Waterproofed Products Co. v. Commissioner

WATERPROOFED PRODUCTS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Waterproofed Products Co. v. Commissioner Docket No. 27419. United States Board of Tax Appeals 25 B.T.A. 648; 1932 BTA LEXIS 1493; February 26, 1932, Promulgated *1493 Petitioner, a new corporation organized by taxpayer corporation to take over its business, acquired all the assets of the taxpayer and issued its stock therefor. The old corporation, while not legally dissolved, is not in business and its charter has been suspended under California law for failure to pay franchise taxes. Held that petitioner is liable in equity as a transferee under section 280. W. H. James and W. F. Williamson, Esq., for the petitioner. J. A. Lyons, Esq., and E. L. Updike, Esq., for the respondent. TRAMMELL *649 This proceeding is for the redetermination of an alleged liability proposed for assessment against petitioner under section 280 of the Revenue Act of 1926, as transferee of the assets of the Gold Medal Waterproofing Company and representing deficiencies in income tax of the latter company determined for fiscal years ending March 31, 1918, 1919, 1920, and 1921, in the respective amounts of $11,735.58, $14,795.13, $11,342.38, and $1,493.90. No question is raised as to the correctness of the deficiencies determined, the only issue submitted being upon this petitioner's liability therefor. FINDINGS*1494 OF FACT. The Gold Medal Waterproofing Company, a corporation, hereinafter referred to as the taxpayer, in 1923, and for some years prior to that date, operated in Oakland, California, a business of water-proofing clothing. In the latter year the directors and stockholders of this corporation conceived the idea of refinancing the business by creation of a new corporation, and thereupon incorporated, under the laws of California, the Waterproofed Products Company, the petitioner herein. Thereupon petitioner, on February 20, 1923, entered into a written contract with the taxpayer to take over all of its assets of every character and valued on the books at $95,967.76. Assets valued at about $2,000 were transferred back to the old corporation, which it afterwards disposed of. By this contract petitioner agreed to assume certain specific indebtedness of the taxpayer amounting to $62,967.76, which total included a first-mortgage bonded indebtedness of $50,000, and to issue to the taxpayer $132,000 par value of its capital stock. The net value of assets received by this petitioner was $33,000. The indebtedness assumed under this contract did not include the liabilities for Federal*1495 income taxes here involved and which at that time had not been determined by respondent. This contract was fully performed, the assets being conveyed to petitioner and stock being issued to the taxpayer as agreed upon. Certain additional stock of the petitioner was issued and sold at par to other parties. The stock received for the assets had a value equal at least to the net value of assets. Upon the performance of the contract in question the taxpayer ceased doing business. OPINION. TRAMMELL: The correctness of the income-tax deficiencies determined in the total amount of $39,366.99 against the taxpayer is not disputed by the petitioner. It merely contends that it is not liable at law or in equity for payment of such liability, as it was a purchaser *650 for value, the stock issued by it to the taxpayer having a par value and actual value in excess of the net value of the assets it acquired. Petitioner acquired the assets of the taxpayer corporation in exchange for its capital stock, which had a value equal at least to that of the assets, and claimed by the taxpayer to be in excess of that value, and agreed as a part of the consideration to pay certain specific*1496 liabilities, these being all of the known liabilities of the taxpayer. These liabilities did not include that now asserted for Federal taxes. It is well settled that where one corporation sells its assets to another for stock of the 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 assets received, as such a sale is a fraud upon the creditors and the purchaser is a party to the fraud. ; ; . This rule has been applied to cases where the consideration paid was capital stock of the purchasing corporation delivered to the seller where the transaction resulted in a fraud upon creditors. ; ; *1497 . It is also well established that where a new corporation is organized to take over assets of another corporation for stock, the new company being simply a reincorporation or reorganization of the old, with the same assets and business, the new corporation is liable for the debts of the old. See ; ;. See also Thompson on Corporations, sec. 6517, and cases cited in notes in ; ; . In this case the evidence discloses that the directors of the Gold Medal Waterproofing Company, the old corporation, organized the new corporation to carry on the business formerly carried on by the old company with the same assets, except for a tract of land, valued at about $2,000. This land, while conveyed to the new company, was reconveyed to the Gold Medal Company and it disposed of it. The old company was kept in technical legal existence, although it had no assets, and failed*1498 to pay its franchise tax to California. As a result it became suspended as a corporation. For all practical purposes it was the same as if it had been legally dissolved. *651 We think that the facts in this case distinguish it from our decision in the . See . Here the new corporation was in every substantial sense a reincorporation or reorganization of the old, with the same assets and business acquired for stock. The decisions of the courts are practically uniform in holding that under such circumstances the creditors can follow the assets into the new corporation. The new corporation under this principle is liable to the extent of the value of the assets received, to wit, $33,000. We therefore hold that the petitioner is liable as a transferee. Reviewed by the Board. Judgment will be entered under Rule 50. MURDOCK, GOODRICH, and LEECH concur in the result.