. 579, 61 S. Ct. 759, 85 L. Ed. 1055 (1941). In Lucas v. Earl, the Supreme Court held that the breadwinner could not shift the incidence of the income tax on his future personal earnings merely by contracting to pay part of them to his wife. In Horst, the Court held that the taxpayer who retained the ownership of a bond but gave an interest coupon to his son was taxable on the interest collected by his son. In Eubank, the taxpayer was liable for the income tax on renewal commissions earned by him as an insurance agent, the right to collect which had been assigned to another. In Harrison v. Schaffner, the Court held that a voluntary assignment by the income beneficiary of a trust of a percentage of the succeeding year's trust income was an anticipatory assignment of income which remained taxable to the assignor. The philosphy underlying these cases is that the taxpayer has performed services or has a vested interest in ...