Fairfield S.S. Corp. v. Commissioner of Internal Revenue‪.‬

This is a petition to review an order of the Tax Court, affirming a deficiency assessment against the Fairfield Steamship Company, based upon a gain "realized" upon the sale of a ship in 1940. The Fairfield Company was a corporation, all of whose shares were owned by another corporation, the Atlantic Coast Shipping Company, and the validity of the assessment turns upon which of the two companies made the sale. Concededly the Fairfield Company owned the ship and transferred it to the Atlantic Company, which sold it to a third party; if the transfer to the Atlantic Company was a distribution in liquidation of the Fairfield Company under § 112 (b) (6) (C) or (D), it did not result in any gain "recognizable" against the Fairfield Company; the gain was postponed, and was "realized" only when the Atlantic Company itself sold to the third person.The importance of the difference lies in the fact that the Atlantic Company had losses which it could offset against the gain. The relevant facts were as follows. The shares of the Atlantic Company were all held by three persons: 51% by one, Lewis, 39% by Lewis and Barns, as executors of Lewiss father; 10% by a Mrs. Dennis. The directors were Lewis, Barns and a woman, named Logan, whose relation to the company does not appear. The directors of the Fairfield Company were these three persons and two more, whose relation to that company also does not appear. The three shareholders of the Atlantic Company in the summer of 1940, and even earlier, had agreed upon a liquidation of that company and of the Fairfield Company at the same time. However, it was from the first intended that the ship would be sold by the Atlantic Company after title to it had passed upon the liquidation of the Fairfield Company; that being a method which would save taxes. Lewis employed one, Pendleton, and Lambert, a ship broker, and after a good deal of negotiation Lambert got an offer of $50 a ton on September 18, 1940, which was satisfactory to Lewis. Lambert did not know for whom he was working, but Pendleton did, and Lewis meant the Atlantic Company to be the seller, as we have just said. The actual transfer was made as follows. On September 19, 1940, the three shareholders of the Atlantic Company authorized that company, as sole shareholder of the Fairfield Company, to execute and file a dissolution certificate of the Fairfield Company, and to surrender the shares which it held in that company in exchange for the ship and all the Fairfield Companys other property. On the same day the shareholders of the Fairfield Company ("represented" by Lewis alone, as president of that company) held a meeting and voted to dissolve and to make the transfer. Thereafter, still on the same day, the three shareholders of the Atlantic Company reconvened and authorized Lewis to sell the ship for the price mentioned. The Fairfield Company transferred title to the ship to the Atlantic Company on the 23rd, and the Atlantic Company made a formal contract of sale with the purchaser on the 30th, and actually transferred her on October 3rd. The Fairfield Company did not transfer the rest of its property - more than $107,000 - to the Atlantic Company until December 27.