
    THE WESTERN AND SOUTHERN LIFE INSURANCE COMPANY v. THE UNITED STATES
    [No. 442-52.
    Decided July 16, 1958]
    
      
      Mr. Lawrence H. Kyte for plaintiff. Mr. Thomas L. Con-lan, Mr. Luden Wulsim,, Jr., and Mr. Alan B. Vogeler were on the brief.
    
      Mr. John A. Bees for defendant, with whom was Mr. Assistant Attorney General Charles K. Biee. Mr. James P. Garland was on the brief.
   Opinion

per curiam:

This case was referred by the court, pursuant to Buie 45 (a), to Mastín G. White, a trial commissioner of the court, with directions to make findings of fact and recommendations for conclusions of law. The trial commissioner has done so in a report filed May 5,1958. Although the defendant did within 15 days of the filing of this report file a notice of intention to except to the trial commissioner’s findings and recommendation, the defendant by motion filed June 19, 1958, and allowed on July 1, 1958, withdrew this notice of intention to except, and moved for a judgment in accordance with the recommendation of the trial commissioner. On June 25,1958, plaintiff filed a notice joining with defendant for a judgment based on the trial commissioner’s recommendations. Since the court agrees with the recommendations and findings of the trial commissioner, as hereinafter set forth, it hereby adopts the same as the basis of its judgment in this case. Plaintiff is therefore entitled to recover, together with interest thereon as provided by law, and judgment is entered to that effect. The amount of recovery will be determined pursuant to Buie 38 (c).

OPINION OE THE COMMISSIONER

The primary issue in this case is whether certain sales of real estate that were made in 1946 should be attributed for income tax purposes to the Waslic Corporation.

The plaintiff, The Western and Southern Life Insurance Company, is a corporation organized and existing under the laws of the State of Ohio, with its principal office and place of business located in the city of Cincinnati. During 1946 and for many years prior thereto, the plaintiff was a stock life insurance company.

The Waslic Corporation (which will usually be referred to in this opinion as “Waslic”) was organized on March 20,1933 under the laws of the State of Delaware as a wholly owned subsidiary of the plaintiff. It was intended, at the time of Waslic’s organization, that it would take over from the plaintiff, hold, and manage real estate in States where the plaintiff was not authorized to do business but in which the plaintiff had made loans on realty, had foreclosed the mortgages, and, as a result, was holding title to real estate. In addition, Waslic was to hold the title to real estate in situations where the plaintiff was not permitted to hold such title under the rules and regulations of the Insurance Department of the State of Ohio. Under those rules and regulations, Ohio life insurance companies were not permitted to hold real estate as admitted assets for the computation of reserves beyond a period of 5 years without specific permission from the Insurance Department of the State.

The directors and principal officers of Waslic and of the plaintiff were identical.

Following the establishment of Waslic, farm properties and commercial real estate were transferred by the plaintiff to Waslic and thereafter were operated by the latter. Each farm held and operated by Waslic was given a number preceded by the abbreviation “WF”; and each commercial property held and operated by Waslic was given a number preceded by the abbreviation “W”. Such designations will be used in this opinion.

When favorable conditions were presented, the less desirable of the properties that had been transferred to Waslic were disposed of by Waslic. This program of disposition extended over a period of years. The standard procedure followed by Waslic in disposing of its real estate holdings was as follows: appropriate officers or other agents of Waslic were authorized and instructed to procure prospective purchasers for parcels of real estate; these officers or agents would secure from the prospective purchasers signed offers and submit the propositions to Waslic; and Waslic, in turn, submitted the proposals to the finance committee of the plaintiff for approval or disapproval. Waslic never executed a contract of sale for real estate without the prior approval of the plaintiff’s finance committee.

For a number of years prior to 1946, the board of directors of the plaintiff had been considering a plan for the mutualization of the plaintiff. Mutualization involves the transfer- of ownership of an insurance company from the stockholders to the policyholders. This change of ownership is brought about by the stockholders surrendering to the insurance company their stock for an agreed price. On the surrender of the stock, the company then belongs to the policyholders.

On January 8, 1946, the president of the plaintiff appointed a committee to prepare and submit a plan for the mutualization of the plaintiff.

On March 25, 1946, after learning from the Ohio Superintendent of Insurance that in the event of mutualization the stockholders of the plaintiff would be required to take all the real estate (with the exception of. the home office building) from the assets of the plaintiff, it was decided by the finance committee of the plaintiff that an intensive drive would be made for the sale, at not less than its appraised value, of all the real estate held by Waslic or by the plaintiff. This program was to be carried out irrespective of whether mutualization should become effective or not. Accordingly, officers and agents of Waslic were instructed to endeavor to obtain offers for the purchase of real estate owned by Waslic.

At a meeting of the board of directors of the plaintiff on May 7, 1946, the president and secretary of the plaintiff were instructed to take all the steps necessary to dissolve Waslic. Subsequently, the board of directors of Waslic, at a meeting held on June 5,1946, passed a resolution declaring that it was the best judgment of the directors that Waslic be dissolved. On the same date, the plaintiff, as the sole stockholder of Waslic, consented to the dissolution. A certificate of dissolution was filed with the Secretary of State of Delaware on June 15, 1946. However, as indicated below, Waslic continued to function de faeto for certain purposes subsequent to June 15,1946.

On June 20,1946, the board of directors of Waslic adopted a resolution authorizing the transfer of Waslic’s assets to the plaintiff. In accordance with this resolution, the officers of Waslic on June 20,1946 executed general warranty deeds transferring to the plaintiff all the real estate owned by Waslic, with the exception of a piece of commercial real estate designated as W-63, which was transferred by Waslic to the plaintiff on June 28, 1946, and two other commercial properties designated as W-76 and W-78, which are not directly involved in this litigation. A total of 52 parcels of real estate were involved in the transfers from Waslic to the plaintiff on June 20 and 28,1946.

The real estate mentioned in the preceding paragraph as having been transferred by Waslic to the plaintiff on June 20 and 28,1946 was conveyed by the plaintiff to third parties during the period June 28 — December 30, 1946 pursuant to contracts of sale. In most instances, the contracts of sale were negotiated by the plaintiff after the properties had been transferred by Waslic to the plaintiff. However, the negotiations for the contracts of sale relative to nine of the parcels were conducted by Waslic prior to the time when the particular properties were transferred by Waslic to the plaintiff, and seven of these purchase contracts were signed by Waslic as seller, while the other two purchase contracts were signed by the plaintiff as seller after the two parcels had been transferred to the plaintiff by Waslic.

The gains (or losses) resulting from the sales of all the ■ 52 parcels form the subject matter of the present litigation. Gains aggregating $1,148,063.15 were realized from the sales of 47 parcels, while losses aggregating $6,721.55 were realized from the sales of 5 parcels. Hence, the aggregate net gain resulting from all the transactions amounted to $1,141,341.60.

On December 26, 1946, a Federal corporation income tax return for 1946 was filed for Waslic with the Collector of Internal Revenue at Cincinnati. This return indicated upon its face that it was a final return (Waslic having been dissolved). The return reported a net income amounting to $75,022.95 and a tax liability of $28,294.22, which was assessed and paid. The gains (or losses) realized from the sales of the 52 parcels of real estate involved in this litigation were not reported on the income tax return that was filed for Waslic.

On May 31,1951, following a revenue agent’s examination and report, a statutory notice of a deficiency in the amount of $318,095 for 1946 was issued to the plaintiff as the transferee of Waslic. The tax of $318,095, together with interest in the amount of $94,204.05, was duly assessed. A total of $412,299.05 was paid to the Collector of Internal Eevenue by the plaintiff pursuant to the assessment.

The deficiency assessed against the plaintiff as the transferee of Waslic was based on a determination by the Internal Eevenue officials that the net sum of $1,277,640.92 was realized from the sales of the 52 parcels of real estate previously mentioned, and that this amount represented a capital gain to Waslic.

The plaintiff later filed with the Collector of Internal Eevenue a claim for the refund of the $412,299.05 which it had paid pursuant to the deficiency assessment of May 31, 1951, together with interest on such amount. The plaintiff’s claim was denied by the Commissioner of Internal Eevenue, and the present suit was then filed by the plaintiff;

The propriety of the action of the Internal Eevenue officials in attributing to Waslic the sales of the 52 parcels of real estate involved in this litigation depends upon whether such sales were actually made by Waslic or by the plaintiff. United States v. Cumberland Public Service Co., 338 U. S. 451, 455-456 (1950). In this connection, the circumstances that the plaintiff signed the deeds of conveyance relative to the 52 parcels of land involved in the litigation, and signed the purchase contracts relative to 45 of the parcels, are relatively unimportant. Each of the transactions must be viewed as a whole, from the commencement of the negotiations to the consummation of the sale, in order to determine whether the facts of the entire transaction indicate that the executed sale was, in substance, the sale of the plaintiff or of Waslic. Commissioner v. Court Holding Co., 324 U. S. 331, 334 (1945).

When the sales transactions are viewed in the light of the proper standard, it is readily apparent that the great majority of the real estate sales with which we are concerned in this case were improperly attributed to Waslic by the Internal Revenue officials. Putting aside for subsequent discussion the sales transactions involving the parcels of real estate designated as W-66, W-68, W-69, W-70, W-71, W-72, W-75, WF-13, and WF-46, neither Waslic nor the plaintiff solicited offers from the eventual purchasers of the real estate now under consideration, or conducted any negotiations with the eventual purchasers, prior to the time when the properties were transferred by Waslic to the plaintiff. Such negotiations were conducted by the plaintiff after the properties had been transferred by Waslic to the plaintiff, and, of course, the contracts of sale were entered into after that time. Therefore, as to the properties other than those specifically enumerated earlier in this paragraph, the sales were made, both as to form and substance, by the plaintiff— not by Waslic — and it was error for the Internal Revenue officials to attribute such sales to Waslic for income tax purposes. It necessarily follows that the plaintiff is entitled to recover, at least in so far as the major portion of its claim is concerned.

With respect to the commercial properties designated as W-66, W-68, W-69, W-70, W-71, W-72, and W-75, the negotiations with the eventual purchasers were conducted by Waslic, the purchase offers that led to the disposition of the properties were made to Waslic by the eventual purchasers, and the contracts of sale were signed in the name of Waslic as seller, since these actions were taken while the properties were still owned by Waslic. Despite the fact that the contracts of sale were not entered into by Waslic until after Waslic had transmitted the purchase offers to its sole shareholder, the plaintiff, and the offers had been approved by the plaintiff, it must be concluded, in my opinion, that the sales of the properties discussed in this paragraph were made, both as to form and substance, by Waslic.

In the cases of the farm properties designated as WF-13 and WF-46, the negotiations with the eventual purchasers were conducted by Waslic, and acceptable offers were submitted to Waslic by the eventual purchasers while the properties were owned by Waslic. However, the offers were transmitted by Waslic to its sole shareholder, the plaintiff, for approval, and the offers were not approved until after these properties had been transferred by Waslic to the plaintiff. The purchase contracts were, of course, signed by the plaintiff as seller. Since the purchase offers were negotiated for and obtained by Waslic, it is my opinion that the sales of WF-13 and WF-46 were, in substance, made by Waslic. See St. Louis Union Trust Co. v. Finnegan, 197 F. 2d 565, 568 (C. A. 8, 1952).

The gains realized from the sales of W-66, W-68, W-69, W-70, W-71, W-72, W-75, WF-13, and WF-46 totaled $219,544.47. Therefore, to the extent that the deficiency assessment of May 31, 1951 was based upon the attribution of this amount to Waslic, it is my opinion that the deficiency assessment was correct. On the other hand, as previously indicated, I believe that the deficiency assessment was erroneous to the extent that it was based upon the attribution of $1,058,096.45 to Waslic.

As a subsidiary point, the defendant contends in its brief for the first time that the profits realized from the realty sales made by Waslic in 1946 constituted ordinary income rather than a capital gain to Waslic. This contention is based upon the assertion that the realty sold by Waslic constituted “property held by the taxpayer primarily for sale to customers in the ordinary course of * * * [its] trade or business,” within the meaning of that phrase as used in Section 117 (a) (1) (A) of the Internal Revenue Code of 1939 (26 U. S. C., 1952 ed., 117 (a) (1) (A)).

Since Waslic’s realty sales in 1946 were made in the course of a program for the liquidation of its assets in anticipation of dissolution, it is my view that the realty sold by Waslic cannot properly be regarded as “property held-by the taxpayer primarily for sale to customers in the ordinary course of * * * [its] trade or business.” Garrett v. United States, 128 C. Cls. 100, 105 (1954); Victory Housing No. 2 v. Commissioner of Internal Revenue, 205 F. 2d 371, 372-373 (C. A. 10, 1953); Fahs v. Crawford, 161 F. 2d 315, 317 (C. A. 5, 1947); Dillon v. Commissioner of Interned Revenue, 213 F. 2d 218, 220 (C. A. 8, 1954); Chandler v. United States, 226 F. 2d 403, 406 (C. A. 7, 1955); Curtis Co. v. Commissioner of Internal Revenue, 232 F. 2d 167, 170 (C. A. 3, 1956).

For the reasons indicated above, it is my opinion that the plaintiff is entitled to recover the major portion of its claim with interest.

FINDINGS OF. FACT

1. (a) The plaintiff is a corporation organized and existing under the laws of the State of Ohio, with its principal office and place of business located in the city of Cincinnati, Ohio.

(b) During 1946 and for many years prior thereto, the plaintiff was a stock life insurance company.

2. The Waslic Corporation (which will usually be referred to in these findings as “Waslic”) was organized on March 20, 1933 under the laws of the State of Delaware as a wholly owned subsidiary of the plaintiff, the entire stock of Waslic being held by the plaintiff at that time. Waslic was organized for the following purposes:

(a) Waslic was to take over from the .plaintiff, hold, and manage real estate in States where the plaintiff was not authorized to do business but in which the plaintiff had made loans on realty, had foreclosed the mortgages, and, as a result, was holding title to real estate. Thus, after the establishment of Waslic, the plaintiff would not be holding title to and managing real estate in States where it was not authorized to do business.

(b) Waslic was to hold the title to real estate in situations where the plaintiff was not permitted to hold such title under the rules and regulations of the Insurance Department of the State of Ohio. Under those rules and regulations, Ohio life insurance companies were not permitted to hold real estate as admitted assets for the computation of reserves beyond a period of 5 years, without specific permission from the Insurance Department of the State. It was felt by the plaintiff that the properties taken over by it on mortgage foreclosures were inherently valuable and that the disposition of such properties by the plaintiff within the 5-year period should not be required.

(c) Waslic was to operate real, estate while the title was held by the plaintiff during the 5-year period mentioned in paragraph (b) of this finding.

3. Waslic’s principal office was located in Cincinnati, Ohio.

4. At all times material to this litigation, the directors and principal officers of Waslic and of the plaintiff were identical.

5. The purposes for which Waslic was organized were carried out. One of the results of this arrangement was that the plaintiff did not pay corporate taxes in States where it was not authorized to do business, and Waslic paid in each State where it operated a corporate tax based on its own corporate structure rather than on that of its parent, the plaintiff.

6. Following the establishment of Waslic, farm properties located in Texas, Arkansas, and Missouri and commercial real estate located in the South and Middle West were transferred by the plaintiff to Waslic and thereafter were operated by the latter. A substantial number of these transfers took place in 1940. In some cases, local agents of Waslic managed and supervised the properties after they were transferred to Waslic. In other cases, the real estate operations were conducted directly from the home office of Waslic in Cincinnati.

7. Each farm held and operated by Waslic was given a number preceded by the abbreviation “WF”; and each commercial property held and operated by Waslic was given a number preceded by the abbreviation “W”. These designations will be used in subsequent findings.

8. In the latter part of 1940, a dividend in the stock of Waslic to the shareholders of the plaintiff was declared. After the issuance of this dividend, the stock ownership of Waslic was five-sixths in the plaintiff and one-sixth in individual shareholders of the plaintiff.

9. When favorable conditions were presented, the less desirable of the properties that had been transferred to Waslic were disposed of by Waslic. This program of disposition extended over a period of years. The standard procedure followed by Waslic in disposing of its real estate holdings was as follows: appropriate officers or other agents of Waslic were authorized and instructed to procure prospective purchasers for parcels of real estate; these officers or agents would secure from the prospective purchasers signed offers and submit the propositions to Waslic; and Waslic, in turn, submitted the proposals to the finance committee of the plaintiff for approval or disapproval. No officer of Waslic ever executed a contract of sale for .real estate without the prior approval of the finance committee of the plaintiff.

10. For a number of years prior to 1946, the board of directors of the plaintiff had been considering a plan for the mutualization of the plaintiff. Mutualization involves the transfer of ownership of an insurance company from the stockholders to the policyholders. This change of ownership is brought about by the stockholders surrendering to the insurance company their stock for an agreed price. On the surrender of the stock, the company then belongs to the policyholders. Under the laws of the State of Ohio, it is necessary that a stock insurance company take four steps in order to effect mutualization. These four steps are as follows:

(1) adoption of the plan of mutualization by a majority vote of the board of directors;
(2) approval of the plan by a majority vote of the stockholders of the insurance company;
(3) approval of the plan by a majority vote of the policyholders of the insurance company eligible to vote under the statutory classification; and
(4) approval in writing by the Superintendent of Insurance of Ohio.

11. When mutualization of the plaintiff was originally considered, it was realized that legal obstacles might hamper and delay indefinitely the completion of mutualization. However, the officers of the plaintiff decided to go ahead with the plans that were necessary to achieve effective mutualization, regardless of the fact that effective mutualization would probably be delayed and, indeed, might never be accomplished.

12. On January 8, 1946, the president of the plaintiff appointed a committee to prepare and submit a plan for the mutualization of the plaintiff.

13. On March 25, 1946, after learning from the Ohio Superintendent of Insurance that in the event of mutualization the stockholders of the plaintiff would be required to take all the real estate, with the exception of the home office building, from the assets of the plaintiff, it was decided by the finance committee of the plaintiff that an intensive drive would be made for the sale, at not less than its appraised value, of all the real estate held by Waslic or by the plaintiff. This program was to be carried out irrespective of whether mutualization should become effective or not.

14. (a) In April 1946, Paul J. Vollmar, a vice president of Waslic and of the plaintiff, issued instructions to A. D. Fraser, Inc., one of Waslic’s agents, to procure offers for the purchase of certain commercial properties owned by Waslic in Cleveland, Ohio, and designated as W-70, W-71, and W-72.

(b) In the same month, Mr. Vollmar also instructed the Cobb Eealty Company, Sarasota, Florida, an agent of Waslic, to procure offers for the purchase of a piece of commercial real estate owned by Waslic in Sarasota and designated as W~77.

15. The committee mentioned in finding 12 formulated a mutualization plan under which the stockholders of the plaintiff would receive:

(1) all real estate (if any) unsold at the time of mutualization, except the home office building, and the proceeds derived from sales of real estate subsequent to December 31,1945;
(2) all unlisted and non-admitted assets (if any) unsold at the time of mutualization, and the proceeds derived from sales of such assets subsequent to December 31,1945; and
(3) U. S. Government bonds with a book value of $25,000,000.

16. (a) On May 7, 1946, the mutualization plan outlined in finding 15 was submitted to and adopted by the board of directors of the plaintiff and approved by the stockholders of the plaintiff, subject to the approval of the Ohio State Superintendent of Insurance.

(b) Upon subsequent consultation with all interested parties, it was brought out that it was impossible under the proposed mutualization plan mentioned in finding 15 to present clearly to the plaintiff’s policyholders the terms of the proposed transfer, since the plan did not state to the policyholders the actual dollar value of what the stockholders were to receive in return for their stock. The stockholders were to receive (among other things) real estate, the value of which was uncertain and the true value of which was not reflected on the books of the plaintiff. Furthermore, it was clear that it would be impractical to convey interests in real estate to the numerous stockholders of the plaintiff, particularly since many of them were minors, and that such a distribution would be inequitable to stockholders holding small amounts of stock. For these reasons, it was decided to change the proposed plan of mutualization by eliminating the transfer of real estate and substituting U. S. Government bonds, whose value could be readily ascertained. Under the new plan, all real estate, whether then held in the name of the plaintiff or by Waslic, would be sold, with the exception of the home office building; and stockholders would receive only cash and U. S. Government bonds.

17. At the same meeting of the board of directors of the plaintiff on May 7,1946 that is mentioned in finding 16 (a), when the original plan of mutualization was adopted, the president of the plaintiff reported to the board an offer from the individual owners of the one-sixth interest in Waslic stock (see finding 8) to sell this interest to the plaintiff. This offer was accepted; and the president and secretary of the plaintiff were instructed to take all the steps necessary to dissolve Waslic on the acquisition of the Waslic stock from the individual shareholders.

18. On May 7,1946, the plaintiff acquired the one-sixth interest in Waslic previously held by the individual shareholders. After that date, the plaintiff owned the entire capital stock of Waslic.

19. (a) On May 29, 1946, Carl G. Peterson, an assistant vice president of the plaintiff and a vice president of Waslic, was instructed by C. C. Stayman, financial vice president of the plaintiff and of Waslic, to procure offers for the purchase of all Waslic-owned farms. Mr. Peterson resided in Houston, Texas, and was in charge of the operation and management of all Waslic-owned farms.

(b) In accordance with his instructions of May 29, 1946, Mr. Peterson began to search for purchasers of the “WF” properties.

20. (a) In furtherance of the plan for the dissolution of Waslic, the board of directors of Waslic, at a meeting held bn June 5, 1946 in Cincinnati, passed a resolution declaring that it was the best judgment of the directors that Waslic be dissolved. On the same date, the plaintiff, being then the sole stockholder of Waslic, consented to the dissolution.

(b) A certificate of dissolution was filed with the Secretary of State of Delaware on June 15, 1946.

21. The principal officers of Waslic at the time of its dissolution were as follows:

Name Office
Charles F. Williams_President.
Charles M. Williams — -__ Executive Vice President.
William J. Williams_Vice President.
John F. Ruehlmann-Vice President.
E. S. Runnells- Vice President.
Carl 6. Peterson_Vice President.
Paul J. Vollmar-Vice President.
William C. Willging-Vice President.
Clarke C. Stayman-Financial Vice President.
I. B. Sanford-Vice President and Treasurer.
R. G. Stenger-Auditor and Assistant Secretary.
E. C. Massa- Secretary.

22. Waslic continued to function de facto for certain purposes until August 17, 1946. (See findings 23, 32, and 34.)

23. On June 20, 1946, the board of directors of Waslic adopted a resolution authorizing the transfer of Waslic’s assets to the plaintiff. In accordance with this resolution, the officers of Waslic on June 20,1946 executed general warranty deeds transferring to the plaintiff all the real estate owned by Waslic, with the exception of a piece of commercial real estate designated as W-53, which was transferred by Waslic to the plaintiff by means of a deed dated June 28, 1946, and two other commercial properties designated as TV-76 and W-78, which are not directly involved in this litigation and which were disposed of under the circumstances related in finding 34. A total of 52 parcels of real estate were involved in the transfers from Waslic to the plaintiff on June 20 and 28,1946.

24. The real estate mentioned in finding 23 as having been transferred by Waslie to the plaintiff on June 20,1946 or (in the case of W-53) on June 28, 1946 was subsequently conveyed by the plaintiff in 1946 to third parties pursuant to contracts of sale, as indicated in findings 25 and 27. The gains (or losses) resulting from such transactions form, the subject matter of the present litigation.

25. With respect to the farm properties which were transferred by Waslie to the plaintiff on June 20, 1946 and were subsequently conveyed in 1946 by the plaintiff to third parties, the table below shows the date on which the written offer of purchase resulting in the eventual sale was signed by the purchaser, the date of approval by the finance committee of the plaintiff, the date of the deed by the plaintiff conveying the property to the purchaser, the date when the deed was filed for recording, and the amount of the gain (or loss) resulting from the sale:

Property Date of offer Date of Date of approval deed Date deed filed Gain or loss
WF-1__ () 9/ 4/46 9/ 4/46 10/ 3/46 $2,700.00
WF-4__ 9/23/46 9/30/46 12/13/46 1/ 4/47 881.50
WF-5-. 11/20/46 11/25/46 12/13/46 1/ 9/47 875.00
wE-6„_ 11/20/46 11/25/46 12/13/46 1/18/47 5,063.26
WF-8.. 12/26/46 12/30/46 12/30/46 8/20/47 2, 675.00
WF-9__ 9/23/46 9/30/46 10/29/46 11/13/46 1,918.20
WF-10. 11/20/46 11/25/46 12/ 9/46 12/23/46 2,950.10
WF-11. 8/19/46 8/22/46 9/ 9/46 12/11/46 2,300.00
WF-12. () 12/12/46 12/12/46 12/21/46 1,300.00
WF-13-6/19/46 6/24/46 8/28/46 9/13/46 344.29
WF-14. 10/ 2/46 10/ 7/46 12/ 3/46 12/18/46 7,665.00
WF-15. () 11/25/46 11/25/46 12/14/46 34,666.00
WF-22:
() 8/30/46 8/10/46 10/ 5/46 6,448.25
8/30/46 9/ 3/46 10/ 5/46
Pt. 3. 7/20/46 8/30/46 9/ 3/46 10/ 5/46
WF-23... 8/ /46 9/12/46 9/25/46 11/11/46 2,500.00
WF-24... () 12/20/46 12/20/46 1/14/47 (1,444.10)
WF-26... () 10/17/46 10/17/46 12/30/46 4,162.50
WF-27... 9/21/46 9/30/46 11/ 7/46 11/26/46 562.50
WF-29... 8/13/46 8/16/46 9/17/46 10/22/46 (593.00)
WF-30... 7/17/46 7/22/46 8/30/46 9/26/46 971.71
WF-33... 9/ 9/46 10/22/46 10/22/46 10/26/46 5,582.00
WF-34... () 9/12/46 9/30/46 10/19/46 1,200.00
WF-36:
Pt. 1. 6/28/46 7/ 3/46 9/25/46 10/24/46 740.88
Pt. 2. 6/28/46 7/ 3/46 9/25/46 10/24/46
WF-37... () 9/25/46 9/25/46 12/11/46 25,671.80
WF-38... 8/13/46 8/16/46 9/17/46 10/ 8/46 7,916.98
WF-39.. 11/12/46 11/15/46 11/21/46 11/27/46 (5.14)
WF-40 — . 7/31/46 8/ 8/46 9/17/46 11/21/46 3,161.88
WF-41 — . 9/ 1/46 9/ 9/46 10/10/46 10/19/46 4, 966. 97
Property Date of offer Date of approval Date of deed Date deed filed Gain or loss
WF-42. 7/24/46 7/31/46 8/28/46 9/11/46 1, 702.04
WF-43. 9/ 9/46 9/16/46 10/24/46 11/13/46 (101.31)
WF-44. 7/29/46 7/31/46 11/ 4/46 12/-3/46 2,251.00
WF-46. 6/19/46 6/24/46 8/28/46 9/13/46 2.217.95
WF-47. 10/21/46 10/21/46 12/16/46 3/ 4/47 9.936.95
WF-48. 7/22/46 7/31/46 8/30/46 9/17/46 837. 50
WF-49. 9/ 6/46 9/12/46 9/25/46 12/ 3/46 955.00
WF-50. () 8/30/46 8/30/46 4/15/48 772.50
WF-51. () 9/ 3/46 9/ 3/46 9/11/46 133.78
WF-52. 10/21/46 10/28/46 11/22/46 12/14/46 6,650.00
WF-53. () 9/ 9/46 10/ 1/46 10/ 9/46 4, 921.00
WF-54. 8/13/46 8/16/46 9/17/46 10/11/46 (4,578.00)

26. (a) In so far as the farm properties mentioned in finding 25 are concerned, with the exception of WF-13 and WF-46, there were no negotiations by either Waslic or the plaintiff with the eventual purchasers of such properties, and no acceptable offers to purchase such properties were submitted by the eventual purchasers, and no oral or written agreements for the sale of such properties were entered into, while such properties were owned by Waslic.

(b) In the cases of WF-13 and WF-46, the negotiations with the eventual purchasers were conducted by Waslic, and acceptable offers were submitted to Waslic by the eventual purchasers while the properties were owned by Waslic. However, the offers were transmitted by Waslic to its sole shareholder, the plaintiff, for approval, and the offers were not approved until after these properties had been transferred by Waslic to the plaintiff. The contracts of sale relative to WF-13 and WF — 46 were signed by the plaintiff as seller.

(c) With regard to all the “WF” properties, including WF-13 and WF-46, the offers that led to the disposition of such properties were approved by the plaintiff, and the deeds to the purchasers were executed by the plaintiff.

27. With respect to the commercial real estate which was transferred by Waslic to the plaintiff on June 20, 1946 or (in the case of W-53) on June 28,1946 and was subsequently conveyed in 1946 by the plaintiff to third parties, the table below shows the date on which the written offer of purchase resulting in the eventual sale was signed by the purchaser, the date of approval by the finance committee of the plaintiff, the date of the deed by the plaintiff conveying the property to the purchaser, the date when the deed was filed for recording, and the amount of the gain resulting from the sale:

Property Bate of offer Date of approval Date of deed Date deed filed Gain
W-53— 7/ 9/46 7/17/46 7/17/46 8/ 1/46 $16,167.34
W-54— 6/25/46 6/25/46 6/28/46 7/ 9/46 15,592.67
W-B4— 7/15/46 7/15/46 7/29/46 300, 817.52
W-65— 6/27/46 6/28/46 8/23/46' 9/10/46 6, 640.80
W-66— 5/15/46 5/23/46 8/23/46 9/ 6/46 47, 500.10
W-68... 5/21/46 5/21/46 8/23/46 8/31/46 20,468,85
W-69— 6/ 3/46 6/ 3/46 8/23/46 8/31/46 3,711. 51
W-70. 5/23/46 5/27/46 10/ 1/46 10/14/46 81,419.12
W-71— 4/28/46 4/30/46 8/22/46 8/31/46 12, 055.36
W-72— 5/ 1/46 5/ 2/46 8/19/46 9/27/46 44,252.80
W-74— 10/28/46 11/ 1/46 11/26/46 12/46 427,190.41
W-75— 5/21/46 5/23/46 8/23/46 9/11/46 7, 574.49
W-77— 7/ 8/46 7/ 8/46 8/26/46 9/ 4/46 8,070.74

28. (a) In so far as the commercial real estate mentioned in finding 27 is concerned, with the exception of the properties designated as W-66, W-68, W-69, W-70, W-71, W-72, and W-75, neither the plaintiff nor Waslic solicited offers from the eventual purchasers or conducted any negotiations with the eventual purchasers prior to the time when the commercial properties were transferred by Waslic to the plaintiff. Such negotiations were conducted by the plaintiff after the properties had been transferred by Waslic to the plaintiff.

(b) With respect to the properties designated as W-66, W-68, W-69, W-70, W-71, W-72, and W-75, the negotiations with the eventual purchasers were conducted by Waslic, the purchase offers that led to the disposition of the properties were made to Waslic by the eventual purchasers, and the contracts of sale were signed in the name of Waslic as seller, since these actions were taken while the properties were still owned by Waslic. However, the contracts of sale were not entered into until after Waslic had transmitted the purchase offers to its sole shareholder, the plaintiff, and the offers had been approved by the plaintiff.

(c) The deeds to the purchasers of all the properties mentioned in finding 27, including W-66, W-68, W-69, W-70, W-71, W-72, and W-75, were executed by the plaintiff after such properties had been transferred by Waslic to the plaintiff.

29. (a) Subsequent to the filing of the certificate of dis^ solution relative to Waslic, a new corporation, styled the Waslic Management Corporation, was incorporated under the laws of the State of Delaware on July 11, 1946 as a subsidiary of the plaintiff.

(b) The authorized purposes for which the Waslic Management Corporation was organized were, in substance, the same as those of Waslic. Tire Waslic Management Corporation was to manage and operate the real estate received by-the plaintiff from Waslic, until such time as the real estate was sold; and it was also to be prepared and able to acquire title to real estate in those States where the plaintiff was not authorized to do business.

30. (a) The authorized stock of the Waslic Management Corporation consisted of 100 shares of $100-par common stock, representing a paid-in capital of $10,000.

(b) The authorized stock of Waslic had consisted of 12,000 shares of no-par stock, representing a capital stock value on the balance sheet of $1,928,547.04. The capital surplus of Waslic at the time of its dissolution was minus $327,839.69, and the earned surplus stood at $241,206.77.

31. The principal officers of the Waslic Management Corporation elected after its incorporation were as follows:

Charles F. Williams-President.
Charles M. Williams_Vice President.
Clarke C. Stayman_Secretary.
James B. Williams_Treasurer.

32. Up until the time when the Waslic Management Corporation began to operate effectively following its organization, Waslic continued to receive management fees from certain of the hotel properties which had been owned by Waslic and transferred to the plaintiff. Subsequent payments of management fees were made to the Waslic Management Corporation.

33. None of the properties referred to in findings 25 and 27 was ever placed in the name of or owned by the Waslic Management Corporation.

34. (a) After the properties mentioned in findings 25 and 27 had been transferred by Waslic to the plaintiff, there still remained two pieces of real estate, W-76 (a large parking lot) and W-78 (a laundry), that were owned by Waslic. Both properties were located in Tulsa, Oklahoma, adjacent to the Tulsa Hotel and were used in connection with the hotel. The Tulsa Hotel was lawfully owned by the plaintiff, but the plaintiff could not lawfully own W-76 and W-78. At the time when Waslic’s other real estate was transferred to the plaintiff, there was no immediate prospect for the sale of W-76 and W-78. Counsel for the plaintiff in Oklahoma advised the plaintiff that it should not, and could not legally, hold title to W-76 and W-78. Since the titles to these properties would have been impaired if they had been transferred to the plaintiff along with Waslic’s other real estate mentioned in findings 25 and 27, W-76 and W-78 were transferred to the Waslic Management Corporation on August 17, 1946 by the Waslic officers who were authorized to wind up Waslic’s affairs and dispose of the remaining assets.

(b) On September 4, 1946, W-76 was sold by the Waslic Management Corporation to the Hunt Building Company; and on September 10, 1946, W-78 was sold by the Waslic Management Corporation to the Tulsa Hotel Company. Both sales were at the book value of the respective properties, as shown on the books of Waslic and of the Waslic Management Corporation. The proceeds derived from such sales are not involved in the present litigation.

35. The new plan for the mutualization of the plaintiff mentioned in finding 16 (b) was submitted to the board of directors and the stockholders of the plaintiff, and was approved by them on October 8,1946.

36. (a) On December 16,1946, the president of the plaintiff wrote a letter to the plaintiff’s policyholders stating the terms under which it was proposed to mutualize the plaintiff and asking for their approval of this plan. The plan was approved at a meeting of policyholders held on January 30, 1947.

(b) Subsequent legal action was taken against the plaintiff in an effort to halt the mutualization. It was not until the termination of this litigation in July 1948 that final approval of the proposed plan was secured from the Superintendent of Insurance of the State of Ohio.

37. (a) On December 26, 1946, a Federal corporation income tax return for the calendar year 1946 was filed for Waslic with the Collector of Internal [Revenue at Cincinnati, Ohio. This return indicated upon its face that it was a final return (Waslic having been dissolved). The return reported a net income amounting to $75,022.95 and a tax liability of $28,294.22, which was assessed and paid.

(b) The gains (or losses) realized from the sales of the properties mentioned in findings 25 and 27 were not reported on the 1946 income tax return for Waslic.

38. Gains aggregating $1,148,063.15 were realized from the sales of 47 parcels, while losses aggregating $6,721.55 were realized from the sales of 5 parcels. Hence, the aggregate net gain resulting from all the transactions amounted to $1,141,341.60.

39. On May 31,1951, following a revenue agent’s examination and report, a statutory notice of a deficiency in the amount of $318,095 for the taxable period January 1-June 30, 1946 was issued to the plaintiff as the transferee of Waslic. The tax of $318,095, together with interest thereon in the amount of $94,204.05, was duly assessed. On August 22,1951, a total of $412,299.05 was paid to the Collector of Internal [Revenue by the plaintiff pursuant to the assessment.

40. The deficiency assessed on May 3Í, 1951 against the plaintiff as the transferee of Waslic was based on a determination by the Internal Revenue officials that the aggregate net gain arising from the sales of the properties mentioned in findings 25 and 27 amounted to $1,277,640.92; and that this amount represented a capital gain to Waslic.

41. On September 26, 1951, the plaintiff filed with the Collector of Internal Revenue a claim for the refund of the $412,299.05 mentioned in finding 39, plus interest. The grounds for the filing of the claim for refund were set forth in the following language:

The above tax has been assessed against The Western and Southern Life Insurance Company as transferee of the assets of Waslic Corporation. The Waslic Corporation was a wholly owned subsidiary of the taxpayer. For a valid business reason, Waslic was dissolved on June 20,1946, and all of its assets transferred to The Western and Southern Life Insurance Company. These assets, consisting of fifty-two parcels, more or less, of real estate located in various states throughout the United States were subsequently sold by The Western and Southern Life Insurance Company. These sales were made at various times and in various places to numerous different purchasers. The capital gains accruing from these sales have been assessed against Waslic, based on the claim that the sales were in substance made by Waslic and not The Western and Southern Life Insurance Company and that the gain therefrom should be includible in Waslic’s gross income. Taxpayer asserts that sales were in fact and in substance made by The Western and Southern Life Insurance Company; that Waslic had ceased to exist when said sales were made; that The Western and Southern Life Insurance Company negotiated and consummated the sales on its own behalf and not as the agent or substitute or otherwise for its former subsidiary, Waslic.
The Western and Southern Life Insurance Company further asserts that even if the above described sales were made by Waslic, that no capital gains tax should be levied against The Western and Southern Life Insurance Company as transferee of Waslic. Waslic was a wholly owned subsidiary of The Western and Southern Life Insurance Company. Since the parent organization, The Western and Southern Life Insurance Company, is not subject to capital gains tax, so also its subsidiary, which, in substance if not in form, is an extension of the parent, should not be subject to a capital gains tax.

42. By a registered letter dated April 4, 1952, the Commissioner of Internal Revenue notified the plaintiff that its claim for refund was disallowed.

43. (a) The sales of the properties designated as WF-13, WF-46, W-66, W-68, W-69, W-70, W-71, W-72, and W-75 were, in substance, made by Waslic; and the gains realized from such sales, aggregating $219,544.47, were properly attributable to Waslic for income tax purposes.

(b) Except as indicated in paragraph (a) of this finding, the sales of the properties involved in this litigation were made by the plaintiff, and not by Waslic; and the gains (or losses) realized from such sales were not attributable to Waslic for income tax purposes.

44. The deficiency assessment mentioned in findings 39 and 40 as having been made against the plaintiff as the transferee of Waslic was correct to the extent that it was based upon the attribution to Waslic of gains aggregating $219,544.47 from the sales of WF-13, WF-46, W-66, W-68, W-69, W-70, W-71, W-72, and W-75. The deficiency assessment was erroneous to the extent that it was based upon the attribution of $1,058,096.45 to Waslic.

conclusion of law

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is entitled to recover, together with interest thereon as provided by law, and judgment will be entered to that effect. The amount of recovery will be determined pursuant to Rule 38 (c).

In accordance with the opinion of the court and on a memorandum report of the commissioner as to the amount due plaintiff, it was ordered September 30, 1958, that judgment foir the plaintiff be entered for $341,158.37, together with interest thereon from August 22, 1951, as provided by law. 
      
       The mutualization of the plaintiff was ultimately carried out in 1948, after delay occasioned by litigation that is of no particular importance from the standpoint of the present case.
     
      
       As previously indicated, the correct amount of the aggregate net gain was $1,141,341.60, rather than $1,277,640.92.
     
      
       There Is no evidence of a written offer being made.
     
      
       There Is no evidence of a written offer being made.
     
      
      Sold under contract of sale delivered July 29,1946, under which deed was to be delivered after one-half of purchase price had been paid under contract.
     
      
      On August 12, 1946, at the request of the purchaser, a substantial change in the terms of the purchase contract was made by the plaintiff. Based on the modified contract, the transaction was finally closed.
     
      
       As indicated in finding 38, the aggregate net gain on all such sales actually amounted to $1,141,341.60, rather than $1,277,640.92, as determined by the Internal Revenue officials.
     