Gideon-Anderson Co. v. Commissioner , 20 B.T.A. 106 ( 1930 )

GIDEON-ANDERSON CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Gideon-Anderson Co. v. Commissioner

Docket No. 24351.

United States Board of Tax Appeals

20 B.T.A. 106; 1930 BTA LEXIS 2201;

June 19, 1930, Promulgated

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1. Held that the petitioner is transferee of the assets of the Gideon-Anderson Lumber & Mercantile Co. and as such is answerable for the deficiencies in tax liability of that company for the years 1920 and 1921.

2. Held that the deficiencies in tax of the Gideon-Anderson Lumber & Mercantile Co. for 1920 and 1921 are not barred by the statute of limitations.

Chase Morsey, Esq., and Harry Friedman, Esq., for the petitioner.

H. Leroy Jones, Esq., for the respondent.

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TRAMMELL

Under section 280 of the Revenue Act of 1926 the respondent has proposed for assessment against the petitioner as transferee of the assets of Gideon-Anderson Lumber & Mercantile Co., Gideon, Mo., deficiencies in the income and profits tax of that company and its affiliated companies in the amount of $68,918.55 for 1920 and $6,303.52 for 1921. Pursuant to motion of counsel for the petitioner, hearing was had as to the petitioner's liability as transferee for the payment of the deficiencies. The questions involved are (1) whether the petitioner is liable as transferee of the assets of the Gideon-Anderson Lumber & Mercantile Co. and its affiliated companies, and (2) whether assessment and collection of the deficiencies are barred by limitations.

FINDINGS OF FACT.

The tax liability here involved is that of a consolidated group of four Missouri corporations, the Gideon-Anderson Lumber & Mercantile Co., Gideon Cooperage Co., Anderson-Poorman Manufacturing Co., and Senath Cooperage Co., for 1920 and 1921. During these years the foregoing corporations were also affiliated with the Gideon & North Island Railroad Co.

On December 31, 1921, the Gideon-Anderson Lumber & Mercantile Co., Gideon Cooperage Co., Anderson-Poorman Manufacturing Co., and Senath Cooperage Co., all being corporations of the State of Missouri and engaged in a similar line of business, after proper action by their respective stockholders and boards of directors, entered into an agreement of "Consolidation, Amalgamation and Incorporation" for the consolidation of the four corporations under the laws of Missouri into a consolidated corporation to be called "The Gideon-Anderson Company," which is the petitioner in this proceeding.

On January 24, 1922, the Secretary of State of the State of Missouri issued a certificate of consolidation setting forth that, whereas these four corporations had complied with the law governing the consolidation of manufacturing and business companies, the said corporations were duly consolidated under the name of "The Gideon-Anderson Company," located at Gideon, Mo., and were entitled to all the rights and privileges granted to manufacturing and business corporations under the laws of the State for a term of fifty years, and that the amount of capital stock of the consolidated corporation was $167,000. The capital stock of $167,000 consisted of 1,670 shares of a par value of $100 each.

The agreement of "Consolidation, Amalgamation and Incorporation" provided in part as follows:

NOW THEREFORE BE IT KNOWN THAT IT IS AGREED

That the several capital stocks, debts, properties, assets and franchises held, owned or possessed by each of the following corporations to-wit:

Gideon-Anderson Lumber & Merc. Company

Gideon Cooperage Company

Senath Cooperage Company

Anderson-Poorman Manufacturing Company

shall be, consolidated, united and amalgamated and that the title shall be vested in one consolidated and amalgamated corporation as full as the same are now severally held and enjoyed by them respectively, subject, however, to all the conditions, stipulations, contracts, liens, claims and charges thereon and to all debts and obligations of said respective corporations, and said consolidated and amalgamated corporation shall fully complete carry out and perform all valid conditions, stipulations and contracts, heretofore made by, and shall pay and discharge all liens, claims and charges heretofore created or suffered by, and of said corporations on their respective properties, and shall pay and discharge all valid debts and obligations of every kind, character and description heretofore incurred or assumed by or now existing against any of said corporations.

No distribution of the assets of the respective corporations was made to the stockholders nor were any assets transferred to any person, stockholder or corporation except as hereinafter indicated.

Pursuant to the consolidation as effected by the agreement of "Consolidation, Amalgamation and Incorporation," the four consolidating corporations, the Gideon-Anderson Lumber & Mercantile Co., Gideon Cooperage Co., Anderson-Poorman Manufacturing Co., and Senath Cooperage Co., transferred to the petitioner all of their assets, having a book value of $1,699,000 but an actual value considerably in excess of that amount. The net book value of the assets transferred to the petitioner by the Gideon-Anderson Lumber & Mercantile Co. at the time of the consolidation of the four companies into the petitioner was $1,187,000. However, the actual value was in excess of that amount, which also in turn is in excess of the deficiencies here involved. At the time of the consolidation the petitioner had no assets other than those transferred to it by the consolidating corporations.

For the assets transferred to it by the consolidating corporations the petitioner issued its capital stock. For the assets transferred to it by the Gideon-Anderson Lumber & Mercantile Co. the petitioner issued 1166 shares of its capital stock. Upon advice of counsel that the laws of Missouri at that time would not permit one corporation to hold stock in another, the 1166 shares of stock were not issued to the Gideon-Anderson Lumber & Mercantile Co., but were issued to the stockholders of that company, who were five in number and who also constituted its board of directors.

The 1920 income-tax return for the Gideon-Anderson Lumber & Mercantile Co. was filed on April 14, 1921. The return for 1921 was filed at some undisclosed date, but not prior to March 15, 1922, nor later than June 16, 1922. The notice of the determination of liability under section 280 of the Revenue Act of 1926 was mailed to the petitioner on December 23, 1926. Petition was filed with the Board on February 17, 1927.

No action was ever taken by the respondent to assess or attempt to assess any deficiency in taxes against the Gideon-Anderson Lumber & Mercantile Co. for the taxable years here involved, nor was any notice of deficiency mailed to that company within the statutory period of limitations.

OPINION.

TRAMMELL: The petitioner contends that it is not liable in law or in equity as a transferee of the assets of Gideon-Anderson Lumber & Mercantile Co. as it paid full value for such assets.

While we recognize the general and well settled rule that where one corporation in good faith sells or transfers all of its assets to another for a fair consideration, the transferee corporation is not liable for the debts and the liabilities of the transferor, Metropolitan Securities Corporation,19 B.T.A. 299">19 B.T.A. 299, we do not think this is such a case.

It is well settled that where one corporation exchanges or transfers its assets to another corporation for stock of the latter, which is issued direct to the stockholders of the seller, thus leaving the seller without assets of any kind to satisfy its creditors, the purchaser is liable to the creditors of the seller to the extent of the value of the property received, the sale being in fraud of creditors and the purchaser being a party to the transaction. United States v. Capps Mfg. Co., 15 Fed.(2d) 528; Grennell v. Detroit Gas Co.,112 Mich. 70">112 Mich. 70; 70 N.W. 413">70 N.W. 413; McWilliams v. Excelsior Coal Co.,298 Fed.884; Swing v. American Glucose Co.,123 Ill. App. 156">123 Ill.App. 156; Woodley Petroleum Co. et al.,16 B.T.A. 253">16 B.T.A. 253. And this rule has been applied in some instances where the consideration paid was capital stock of the purchasing corporation actually delivered to the seller. Hibernia Ins. Co. v. St. Louis & New Orleans Transportation Co.,13 Fed. 516; American Ry. Express Co. v. Commonwealth,190 Ky. 636">190 Ky. 636; 228 S.W. 433">228 S.W. 433.

In the instant case the consolidated corporation took over all the assets of the consolidating companies and issued its stock not to the transferor corporations, but to the stockholders of such companies, thereby leaving the consolidating corporations without assets to satisfy their creditors. This constituted a constructive fraud on the creditors of the consolidating corporations. The petitioner being a party to the transaction, we think that it must be held liable as a transferee. Cf. Metropolitan Securities Corporation, supra.

The petitioner contends that the seller corporations constructively received the stock of the consolidated corporations and constructively distributed the assets to their stockholders in accordance with the rule laid down in the case of Rensselaer & Saratoga R.R. Co. v. Irwin,249 Fed. 726, and other cases, but we do not think that this principle is applicable here. The actual fact is that the transferor corporations as the result of the transfer of assets had no assets out of which the liability for taxes could be satisfied. We think, therefore, that the petitioner is liable as transferee.

The petitioner contends that the period of limitations within which assessment of the tax liability of the Gideon-Anderson Lumber & Merchantile Co. expired in April, 1926, and as the tax was not assessed against that company prior to the expiration of the period of limitations it has been extinguished by the provisions of section 1106 of the Revenue Act of 1926. The petitioner urges that there is therefore no liability to be assessed against or collected from it.

The 1920 return of the Gideon-Anderson Lumber & Merchantile Co. was filed on April 14, 1921, and the 1921 return was filed at some undisclosed date, but not prior to March 15, 1922, nor later than June 16, 1922. Assuming that the 1921 return was filed on March 15, 1922, the period of limitations within which assessment could be made expired on March 15, 1926, with respect to the taxes for 1921 and on April 14, 1926, with respect to the tax for 1920. Clearly, the period of limitations within which assessment of the tax for both years had not expired on February 26, 1926, the date of the enactment of the Revenue Act of 1926.

Section 280 of the Revenue Act of 1926 provides in part as follows:

(a) The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this title (including the provisions in case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds):

(1) The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this title or by any prior income, excess-profits, or war-profits tax Act.

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(b) The period of limitation for assessment of any such liability of a transferee * * * shall be as follows:

(1) Within one year after the expiration of the period of limitation for assessment against the taxpayer; * * *

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(c) For the purposes of this section, if the taxpayer is deceased, or in the case of a corporation, has terminated its existence, the period of limitation for assessment against the taxpayer shall be the period that would be in effect had the death or termination of existence not occurred.

(d) The running of the period of limitation upon the assessment of the liability of a transferee or fiduciary shall, after the mailing of the notice under subdivision (a) of section 274 to the transferee or fiduciary, be suspended for the period during which the Commissioner is prohibited from making the assessment in respect of the liability of the transferee or fiduciary, and for 60 days thereafter.

Subdivision (b), paragraph (1), of this section specifically provides that the assessment of the liability of a transferee may be made within one year after the expiration of the period of limitation for assessment against the taxpayer. Nor, in order to make the assessment against the transferee, is it necessary for the respondent to first assess the tax against the transferor. Woodley Petroleum Co. et al., supra;Angier Corporation,17 B.T.A. 1376">17 B.T.A. 1376. It is sufficient if he proceeds against the transferee within the one year period provided therefor by statute.

Since the period of limitations within which assessment could be made of the taxes here involved had not expired at the time of the enactment of the Revenue Act of 1926, and as the respondent mailed the notice of the deficiencies to the petitioner on December 23, 1926, and well within the time provided by section 280(b)(1), we do not think that the tax liability has been extinguished by section 1106. To hold otherwise would be to do violence to the plain language as well as the intent and purpose of the provisions of section 280.

Since the petitioner is liable, as transferee of the assets of the Gideon-Anderson Lumber & Mercantile Co., for the tax liability here involved, and as the period of limitations within which assessment against and collection of such liability from the petitioner has not expired, an order will be entered restoring the proceeding to the General Calendar for hearing on the merits.