Metropolitan Sec. Corp. v. Commissioner , 19 B.T.A. 299 ( 1930 )

METROPOLITAN SECURITIES CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Metropolitan Sec. Corp. v. Commissioner

Docket No. 27956.

United States Board of Tax Appeals

19 B.T.A. 299; 1930 BTA LEXIS 2428;

March 18, 1930, Promulgated

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">*2428 The petitioner held not liable for the taxes due from the Union Finance Co. for the years 1921 and 1922.

H. A. Hauxhurst, Esq., for the petitioner.

J. A. Lyons, Esq. and J. E. Mather, Esq., for the respondent.

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MARQUETTE

">*299 This proceeding is for the determination of liabilities in income and profits taxes asserted by the respondent against the petitioner ">*300 under section 280 of the Revenue Act of 1926, as transferee of the Union Finance Co. The deficiencies are $6,295.21 for the year 1921 and $6,951.11 for the year 1922.

FINDINGS OF FACT.

The petitioner is a corporation organized under the laws of the State of Ohio in July, 1926, with its office and place of business at Cleveland.

The Metropolitan Securities Co. is an Ohio corporation organized in February, 1917, and until September, 1926, it was engaged in business at Cleveland, Ohio. It had substantial property and assets, and outstanding capital stock of approximately $450,000, consisting of both common stock and 700 shares of preferred stock. The authorized preferred stock was 10,000 shares of the par value of $100 per share. In the latter part of the year">*2429 1922 the Metropolitan Securities Co. made an offer to purchase all of the assets of the Union Finance Co., an Ohio corporation engaged in the business of financing manufacturers and jobbers at Cleveland, Ohio, and to pay therefor shares of the preferred stock of the Metropolitan Securities Co. equal in number to the shares of the capital stock of the Union Finance Co. then outstanding, and in addition to assume all of the liabilities of the Union Finance Co. existing on the date of transfer, as shown by its books. Said offer of the Metropolitan Securities Co. was accepted by the board of directors of the Union Finance Co. on November 2, 1922, and was approved by the stockholders on December 4, 1922. The sale was consumated on January 4, 1923, by a bill of sale of that date, which is in the words and figures following:

BILL OF SALE

THE UNION FINANCE COMPANY TO THE METROPOLITAN SECURITIES COMPANY

The Union Finance Company, a corporation duly organized and existing under and by virtue of the laws of the State of Ohio, by its President and Secretary, thereunto duly authorized by a Resolution adopted at a special meeting of the stockholders of the said Company held on December 4, 1922, for">*2430 and in consideration of the sum of Ten Dollars ($10.00) and other valuable considerations paid to it by The Metropolitan Securities Company, receipt whereof is hereby acknowledged, does hereby grant, bargain, sell, transfer and deliver unto the said The Metropolitan Securities Company, its successors and assigns, the following described property now owned by it, to-wit: all furniture, books, and other movable property now used in connection with its business in its office No. 1540 Hanna Building, Cleveland, Ohio, all rights, credits, accounts receivable, bills receivable, notes receivable, and all claims, demands and other choses in action, whatever, all securities or other evidences of indebtedness, all moneys on hand or on deposit in bank, and all property and assets of every kind and nature which the said The Union Finance Company owns and has the right to convey, subject only to such accounts payable or other obligations owing by ">*301 The Union Finance Company on the date of this instrument, as shown by its books, which obligations The Metropolitan Securities Company hereby assumes and agrees to pay.

To have and to hold the said described property unto the said, The Metropolitan">*2431 Securities Company, its successors and assigns forever. And the said The Union Finance Company hereby convenants and agrees with the said The Metropolitan Securities Company, its successors and assigns, forever. And the said The Union Finance Company hereby convenants and agrees with the said The Metropolitan Securities Company, its successors and assigns, that the said The Union Finance Company is the lawful owner of all of the property intended to be conveyed by this instrument, that it has good right to sell the same, that the same is free and clear of all encumbrances whatever, and that the said Union Finance Company will warrant and defend the same against all lawful claims and demands whatever.

In witness whereof the name of the said The Union Finance Company is hereunto subscribed and incorporate seal hereunto affixed by its president and secretary at Cleveland, Ohio, this 4th day of January, 1923.

THE UNION FINANCE COMPANY.

By: PAUL GUNDLING, President.

L. H. STERNHEIMER, Secretary.

Signed, sealed and delivered in the presence of -

L. H. CLOSE. H. MAPES.

The Metropolitan Securities Co. took over all of the property of the Union Finance Co. and">*2432 issued to that company one certificate for 5,886 shares of the preferred stock of the Metropolitan Securities Co. On January 18, 1923, this stock certificate was delivered by the Union Finance Co. to the Guardian Trust Co. of Cleveland, Ohio, which was the transfer agent of the Metropolitan Securities Co., with instructions to issue certificates of the Metropolitan Securities Co. stock to the stockholders of the Union Finance Co. share for share, upon the surrender by the stockholders of the Union Finance Co. of their certificates of stock in that company. Pursuant to said instructions the Guardian Trust Co. of Cleveland distributed to the stockholders of the Union Finance Co. said 5,886 shares of the preferred stock of the Metropolitan Securities Co. and said stockholders surrendered their shares of the capital stock of the Union Finance Co. The Metropolitan Securities Co. was not a stockholder in the Union Finance Co.

The value of the assets transferred by the Union Finance Co. to the Metropolitan Securities Co. was about $500,000. The preferred stock of the Metropolitan Securities Co. issued to the Union Finance Co. and distributed to its stockholders had an actual value">*2433 of $100 per share.

Immediately upon the transfer of its assets to the Metropolitan Securities Co., the Union Finance Co. ceased to carry on any business On February 14, 1925, the charter of the Union Finance Co. was canceled for nonpayment of taxes.

">*302 In September, 1926, the petitioner exchanged shares of its capital stock for all of the shares of the capital stock of the Metropolitan Securities Co., both preferred and common, on a share-for-share basis. It then took over all of the property of the Metropolitan Securities Co. and assumed the debts and liabilities of the Metropolitan Securities Co. as a part of the consideration for the transfer of the property. The Metropolitan Securities Co. is still in existence, but it has no assets.

The Union Finance Co. filed returns of income for the years 1921 and 1922. The respondent, upon audit of the returns, determined that there are deficiencies in tax in the amount of $6,295.21 for the year 1921 and $6,951.11 for the year 1922. The respondent subsequently asserted the amount of said deficiencies against the petitioner as a transferee of the Union Finance Co.

OPINION.

MARQUETTE: This proceeding involves additional">*2434 taxes claimed by the respondent to be due from the Union Finance Co. for the years 1921 and 1922, which he proposes to assess against the petitioner as a transferee of that company, under authority of section 280(a)(1) of the Revenue Act of 1926, which provides that:

SEC. 280. (a) The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this title, (including the provisions in case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds):

(1) The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this title or by any prior income, excess-profits, or war-profits tax Act.

The petitioner contends that the Metropolitan Securities Co. was a purchaser for value of the assets of the Union Finance Co., and that">*2435 there is no liability on its part, either at law or in equity, for the taxes in question.

The record in this proceeding establishes that in 1926 the petitioner acquired all of the assets of the Metropolitan Securities Co. and assumed all of its debts and liabilities. The petitioner is, therefore, liable for the taxes of the Union Finance Co. for the years 1921 and 1922, provided there is any liability for such taxes on the part of the Metropolitan Securities Co.

It is clear that the Metropolitan Securities Co. is not liable under the contract made between it and the Union Finance Co. to pay the taxes under consideration. The contract provided as a part of the ">*303 consideration for the purchase of the assets of the Union Finance Co., that the Metropolitan Securities Co. assumed and would pay such accounts payable and other obligations of the Union Finance Co. as were shown by its books as of January 4, 1923. The taxes involved in this proceeding were not determined or proposed for assessment until subsequent to that date and did not constitute any part of the known liabilities of the Union Finance Co. which the Metropolitan Securities Co. expressly agreed to assume. ">*2436 We must, therefore, inquire whether independently of the contract there is any obligation on the part of the Metropolitan Securities Co. to pay these taxes.

The facts herein establish that the Metropolitan Securities Co. desired to purchase the assets of the Union Finance Co. and that it offered to pay therefor a certain number of shares of its own preferred stock and to assume the liabilities of the Union Finance Co. as then shown by its books. This offer was accepted and the Union Finance Co. conveyed to the Metropolitan Securities Co. all of its then assets, subject to the liabilities as shown by its books, and received in exchange 5,886 shares of the preferred stock of the Metropolitan Securities Co. The net value of the assets was about $500,000 and the value of the preferred stock of the Metropolitan Securities Co. received in payment of said assets was $100 per share, or a total value of $588,600. When the transaction was completed the Union Finance Co. was still the owner of assets at least equal in value to the assets it conveyed to the Metropolitan Securities Co.

It is well settled that where one corporation sells its assets to another corporation for stock of the">*2437 latter which is issued directly to the stockholders of the seller, thus leaving the seller without assets to satisfy its creditors, the purchaser is liable to the creditors of the seller to the extent of the value of the property received, the sale being in fraud of creditors and the purchaser being a party to the fraud. ; ; ; ; ; . And this rule has been applied in some instances where the consideration paid was capital stock of the purchasing corporation delivered to the seller, but the reason for the application of the rule was that in those cases the transactions amounted to fraud on existing creditors. ; ">*2438 ; . In the instant proceeding we see no reason for applying that rule. The Metropolitan Securities Co. purchased the assets of the Union Finance Co. and, after making provision for the satisfaction of all of the known liabilities of that company, paid to the Union Finance Co. shares of its, the Metropolitan Securities ">*304 Co.'s preferred stock, which shares were at least equal in value to the assets purchased. The seller at the conclusion of the transaction was possessed of assets equal in value to those it had sold, and those assets were amply sufficient to meet the tax claim that was subsequently determined and asserted. The transaction shows on its face that it was not made with intent to defraud, and it did not amount to a fraud on any existing creditor, in that it did not leave the seller without assets or change the situs of the assets so that creditors could not reach them. Under the circumstances we are of opinion that the Metropolitan Securities Co. was a purchaser for value of the assets of the Union Finance Co., and that it is not liable for the taxes involved">*2439 herein.

Reviewed by the Board.

Judgment will be entered for the petitioner.

MORRIS dissents on the authority of .