Court Opinion

ID: 9442901
Source: CourtListenerOpinion
Date Created: 2023-08-03 19:03:20.89614+00
Date Added: 2024-06-11T17:29:16.618640
License: Public Domain

SIBLEY, Circuit Judge
(dissenting).
The majority of the Tax Court judges say: “Neither are there any writings or resolutions, corporate or otherwise, to show that the deposit of $50,000 in cash by Burton on June 4 to the credit of the corporation then being organized, and its subsequent application in payment for one half of the authorized stock, were intended to be mere formalities lacking in substance, rather than what they appeared to be”. The minority says: “To hold as the majority does that the $50,000 deposit so soon withdrawn was a substantive payment for shares and that the asset transfer following within a few days was not a part of a preconceived plan strains credulity. * * * I fail to see any substance in such act; substance inhered only in the asset transfer and in my view petitioners shares were in reality issued for the assets”. The minority indeed calls the deposit “a perfunctory requirement of incorporation”. I think the $50,000 put in bank on June 4, 1940, was as stated in the affidavit filed with the Secretary of State that day, a payment in cash for one half the capital stock on their subscription for the whole of it, and can be regarded as nothing else. The Texas corporation law under which the charter was offered to the Secretary for approval and filing contains these provisions: Rev. Civ.Stats., Art. 1308: “Before the charter of a private corporation created for profit can be filed with the Secretary of State, the full amount of its authorized capital stock must be in good faith subscribed by its stockholders and fifty per cent thereof paid in cash, or its equivalent in other property or labor done, the product of which shall be worth to the company the actual value at which it was taken or at which the property was received. The affidavit of those who executed the charter shall be furnished to the Secretary of State, showing:
“1. The name, residence and post office address of each subscriber to the capital stock of such company;
“2. The amount subscribed by each, and the amount paid by each;
“3. The cash value of any property received, giving its description, location and from whom and the price at which it was received * * Art. 1309: “If the *119Secretary of State is not satisfied, he may, at the expense of the incorporators, require other satisfactory evidence before he shall be required to receive, file and record such charter”. Burton and his associates thus had a choice in transferring his former business to a corporation, either to pay for one half of the stock with property, or to pay cash for the stock and cause the corporation to buy the property later. The advantage in the latter course was that the business was a mass of assets and liabilities whose actual value to the corporation might be questioned by the Secretary. He could raise no question and make no delay if cash were used. Facts found by the court, based on stipulation, are: “The application was accompanied by an affidavit of the incor-porators showing that they had subscribed for the-entire capital stock and had paid for one half thereof in cash. The application was approved by the Secretary of State on June 20, 1940. * * * On June 24, 1940, the first meeting of the stockholders of the corporation and the first meeting of its directors was held. * * * On June 24, 1940, the $50,000 deposited to the credit of the corporation by Burton on June 4, 1940 was applied in payment for $50,000 of the corporation’s capital stock after which the payment record of the corporation showed that the subscriptions of the incorporators had been paid to the extent of one half thereof. On the same day certificates for 500 shares (one half) of the corporation’s authorized stock were issued, Burton 450 shares, Henderson 25 shares, and Ayers 25 shares. The stock issued to Henderson and Ayers having been paid for by Burton was owned by him but issued in their names as his nominees.” (Emphasis added). The corporation therefore after its organization accepted the cash deposited in its name in payment for 500 shares of stock, which it duly issued and delivered and made full and appropriate entries on its records. One of the methods for obtaining a charter had been lawfully and deliberately followed. The payment of the $50,000 into the corporation was not a “perfunctory requirement of incorporation”, but a very substantial part of it, on the faith of which the charter was approved. As to the 500 shares of stock thus paid for and delivered, there has never been any rescission, if any there could be.
On the following day Burton borrowed $49,000 from the company, which was entered on its books as a loan, and used by him to pay another debt elsewhere. The next week, on July 1, book entries were made showing receipt by -the company of the assets, and assumption of the liabilities of Burton’s automobile sales business, at a net value of $102,532. Of this credit $49,-000 was applied to the loan of that sum due by Burton; $50,000 was applied to the payment of the remainder of the stock subscription, and the remainder put to Burton’s credit as a drawing account. By this transaction the corporation acquired on July 1 all the assets of Burton’s former business, but did not pay therefor substantially all its capital stock, but only $50,000, or one half of it. This sort of acquisition of a precedent business does not come within the provisions of the subsequently enacted Excess Profits Act of 1940 in respect of the matter here involved. These provisions cannot be stretched to cover this case because Burton may have had a general intent all the time to sell his business and acquire the corporations stock. The Texas law gave him a choice of two methods of going about it, but he had to choose. He deliberately, clearly, and consistently chose to buy half the stock for cash, and after organization to get the other half by a sale of his assets to the corporation, in a settlement of the sale. The tax consequences afterwards arising must be visited, whether more or less favorable than if he had chosen otherwise.
The Tax Court’s conclusion is supported as to what was actually done by the incor-porators’ affidavit filed with the Secretary of State, by the acceptance of the $50,000 in payment for stock, and actual issue of the stock, and by all the corporate records. There is no evidence otherwise. I would affirm the judgment.