Murchison v. Commissioner

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. , PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Murchison v. Commissioner Docket Nos. 77945, 77946, 78093, 78094, 78095, 78096. United States Board of Tax Appeals 35 B.T.A. 1023; 1937 BTA LEXIS 812; April 27, 1937, Promulgated *812 A Texas joint stock association transferred all of its assets to two corporations for their entire capital stock, which was issued to such association and by it distributed, in dissolution, to the owners of beneficial interest certificates therein. The petitioners, two being the purchasing corporations, and the remainder being the individual beneficial owners of the association who received such capital stock in exchange for their certificates, having received assets of value in excess of the deficiency found by the respondent against the association, are all severally liable as transferees under the provisions of section 280 of the Revenue Act of 1926. John B. King, Esq., W. Clif Klein, Esq., and L. E. Cahill, Esq., for the petitioners. John F. Greaney, Esq., F. L. Van Haaften, Esq., and Henry H. Surface, Esq., for the respondent. MORRIS *1024 The respondent having determined deficiencies in income tax of $23,895.48 and $21,604.14, for the years 1925 and 1926, respectively, against the Murchison & Fain Oil Co., and having proposed such deficiencies against each of these petitioners, as transferees of the assets of said company under*813 the provisions of section 280 of the Revenue Act of 1926, they contest that action on the sole ground that they are not liable as such transferees. FINDINGS OF FACT. The petitioners - except the Murchison Oil Co. and Fain-McGaha Oil Corporation - are individuals, residents of the State of Texas. The Murchison & Fain Oil Co. was a trust, operating as a joint stock association, the beneficial interests in which were entirely owned by those individuals, to wit, C. W. Murchison, E. R. Fain, L. D. Fain, and Charles P. McGaha, on January 1, 1927, all of whom were then, as they are now, solvent and financially able to respond for the debts of that association. On January 1, 1927, the aforesaid Murchison Oil Co. and Fain-McGaha Oil Corporation were organized and incorporated under the laws of the State of Texas, and at or about which time the Murchison & Fain Oil Co. transferred all of its properties and assets to these two corporations in exchange for all of the capital stock of the said two newly organized corporations, the Murchison Oil Co. receiving seven-sixteenths of such properties and assets, and the Fain-McGaha Oil Corporation the remaining nine-sixteenths. Immediately*814 thereafter the Murchison & Fain Oil Co. distributed the capital stock of these two corporations, so received for its assets, to the holders of beneficial interests therein in proportion to their respective interests, it receiving in exchange their shares of beneficial interests. The stock received by each individual herein had a market value in excess of $75,000, and the assets received by the Murchison Oil Co. and Fain-McGaha Oil Corporation had a net value in excess of $131,250 and $168,750, respectively. The transfers above from the Murchison & Fain Oil Co. to the Murchison Oil Co. and Fain-McGaha Oil Corporation have been treated as nontaxable exchanges and reorganizations within the meaning of section 203 of the Revenue Act of 1926. The Board entered its memorandum opinion on August 29, 1933, in Murchison & Fain Oil Co., Docket Nos. 45425 and 48499, finding the deficiencies here in controversy of $23,895.48 and $21,604.14 for the respective taxable years, and entered its decisions thereunder for such amounts on August 31, 1933. These amounts were certified to the second collection district of Texas for assessment on the Commissioner's *1025 assessment list of December 22, 1933. *815 Two formal demands were made for payment of said amounts, one on December 30, 1933, and another on January 11, 1934. A warrant of distraint was duly issued and, there being no return and no collection (nor has payment yet been made), a notice of tax liens was filed. On January 9, 1934, Charles P. McGaha as "Former Vice President" of the Murchison & Fain Oil Co., executed and tendered formal offer in compromise to the respondent, stating: The taxpayer Murchison & Fain Oil Company, a trust estate, is no longer in existence. It disposed of all of its properties and ceased to do business in the year 1927. It is at the present time without funds or property of any kind or character - real, personal, or mixed. For this reason there is not attached hereto any balance sheet, and it is unable to respond in whole or in part to the demand being made upon it for additional taxes and interest for the years 1925 and 1926. The amount offered in compromise of the liability of the taxpayer is not tendered herewith, but attached hereto is a letter from Fain-McGaha Oil Corporation, a Texas corporation, with its principal office located in Wichita Falls, Texas, and Murchison Oil Company, a*816 Texas corporation, with its principal office at Dallas, Texas, agreeing to pay on behalf of the taxpayer (for the reasons set forth in said letter) the amount offered in compromise. The letter of the Fain-McGaha Oil Corporation and Murchison Oil Co., referred to in said offer in compromise, addressed to the collector of internal revenue at Dallas, Texas, and signed by E. R. Fain, as president of the Fain-McGaha Oil Corporation and by C. W. Murchison, as president of the Murchison Oil Co., is as follows: There is being executed this day in the name of the Murchison & Fain Oil Company, a trust estate, an offer in compromise of the additional income taxes and interest adjudged against the Murchison & Fain Oil Company by the United States Board of Tax Appeals for the years 1925 and 1926. The Murchison & Fain Oil Company ceased to do business and went out of existence in the year 1927, and does not possess any assets or properties of any kind or character. It is therefore unable to obtain funds to pay the taxes and interest assessed or to tender the amount of the offer. The undersigned, Murchison Oil Company and Fain-McGaha Oil Corporation, acquired substantially all of the*817 properties of the Murchison & Fain Oil Company in 1927. The liability of the Murchison & Fain Oil Company for additional taxes for the years in question had not been ascertained at the time its properties were acquired by the undersigned corporations, nor was such liability known to exist. Neither did the undersigned companies assume the payment of such liability. Notwithstanding this, however, and without conceding that the undersigned corporations did not acquire such properties for a valuable consideration, the undersigned corporations, because of their desire to avoid probable long drawn out and costly litigation, have agreed to and obligate themselves to advance for the account of Murchison & Fain Oil Company, a trust estate, the amount of the offer submitted in compromise, when, as, and if the same is accepted, and provided that suitable terms can be arranged so that the payment of such amount can be made in an orderly manner. *1026 OPINION. MORRIS: The respondent has the burden of proof in the only issue submitted for consideration, i.e., whether these petitioners, or any of them, are transferees and liable in law or in equity for the deficiencies in tax of*818 the Murchison & Fain Oil Co. for the years 1925 and 1926. It is shown that the Murchison & Fain Oil Co. was a trust estate, operating as a joint stock association, with beneficial interests in these individual petitioners; that on or about January 1, 1927, said association transferred all of its properties and assets to two newly organized corporations, the Murchison Oil Co. and Fain-McGaha Oil Corporation, receiving in exchange therefor capital stock having an aggregate market value of at least $300,000, which stock was immediately distributed to the owners of beneficial interests. We are satisfied that the transfer in question left the association without assets with which to pay the proposed tax and that each of the present petitioners received assets of value in excess thereof. Action against petitioners Murchison-Fain Oil Co. and Fain & McGaha Oil Corporation is defended under the principle of ; petition for review dismissed at , wherein we held that the purchasing corporation was not liable for taxes due from the selling corporation in a transaction involving the issuance of*819 stock for assets. Pointing out that when the transaction was completed the selling corporation was still the owner of assets - stock of the purchasing corporation - at least equal in value to the assets conveyed to the purchasing corporation - the alleged transferee - we said: It is well settled that where one corporation sells its assets to another corporation 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 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*820 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. ; ; . 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 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 *1027 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*821 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 herein. However, we have also said 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 debts of the old." . Our conclusion there was based upon the trust fund doctrine. Here, it appears, as there, that the owners of the vendor - transferor - caused the organization of the vendee corporations - alleged transferees - for the purpose of taking over the assets and business of the vendor for stock, in a transfer recognized and treated by the parties as a reorganization within the meaning of section 203 of the Revenue Act of 1926. See also . Upon the authority of these two cases, it is held that the petitioning corporations are liable as transferees. *822 Furthermore, where assets are distributed to the stockholders of a corporation in dissolution - in the instant case, stock of the purchasing corporation having an admitted aggregate market value far in excess of the tax - such stockholders may also be severally held under the trust fund doctrine with all other transferees to the extent of the assets which they received on distribution. ; ; ; ; ; . This is so irrespective of our conclusion affecting the purchasing corporations - which is based upon that well established principle that a creditor under the trust fund doctrine may follow the corporate assets, upon the faith of which credit was extended, and may not be entirely subordinated to the corporate stock received therefor, see *823 - and irrespective of the fact that under the laws of Texas such individuals, members of an association, are regarded as partners and are liable as such for the debts incurred by the association. Respecting this, it was said, in ; affirmed at : "No debate can follow the assertion that the trustees of such association, and probably the members thereof, are liable for debts to third parties; but when they are viewed from a taxing standpoint and in that herding where the accepted classification puts them as well-known and *1028 distinctive commercial enterprises, they wear, likewise, another label, another livery, another name", and in , affirming the Board at : * * * We think, too, that there is no merit in the additional point the taxpayer seeks to make here, the point that petitioner is not liable as a transferee because the original Shamrock Oil Company was a partnership, and since partners may be looked to for partnership*824 debts, a transfer of all the partnership assets does not charge them in the hands of the transferee with a lien for partnership debts. These proceedings deal with federal taxes. As to federal taxes, Texas stock associations are not partnerships, they are corporations. . They are liable as corporations for the taxes they incur. Whatever may be the rule in Texas as to the liability to general creditors, of the members of such associations, as partners, and whatever may be the rule there as to the effect upon general creditors of a transfer of all the assets, we think it clear that as to tax liability, a transfer by a joint-stock association which strips it bare makes the taker liable as transferee for the federal taxes it owes. * * * We hold, therefore, that all of the petitioners are transferees under the provisions of section 280, supra. Judgment will be entered for the respondent.