Opinion ID: 1479374
Heading Depth: 1
Heading Rank: 2

Heading: The Creditor Issue.

Text: The position of petitioners as to this issue is that the proposition to repurchase became a contract creating the position of debtor-creditor; that there was a valid consideration given by petitioners; that a corporation has a legal right to discharge such a contract obligation; that the payments here did not render the corporation insolvent; and that the obligee does not become liable, as a transferee, for the unpaid income tax of the corporation. It is true that the proposal in the statement by the Stephens Company [2] and the subsequent subscriptions for stock in reliance thereon constitute a contract based upon a consideration passing from such subscribers. Likewise, it is true that, ordinarily, a corporation may discharge a contract obligation by payments and that such payees do not thereby become liable for federal income taxes of the corporation as transferees. Also, the above is true even if the obligee creditor to whom such payments are made be also a stockholder in the corporation. However, these general legal truths do not solve the problem here. We have here a particular kind of contract. If the contract is sufficient to establish a debtor-creditor relation between petitioners and the company, yet the subject matter of the contract is the repurchase of their stock by the corporation. The purposed and the effectual result of performance of the contract would be to take assets from the corporation in exchange for nothing of any value to its creditors. Such a situation brings into play established rules of law concerning the nature and functions of capital stock in corporations and the usually stringent rules against withdrawal thereof. Thus because of the particular subject matter of this contract we have considerations of public policy which bear directly upon the application of the contentions of the petitioners. Our problem is how far these considerations control the situation here. In the statutory method of collecting income taxes is provided the liability of transferees of the taxpayer. That liability is the liability, at law or in equity, of a transferee of property of a taxpayer Int.Rev.Code, § 311(a) (1), 26 U.S. C.A. Int.Rev.Code § 311(a) (1). Whether a transferee is liable at law or in equity depends upon State law. Helvering v. Stuart, Nov. 16, 1942, 317 U.S. 154, 63 S. Ct. 140, 87 L.Ed. ___; Blair v. Commissioner, 300 U.S. 5, 9, 57 S.Ct. 330, 81 L.Ed. 465; Freuler v. Helvering, 291 U.S. 35, 54 S.Ct. 308, 78 L.Ed. 634. Here, it is the law of Missouri as to stockholders who are transferees of the property of the corporation. One of the statutory powers of Missouri corporations is: To purchase, hold, sell and transfer shares of its own capital stock: Provided, that no such corporation shall use its funds or property for the purchase of its own shares of stock when such use would cause an impairment of the capital of the corporation or perpertrate a fraud upon its creditors or other stockholders. R.S.Mo.1929, § 4940, same R.S. Mo.1939, § 5345, Mo.R.S.A. § 5345. Other sections, R.S.Mo.1929, §§ 4948-4950, same R.S.Mo.1939, §§ 5353-5355, Mo.R.S.A. §§ 5353-5355, prescribe the conditions and methods of diminishing capital stock. Missouri decisions hold that the only way by which capital stock can be diminished is as required by the above sections, and that a contract by a corporation to repurchase its stock is ultra vires and void as against public policy. David v. B. L. Fry Mfg. Co., 209 Mo.App. 134, 236 S.W. 1103; Hunter v. Garanflo, 246 Mo. 131, 151 S.W. 741; Wilson v. Torchon Lace & Mercantile Co., 167 Mo.App. 305, 149 S.W. 1156; and see Potts-Turnbull Adv. Co. v. Gatchell, Mo.Sup., 257 S.W. 134, 139; and Stringfellow v. Rosebrough Monument Co., Mo.App., 196 S.W. 1050, 1052, 1053. In Hunter v. Garanflo, supra, 151 S.W. at page 742, the court stated: The withdrawal of this fund, or any part of it, by the stockholders, otherwise than under the sanction of the law in conformity with which it is created, or its application to other uses than those authorized by the laws under which the corporation exists, is a clear violation of the policy of the state as expressed in its Constitution. In St. Louis Carriage Mfg. Co. v. Hilbert, 24 Mo.App. 338, 343, in reference to the power of a Missouri corporation to purchase its own stock, the court said: A corporation in this state has no such power. It is not simply a question between the state and the corporation, or between the corporation and its creditors, as the defendant assumes, but a question affecting the validity of the contract itself. Since the contract here was void as against public policy, no legal relation of debtor-creditor can be based thereon. As the petitioners received these payments under a void contract and in violation of the public policy of the State of incorporation, creditors of the corporation could follow such funds into their hands. The payments were, in law, a fraud upon such creditors. The question of whether or when such payments rendered this corporation insolvent is not material. If it were, it could not avail petitioners under the facts. Upon substantial evidence, the Board found that shortly after said sale was consummated, all of the stockholders, including petitioners, requested the corporation to repurchase their shares of stock at $100 per share as provided in said repurchase agreement. Further, the Board found that the corporation then agreed to repurchase said shares of stock at par and did make the payments herein involved. This situation is clearly set forth in the evidence of the president of the company who testified: All of the stock was bought back in 1933, but bought back conditionally, if, when and as we should have sufficient funds to pay for it. The demand was made in 1933, so we agreed at the time to repurchase all the outstanding stock under the contract we made in selling it, when, as and if we got the money to pay for it. Stock was paid for under this repurchase agreement along through 1933, 1934 and 1935 and until 1936, when I turned in 100 shares and took $6,500.00. Thus the situation is revealed as being a series of intimately connected transactions which justified the conclusion of the Board that: It may be true that these distributions in the earlier years did not bring about insolvency of the Botz Co., but the important and controlling fact is that the distributions were each made as one of a series of distributions in partial liquidation, which unquestionably rendered the corporation insolvent. The petitioners, distributees, are therefore liable as transferees in the respective amounts of those distributions they received.