of the merits of this issue is necessary or proper in the instant case, as the law is now well established that this Court has no jurisdiction over matters concerning interest. Commissioner v. Kilpatrick's Estate, 140 Fed. (2d) 887.

Decision will be entered for the respondent.

WEST COAST SECURITIES COMPANY (A DISSOLVED CORPORATION), PETITIONER, ET AL.,* v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 13922, 13923, 13924, 13925, 13926, 13927, 13928, 13929, 13930, 13931.

Promulgated May 29, 1950.

In 1943 petitioner corporation distributed in liquidation 47,000 shares of Transamerica Corporation stock to its stockholders, which stock was then pledged with creditors as security for certain notes of the petitioner corporation. Thereafter, the stockholders sold the stock to one of the creditors and the proceeds of the sale were applied in payment of the loans for which the shares were held as security. Petitioner, in order to secure cash with which to pay its debts and carry out its proposed liquidation, canceled two notes held by it which were secured by second mortgages in consideration of the debtor making payment to the extent of 60 per cent of their face value. Held:

(1) That the petitioner corporation realized no taxable income in 1943 as a result of the sale of the 47,000 shares of Transamerica stock by its stockholders.

(2) That the petitioner corporation is entitled to a deduction in 1943 in the amount of $43,577.50 as a loss under section 23 (f) of the Internal Revenue Code arising from the compromise settlement of the indebtedness.

George H. Koster, Esq., for the petitioners.
R.G. Harless, Esq., for the respondent.

Petitioner corporation claims an overpayment of income tax for 1943 in the amount of $18,519.54.

Respondent also asserted transferee liability against individual stockholders of West Coast Securities Co. for the tax deficiencies of the corporation in 1943, as transferees of the assets of the company on dissolution. Respondent limited the liability of each shareholder to the amount of cash he received from petitioner corporation as a liquidating distribution on August 25, 1943, in the following manner:

(1) Did petitioner corporation realize taxable income in 1943 from the sale of Transamerica Corporation stock which it had previously distributed to its shareholders in liquidation?

(2) Was petitioner corporation entitled to a bad debt deduction, a capital loss deduction, or an ordinary loss deduction in 1943 as the result of the compromise settlement of certain notes with the maker?

(3) In the event petitioner corporation was not entitled to the above deduction, did the total interest accrued on the notes canceled in the compromise settlement constitute taxable income?

(4) Was petitioner corporation subject to a personal holding company surtax in 1943, although it distributed assets to its shareholders and dissolved that year?

(5) In the event that petitioner corporation was liable for tax deficiencies for 1943, what was the limit of the transferee liability of each of its shareholders?

FINDINGS OF FACT.

Part of the facts were stipulated and are so found.

Petitioner West Coast Securities Co. (hereinafter sometimes referred to as West Coast) was incorporated under the laws of the State of California on July 14, 1937. It completed voluntary dissolution proceedings under the provisions of section 400 of the California Civil Code on August 31, 1943, and now exists as a body corporate pursuant to the provisions of section 399 of the California Civil Code for the purpose of this proceeding. Its office address is 206 Sansome Street, San Francisco, California. West Coast filed its returns for the year 1943 with the collector of internal revenue for the first district of California. The nine individual petitioners are residents of California and apparently filed their returns with the collector for the first district of California.

West Coast was organized by a group of individuals closely associated with A. O. Stewart, a San Francisco financier, either as his employees or as employees of companies with which he was associated. Stewart had suggested to them in 1937 that if they would organize a corporation and purchase securities and other property recommended by him, and would manage these assets, he would assist them in establishing credit with which to operate the business. During its corporate existence he arranged credit for petitioner corporation and in turn was allowed to pledge securities owned by West Coast for his personal loans and market operations. Though Stewart was thus closely identified with the corporation, he was not a stockholder, officer, or director.

By its articles of incorporation, West Coast was authorized to engage in a general investment business having the right to purchase and sell stocks, bonds, notes, mortgages, and property, to own and operate real estate, and to do all things necessary for successful operation of its business. The outstanding capital stock of the company consisted of 1,000 shares of no par value common stock issued at 50 cents a share. The first president of the corporation was Harley Kise, who held that position until late 1942. At that time W. A. Rabbett became president, and he continued in that office until the corporation dissolved in 1943.

West Coast operated at a profit until 1941, but thereafter it suffered losses, with the result that by January 1, 1943, it had an operating deficit of $111,863. On succeeding to the presidency of petitioner corporation Rabbett investigated the financial status of the company and determined that the existing financial situation early in 1943 was unfavorable, for war conditions had caused shrinkage and losses in the corporation's security portfolio and market conditions were unstable. Furthermore, West Coast was a personal holding company and it was necessary to distribute current earnings to stockholders to avoid the personal holding company surtax on undistributed income. Rabbett believed that if the company continued operating under such circumstances it would never be able to make up its deficit, pay its debts, and accumulate any equity for its shareholders. Due to these conclusions, Rabbett discussed dissolution of West Coast with the board of directors early in the spring of 1943. In May, 1943, he obtained permission from the directors to get the advice of a tax attorney concerning the best procedure for dissolving West Coast.

In the ensuing consultations between Rabbett and the tax attorney a topic of discussion was the proper disposition of 47,000 shares of Transamerica Corporation (hereinafter referred to as Transamerica) stock, the chief assets owned by West Coast. To secure its indebtedness existing on two promissory notes to the order of Transamerica in the face amounts of $410,292.96 and $33,175, petitioner corporation

had pledged various securities, including 14,600 shares of this stock. As security for two promissory notes in the face amounts of $315,875 and $89,300 to the order of the Bank of America National Trust & Savings Association (hereinafter referred to as the Bank of America) petitioner corporation had pledged the remaining 32,400 shares of Transamerica stock it owned. The market value of this stock in the spring of 1943 was considerably higher than its adjusted cost basis to West Coast of $310,590.20. Tax counsel advised Rabbett that in dissolving petitioner corporation the best way to accomplish payment of the debts for which the stock was pledged and also leave some equity for the shareholders by avoiding the capital gains tax which would result if West Coast sold the stock, was to distribute this stock in kind to the stockholders, letting them sell it and apply the proceeds to the pledged notes. With this goal in mind, the attorney prepared a complete plan and schedule for dissolution and liquidation of West Coast which the officers of the company subsequently carried

out.

At first, liquidation of petitioner corporation was scheduled for June, 1943, and all the necessary papers and minutes were prepared, but, because of unfavorable market conditions for sale of the Transamerica stock and delay caused by unsuccessful attempts to dispose of certain promissory notes of J. L. Stewart held by West Coast, the liquidation was postponed until July of that year.

Liquidation of West Coast commenced on July 19, 1943, when all its stockholders signed and filed with the corporation both a written consent to the voluntary winding up and dissolution of the corporation and a written consent to distribution in kind of assets of the corporation to them upon liquidation. At that time, the following individuals owned the 1,000 shares of West Coast stock outstanding:

On July 20, 1943, the president and vice president of petitioner corporation executed a "Certificate of Election of West Coast Securities Company to Wind Up and Dissolve," which certificate was filed with the Secretary of State of the State of California at Sacramento on July 21, 1943.

Also, on July 20, 1943, at 10 a. m., the board of directors of petitioner corporation held a special meeting, at which they acknowledged receipt of the stockholders' consents and authorized the officers to perform all acts necessary to distribute corporate assets to the stockholders and complete the winding up and dissolution of West Coast. The secretary was authorized to give written notice of

the commencement of dissolution proceedings to all shareholders and creditors of the corporation.

On the same day, at 1: 30 p. m., the board of directors of West Coast held another special meeting, at which they authorized the immediate distribution to stockholders of the corporation's 47,000 shares of Transamerica stock, subject to their pledge to secure indebtednesses of petitioner corporation to the Bank of America and Transamericà.

Still on the same day, pursuant to the authorization of the board of directors, West Coast distributed 47,000 shares of Transamerica stock to its stockholders, subject to the indebtednesses for which the stock was pledged, by executing a bill of sale and delivering an executed copy thereof to each shareholder, transferring to each stockholder according to his proportionate stockholding in the company a certain number of shares of Transamerica stock. These shares of Transamerica stock, still issued in the name of West Coast and endorsed by it in blank, remained in the possession of the Bank of America and Transamerica.

On July 20 West Coast sent separate notices of its dissolution proceedings and also of the distribution of its Transamerica stock to both the Bank of America and Transamerica. The two notices to the Bank of America were sent through the mail and were delivered on July 21. The letter concerning the distribution of Transamerica stock informed the bank that from this day the shareholders of West Coast were owners of all 47,000 shares of this stock.

The notice of commencement of dissolution proceedings sent to Transamerica was delivered to W. L. Andrews, vice president and treasurer of the company, by Clayton, who was both secretary and a stockholder of West Coast, on the morning of July 20. A notice of distribution of the 47,000 shares of Transamerica stock similar to the one mailed to the Bank of America was also delivered to Andrews by Clayton late on the afternoon of July 20. It was known by the officers of West Coast that Transamerica was buying up its outstanding stock for retirement, and after Clayton delivered the notice, he, as the representative of the West Coast stockholders, asked Andrews if Transamerica would buy their 47,000 shares of Transamerica stock. Andrews replied that Transamerica would buy them at the closing stock market price of 8% per share on July 20 if the stockholders of West Coast would accept the offer promptly. Following this conversation, Clayton returned to his office, advised the assembled West Coast stockholders of the offer, and received their permission to proceed with the sale of stock on the terms stated by Andrews.

On July 21 West Coast reduced its indebtednesses to the Bank of America for which the Transamerica stock was pledged by payment of $132,452.94 on the principal of its two notes held by the bank. Pay

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