Atlas Plywood Co. v. Commissioner

ATLAS PLYWOOD CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Atlas Plywood Co. v. Commissioner Docket No. 25797. United States Board of Tax Appeals 17 B.T.A. 156; 1929 BTA LEXIS 2345; August 27, 1929, Promulgated *2345 1. The taxpayer transferred all its assets to a second corporation, and the second corporation by a similar process transferred such assets to the petitioner, and both the taxpayer and the second corporation have been dissolved. Held that under section 280 of the Revenue Act of 1926 the petitioner is liable for the unpaid Federal income tax of the taxpayer to the extent of the value of the property it received by transfer from the second corporation. 2. Rates of depreciation of taxpayer's property for the taxable year determined. Walter A. Cooper, C.P.A., for the petitioner. R. W. Wilson, Esq., for the respondent. LANSDON *156 Under the provisions of section 280 of the Revenue Act of 1926 the respondent has determined a liability against the petitioner on account of a deficiency in income and profits tax for the year 1919, in the amount of $2,581.32, previously asserted against the Richford Manufacturing Co. The petitioner asserts that such deficiency was erroneously determined and alleges error in the computation of deductions on account of depreciation, and that in any event it is not a transferee of any assets of the original*2346 taxpayer within the meaning of the statutory provisions under which its liability is asserted. FINDINGS OF FACT. The petitioner is a corporation organized July 2, 1925, under the laws of the Commonwealth of Massachusetts. Its principal office is in Boston. It was formed by the merger or consolidation of the Nelson-Hall Co., Inc., the Veneer Products Co., and the Allen-Quimby *157 Co., three corporations which theretofore had been engaged in the same business. In such merger or consolidation it acquired for cash all the stock of the three predecessor corporations. Prior to the incorporation of the petitioner certain persons executed an escrow agreement under the terms of which the stockholders of the three predecessor corporations placed their stock in a bank subject to an option to purchase for cash. After all such stock had been surrendered and assembled the option thereon was exercised and the depositing stockholders received cash for their shares in the amount specified in the agreement. The purchasers of such stock then caused the petitioner to be incorporated with 50,000 shares of no par value stock and bonds in the amount of $1,500,000, all of which were*2347 issued to bankers who sold them to the public, and from the proceeds thereof the promoters or incorporators of the petitioner received back the amounts of cash which they had paid out in securing 100 per cent of the stock of the predecessor corporations, which, by this procedure, became the property of the petitioner. Thereafter, each of the predecessors, by proper corporate action, deeded and transferred all its assets of every description to this petitioner and thereupon dissolved. The Richford Manufacturing Co., hereinafter designated the taxpayer, was incorporated in 1898, under the laws of Vermont and was engaged in the manufacture and sale of plywood and veneer products until its dissolution. The Nelson-Hall Co., a corporation, acquired all the stock of the taxpayer for cash and shares of its own stock. The stock transaction was on the basis of share for share, and the cash payments were on terms not disclosed by the record. Something like 75 per cent of the stock so acquired was paid for in cash and the remainder by the issue of shares of the Nelson-Hall Co. On April 24, 1924, immediately after the acquisition of all its stock by Nelson-Hall Co., the taxpayer was dissolved*2348 without any formal distribution of its assets in liquidation. At date of acquisition by the Nelson-Hall Co. such assets had a book value of $135,582.46, but the record does not show whether this amount was original or depreciated cost. The tangible assets used by the taxpayer were transferred to Nelson-Hall Co. about April 24, 1924, and by such transferee were conveyed to the petitioner in July, 1925, at which time they had a value in excess of $5,000. On March 16, 1920, the taxpayer filed its income and profits-tax return for the year 1919. Upon audit thereof the Commissioner made certain adjustments as to income and invested capital and under date of February 12, 1925, asserted a deficiency in the amount of $2,581.32. On July 7, 1925, the taxpayer filed a petition requesting the redetermination of such deficiency by this Board. When such petition was *158 called for hearing on the merits there was no appearance for the taxpayer, and on motion of counsel for the respondent the proceeding was dismissed. Thereafter, the Commissioner assessed the amount of such deficiency. The assessment was not paid and on January 31, 1927, the Commissioner determined the liability*2349 for such deficiency against this petitioner as transferee of the taxpayer's assets. In the year 1919 the taxpayer owned and used tangible depreciable property which it had theretofore acquired at the costs below set forth: buildings, $35,966.85; sprinkler system, $15,714.29; and machinery and equipment, $71,298.88. In his audit of taxpayer's income and profits-tax return for such year the Commissioner computed depreciation on such assets at 3, 3, and 7 1/2 per cent, respectively. The taxpayer was engaged in the manufacture of plywood, veneers, and products therefrom. In its operations each log was boiled for 12 hours and by the use of lathes designed for such purpose the sheets to be used for veneer and plywood were sliced from the logs softened by boiling, and were then dried in especially designed drying rooms. Afterwards the sheets were glued together, two or more plies to the sheet, subjected to great pressure, trimmed, and either sold as plywood or veneer or manufactured into boxes and other products for sale. The large vats of hot water in which the logs were boiled and softened constantly give off volumes of steam which permeates the entire building and results in*2350 rapid deterioration of the structure and its constituent parts. There is also considerable vibration in the operation of the lathes, presses and other heavy power driven machinery. In the year 1919 the petitioner's plant was operated overtime and for the most of the years for at least 12 or 15 hours daily. The buildings owned by the taxpayer in the taxable year were of frame construction, with open studding on the inside and clapboard siding outside. The sprinkler system was a part of the building in which it was installed. The useful life of such building in northern Vermont, and of the machinery and equipment for the purposes of the taxpayer, is 10 years. OPINION. LANSDON: The record shows that immediately following the acquisition of all its stock by Nelson-Hall Co. the taxpayer was dissolved without any distribution of regular or liquidating dividends. In such circumstances it must be presumed that all the assets of the dissolved corporation were acquired by its only stockholder prior to or at the date of dissolution. It is clear, therefore, that, by action of law, the Nelson-Hall Co. became the transferee of all the assets of the taxpayer at date of dissolution*2351 thereof. ; . In 1925 the petitioner, then owning all the stock of Nelson-Hall Co., acquired the assets *159 of that concern, including the property transferred to it by the taxpayer less than one year before. The directors of Nelson-Hall Co. indulged in some sort of corporate action, the nature of which is not clear, but the effect was to divest that concern, then about to be dissolved, of title to all its assets and transfer the same to the petitioner. Whether such action was a distribution to the stockholders or a transfer by deed or bill of sale to the petitioner is not material, since the petitioner was the only stockholder and received the assets without consideration other than the stock and cash it paid for the stock of the Nelson-Hall Co. In each instance the procedure employed was in effect and in fact a distribution of all the assets of a corporation in process of dissolution to its stockholders. It is now well established that stockholders of a corporation in process of dissolution receive the property subject to the debts of the dissolved corporation. In *2352 , No. 17,944, the court is unable to distinguish between a dissolved corporation stripped of assets by a distribution to stockholders and one that is insolvent. He says: * * * If the capital stock is a trust fund [and he holds that it is], then it may be followed by the creditors into the hands of any persons having notice of the trust attaching to it. As to the stockholders themselves, there can be no pretense to say, that, both in law and fact, they are not affected with the most ample notice. The doctrine of following trust funds into the hands of any persons, who are not innocent purchasers, or do not otherwise possess superior equities, has long been established. * * * In , Judge Van Valkenburgh says: It must be conceded that if the corporation was subject to this tax, and if its property distributed upon dissolution constitutes a trust fund on behalf of creditors or those entitled to be paid out of its assets, the stockholders who received its property in distribution must be held to respond to the extent of their receipts under such distribution. *2353 The trust fund doctrine has been held not to apply to solvent going concerns; but dissolution, in this respect, has the same effect as insolvency. , etc.; , etc. Its property then becomes a trust fund for the benefit of creditors and those sustaining a like position under the law; and, if that property has been distributed to stockholders, it remains impressed with the same trust. Citing and many other cases. * * * It has, therefore, been held that the assets of a dissolved corporation may be followed as in the nature of a trust fund, into the hands of stockholders, and that, where the debt was not judicially established by action against the corporation before its dissolution, it may be presented and its validity determined in the equitable suit to enforce such liability of the stockholders. Citing ; *2354 . *160 As the taxpayer and the primary transferee has each divested itself of title to assets subject to distraint for Federal taxes due and unpaid and each is dissolved, we think it follows that the petitioner, having acquired such assets still impressed with a trust in favor of the creditors of the taxpayers in the manner set forth above, is liable under section 280 of the Revenue Act of 1926 for any part of the deficiency asserted against the taxpayer that may be found on redetermination to be due and unpaid, but only to the extent of the value of the assets originally owned by the taxpayer which it acquired from the Nelson-Hall Co. . Upon the evidence we are convinced that a composite rate of 10 per cent of the cost of the petitioner's tangible property is a reasonable basis for the computation of depreciation of the taxpayer's tangible assets in the year 1919. Decision will be entered under Rule 50.