Court Opinion

ID: 4609661
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:45:12.528723+00
Date Added: 2024-06-11T07:53:55.818911
License: Public Domain

MAGNOLIA WINDOW GLASS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Magnolia Window Glass Co. v. CommissionerDocket No. 21773.United States Board of Tax Appeals23 B.T.A. 1242; 1931 BTA LEXIS 1744; July 24, 1931, Promulgated 1931 BTA LEXIS 1744">*1744  TRANSFEREE - LIABILITY.  Where the transferee corporation purchased all of the assets of the transferor corporation, and which assets had a net value in excess of the liabilities assumed and the taxes due, and paid therefor stock of the transferee, which was issued and paid directly to the stockholders of the transferor, leaving the transferor without assets, the transferee is liable for taxes legally due.  Fadjo Cravens, Esq., for the petitioner.  John D. Kiley, Esq., for the respondent.  BLACK 23 B.T.A. 1242">*1242  This case arises from a proposed deficiency in tax for the fiscal year ended July 31, 1920, in the amount of $8,696.90, proposed for assessment against the petitioner as transferee of the assets of the Model Window Glass Company, under section 280 of the Revenue Act of 1926.  Petitioner does not raise any objection to the correctness of the tax as determined by the respondent against the taxpayer transferor, but alleges as error that the petitioner is not a transferee of the assets of the Model Window Glass Company within the meaning of section 280, because it was a bona fide purchaser in good faith for value without notice.  FINDINGS OF FACT. 1931 BTA LEXIS 1744">*1745  The petitioner, Magnolia Window Glass Company, is a corporation organized under the laws of the State of Arkansas, and has its principal office at 323 Merchants Bank Building, Fort Smith, Ark.  The Model Window Glass Company was an Arkansas corporation organized in 1917 for the purpose of manufacturing glass and its plant was located at Fort Smith, Ark.  Its capital stock was $75,000, and its largest stockholder and manager was C. P. Zenor, Sr.  Other stockholders resided in West Virginia.  The business at first was profitable and Zenor bought out the other stockholders and distributed the stock to himself and other members of his family, including his son-in-law, J. R. Miller, but the absolute control, management and disposition of the business and plant of the taxpayer Model Window Glass Company remained in Zenor, who dominated and operated the business.  In 1923 or 1924 the plant was destroyed by fire.  A large amount of insurance was carried on the plant and stock in trade and $135,000 was collected from this source.  The plant was rebuilt in 1924 but not in as substantial a way as the old plant which was destroyed.  23 B.T.A. 1242">*1243  The insurance companies would grant no insurance1931 BTA LEXIS 1744">*1746  as long as Zenor was at the head of the company.  However, the plant resumed operations without insurance and ran until the summer of 1925, when it shut down because of increasing difficulties in borrowing necessary funds resulting from lack of insurance; difficulties resulting from failure to pay dues to the Glass Blowers' Union and its refusal to furnish labor; and the accumulation of certain indebtedness.  In order to reopen and operate the plant, Zenor entered into an agreement with J. S. Hill and A. H. Scroggin in the summer of 1925.  Under the terms of the agreement a new corporation, to be known as the Magnolia Window Glass Company, was to be organized, with a capital stock of $75,000, to which the real estate, plant and free assets of the Model Window Glass Company were to be transferred.  Hill and Scroggin on their part were to advance $15,000 with which to pay the urgent debts of the Model Window Glass Company, make necessary repairs on the plant, take out insurance thereon, and pay immediate running expenses.  The stock in the new corporation was to be issued to J. R. Miller, son-in-law of C. P. Zenor, Sr., $37,500 and a like amount to Hill and Scroggin, to be divided1931 BTA LEXIS 1744">*1747  equally between them.  Prior to or contemporaneous with this agreement, Miller had become the holder of the entire capital stock of the Model Window Glass Company by the assignment to him of all such stock held by the family of C. P. Zenor, Sr.  There was no agreement to pay anything thing of value to the Model Window Glass Company, except to assume and pay certain debts which it owned, and which did not exceed in the aggregate $9,000.  This agreement was carried out in the following manner: August 1, 1925, the petitioner was organized as a corporation with a capital stock of $75,000, $37,500 of which was issued to J. R. Miller, son-in-law of C. P. Zenor, Sr., and $37,500 to Hill and Scroggin.  Miller paid nothing into the treasury of the corporation for his stock and Hill and Scroggin paid in $15,000, which was used as hereinafter detailed.  On August 3, 1925, the board of directors of the Model Window Glass Company passed the following resolution: Be it remembered that on this the 3rd day of August 1925, a special meeting of the Board of Directors of the Model Window Glass Company was called to meet at the office at the plant of said corporation in the City of Fort Smith, Arkansas, 1931 BTA LEXIS 1744">*1748  and at such meeting there were present and participating the following named directors; C. P. Zenor, C. P. Zenor, Jr., Francis Zenor, Louis Zenor, and J. R. Miller, being all the directors of the said corporation; and at such meeting a motion was made and seconded that C. P. Zenor, as president and J. R. Miller, as Secretary, of said Model Window Glass Company, are authorized, directed and empowered to convey by proper deed of conveyance to a corporation to be formed under the name of Magnolia Window Glass Company, all of its real estate, consisting of 8 9/10 acres described as Block 38, Midland Heights Addition to the City of Fort Smith, Arkansas, together with 23 B.T.A. 1242">*1244  the plant equipment and office equipment thereon, also all raw material on hand of the approximate value of $6,761.00 and all property of every nature and description connection with or used in connection with the operation of said Model Window Glass Company, and said motion was by the President submitted to said Board of Directors for their vote.  Whereupon each and every one of the above named directors voted in the affirmative.  This was followed August 7, 1925, by an absolute conveyance from the Model Window1931 BTA LEXIS 1744">*1749  Glass Company to the petitioner of all of its real estate and plant and raw material on hand for a recited consideration of $10.  The grantor received nothing of value as a consideration for this conveyance except the subsequent payment by the Magnolia Window Glass Company of all its indebtedness then outstanding except the taxes involved in this proceeding.  Pursuant to their agreement, Hill and Scroggin paid into the treasury of the petitioner $15,000, of which not to exceed $9,000 was used to pay the debts of the Model Window Glass Company and the balance was used to put the plant in running condition, pay insurance premiums, etc.  As a result of this transaction the Model Window Glass Company was denuded of all assets, became and is still insolvent, and discontinued business.  Prior to the date of this transfer of assets, the Model Window Glass Company was indebted to the City National Bank of Fort Smith, Ark., between $33,000 and $34,000, which was secured by pledge of a large quantity of manufactured glass and bills receivable.  Prior to the transfer of assets from the Model Window Company to the Magnolia Window Glass Company, the bank had secured title to this collateral1931 BTA LEXIS 1744">*1750  and in the transfer of assets from one corporation to the other, this indebtedness of the City National Bank and collateral did not figure one way or the other.  Subsequently, however, Hill and Scroggin became endorsers for this indebtedness and ultimately paid it.  The glass and bills receivable were turned over to them in consideration of their endorsement and payment of the notes.  They collected a large part of the bills receivable and sold the major portion of the glass.  While it does not appear how much they received from these collections and sales, that fact does not appear material to any issue in this case.  In order to secure themselves against losses because of this transaction with the City National Bank and certain other indebtedness, Hill and Scroggin required J. R. Miller to assign and pledge to them as security $32,500 of his stock in the petitioner.  Subsequently, in the case of ; , the Supreme Court of Arkansas held that the stock in the petitioner issued and standing in the name of J. R. Miller was really the stock of C. P. Zenor, Sr., and subject to his debts and that1931 BTA LEXIS 1744">*1751  the assignment thereof by Miller to Hill and Scroggin was void and of no effect.  23 B.T.A. 1242">*1245  Other indebtedness of the transferor came to light in course of time, other than that figured on at the time of the transfer of assets, and this was paid either by the petitioner or Hill and Scroggin, but in all the total amount of the indebtedness of the Model Window Glass Company paid by petitioner or on its behalf did not exceed $9,000.  During the operation of the business of the petitioner, Hill and Scroggin, by endorsement and otherwise, borrowed for petitioner various sums from time to time, running as high as $45,000.  These loans were for the benefit of petitioner and no benefit was derived therefrom by the transferor.  The transferor corporation had nothing to do with them and they did not constitute any part of a consideration for the transfer of the plant to the petitioner.  The value of the real estate, plant, equipment, and stock on hand transferred by the Model Window Glass Company to the petitioner at the time of transfer was at least $35,000.  The Model Window Glass Company, Fort Smith, Ark., filed its corporation income and profits-tax return for the fiscal year1931 BTA LEXIS 1744">*1752  ended July 31, 1920, in the District of West Virginia on October 25, 1920.  Under date of February 7, 1925, the Model Window Glass Company filed an income and profits-tax waiver for the fiscal year ended July 31, 1920, extending the period of limitations to December 31, 1925.  On May 9, 1925, a deficiency notice was mailed by the Commissioner to the Model Window Glass Company, Fort Smith, Ark., asserting a deficiency against it for the fiscal year ended July 31, 1920, of $8,696.90.  Under date of September 24, 1925, this deficiency was duly assessed in the District of West Virginia against the Model Window Glass Company, Fort Smith, Ark.  The return was filed in West Virginia.  Under date of November 23, 1925, the deficiency tax assessment in the District of West Virginia was transferred to the District of Arkansas.  The deficiency tax assessment against the Model Window Glass Company is outstanding and unpaid.  Under date of October 18, 1926, a sixty-day notice of deficiency was mailed to the Magnolia Window Glass Company, Fort Smith, Ark., by the Commissioner, notifying the petitioner of its liability as transferee of the assets of the Model Window Glass Company.  It1931 BTA LEXIS 1744">*1753  is from this notice of deficiency that the present appeal is taken.  OPINION.  BLACK: The question presented is whether or not the petitioner is a transferee of the assets of the Model Window Glass Company within the meaning of section 280 of the Revenue Act of 1926, so as to render 23 B.T.A. 1242">*1246  it liable for unpaid taxes of its transferor.  The petitioner contends that it was a bona fide purchaser in good faith for full value of the assets of the Model Window Glass Company, had no notice of the Government's tax claim at the time it purchased the assets, and, hence, is not liable as transferee of said assets, either at law or in equity.  Undoubtedly such a state of facts would present a good defense, if it were established by evidence.  . But in this proceeding, the evidence does not establish the defense which has been made.  The petitioner did not pay full value to the transferor corporation for the assets.  We have held in a number of recent cases that where the transferee corporation purchased all of the assets of the transferor corporation having a net value in excess of the amount of the taxes due, and paid therefor1931 BTA LEXIS 1744">*1754  stock of the transferee, which was issued and paid directly to the stockholders of the transferor, leaving the transferor without assets, the transferee is liable to the extent of taxes legally due.  ; Concrete Industries Co., 19 B.T.A; 655; ; ; ; 53 ; . Omitting a detailed discussion of the facts, it appears that the situation in the instant case was about as follows: C. P. Zenor, St., a practical and experienced glass manufacturer, was the majority stockholder and dominating influence in the Model Window Glass Company.  His family held the rest of the stock.  The plant and stock burned and $135,000 insurance was collected.  The plant was rebuilt, but it was impossible to procure insurance as long as Zenor was manager of the corporation.  Under these circumstances it was difficult to finance its operations, as banks would not loan money on uninsured property.  The1931 BTA LEXIS 1744">*1755  plant was operated about a year without insurance, but on account of difficulties with the Glass Blowers' Union, lack of insurance and borrowing credit and accumulated debts, further operations were suspended.  Under these circumstances the agreement was made with Hill and Scroggin to organize a new corporation for the purpose of securing credit and funds, insurance, and paying urgent debts.  The agreement was carried out as detailed in our findings of fact, by which the petitioner was organized and obtained a plant and real estate and raw material of the value of at least $35,000, for the payment of approximately $9,000 of debts owing by the old company.  It is true the evidence shows that Hill and Scroggin paid in $15,000 in cash for their stock, but the balance of such $15,000, after the payment of the $9,000 debts owing by the transferor corporation, was used in repairing the plant and equipment and putting it into operating condition after petitioner took it 23 B.T.A. 1242">*1247  over.  This of course was a matter with which the transferor corporation had nothing whatever to do, and constituted no part of the purchase price which was paid by petitioner to the transferor corporation for1931 BTA LEXIS 1744">*1756  its assets.  The latter company was denuded of its assets and received nothing, and the payment of the comparatively small amount of indebtedness for at least $35,000 worth of property was an entirely inadequate consideration to constitute the petitioner a bona fide purchaser for value.  The evidence in this proceeding would support a higher valuation than $35,000, on the assets transferred, but after giving consideration to all elements of value, we have found the value of such assets at time of transfer to be at least $35,000, which exceeds the amount of indebtedness assumed by petitioner of at least $25,000.  The case of , cited and relied upon by the petitioner, is not in point, as in that case the purchaser paid full value for the assets conveyed.  On page 1409 the Board said: "The assets of the milling company transferred to petitioner had a fair market value at the time of the sale and transfer not in excess of $75,000.  It further appeared the transferee in that case paid a mortgage of $72,000, with interest of $4,542.40, two notes of $3,500 and $2,000, with interest, and all taxes then due and assessed." These1931 BTA LEXIS 1744">*1757  facts serve to distinguish the Fostoria Milling & Grain Co. case from the instant case.  Counsel for petitioner in his brief lays considerable stress on the fact that petitioner, after it acquired the property, never operated it at a profit and finally had to close down and is still closed down, lying idle as an unprofitable venture.  But it must be borne in mind that our task is to find the value of the assets at the time of the transfer and what was paid for them.  Upon these facts we must base our decision, regardless of what took place in petitioner's business after the transfer.  It is, therefore, our decision that petitioner is liable as transferee of the assets of the Model Window Glass Company to the full extent of the deficiency, $8,696.60.  Decision will be entered for the respondent.