Before STALEY, HASTIE and SMITH, Circuit Judges.
WILLIAM F. SMITH, Circuit Judge.
These cases are before the court on petitions to review a decision of the Tax Court, 39 T.C. 657. The question for decision is whether the Tax Court erred in its determination that four disbursements of corporate funds, made in connection with the redemption of stock, "were not liquidating distributions" within the meaning of §§ 115(c) and (i) of the Internal Revenue Code of 1939, 26 U.S.C.A., but were "instead * * * essentially equivalent to [dividends] within the meaning of" §§ 115(a) and (g) of the Code. The determination is challenged as clearly erroneous and not in accord with the law.
The petitioners Robert W. Cleveland and Royal E. Cleveland were, and had been for many years prior to 1953, the sole owners and operators of Cleveland Brothers Equipment Co., a corporation engaged in the distribution and sale of heavy equipment, particularly of the type used in the construction industry. Each of them also owned, during the period here in question, twenty per cent of the capital stock of the Apex Constructing Company, a corporation engaged in the rental and sale of reconditioned construction equipment. The principal stockholder of the Apex Company was one James Fulghum, who held forty per cent of the outstanding shares. The said James Fulghum was also the owner of the Fulghum Contracting Corporation, which was, and had been prior to 1953, engaged in the business of pipe line construction. The significance of these intercorporate relationships will appear when viewed in the light of the facts hereinafter summarized.
The Britton Contracting Company, a corporation maintaining its principal place of business in Washington, Pennsylvania, was engaged in the business of pipe line construction. The sole stockholder of the said corporation had been one Roy Clark, who died on September 4, 1953; at the time of his death he held 251 shares of capital stock, each share of a par value of $100. At the time of Clark's death the Britton Company held six contracts for the construction of pipe lines, the work on which was in a state of partial completion. There was also outstanding a bid, submitted to the United Fuel Gas Company early in 1953, under the terms of which the Britton Company had offered to construct two pipe lines at a total cost slightly in excess of $1,751,000. For reasons not here relevant the United Company deferred action on the bid until 1954, but had assured Clark that when the contract was awarded the Britton Company would be given first consideration. It should be noted that the Fulghum Corporation had also submitted a bid to perform the work but at a higher price.
The executors of Clark's estate, because of their lack of knowledge and experience in the construction field, decided that it was not feasible for them to carry on the business and agreed that it should be liquidated. Accordingly, the directors of the Britton Company resolved to prepare for liquidation. Thereafter the petitioners made an offer to purchase the construction equipment for a price of $205,000, but this offer was rejected. Thereupon the petitioners, after negotiations with the executors, entered into an agreement to purchase the capital stock for a price of $265,000, payable in installments as follows:
November 22, 1953 100,000
The purchase agreement contained no provision for the liquidation of the corporate business although this prospect had been discussed with the executors. The new officers and directors of the Britton Company met several days after the petitioners had acquired the stock but they took no action with respect to a plan of liquidation; in fact, such a plan was not even discussed.
Within a short time after they had acquired the stock of the Britton Company, the petitioners, having concluded that they lacked the requisite knowledge and experience to complete the construction work then in progress, solicited the services of James Fulghum, their business associate in the Apex Company. As the former associate of Clark, and as owner of the Fulghum Corporation, Fulghum had a wide experience in the construction of pipe lines. He was also familiar with the bid which the Britton Company had submitted to the United Company. He assured the petitioners that the contract was a "plum" and they agreed that they would make an effort to obtain it. Fulghum agreed to become an associate of the petitioners and became vice president of the Britton Company on November 2, 1953. Again the officers and directors of the Company met but took no action on a plan of liquidation.
As a condition of Fulghum's acceptance of the vice presidency of the Britton Company it was agreed that: first, the petitioners would retain the right to sell the equipment at prices acceptable to them; second, an endeavor would be made to obtain the contracts with the United Company on the basis of the bid submitted by Clark early in 1953; third, if the contracts were awarded to the Britton Company the petitioners would sell their stock to Fulghum; and fourth, if their endeavor to obtain the contracts was not successful Fulghum would be compensated for his services. These conditions were met, as will hereinafter appear.
Between October 23 and December 31 of 1953, the equipment was sold and, on more than fifteen individual sales, the Britton Company realized a total sum slightly in excess of $307,000. The largest individual sale, except for one made to another customer, was one in the amount of $100,000, made to the Apex Company, in which the petitioners held a forty per cent interest.*fn1 During the period between October 23, 1953 and October 1, 1954, the Britton Company completed the work under three contracts, in effect at the time of Clark's death, and was paid a sum in excess of $175,000. The other contracts were either terminated or sublet. As the work in progress was completed many of the employees were laid off. However, it appears ...