Opinion ID: 374307
Heading Depth: 1
Heading Rank: 3

Heading: Atlas' Transferee Liability For Fletcher's Tax Obligation

Text: 39 The Commissioner determined that Fletcher also accumulated earnings beyond the reasonable needs of its business, and imposed an accumulated earnings tax for its fiscal years ending November 30, 1968 and 1969. This Fletcher liability is not disputed. A deficiency notice was mailed to Atlas as Fletcher's successor. The Tax Court held that the tax was collectible from Atlas, as transferee, by virtue of section 6901(a)(1)(A). 22 That section permits collection from a transferee if under the governing state law the transferee would be liable for the transferor's debts. The state law in issue is that of New Jersey, and the Tax Court concluded that New Jersey would treat the Fletcher-Atlas transaction as a de facto merger, and a continuation of Fletcher's business. 40 Normally, a corporation that purchases all of the assets of another corporation is not liable for the debts of the transferor. 23 However, the New Jersey courts have formulated exceptions to the rule in the context of personal injury/products liability and minority appraisal suits. The leading New Jersey case is McKee v. Harris-Seybold Co., 109 N.J.Super. 555, 264 A.2d 98 (Super.Ct.Law Div. 1970), aff'd per curiam, 118 N.J.Super. 480, 288 A.2d 585 (Super.Ct.App.Div. 1972). The McKee court noted five exceptions, two of which are relevant here: (1) the transaction amounts to a consolidation or merger of the seller and purchaser; (2) the purchasing corporation is merely a continuation of the selling corporation. 109 N.J.Super. at 561, 264 A.2d at 101. 41 De facto mergers have been found where a sale is really a merger one corporation absorbing the other, the absorbed corporation going out of existence and losing its identity to the absorbing corporation that remains. In de facto situations, the factors considered have included: (1) continuation of the same shareholder control particularly in the instance of a sole shareholder, (2) intention to dissolve the selling company, (3) retention of executive and operating personnel of the vendor by the transferee, (4) transfer of assets and shares, (5) assumption of vendor's liabilities, (6) a pooling of interests. 24 Most of these elements are present in the case sub judice. Moreover, every factor is not essential for applying the doctrine. Good v. Lackawanna Leather Co., 96 N.J.Super. 439, 452, 233 A.2d 201, 208 (Super.Ct.Ch.Div. 1967). However, in Good, the court found that because most of the elements were missing, particularly the transfer of assets in exchange for shares, the de facto doctrine did not apply. See id. 42 In Wilson v. Fare Well Corp., 140 N.J.Super. 476, 356 A.2d 458 (Super.Ct.Law Div. 1976), the court found the de facto doctrine applicable because there was continuity of management, personnel, physical location, assets, general business operations, shareholders, and the seller had ceased operations and the transferee had assumed the continuation of the business. The court while recognizing the McKee factors, adopted the modern, fair-minded broad approach to the doctrine. 140 N.J.Super. at 493, 356 A.2d at 468. 43 In Shannon v. Samuel Langston Co., 379 F.Supp. 797 (W.D.Mich. 1974), the court found a de facto merger under New Jersey law where there was a continuation of the shareholders and business enterprise and the transferor had liquidated. 44 As is illustrated by the de facto merger cases, that exception is interrelated to the second exception for continuity. In McKee, there was no evidence of continuity of management or stockholder investment and the transferor did not liquidate until two years after the sale, although the purchaser presumably did continue the manufacturing operations. For liability to attach, the purchasing corporation must represent merely a 'new hat' for the seller. McKee v. Harris-Seybold Co., 109 N.J.Super. at 570, 264 A.2d at 106. Certainly, in the case at bar there is continuity of shareholder investment and Fletcher was liquidated almost immediately. However, even in a case where the transferor corporation liquidated soon after the sale, this was held not to be dispositive. Menacho v. Adamson United Co., 420 F.Supp. 128 (D.N.J. 1976) (no de facto merger). Menacho is distinguishable from the case at bar because the Menacho court found that there was no continuity of management or control. 420 F.Supp. at 134-35. 45 In Jackson v. Diamond T. Trucking Co., 100 N.J.Super. 186, 241 A.2d 471 (Super.Ct.Law Div. 1968), the court held a transferee corporation liable for the transferor under the continuation exception. The court noted that the factual conclusion that the transferee corporation was a continuation of the transferor did not necessarily lead to imposing liability because a weighing of policy factors was required. The courts that have found a de facto merger or a continuation of the enterprise have involved public policy considerations which favor compensating tort victims or appraisal rights to minority shareholders. 25 We do not believe that the New Jersey courts would regard the favored public policy of the collection of the federal revenue any less highly. 46 Under the case law discussed, continuity is the basis and test for both the de facto and continuity doctrines. Although, there was no stock transfer here, and only cash was involved, there was clearly a continuation of stockholder interest. The stock exchange element of the de facto doctrine appears to be aimed at measuring continuity of stockholder interest. Moreover, it was not unreasonable for the Tax Court to find adequate continuity of the business activity by Atlas for the reasons it found such continuity under section 368, 26 U.S.C. § 368 (1976). Atlas purchased all the operating machinery and inventory, utilized the machinery for the same purposes, retained it in the same location, retained the same employees, and the transferor company was liquidated almost immediately. Thus we hold that the Tax Court did not err in holding that under New Jersey law, Atlas was liable for Fletcher's tax obligations, and that those obligations could be collected pursuant to section 6901(a)(1)(A). 26