Lime Cola Co. v. Commissioner , 22 T.C. 593 ( 1954 )

Lime Cola Company, et al., ^{Lime Cola Co. v. Commissioner}

Docket Nos. 36249, 36250, 36251, 36252, 36253

United States Tax Court

22 T.C. 593; 1954 U.S. Tax Ct. LEXIS 177;

June 17, 1954, Filed. June 17, 1954, Filed

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Decisions will be entered under Rule 50.

1. Held, receipt by Lime Cola Company (referred to as transferor) of $ 3,018.42 in 1941 found on the facts to have been reported as income in 1942, and is not to be added again to 1942 income.

2. In 1930, transferor purchased $ 1,294.65 worth of flavoring for use in making its concentrate and credited the price to an account payable. The flavoring proved to be defective so transferor failed to pay for it. However, it carried the account payable on its books until 1942, then wrote it off to surplus. Held, in the absence of proof to the contrary by transferor, it is found that transferor deducted the $ 1,294.65 in reporting its 1930 income. The $ 1,294.65 is reportable by transferor as income for 1942.

3. Held, reasonable salary for services rendered by transferor's president, a woman over 70 who was not active in the business, was $ 1,200 per year instead of the $ 600 allowed by respondent in his determination of the deficiencies against the transferor and the $ 3,600 claimed by the transferor on its returns.

4. Transferor entered into a contract on September 27, 1945, with a distributing corporation giving the latter exclusive distribution rights in a designated territory and requiring the latter to purchase from it certain minimum quantities of concentrate. No concentrate was purchased under the contract in 1945. A provision of the contract required the distributing corporation to pay transferor $ 40,000 on or before January 15, 1946. That sum was not paid in 1945. Held, the $ 40,000 was intended as a deposit against future purchases of concentrate by the distributing corporation. Since it was not paid in 1945 and no concentrate was purchased in 1945, it is not accrued income to transferor for that year. Pacific Grape Products Co., 1097">17 T. C. 1097, followed.

5. Transferor was dissolved on December 28, 1945, and its stockholders (petitioners herein) received all its assets. Held, stockholders are liable as transferees for transferor's delinquent taxes.

H. Cecil Kilpatrick, Esq., for the petitioners.

Homer F. Benson, Esq., for the respondent.

Black, Judge.

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BLACK

The Commissioner has determined the following deficiencies in the taxes of the Lime Cola Company and has asserted liability therefor, as transferees, against the petitioners in Docket Nos. 36250 (Martha Donovan Owens), 36251 (Donovan Owens), 36252 (Martha Mabon), and 36253 (Ellen P. Owens):

Year	Tax	Deficiency
1942	Income tax	$ 1,933.01
	Declared value excess-profits tax	800.81
1943	Income tax	293.44
	Excess profits tax	5,378.30
1945	Declared value excess-profits tax	5,599.06
	Excess profits tax	33,531.51

The petition of Lime Cola Company in Docket No. 36249 involves only the deficiencies determined by respondent against the corporation for the year 1945.

A number of the adjustments made by the Commissioner in the net income reported by Lime Cola Company for the tax years in issue were not contested by petitioners. Those adjustments that are contested are explained by the Commissioner in his notices to the petitioners, as follows:

1942

(a) Sales in the amount of $ 3,018.75 representing an amount received in 1941 for merchandise actually shipped in 1942 but not reported in 1941 has been included in taxable income.

* * * *

(d) It is held that the deduction claimed as compensation to Mrs. M. D. Owens, President, exceeded a reasonable allowance for compensation for services actually rendered within the meaning of Section 23 (a) of the Internal Revenue Code by the amount of $ 2,360.94.

(e) It has been determined that the amount of $ 1,294.65 credited to Surplus during 1942 represents an account payable entered on the books of the transferor in 1930 for purchase of flavoring extract which was never paid for, therefore the amount thereof written off in 1942 has been included in income of taxable year.

* * * *

(h) It is held that the transferor is entitled to a net operating loss carry-back of $ 3,687.32 from 1944 and such amount has been excluded from income. [Petitioners contend that the carry-back should be increased by $ 3,000 in salary paid Martha Donovan Owens in 1944.]

1943

* * * *

(b) It is held that the amount of $ 600.00 was a reasonable allowance for compensation for services actually rendered [by Martha Donovan Owens] within the meaning of section 23 (a) of the Internal Revenue Code therefore the difference in the amount of $ 4,920.07 deducted on the return and $ 600.00 has been restored to income. Of the total $ 4,920.07 deducted only $ 3,600.00 was actually paid or accrued during the taxable year.

1945

(a) It is held that the deduction claimed in the 1945 return as compensation to Mrs. M. D. Owens, President exceeded a reasonable allowance for compensation for services actually rendered within the meaning of Section 23 (a) of the Internal Revenue Code by the amount of $ 3,000.00.

* * * *

(d) It is held that there was omitted from taxable income, the amount of $ 40,000.00 which accrued under the provisions of a contract dated September 27, 1945, entered into with Lime Cola Associates, Inc. Section 22 (a) of the Internal Revenue Code.

In their petitions the alleged transferees contended that assertions of liability against them for the 1942 and 1943 tax years were barred by the statute of limitations. At the hearing, however, they conceded that notices to them were timely and they have abandoned their plea of limitation.

FINDINGS OF FACT.

The Lime Cola Company (hereinafter sometimes referred to as transferor) was a corporation organized in 1929 under the laws of the State of Georgia. Its principal place of business was in Montgomery, Alabama, and, during the tax years in issue, it filed its returns with the collector of internal revenue for the second district of Alabama. It kept its books and filed its returns on a calendar year, accrual basis.

Transferor's entire capital stock was, during the years in issue, owned in equal shares by the alleged transferees in this proceeding, to wit: Martha Donovan Owens (sometimes referred to as Martha Owens), widow of transferor's deceased founder; Donovan Owens, son of transferor's deceased founder; Martha Mabon, granddaughter of transferor's deceased founder; and Ellen P. Owens, widow of John S. Owens, Jr., who died on July 13, 1945, and was a son of transferor's deceased founder. These stockholders will sometimes be referred to as the Owens Group. All but Martha Mabon were directors of transferor.

Transferor was engaged in the business of manufacturing a concentrate, in accordance with a secret formula, from which a soft drink known as Lime Cola could be made by the addition of carbonated water and simple syrup. It marketed the concentrate by selling it to sales agents who, in turn, were given exclusive authority in designated territories to license bottlers and sell the concentrate to them, as well as to soda fountains and automatic dispensing machine companies.

One of transferor's sales agents was the Lime Cola Sales Company, Inc. (hereinafter referred to as Sales), located in Baltimore, Maryland. By contract dated January 14, 1939, Sales, in consideration of a $ 100 cash payment by it to transferor and the mutual promises of the parties, was designated exclusive agent for all the United States east of the Mississippi River for a period of 50 years. The contract required Sales to purchase a minimum number of units of concentrate each year and gave transferor the right to terminate the contract if such minima were not met. In order to meet this requirement for the year 1941, Sales paid transferor in that year $ 3,018.75 in excess of the amounts due for shipments actually made. The units for which the $ 3,018.75 constituted payment were subsequently shipped to Sales in 1942 and that sum was included and reported in transferor's income for 1942.

In 1930, transferor purchased $ 1,294.65 worth of flavoring extract for use in making its concentrate. It credited the $ 1,294.65 to an account payable and deducted that sum as an expense in determining and reporting its income for 1930. However, because of the inferior quality of the extract, a substandard mix of concentrate resulted which had a substantially adverse effect on transferor's business. Transferor, consequently, never paid for the extract and, in 1942, wrote off the $ 1,294.65 account payable, crediting that sum to surplus. It did not report the $ 1,294.65 as income in 1942, or in any other year.

Transferor was founded by the husband of Martha Owens. Following his death in 1933, Martha Owens' son, John S. Owens, Jr. (who then owned 25 per cent of transferor's stock), became transferor's active manager and held every corporate office except president. The latter office was held by Martha Owens who, during the tax year in issue, was over 70 years old. The business was carried on in a suite of 5 rooms in an office building in Montgomery, Alabama, and, in addition to the officers, employed two stenographers and two laborers. John himself supervised the mixing of the concentrate and was capable of, and did, run every phase of the business. During the years in issue it was John's practice to talk over business matters with his family and Martha Owens (who was then living with him) at dinner and in the evenings, but the purpose of these discussions was not so much to obtain advice as to keep the family fully informed about the business. John received a salary averaging $ 12,000 a year for his services.

Martha Owens did not give John any particular advice, nor did he require it. Occasionally she would give her views on general business policies and on the taste of the drink. There was no office space provided for her in the 5-room suite and she visited those offices only on rare occasions when matters of special importance arose. Over a period of years she made loans to transferor aggregating between $ 7,000 and $ 8,000 but it does not appear that any interest was charged thereon. All but about $ 3,000 of those loans were repaid by the end of 1945. For the years here pertinent transferor's returns report the payment of the following salaries to Martha Owens:

Year Salary
1942	$ 2,960.94
1943	4,920.07
1944	3,600.00
1945	3,600.00

Respondent disallowed the deduction of all but $ 600 per year of those reported amounts. One hundred dollars a month or $ 1,200 per year is a reasonable salary for the personal services actually rendered transferor by Martha Owens.

John S. Owens, Jr., died on July 13, 1945, and his stock in transferor passed to his wife, Ellen P. Owens. The management of transferor was thereupon assumed by another of Martha Owens' sons, Donovan Owens, who had previously been inactive in the business. Donovan reduced transferor's staff to one stenographer and one laborer and carried on the business as best he could.

Transferor's sales agent for all the territory in the United States lying west of the Mississippi River was, under a contract dated January 22, 1945, Lime Cola Distributors of America, Inc. (hereinafter referred to as Distributors), an Alabama corporation. The consideration for that contract was a $ 100 cash payment by Distributors to transferor plus the mutual promises of the parties. Distributors' stockholders were a group of businessmen headed by J. W. Wells and will be referred to as the Wells Group. The Wells Group formed a second Alabama corporation, Lime Cola Associates, Inc. (hereinafter referred to as Associates), which corporation entered into a contract with transferor on September 27, 1945. The contract named Associates its exclusive agent for sales of the concentrate east of the Mississippi River, subject to the outstanding contract of January 14, 1939, between transferor and Sales, and was entered into because Sales had been continuously in default on the minimum quantities of concentrate it had agreed to purchase from transferor. Transferor assigned its rights in the contract with Sales to Distributors, giving the latter the power to collect from Sales for shipments of concentrate and to enforce the contract with Sales by whatever legal means necessary. Associates, for its part, agreed, among other things, to purchase and distribute certain minimum amounts of concentrate each year and to pay transferor $ 10,000 upon the execution of the agreement and $ 40,000 on January 15, 1946, as detailed in the following pertinent excerpts from the September 27, 1945, contract:

WHEREAS, the Agent is willing to make to the Company the payments as specified below and guarantees the minimum purchases or sales specified below in consideration of its appointment as exclusive sales agent or broker for the handling of said Lime Cola concentrate, subject to the existing contract with the Lime Cola Sales Company, Inc. and

WHEREAS, said Company is desirous of appointing said agent as its exclusive sales agent or broker for those purposes, within said territory East of the Mississippi including the handling of sales to Lime Cola Sales Company, Inc., or its licensees, distributors or bottlers, in accordance with and subject to said contract of January 14, 1939.

NOW, THEREFORE, THIS AGREEMENT WITNESSETH:

THAT FOR AND IN CONSIDERATION OF THE PREMISES and for and in consideration of the sum of Fifty Thousand and no/100 ($ 50,000.00) Dollars, in cash, payable as set out below, and the covenants and guarantee of the agent [Associates] to the Company, [transferor] of minimum sales and deliveries of a minimum number of units of Lime Cola concentrate per year, as hereinafter set forth, and the further consideration of the promises and obligations of each of the parties hereto to the other contained hereinafter, it is understood and agreed between the parties hereto, as follows:

1. The Agent, prior to the execution of this agreement has paid to the Company the sum of Ten Thousand and no/100 ($ 10,000.00) Dollars, in cash, the receipt of which the Company hereby acknowledges, and covenants and agrees to pay to the Company on or before January 15, 1946, the further sum of Forty Thousand and no/100 ($ 40,000.00) Dollars, cash, on account of the aforementioned considerations, said sum of Fifty Thousand and no/100 ($ 50,000.00) Dollars representing a payment of Two and no/100 ($ 2.00) Dollars per unit of concentrate for twenty-five thousand (25,000) units of concentrate, the guaranteed minimum to be taken during the period of ten (10) years from the date hereof, as specifically enumerated below; and the Agent agrees to pay or cause to be paid to the Company, the sales price of Sixty-five and no/100 ($ 65.00) Dollars per unit for each unit sold and delivered pursuant to this contract, the Agent guaranteeing the following minimum number of units per year during each year of this contract:

* * * *

* * * The Agent covenants and agrees to pay to the Company the sum of Fifteen and no/100 ($ 15.00) Dollars per unit for any deficiency between the number of units sold and the specified minimum number of units calculated as herein set forth, provided, however, that if in any year subsequent thereto, the number of units purchased and paid for exceed the specified number of units, the Agent would be credited with the sum of Fifteen and no/100 ($ 15.00) Dollars per unit for such excess up to the amount paid for previous year or years deficiency. * * *

To guarantee the performance of this covenant, said Agent agrees to deposit in escrow in the Alabama National Bank, of Montgomery, Alabama, the sum of Twenty-five thousand and no/100 ($ 25,000.00) Dollars, in cash or securities of equal value, or surety bond in said sum, to be held by said escrow agent to indemnify the Company against any default of this covenant. * * *

* * * *

V. This agreement shall become effective immediately, with the exception that the receipt of payments from the Lime Cola Sales Company, Inc., and the payments herein provided to be made for units shipped shall begin January 1, 1946. This agreement to remain in full force and effect for a period of fifty (50) years from the date hereof, * * *

All parts of the contract of September 27, 1945, not set out above are incorporated herein by reference.

Associates paid transferor $ 10,000 in accordance with the above quoted provisions of the contract but, because of the events hereinafter related, never paid the $ 40,000 due on January 15, 1946. Those sums were intended to be advance payments, or deposits, for purchases of the concentrate to be made by Associates under the contract.

About two or three weeks following the execution of the September 27, 1945, contract, Associates proposed to lease transferor's assets and take over the manufacturing of the concentrate, as well as its sale. The Owens Group (transferor's stockholders) discussed this proposal and decided that, because of the death of John S. Owens, Jr., who had been most familiar with the manufacturing operation, it would be well for them to abandon that operation for a satisfactory price. The group further decided that, if the manufacturing operation was abandoned, there was no reason for transferor corporation to continue its existence. Consequently, the group held a stockholders meeting on December 1, 1945, and voted to dissolve transferor.

Meanwhile, on October 20, 1945, the Wells Group had caused Associates to merge with its other corporation, Distributors. The merged corporations adopted Distributors' name and will hereinafter be referred to by that name.

On December 6, 1945, the Owens Group entered into a "lease contract" with Distributors pursuant to which the group leased, for a 50-year term starting January 1, 1946, the assets of transferor, except cash and certain of the accounts receivable which, following the completion of transferor's dissolution, would belong to the group. The lease included an assignment to Distributors of transferor's right under existing contracts, among which was the September 27, 1945, contract with Associates, and granted Distributors the exclusive rights to manufacture, distribute, and sell the concentrate. Distributors, for its part, agreed to pay the Owens Group $ 80,000 on January 1, 1946, as base rental for that year and thereafter an annual base rental of $ 40,000, payable on January first of each succeeding year. Additional rentals were provided for after a specified minimum amount of the concentrate was sold or after 1959 -- whichever first occurred. Further, Distributors obligated itself to manufacture and sell certain prescribed minimum amounts of the concentrate.

Transferor's dissolution was completed on December 28, 1945, and each member of the Owens Group (petitioners who are alleged transferees herein) received 25 per cent of transferor's assets. The aggregate net value of those assets was in excess of $ 100,000. As a result of the dissolution transferor was rendered insolvent and unable to pay its tax deficiencies here determined for the years in issue.

In its return for 1945, transferor reported as income the $ 10,000 received from Associates when the September 27, 1945, contract was executed, but did not report the $ 40,000 which that contract provided should be paid (but never was) on January 15, 1946. No concentrate was ever shipped to Associates (or its successor, Distributors) under the September 27 contract.

Distributors paid the Owens Group the $ 80,000 base rental for 1946 and the $ 40,000 base rental for 1947 provided for in the December 6, 1945, lease, and the group members each reported 25 per cent thereof as individual income in those years. These amounts are not here involved. However, Distributors went bankrupt in 1948, whereupon the lease was canceled by the Owens Group and arrangements were made with another company for production of the concentrate.

OPINION.

1. Respondent asserts that $ 3,018.75 received in 1941 by transferor, Lime Cola Company, from its sales agent, Lime Cola Sales Company, Inc. (Sales), and against which units of concentrate were shipped by transferor to Sales in 1942 should be added to transferor's income as reported for 1942. The transferees contend that the transferor has already included that sum in its 1942 sales figures and reported it as income. The question presented is purely one of fact. A certified public accountant with over 17 years' experience testified that he audited transferor's books for 1942 and that the $ 3,018.75 was included in the sales figure contained therein and in transferor's return for that year. Respondent introduced no contradictory evidence. We are convinced of the accuracy of the accountant's audit and have found, in accordance therewith, that the disputed sum was in fact reported as income by transferor in 1942. On this issue petitioners are sustained.

2. In 1930, transferor purchased flavoring in the amount of $ 1,294.65 for use in manufacturing its concentrates. It credited this sum to an account payable and, we have found, deducted it as an expense in determining and reporting its income for 1930. In regard to that finding, petitioners assert that the record contains no evidence that such a deduction was made in 1930. However, it is that very circumstance that compels the finding since the petitioners here bear the burden of proving the deduction was not taken, Internal Revenue Code, section 1119 (a), ^{*196 and that the normal balancing entry for an account payable item such as this -- i. e., debit to an expense account -- was made. That transferor's books and records are unavailable for 1930 does not alter the consequences of petitioners' failure of proof. Burnet v. Houston, 283 U.S. 223">283 U.S. 223.}

The purchased flavoring proved to be of inferior quality, adversely affected transferor's product, and, petitioners contend, caused substantial harm to transferor's business. As a result, transferor never paid the $ 1,294.65 account and, in 1942, wrote it off crediting the sum to surplus. Transferor did not, however, report the $ 1,294.65 as income either for 1942 or any other year.

Respondent contends that the $ 1,294.65 constitutes income reportable in 1942. We think he is correct in this contention. In general, "when recovery [of a previously deducted item] or some other event which is inconsistent with what has been done in the past occurs, adjustment must be made in reporting income for the year in which the change occurs." Estate of William H. Block, 39 B. T. A. 338, 341, affd. (C. A. 7) 111 F.2d 60">111 F. 2d 60, certiorari denied 311 U.S. 658">311 U.S. 658. It is not necessary that the previously deducted item actually be paid by an accrual basis taxpayer; it is sufficient if it was properly accrued and deducted in one year and adjusted (before payment) in a subsequent year. Elsie S. Eckstein, 41 B. T. A. 746. Again this Court in North American Coal Corporation, 32 B. T. A. 535, 542, affd. (C. A. 6) 97 F.2d 325">97 F. 2d 325, stated that "'when a reserve or liability account, properly created in an earlier year, has ceased to be a true liability or reserve in a later year, it should be reversed and the amount thereof should be added to the income of the year when reversed.'" That case, as does the instant one, involved accrued liabilities deducted from income in one year which were never paid and, consequently, were transferred to surplus in a later year. See also Chicago, Rock Island & Pacific Ry. Co., 13 B. T. A. 988, 1022, affirmed on this point (C. A. 7) 47 F. 2d 990, certiorari denied 284 U.S. 618">284 U.S. 618; Charleston & Western Carolina Ry. Co., 17 B. T. A. 569, affd. (C. A., D. C. Cir.) 50 F.2d 342">50 F. 2d 342.

Petitioners' only argument on this issue is that the $ 1,294.65 cannot be treated as income in 1942 on the basis of a book entry alone. With this we are in agreement. The foregoing discussion, however, indicates that more is involved than mere book entries. An actual accrued and deducted liability was, as a result of lapse of time and transferor's actions, reversed in 1942 and in that year became income available for transferor's unfettered use.

We might also point out that there are no facts in the record from which it could possibly be inferred that the extinction of the $ 1,294.65 account payable constituted either a nontaxable gift to transferor from the creditor, see Helvering v. American Dental Co., 318 U.S. 322">318 U.S. 322; Commissioner v. Jacobson, 336 U.S. 28">336 U.S. 28; or a nontaxable reduction in the purchase price of the flavoring, see Hirsch v. Commissioner, (C. A. 7) 115 F. 2d 656. Indeed there is no evidence that any negotiations whatever were conducted between transferor and creditor or that the creditor actually canceled the account or followed any particular course of conduct regarding it other than one of passivity. Nor can we infer, from the fact alone that transferor's reason for failing to pay the account was because of the inferiority of the flavoring and the consequent harm to its business, that this nonpayment represented a setoff in regard to a claim for damages against the creditor, or that the creditor and transferor agreed to such a settlement. In fact, the logical inference to be drawn is that no settlement was reached since the transferor scrupulously carried the account as a liability until 1942, and there is no evidence of any settlement in that year.

3. Whether or not the respondent erred in disallowing all but $ 600 per year for 1942 through 1945 as reasonable compensation for services rendered transferor by Martha Owens is a question of fact, the burden of proving which rests upon petitioners. We have found from the evidence that $ 1,200 per annum is a reasonable salary for the personal services actually rendered to the transferor by Martha Owens, the corporation's president.

The salient points to be considered are that Martha Owens, although she was transferor's president, was over 70 years old during the years in question, had no office space in transferor's place of business (visiting it only on rare occasions), and rendered no great amount of service to transferor. Transferor's operation was small in size, occupying a 5-room suite and employing no more than four people (in addition to the officers) at its peak. It was completely managed, until his death in July 1945, by John S. Owens, Jr., who held all the corporate offices other than president, was fully capable of (and did) handle all of its affairs, and made all the business decisions. He received $ 12,000 a year for his services. It is true that John often discussed business problems at dinner and during the evenings with Martha and his family, but such discussions were primarily to keep them informed rather than to obtain their advice on business matters. The talks were akin to those a man would normally have with his family concerning his business affairs. Following John's death the active management of transferor's business was taken over by Donovan Owens until transferor's dissolution in December 1945.

Over a period of years Martha Owens loaned transferor sums aggregating between $ 7,000 and $ 8,000. It does not appear that she was paid interest on the loans and about $ 3,000 of the aggregate principal remained unpaid at the time of transferor's dissolution. However, such financial aid is not a proper factor to consider in determining what is reasonable compensation for personal services rendered within the meaning of section 23 (a) (1) (A) of the Code.

We think that $ 100 a month or $ 1,200 per year for each of the taxable years in question is reasonable and we have so found in our Findings of Fact.

4. We must next consider whether the September 27, 1945, contract between transferor and Associates, under which Associates promised to pay $ 40,000 by January 15, 1946, resulted in accrual of the $ 40,000 as income to transferor for 1945. Portions of the contract are quoted in our Findings of Fact. For convenience, two of the key paragraphs are here reproduced:

THAT FOR AND IN CONSIDERATION OF THE PREMISES and for and in consideration of the sum of Fifty Thousand and no/100 ($ 50,000.00) Dollars, in cash, payable as set out below, and the covenants and guarantee of the agent [Associates] to the Company [transferor], of minimum sales and deliveries of a minimum number of units of Lime Cola concentrate per year, as hereinafter set forth, and the further consideration of the promises and obligations of each of the parties hereto to the other contained hereinafter, it is understood and agreed between the parties hereto, as follows:

1. The Agent, prior to the execution of this agreement has paid to the Company the sum of Ten Thousand and no/100 ($ 10,000.00) Dollars, in cash, the receipt of which the Company hereby acknowledges, and covenants and agrees to pay to the Company on or before January 15, 1946, the further sum of Forty Thousand and no/100 ($ 40,000.00) Dollars, cash, on account of the aforementioned considerations, said sum of Fifty Thousand and no/100 ($ 50,000.00) Dollars representing a payment of Two and no/100 ($ 2.00) Dollars per unit of concentrate for twenty-five thousand (25,000) units of concentrate, the guaranteed minimum to be taken during the period of ten (10) years from the date hereof, as specifically enumerated below; and the Agent agrees to pay or cause to be paid to the Company, the sales price of Sixty-five and no/100 ($ 65.00) Dollars per unit for each unit sold and delivered pursuant to this contract, the Agent guaranteeing the following minimum number of units per year during each year of this contract:

A reading of the above paragraphs convinces us that the $ 10,000 paid and $ 40,000 to be paid were intended as advance payments, or deposits, for units of concentrate to be purchased by Associates. The $ 10,000 actually paid to transferor in 1945 is not here in controversy. Transferor accrued that as income in 1945 and included it in its return. The transferor did not accrue the $ 40,000 which was not received in 1945 or at any other time.

It might be contended that there is an ambiguity in the language of the two paragraphs. Reading the first one by itself, the argument might run, leaves the impression that the $ 40,000 (plus $ 10,000 actually paid) was intended as part consideration for transferor appointing Associates its exclusive agent and granting Associates the prerogatives contained in the contract. But we think the latter paragraph explains in detail the character of those sums, indicating that they constituted deposits for future purchases of concentrate by Associates from transferor. That latter paragraph, which is specific in nature, must govern over the former general paragraph. ^{*205 Especially is this so where, reading the contract as a whole, the general purpose of the parties appears to be consistent with that interpretation. *605 Certain extrinsic facts may also be noted. *207 of concentrate from transferor by Associates. No sales of concentrate chargeable against that $ 40,000 were made in 1945. Under these circumstances we think that our decision in Pacific Grape Products Co., 17 T. C. 1097, 1104, 1105, is controlling and that the $ 40,000 is not reportable by transferor as income accrued in 1945.}

Respondent cites in his brief, inter alia, South Dade Farms, Inc. v. Commissioner, (C. A. 5) 138 F. 2d 818, and South Tacoma Motor Co., 3 T. C. 411. Those cases are clearly distinguishable involving, as they do, prepayments actually received by the taxpayer in the particular tax year and, consequently, taxable as accrued income under the so-called "claim of right" doctrine. The transferor did not actually receive the $ 40,000 in 1945. In fact the evidence shows that it never did receive it because of a new contract negotiated before the end of 1945. The facts with reference to this new contract by the Owens Group with Distributors, after the dissolution of Lime Cola Company are found in our Findings of Fact.

5. The final question regards the liability of petitioners (in Docket Nos. 36250, 36251, 36252, and 36253) as transferees for transferor's deficiencies here in issue. Sec. 311 (a) (1), I. R. C.The burden of proving transferee liability rests upon respondent. Sec. 1119, I. R. C., supra, footnote 2.

In J. Warren Leach, 21 T. C. 70, we stated the elements of transferee liability, as follows:

To hold a party liable as transferee in equity for a transferor's delinquent taxes it must be proved (1) that the alleged transferee received assets of the transferor, and (2) that the transferor was insolvent at the time of, or was rendered insolvent by, that transfer of assets. * * * The transferee is retroactively liable for transferor's taxes in the year of transfer and prior years, and penalties and interest in connection therewith, to the extent of the assets received by him even though transferor's tax liability was unknown at the time of the transfer. * * *

We have found (a) that transferor was dissolved on December 28, 1945, (b) that the aforementioned petitioners were transferor's sole stockholders and each received 25 per cent of its assets upon dissolution, and (c) that as a result of the dissolution transferor was rendered insolvent and unable to pay the tax deficiencies here in issue. Sec. 311 (f), I. R. C.; Regs. 111, sec. 29.311-1; R. E. Wyche, 36 B. T. A. 414, 418. Further, we have found that the aggregate value of transferor's assets received by petitioners equaled at least $ 100,000. Petitioners are, therefore, liable as transferees to the extent of the deficiencies of the transferor which clearly under our holdings herein will be considerably less than the amounts of assets which they each received. Petitioners in their brief do not argue anything about transferee liability; and, although they do not expressly abandon the issue of transferee liability, we presume they no longer press it.

Decisions will be entered under Rule 50.

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Footnotes

• 1. The following proceedings are consolidated herewith:

  ↩

  Name	Docket No.
  Martha Donovan Owens, Alleged Transferee of the Assets of Lime
  Cola Company	36250
  Donovan Owens, Alleged Transferee of the Assets of Lime Cola
  Company	36251
  Martha Mabon, Alleged Transferee of the Assets of Lime Cola
  Company	36252
  Ellen P. Owens, Alleged Transferee of the Assets of Lime Cola
  Company	36253

• 1. The year 1944 is of importance only as regards the amount of the net operating loss sustained therein and entitled to be carried back as a deduction for 1942.↩

• 2. SEC. 1119. PROVISIONS OF SPECIAL APPLICATION TO TRANSFEREES.

  (a) Burden of Proof. -- In procedings before the Board the burden of proof shall be upon the Commissioner to show that a petitioner is liable as a transferee of property of a taxpayer, but not to show that the taxpayer was liable for the tax.↩

• 3. Williston, Contracts↩ (rev. ed. 1936), vol. 3, sec. 619, p. 1784: Where there is a repugnancy between general clauses and specific ones, the latter will govern; and even if there is no actual repugnancy if the words of the contract are taken literally, yet when from the whole instrument it appears that the purpose of the parties was solely directed towards the particular matter to which the special clause or words relate, the general words will be restrained. [Footnotes omitted.]

• 4. Id., sec. 618, p. 1779: 3. The writing shall be read as a whole, and every part will be interpreted with reference to the whole; and if possible it will be so interpreted as to give effect to its general purpose. [Footnote omitted.]↩

• 5. Id., sec. 623.↩

• 6. Id., sec. 630, p. 1808: Whatever may be the propriety of admitting evidence of extrinsic facts where the meaning of the instrument is apparently clear, there is no question that such evidence is admissible in every jurisdiction where there is no clear apparent meaning. [Footnote omitted.]↩