Wire Wheel Corp. v. Commissioner

WIRE WHEEL CORPORATION OF AMERICA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Wire Wheel Corp. v. Commissioner Docket No. 26555. United States Board of Tax Appeals 16 B.T.A. 737; 1929 BTA LEXIS 2521; May 28, 1929, Promulgated *2521 Section 280 of the Act of 1926 provides only an additional means of procedure against a transferee, and such procedure is available to respondent only if available remedies against the transferor would be unavailing. Hugh Satterlee, Esq., and A. S. Lisenby, Esq., for the petitioner. John D. Foley, Esq., for the respondent. SIEFKIN *737 This is a proceeding under section 280 of the Revenue Act of 1926 to subject the petitioner to the payment of a deficiency in income and profits taxes asserted by the respondent in the amount of $177,918.10 for the three-month period ended March 31, 1917, against the Houk Manufacturing Co., Inc. By order, the hearing was limited to the issues of the statute of limitations and the constitutionality and applicability of section 280 of the Revenue Act of 1926, and was continued otherwise. FINDINGS OF FACT. The Houk Manufacturing Co., Inc., was organized in October, 1913, under the laws of the State of New York, with an authorized capital stock of 4,000 shares of preferred stock and 5,000 shares of common stock, all of the par value of $100 per share. It manufactured detachable wheels, portions of wheels, *2522 and wire wheels for automotive vehicles. The petitioner was organized on January 5, 1917, under the laws of the State of New York, with an authorized capital stock of 50,000 shares of preferred stock at the par value of $100 per share, and 100,000 shares of common stock without par value, for the purpose of acquiring patents in the United States pertaining to wire wheels and manufacturing of the wheels. On or about April 1, 1917, the petitioner acquired the entire issue and outstanding capital stock of the taxpayer. *738 On July 23, 1917, the Houk Manufacturing Co., Inc., was merged into the petitioner under section 15 of the stock corporation law of the State of New York. It is stipulated that the assets of the Houk Manufacturing Co., Inc., when the merger was effected, had a value in excess of the deficiency (and interest) at issue. On or about April 27, 1918, within the period of extension granted therefor the petitioner filed with the collector of internal revenue at Buffalo, N.Y., an income and profits-tax return for 1917. Before filing that return an officer of the petitioner visited the collector's office at Buffalo and requested information of a deputy*2523 collector as to method of filing returns for the Houk Manufacturing Co., Inc., and the petitioner, and was instructed to make out one return for both companies. Returns were accordingly prepared on that basis and the return of the Wire Wheel Corporation of America purported to include the income of the Houk Manufacturing Co., Inc., for the first three months of 1917 and its own income for the remainder of the year. Schedules attached to the return segregated various items of income and expenses of the Houk Manufacturing Co., Inc., and the petitioner. On September 23, 1922, a revenue agent made a separate report upon the income of the Houk Manufacturing Co., Inc., for the period January 1, 1917, to March 31, 1917, and arrived at a deficiency in tax for that period of $219,594.49. On February 8, 1923, the Commissioner of Internal Revenue issued a letter to the Houk Manufacturing Co., Inc., indicating an additional tax liability for the same period of $229,450.58. On or about February 13, 1923, Houk Manufacturing Co., Inc., by its president and D. H. Blair, Commissioner of Internal Revenue, executed an income and profits-tax waiver covering any taxes due from the Houk Manufacturing*2524 Co. for the year 1917, and consenting to a determination, assessment and collection thereof for one year from the date it was signed by the taxpayer. On February 7, 1924, the Commissioner of Internal Revenue issued a letter to the Houk Manufacturing Co., indicating an additional tax liability for 1917 of $115,090.68 and stated that a jeopardy assessment of that amount would be made. A jeopardy assessment in the amount of $115,090.68 was made against the Houk Manufacturing Co., on February 9, 1924. The Houk Manufacturing Co., Inc., thereupon filed claim without bond for the abatement of such tax. On November 23, 1925, the Commissioner of Internal Revenue issued another letter to the Houk Manufacturing Co., Inc., with respect to its tax liability for 1917, indicating a deficiency in tax of $61,868.88 in addition to the deficiency of $115,090.68 theretofore assessed, and rejected the taxpayer's claim for the abatement of said $115,090.68. *739 On January 9, 1926, the Commissioner of Internal Revenue issued a deficiency letter addressed to the Houk Manufacturing Co., Inc., confirming the determination of a deficiency of $61,868.88. On May 29, 1926, the Commissioner*2525 assessed against the Houk Manufacturing Co., Inc., additional income and profits taxes for 1917 in the amount of $61,868.88, together with interest in the amount of $958.54. On February 15, 1927, the Commissioner addressed a letter to the petitioner proposing an assessment against it of $177,918.10, said to constitute its liability as transferee of the assets of Houk Manufacturing Co., Inc. No part of said additional tax has been paid and no suit or proceeding for the collection thereof has been begun other than the present proceeding. The assets of the Houk Manufacturing Co., Inc., at the time of the merger had a fair value in excess of $177,918.10, the amount of tax in issue plus interest thereon. The Houk Manufacturing Co., Inc., as such, filed no income or profits-tax return covering the period from January 1, 1917, to March 31, 1917. OPINION. SIEFKIN: As we view this case it is clear that the petitioner is not liable as a transferee under section 280 of the 1926 Act. Section 15 of the New York stock corporation law, under which the Houk Manufacturing Co. and petitioner were merged in 1917, reads as follows: SEC. 15. Merger. Any domestic stock corporation*2526 and any foreign stock corporation authorized to do business in this state lawfully owning all the stock of any other stock corporation organized for, or engaged in business similar or incidental to that of the possessor corporation may file in the office of the secretary of state, under its common seal, a certificate of such ownership, and of the resolution of its board of directors to merge such other corporation, and thereupon it shall acquire and become, and be possessed of all the estate, property, rights, privileges and franchises of such other corporation, and they shall vest in and be held and enjoyed by it as fully and entirely and without change or diminution as the same were before held and enjoyed by such other corporation, and be managed and controlled by the board of directors of such possessor corporation, and in its name, but without prejudice to any liabilities of such other corporation or the rights of any creditors thereof. Any bridge corporation may be merged under this section with any railroad corporation which shall have acquired the right by contract to run its cars over the bridge of such bridge corporation. Section 15 is now substantially incorporated*2527 in section 85 of the laws of 1923. *740 Where a corporation is merged into a second corporation under this statute, the first corporation's "existence is retained for the one purpose of carrying out in good faith the reservation in the statute of the rights of the creditors thereof * * * the * * * company may be sued," and a creditor "obtaining judgment against the * * * company, may by execution or otherwise, reach the assets of such company as though the merger had never taken place." ; . That case held that the merging corporation, which continued in existence, was not liable to the creditors of the merged corporation. The action was not an equitable one, but the court cites ; , to the effect that before such creditors may seek the aid of equity against the merging corporation they must recover judgment against the debtor corporation and show the return of execution thereon unsatisfied. That the Irvine case, supra, did not lightly reach such conclusion is shown by excerpt from that opinion as follows: *2528 The provisions of the merger statute and of the consolidation statute were considered together by the Legislature in 1890, and they have since been considered by it from time to time. There would seem to be little or no objection and much reason for making a corporation which takes all of the assets of other corporations by consolidation or merger liable for the indebtedness of such consolidated or merged corporation. The acceptance of such property could be made an assent to such liability. The whole matter was, however, clearly before the Legislature for its consideration, and it was considered by it, and it made a corporation accepting the assets of other corporations under the statute authorizing the consolidation of corporations liable for the indebtedness of the corporations so consolidated. It declined so to do in the case of corporations transferring assets under the merger statute. The rights of creditors were not overlooked, as the Legislature expressly provided that the rights of such creditors should be preserved and that the merger should be without prejudice as to them. * * * * * * The statute, which is the authority for the transfer of the property, if any, *2529 from the Block Company to the gas company, does not provide that the possessor company shall assume the indebtedness of the merged company, but expressly provides that the rights of cred tors of the merged company are preserved. The statute was not carelessly drawn, and the omission to make the possessor company liable for the debts of the merged company was not an oversight. It is the duty of the court to enforce the provisions of the statute without reading into it affirmative provisions. The plaintiff does not claim to recover in equity; but, if he did, he would be required to first take other steps preliminary thereto. Such decision is the settled law of New York State. The later decision in the case of ; , while it holds the merging corporation for a liability of the merged corporation, merely confirms the holding in the Irvine case, supra, for in the later decision the preliminary *741 step of obtaining judgment against the merged corporation, followed by return of execution thereon unsatisfied, had been taken. *2530 The Federal courts also require that the remedies against a transferor be exhausted to no avail before proceedings can be initiated against a transferee. See , which decision was cited in the report of the Senate Finance Committee (p. 29) on section 280 of the Revenue Act of 1926. In , the court said: A judgment creditor's bill is in essence an equitable execution comparable to proceedings supplementary to execution. See . * * * It is true that the bill to reach and apply the assets distributed among the stockholders cannot, as a matter of equity jurisdiction and procedure, be filed until the claim has been reduced to judgment and the execution thereon has been returned unsatisfied, . Thus it seems clear that were it not for section 280 the respondent could not have proceeded against petitioner in equity under the trust fund theory until he had exhausted available remedies against the Houk Company. It seems equally clear that he has not*2531 exhausted such remedies. The facts show that deficiency letters were mailed to the Houk Company and such notices were followed by assessments. We are not improssed with respondent's contention that the assessments were the equivalents of judgment. Even if we assume an assessment to be the equivalent of a judgment, it seems clear from the above cases that (aside from section 280) the respondent had not complied with the prerequisites necessary to maintain a suit against the petitioner. The Houk Company still remained in existence. The cases cited and discussed show that not only must judgment be obtained against it, but that attempt must be made to collect under such judgment. The record does not show any attempt at collection under the assessment, for, so far as we know, notice and demand for payment was never served on that company. There remains section 280, which provides as follows: (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*2532 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 refund): (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. (2) The liability of a fiduciary under section 3467 of the Revised Statutes in respect of the payment of any such tax from the estate of the taxpayer. Any *742 such liability may be either as to the amount of tax shown on the return or as to any deficiency in tax. In , concerning this provision we said: By this section it will be noted that no new liability is created on the part of the transferee, but merely a method of enforcement of such liability as is already his at law or in equity by reason of the circumstances under which he acquired the property of the taxpayer or by reason of any prior lien attaching to the property*2533 at the time of its acquirement. Respecting this section we quote from the Senate Finance Committee's report, pp. 29 and 30: * * * It is probable that under existing law the Government may proceed in equity by suit against the transferee if the transferor no longer exists (that is, in the case of a corporation, is dissolved, or in the case of an individual, is dead), and if the liability of the transferor has not been judicially established by action against the taxpayer before dissolution or death - Updike v.United States, decided Circuit Court of Appeals, eighth circuit, December 1, 1925. If, however, the transferee is still in existence the Government must proceed to obtain judgment against the transferor in an action at law and then proceed against the transferee in equity by a creditor's bill to satisfy the judgment. The creditor's bill is also available if the taxpayer has ceased to exist, but his tax liability was liquidated by judicial action prior to the dissolution or death. - . In all the above cases the transferee is not liable for the tax of the transferor, but is by reason of the receipt*2534 of the assets subject to an independent liability in his own person and payable out of his own estate, arising under the trust fund doctrine or some similar theory. * * * Under existing law proceedings for the enforcement of liability such as those heretofore discussed are solely by court proceedings. No proceedings before the board for the redetermination of a deficiency and for the ultimate enforcement by assessment and distraint may be had. It is the purpose of the committee's amendment to provide for the enforcement of such liability to the Government by the procedure provided in the act for the enforcement of tax deficiencies. It is not proposed, however, to define or change existing liability. The section merely provides that if the liability of the transferee exists under other law then that liability is to be enforced according to "the new procedure applicable to tax deficiencies." Manifestly this section was designed only to allow, and does only allow, the respondent an additional means of procedure against a transferee only if available remedies against a transferor would be unavailing. The same conditions precedent must be met in such a proceeding, however, *2535 as must be met before an action in equity to enforce the same liability. No new liability is created and the Act does not purport to provide for a proceeding against the transferee before action would otherwise lie against such transferee. On the record before us, it is apparent that the respondent is attempting a *743 short cut not contemplated by the statute. Since there is no liability, judgment must be entered for the petitioner. Reviewed by the Board. Judgment will be entered for the petitioner. MILLIKEN MILLIKEN, concurring in the result: The applicability of the statute of limitations results in there being no liability on the part of the transferee for the tax of the transferor. Such being true, I deem it unnecessary to go into the unusual New York statute upon which the opinion is based.