MOTTER, Collector of Internal Revenue, v. PATTERSON, 68 F.2d 252

BRATTON, Circuit Judge. A tax of $108,261.01 was levied against F. H. Patterson as transferee of Fredonia Portland Cement Company, a New Jersey corporation, under

section 280 of the Revenue Act of 1926 (26 USCA § 1069 and note), He paid it under protest and applied for its refund. The application was denied. He instituted this action to recover the sum thus exacted and to review the determination of the Commissioner in refusing to allow as a deduction certain losses asserted to have re-suited from the salo of capital stock of Rea-Patterson Milling Company. Patterson died pending appeal, and the action was revived in the name of Daisy Patterson, executrix. A jury was waived in writing, and the case was submitted to the court.

In a written opinion and in formal findings of fact contained in the judgment, the court found specifically that Fredonia Portland Cement Company did not make a sale of its corporate assets; also that tho Commissioner improperly refused to allow the deduction, claimed on account of losses sustained in connection with the sale of stock of Rea-Pattorson Milling Company. Judgment was rendered for plaintiff.

The collector concedes that the court’s dei-termination of the second question was correct and both parties concede that the single question now presented for decision is whether Fredonia Portland Cement Company made a salo of its corporate assets during the year 1&25. Tho collector brings forward at the outset the contention that the assessment is presumptively correct. We agree with that view. United States v. Anderson, 269 U. S. 422, 46 S. Ct. 131, 70 L. Ed. 347; Niles Bement Pond Co. v. United States, 281 U. S. 357, 50 S. Ct. 251, 74 L. Ed. 901.

But that presumption is a rebuttable one which may he overcome by evidence. Walls v. Commissioner (C. C. A. 10) 60 F.(2d) 347; Pittsburgh Hotels Co. v. Commissioner (C. C. A. 3) 43 F.(2d) 345; Lunsford v. Commissioner (C. C. A. 6) 62 F.(2d) 740. The Com_ necessarily found that there was a gad(J> iphe trial court found contrariwise; ^be definite finding being that the corporation made no sale of its corporate assets.

Plaintiff urges that the decisive fact thus found jg supported by substantial evidence and eonsequontly the judgment should be affirmed, A finding of fact made by the trial court in » ease at law in which trial by jury has been waived is not reviewablo on appeal if it is supported by substantial evidence. Harrison v. United States (C. C. A. 10) 42 F.(2d) 736; There is m]& confliet in tho evidence. ^ without dispute or contradio^ion. The precise question involved is the legal effect of the evidence to support the finding rather than its substantiality; hence we review it briefly.

Fredonia Portland Cement Company, a New Jersey corporation, operated a cement factory at Fredonia, Kan. F. II. Patterson and members of his immediate family owned all of its capital stock, consisting of 2,820 shares, except one share, which was issued to C. Doggett, a qualifying director, and it had been reassigned to Patterson. The other members of tho family were subservient to Patterson with respect to conducting the business of the corporation.

Patterson, during the month of June, 1925, decided to dispose of the business and property. lie wished to avoid the double tax which would be incurred if the corporation sold its corporate assets and distributed the proceeds among the shareholders of stock. With that desire in mind and before beginning negotiations, he consulted a firm of auditors that had done work for him during several years and was advised to sell the corporate stock of the company, not its corporate assets. Two illustration returns were prepared showing the difference in tax between the two methods.

He subsequently entered into a contract with Robert L. Cochrane, dated June 23, 1925, for the sale of the entire capital stock at the agreed purchase price of $1,-200,000. Wiles conducted the negotiations on behalf of the purchaser. The contract was prepared by an attorney in Chicago named Barnes. Patterson advised all parties during the negotiations and while the contract was in' process of preparation that, on account of the income tax feature, he desired to sell the capital stock, not the corporate assets.

Barnes advised him that the tax would be the same if the corporation were dissolved, its assets distributed, and the distributees then made conveyance of the physical property. Patterson, unwilling to act upon that advice, sought and obtained an opinion from Arthur Anderson, a public accountant of high standing in Chicago, at a cost of $1,500. His opinion was given to Wiles and by him conveyed to Patterson. It coincided with that of ike attorney preparing the contract. After such careful investigation and being fhus advised,'Patterson executed the contract.

It accorded Coeh-xane the option to purchase the assets instead of the stock. That option was to be exercised by the purchaser giving the seller written notice mailed to him at Fredonia within three days after the execution of the contract. It was never exercised in that manner. Wiles telephoned Patterson that it was desired to purchase the plant instead of the stock, but the record fails to indicate that he suggested .a corporate conveyance.

There is nothing m the record tending to show that anythmg was said which would conflict with Patterson’s declared nitention to dissolve the corporation, distribute its assets, and have the stockholders make conveyance if the purchaser excised the privilege of acquiring the property instead of the stock. The corporation was not a party to the contract It was exclusively between Patterson and ■Cochrane as individuals. ^ Patterson fell seriously ill with prostate ■complication and went to St. Louis, where he subsequently underwent two major opera-lions.

While there he wrote Doggett, seere-tary of the company, directing the manner in which the transaction was to he handled, and telling him that, in the event the purchaser desired the assets, to cause a dissolution of the corporation, a distribution of its assets, and conveyance by the stockholders' to the purchaser; he further instructed Doggett. to engage a firm of tax attorneys at Kansas City for the purpose of effecting the details in the manner desired, that is to say, in the manner provided in the contract, but Doggett failed to do so.

In violation of the understanding with respect to the manner of making the sale, and despite the definite insbrue-tions given Doggett, an attorney for the pur-ehaser, prepared conveyances from the corporation to Fredonia Portland Cement Corn-pany, a Delaware corporation, obviously formed to accept title in lieu of Cochrane, also minutes of a stockholders’ meeting and of a directors’ meeting authorizing such eonvey-anees. Wiles and the attorney for the purchaser both advised Doggett that the doe-uments were in conformity with the eon-' tract, and he believed their statements.

He thereupon signed the purported minutes and secured the signature of Mrs. Patterson and that of her daughter at their residence, They did not read the minutes. Doggett merely told them that they were a part of the transaction in disposing of the stock and property. Such minutes, both stockholders’ and directors’, reeit¡e that Patterson was pres-eat in Fredonia and acted as chairman. He was in St. Louis at the time. No such meetingS were held, and no resolutions authorizing disposition of the corporate assets were adopted.

The facts recited were untrue, Cooper, attorney for the cement company at Fredoni.aj bad not read the contract, but Patterson told him before leaving for St. Louis tbat th® sale was to be effected in the ^ to ineur tbe least tas. Cooper read ^.j16 from Patterson to Doggett, and he believed that the contract was being carried out alg0, tbat attomeys suggested in the Ietter were being consulted. With that understanding be took the minutes and eonveyances Lotdg to be si d b Pattera0n. Doggett had already signed them.

Patterson wajJ in the ti room undergoing a serioug ^ extremel painful operation at the w c at ^ room witbin fif_ teen or twenty be wag br bt into the room on & stretcbe suffering intensely and under the o£ drugs. Cooper told him the papers were for the transfer of the property. He signed them while in bed, without reading them and without knowing their contents. Their execution was merely a matter of form. ■ They were subsequently delivered and the check covering the purchase price was made payable to the corporation.

Doggett, as secretary, immediately indorsed it, and the money was deposited to Patterson’s credit in the bank. It never was covered into the treasury of the corporation, Patterson made trips to Florida, California, Minnesota, and the Hawaiian Islands in the interest of his health. On account of such absence, he did not learn until late in November or early in December, following his operation in July, that in consummating the transaction his desires had not been effected and his instructions had been violated.

A meeting of the stockholders was called and bel d immediately, at which a resolution was adopted reciting that the pretended previous meeting was never held and that all acts done under such pretended authority were null and void. Cochrane was notified of such action, and a tender of conveyances from the stockholders was made. He failed to respond. The contract was one in which Patterson agreed to sell iho corporate stock, subject to the option of the purchaser, upon written notice within three days after the agreement was executed to have the physical assets of the corporation conveyed.

It was perfectly competent for him thus to bind himself to eonvey and deliver or cause to be conveyed and delivered the stock or assets of the corporation at a future date. Had he failed to comply with the terms of the contract, impossibility of performance would not have been a defense against an action for breach of the contract, Paine v. Parkhurst (C. C. A. 6) 205 F. 740. It was a valid agreement on his part, and there is no suggestion that he was unable to perform it.

It is equally certain that the instruments of conveyances were m pursuance of that contract, l ie purchaser, with full knowledge of the faces, mdertook to bring about another method ox perform- ’ ,, , • , anee. And that method was squarelv eon- , . ,, , .. . , /. ,. trary to Pattersoirs desire and determination. TT ,1 , , , .-j ., XT lie diligently sonant to avoid it. He ext 7 , ... t . pressed such aesiro and denomination during j a the negotiations and while the contract was being prepared.

In connection therewith, he received counsel and advice from the attorney preparing the contract and the accountant in Chicago. These facts were known to the purchaser. Although Cochrane was the purehaser named in the contract, he and the corporation formed to take title in his stead were in privity. It cannot disclaim know!edge of the agreement or the circumstances under which it was executed.

There is no substance ujion which to conclude that Patterson changed his attitude and assented to the method ho had consistently endeavored to avoid. lie never consented to the chango; he never agreed that the corporation should convey its assets; he did not know that the instrumonts were corporate conveyances.

He learned the facts about four months later; ho then acted promptly by convening the stockholders, adopting a resolution canceling the deeds and tendering conveyances from the stockholders in conformity with his undorstanding' and purpose which had been known to the purchaser since before the contract wits executed. The tax necessarily rests upon the assumption that the action of the corporation was a valid transaction made intelligently by those who acted for it. The assumption is false.

The stockholders, directors, and officers, including Patterson, the dominant and controlling officer, as such, never agreed to it. That is the actuality of the situation. That the minds of contracting parties must meet and agree on all material features of a contract in order to constitute a binding and enforceable agreement is too well recognized to merit the citation of authorities. That there must be mutual assent is fundamental in the law of contracts. It tücL not exist in this instance. This court is committed definitely to the doctrine that substance, not form, governs in matters relating income tax.

Howbert v. Penrose, 38 F.(2d) 577, 68 A. L. R. 820; Commissioner v. Moore, 48 F.(2d) 526; Golden Cycle Corporation v. Commissioner, 51 F.(2d) 927; Tulsa Tribune Co. v. Commissioner, 58 F.(2d) 937; Prairie Oil & Gas Co. v. Motter (C. C. A.) 66 F.(2d) 309. It is urged tllat Patterson will not be board t(> avoid an oxeOTtod contract bv setüng íhe fact tbat tho aetion waf} un£ratllor. ized Qr ^ ih(j convü was ultm vi in otber word ^ h(J is est d to asscrt a „ tit /A . that there was no valid sale of the corporate , A ,. , , « , , . assets.

An essential element or estoppel is . . , , ... 1%, that the party against whom it is asserted has , , , acted wall respect to property, contract, or , r ,/ , ,, ;. remedy m such manner that another, acting . fi _ , . ,, _ , fA - re ymg thereon has been led to eha,j8'° his Poslüon and wll(] sutfor ülc true faete WGrc 0Btabhrfied aild shookl prevail. The collector is not in that position, cann°t be prejudiced by the esta Wish-ment facts.

He is not entitled to the tax levicd against Patter-son as transferee unless a bona fide sale of the corporate assets waa ma(ie- has not acted to his detriment 011 ü10 strength of the apparent sale, The case of Arizona v. Cooper Queen Mining Co., 233 U. S. 87, 34 S. Ct. 546, 549, 58 L. Ed. 863, was one for the collection of a tax. The territory contended that the eor-poration was estopped to deny the lien.

The court disagreed with that contention, using this language to express its views: “In such a proceeding it is difficult to see how the principles of estoppel because of the description of the land made by the owner in returning the property or the payment of taxes, as appears from the finding in this case, could have application. Estoppel ordinarily proceeds upon principles which prevent one from denying the truth of statements upon which others have acted, where the denial would have the effeet to mislead them to their prejudice.

In this case the territory is undertaking to collect its revenues by certain statutory proceedings duly provided for that purpose, and it would seem to be elementary that such enforcement of col- ... . % , .., , lection must depend upon a valid assessment as its basis, and this again was the holding in Missouri.” So here, the right to the tax depends exclusively upon whether the corporation made a bona fide sale of its corporate assets. If so, the tax is due; if not, there can be no tax. The truth cannot prejudice the collector because he has not acted to his detriment.

It is unnecessary to express an opinion with respect to the facts constituting a sale of corporate stock, or the rights of parties in other proceedings. Those questions are not before us. 'It is enough to say that upon the considefattons stated the transaction fails to justify the imposition of the tax in question. The judgment, rendered on December 21, 1931, provides that it shall bear interest according to law from February 21, 1929. The lawful rate at that time was 6 per cent. per annum. It'is suggested that

section 319 of the Act of June 30, 1932 (47 Stat. 412), commonly called the Economy Act, reduced the applicable rate to 4 per cent.

Section 2 of title 2 of the Act, approved January 30, 1933 (47 Stat. 780, 786), provides that seetion 319 shall not be applicable to a judgment rendered prior to July 1,1982, and

section 14 of title 2 of the Act approved Mareh 3, 1933 (47 Stat. 1489, 1517 [26 USCA § 2614 note]), repeals the statute entirely and expressly restores the rate applicable .prior to June 30, 1932, thus eliminating the question of interest from the case. It should be said in fairness to counsel that the brief presenting the matter was filed prior to the enactment of the two acts last mentioned. * lee judgment IS amrmed.