Court Opinion

ID: 4608650
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:43:07.50424+00
Date Added: 2024-06-11T07:53:44.616371
License: Public Domain

CONTINENTAL BAKING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Continental Baking Co. v. CommissionerDocket No. 44873.United States Board of Tax Appeals27 B.T.A. 884; 1933 BTA LEXIS 1289; March 7, 1933, Promulgated *1289  Where petitioner, in exchange for all of the taxpayer's assets, transferred to the taxpayer shares of its capital stock and assumed all existing liabilities of the taxpayer, petitioner is liable as transferee for additional Federal taxes due from the taxpayer.  Robert No. Andeson, Esq., for the petitioner.  B. U. Steele, Esq., for the respondent.  MCMAHON *884  This is a proceeding for the redetermination of the asserted liability of the petitioner as transferee, for the income taxes of the Livingston Baking Company for the fiscal year ended June 30, 1924, and the period July 1, 1924, to January 10, 1925, in the respective amounts of $447.42 and $2,451.92.  It is alleged by the petitioner: (1) That assessment of the additional taxes is barred by the statute of limitations; (2) that there is no liability on its part for the taxes of the Livingston Baking Company; and (3) that the depreciation deductions claimed by the Livingston Baking Company were not excessive.  At the hearing petitioner abandoned each of the assignments of error except the second.  Thus the only issue remaining is whether petitioner is liable, at law or in equity, as a transferee*1290  of property of the Livingston Baking Company for the additional taxes asserted by respondent.  FINDINGS OF FACT.  The petitioner is a Delaware corporation, with principal office at New York, New York.  The Livingston Baking Company was, at all times material herein, a corporation duly organized and existing under the laws of the State of Illinois, with principal office at Chicago.  The minutes of a meeting of the board of directors of petitioner held on September 24, 1926, contain the following: Now, THEREFORE, BE IT RESOLVED, that the proposal of said LIVINGSTON BAKING COMPANY to transfer and convey to this corporation all its said properties and assets of every kind and nature, tangible or intangible, including the business as a going concern, and the good will of said corporation, as of September 18, 1926, excepting motor vehicles which shall be transferred as of January 1, 1927, which said properties and assets the Board of Directors does hereby adjudge and declare to be of a value equal to a value of the shares of this corporation to be issued therefor, and which said properties and assets are desirable and useful for the business of this corporation be and they are*1291  hereby accepted, *885  and that the proper officers of this corporation be, and they hereby are, authorized and directed to accept such proposal on behalf of this corporation, and to take such steps as may be necessary to acquire said properties and assets and assume all existing liabilities of said corporation, and further RESOLVED, that the proper officers of this corporation be, and they are hereby, authorized and directed upon the delivery to this corporation of all conveyances, bills of sale, assignments, agreements and other instruments of transfer of said properties and assets, to issue and deliver to said corporation, certificate for one-hundred-fifty-one (151) shares of stock of this corporation, without nominal or par value.  The transfer of the assets of the Livingston Baking Company to the petitioner was authorized by the board of directors of the Livingston Baking Company at a meeting held on September 24, 1926, and by the stockholders of that company at a special meeting held on October 2, 1926.  The minutes of each meeting recite that the Continental Baking Corporation, a Maryland corporation, owns all the outstanding stock of the Livingston Baking Company, *1292  except directors' qualifying shares, and also owns together with other corporations all the outstanding stock of the Continental Baking Company (the petitioner herein) and that the transaction was proposed by the Continental Baking Corporation and the petitioner.  As of September 18, 1926, 151 shares of the capital stock of the petitioner were duly transferred to the Livingston Baking Company in exchange for all of its assets.  Such stock at that time was worth approximately $10,000 per share.  The balance sheet of the Livingston Baking Company as of September 18, 1926, shows total liabilities, exclusive of its capital stock liabilities, of $888,198.85.  Such figure, however, does not include any amount of additional Federal taxes of the Livingston Baking Company for the fiscal year ended June 30, 1924, or the period July 1, 1924, to January 10, 1925.  Such balance sheet shows assets of a value of $2,533,923.58, which includes cash in the amount of $515,021.77, marketable securities in the amount of $112,157.25, accounts receivable in the amount of $86,855.80 and sundry investments in stocks, bonds, mortgages, etc., in the amount of $187,800.  The petitioner paid the indebtedness*1293  of the Livingston Baking Company which was shown upon the balance sheet of that company on September 18, 1926.  The Federal tax liability herein involved has not been paid by petitioner.  The stock which petitioner transferred to the Livingston Baking Company was held by that company until April 5, 1927, when it was transferred to the Continental Baking Corporation, owner of all of the stock of the Livingston Baking Company, except qualifying shares.  The Livingston Baking Company thereafter remained in existence but was inactive.  *886  The transfer by the Livingston Baking Company of its assets to the petitioner was not made with intent to defeat or defraud the Government of taxes.  On September 24, 1927, there were assessed against the Livingston Baking Company additional taxes in the amounts of $447.42 and $2,451.92 for the fiscal year ended June 30, 1924, and the period July 1, 1924, to January 10, 1925, respectively.  Such amounts have never been paid.  In the letter dated April 24, 1929, which is the basis for the instant proceeding, the respondent proposed the assessment of such amounts, plus any accrued penalty or interest, against this petitioner as transferee*1294  of the assets of the Livingston Baking Company.  OPINION.  MCMAHON: The only question here presented is whether the petitioner is liable at law or in equity, as a transferee, for the additional taxes asserted by the respondent to be due from the Livingston Baking Company for the fiscal year ended June 30, 1924, and for the period July 1, 1924, to January 10, 1925.  The burden of proof in a transferee proceeding is upon the respondent to show the liability of the alleged transferee, but not to show the correctness of the determination of the tax liability of the transferor corporation.  Section 912 of the Revenue Act of 1924, as amended by section 602 of the Revenue Act of 1928. 1It is our opinion that the respondent has met the burden of showing that the petitioner is liable for the taxes in question under its contract with the Livingston Baking Company.  In the minutes of the meeting of the board of directors of the petitioner held on*1295  September 24, 1926, wherein the acquisition of the assets of the Livingston Baking Company was authorized, the officers were authorized and directed to "take such steps as may be necessary to acquire said properties and assets and assume all existing liabilities of said corporation".  By assuming "all existing liabilities" at the time of the transfer on September 18, 1926, the petitioner assumed any additional tax liability of the Livingston Baking Company for the fiscal year ended June 30, 1924, and for the period July 1, 1924, to January 10, 1925, even though at such time such deficiencies were not assessed against the Livingston Baking Company and may not have been determined by the respondent.  At that time all the events had occurred which fixed the amount of the tax and determined the liability of the taxpayer to pay it.  . Cf. ; and United*887 . It is true that Brayton Campbell, who is secretary and treasurer of the Continental Baking Corporation and its subsidiaries, testified that it*1296  was his understanding that the petitioner was to assume only those liabilities contained in the balance sheet as of September 18, 1926.  However, the petitioner did not introduce the contract in evidence and we can not accept, as binding, the understanding of Campbell upon this question as against petitioner's written minutes evidencing the agreement of the parties.  The agreement is binding on the parties to it.  His understanding is not binding here.  The minutes of the petitioner are a written admission by the petitioner of its liability in this respect, which is not overcome by Campbell's understanding to the contrary.  It is for the Borad to construe these minutes and it is not bound by Campbell's construction.  As stated, we believe the respondent has met the burden placed upon him in this respect.  Such a contractual liability is enforceable under section 280 of the Revenue Act of 1926.  . If petitioner did not assume such taxes in its agreement with the Livingston Baking Company, petitioner is nevertheless liable under the well established doctrine that if one corporation takes over all the assets*1297  of another corporation without giving adequate consideration, thereby leaving the transferor without means of paying its creditors, it is liable for the amounts due to the creditors, to the value of the assets received by it.  It is true that the stock of petitioner which was transferred to the Livingston Baking Company in exchange for the assets had a value of $1,510,000, which was greatly in excess of the amount of tax here in controversy, but it is well settled that creditors may not be forced to give up the real, tangible assets of a corporation as security and look for payment alone to stock of another corporation.  In , there was involved a situation substantially similar to that in the instant proceeding and we held the transferee liable.  We there stated: Similar questions of transferee liability have been before us on numerous occasions, and it is now well settled by decisions of the Board that where one corporation transfers its assets to a new corporation in exchange for stock of the latter which is issued directly to the stockholders, leaving the transferor without assets to satisfy its creditors, the new corporation*1298  is liable to the creditors of the old to the extent of the value of the property received. ; ; ; , and cases cited therein.  Many courts have reached the same conclusion where stock of the new corporation was delivered to the old corporation and later distributed to its stockholders, which is the situation in the instant case.  ; ; ; ; ; ; ; ; ; *1299 ; ; . The reason for application of the rule in cases of the latter group where the old corporation is not without assets, having received stock of the new corporation, is stated as follows in :Creditors of the old corporation cannot be required to look alone to the stock and bonds which were substituted for the real, tangible assets of that corporation.  The value of securities so substituted is more or less problematical, and creditors should not be forced to surrender their claim against available, visible assets, and transfer such claim to new securities.  The remedy cannot thus be hindered and impaired for the benefit of stockholders.  * * * See also to the same effect ; . These principles were recognized and applied by this Board in , and in *1300 , wherein we held the transferee corporation liable even though the stock which it exchanged for the assets of the transferor corporation was shown to have a value at least equal to the net value of the assets.  The transferee corporation is liable whether it was organized for the purpose of absorbing the business of the transferor or whether it was already in existence.  In ; , the court quoted with approval the following: "* * * Where, however, there is an absorbtion of the business and assets - in other words, a merger de facto - by either a corporation formed for the purpose, or one already in business, the liability of the corporation receiving the assets is rested upon the familiar trust fund doctrine, since such receiving corporation does not stand as a bona fide purchaser for value.  In such case the extent of the liability is necessarily determined by the value of the property received." Page 1120 of 11 L.R.A. (N.S.).  * * * The cases of *1301 , and , cited by petitioner, are distinguishable from the instant proceeding.  In , the taxpayer retained its cash, bills and accounts receivable, and stock on hand, and the Commissioner did not prove that the value of these retained assets was less than the amount of the taxes and other obligations.  In the instant proceeding no assets of the transferor were retained by it.  In , it was not shown that the value of the consideration received by the taxpayer, other than stock, was less than the amount of the tax sought to be collected from the alleged "transferee". *889 , relied upon by petitioner, is also different from the instant proceeding.  In that proceeding the transferor "at the conclusion of the transaction was possessed of assets [preferred stock of the transferee] equal in value to those it had sold." The proof in the instant proceeding does not sustain such a conclusion.  Here the net worth of assets*1302  received by petitioner, as shown by the balance sheet of the Livingston Baking Company, was $1,645,724.73, not including any going concern or good will value, while the value of the stock transferred to the Livingston Baking Company was $1,510,000. The assets which petitioner received had a value, according to the balance sheet of the Livingston Baking Company as of September 18, 1926, substantially in excess of the liabilities shown upon the balance sheet and the additional taxes herein involved.  We hold that the petitioner is liable for the additional taxes determined by respondent.  The petitioner's liability also includes interest upon such amounts from September 18, 1926, the date as of which petitioner received the assets.  , and . Decision will be entered under Rule 50.Footnotes1. Sec. 912.  In proceedings 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. ↩