Botz v. Commissioner

OTTO C. BOTZ, TRANSFEREE OF BOTZ PRINTING AND STATIONERY COMPANY, A CORPORATION, PETITIONER, ET AL., 1v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Botz v. Commissioner Docket Nos. 101439, 101440, 101441, 101442, 101443, 101454, 101455. United States Board of Tax Appeals 45 B.T.A. 970; 1941 BTA LEXIS 1042; December 10, 1941, Promulgated *1042 A corporation, after exchanging most of its assets for cash and securities in another corporation on August 1, 1933, "repurchased" and retired, during 1933, 1934, 1935, and 1936, so much of its stock as its assets covered, which resulted in the insolvency of the corporation and its consequent inability to pay its income and excess profits taxes arising from the exchange on August 1, 1933. Held: (1) The reacquisitions of its stock, though in form purchases, constituted, in fact, a series of distributions in partial liquidation. L. B. Coley,45 B.T.A. 405. (2) The stockholders receiving such distributions are liable as transferees of the corporation. Benjamin E. May,35 B.T.A. 84. (3) The Board is not bound by the judgment of a state court obtained in a proceeding collusive upon its face. See Freuler v. Helvering,291 U.S. 35. William M. Fitch, Esq., and Malcolm I. Frank, Esq., for the petitioners. C. H. Curl, Esq., for the respondent. LEECH *970 These consolidated proceedings result from a determination by respondent that each of the petitioners is liable for $12,886.19, *1043 together with interest, as a transferee, for an unpaid deficiency in income and excess profits taxes in the respective amounts of $10,964.89 and $1,921.30 assessed against the Botz Printing & Stationery Co. for the taxable year 1933. The issue is whether petitioners are liable as such transferees. We find the facts as stipulated and, in addition thereto, find additional facts upon evidence submitted at the hearing. FINDINGS OF FACT. The stipulation follows: (1). All of the petitioners herein reside in Jefferson City, Missouri and filed their federal income tax returns in the Sixth District of Missouri, except William B. Malone and Ada G. Malone who reside in New York City. (2). On the 23rd day of December, 1921, the Hugh Stephens Printing & Stationery Company, a corporation, owned a printing and stationery business in Jefferson City, Missouri. Otto C. Botz was president of said corporation, *971 and was merging and consolidating the assets of certain other corporations whereby to organize a corporation known as the Botz Printing & Stationery Company, a Missouri corporation. (3). The Hugh Stephens Printing & Stationery Company issued its agreement to the*1044 then employees of said Hugh Stephens Printing & Stationery Company or its successor, which agreement is as follows: "THE HUGH STEPHENS PRINTING & STATIONERY Co. OTTO C. BOTZ PRESIDENT AND GENERAL MANAGER Printers-Binders Office Outfitters JEFFERSON CITY, MISSOURI December 23, 1921 IT IS AGREED, under the re-organization plan, by THE HUGH STEPHENS PRINTING & STANTIONERY COMPANY, with the employees of the present organization, as follows: - Stock in the new corporation will be worth $100 per share and the capital stock will be $500,000, covering all of the assets and properties of The Hugh Stephens Printing Company, the Jefferson Printing Company, the Botz & Sons Printing Company, and the Art Shop, all of Jefferson City, and the Botz and Sons Printing Company, plant, store and building at Sedalia, Mo. The stock will be sold to employees on the following conditions: For cash at 90?? on the dollar, or a discount of 10%. For time with at least 25% cash and the balance to be paid monthly within a period of two years. In case of sickness or accident, additional time will be given on payments during such time. Where stock is paid on installment, a bonus of*1045 10% additional stock will be issued when the balance is paid for. Or at least 10% of the payment can be taken in lieu of the bonus. The corporation guarantees dividends of at least 8%, and interest will be deducted at the rate of 7% on unpaid portion of stock from dividends when issued. Dividends will be paid semi-annually after 1922, i.e., with the entering into of the new contract, (state) IT IS FURTHER AGREED, that in case of discharge or voluntary severance of connection by an employee-stockholder with the new corporation, that all stock or paid-up portion of stock, will be purchased back by The Hugh Stephens Printing & Stationery Company at its face value, plus interest at the rate of 7% for all the time between dividend dates, at the option of the employee, provided 30 days' notice of such desire is given, and it is agreed that money be paid back within 30 days of such time in cash. THE HUGH STEPHENS PRINTING & STATIONERY COMPANY By (Signed) OTTO C. BOTZ, President & General Manager." (4). A large amount of stock was sold under the terms of said agreement to various employees of said corporation, including the above-named petitioners. (5). The Botz Printing*1046 & Stationery Company was incorporated under the laws of Missouri January 3, 1922, as contemplated, and petitioners from time to time purchased shares of stock in said corporation under the terms of the above agreement. (6). On August 1, 1933, by reason of a change in the politics of the State of Missouri administration, the corporation found it necessary to surrender its state printing and stationery business, and sold its physical assets for the *972 sum of $300,000 payable as follows: $75,000 in cash, and $225,000 in bonds issued by the purchaser, the Midland Printing Company, payable at various dates thereafter. (7). Certain of its other assets were not sold by the Botz Printing & Stationery Company. Among such assets so retained were the accounts receivable and certain other property of said corporation, including its name and good will. (8). Shortly after said sale was consummated, all of the stockholders, including petitioners, requested the corporation to repurchase their shares of stock at $100 per share as provided in said repurchase agreement. (9). The corporation agreed to repurchase said shares of stock at $100 per share and did pay in cash, bonds, *1047 or stock in other corporations, to petitioners and other stockholders on account of the repurchase of said stock, as follows: [1933] Docket No. Name Amount in cash, bonds, or stock in other corporations Shares 101439 Otto C. Botz $5,400 [54] 101440 Renee O. Botz 2,600 [26] 101441 Joseph C. Botz 10,000 [100] 101442 Katherine Botz 20,000 [200] 101443 Frank C. Botz 10,000 [100] 101454 William B. Malone 15,600 [156] 101455 Ada G. Malone 25,000 [250] Other stockholders 128,490 1,355 Totals $217,090 2,241 [1934] Docket No. Name Amount in cash, bonds, or stock in other corporations Shares 101439 Otto C. Botz $20,625 [275] 101440 Renee O. Botz 36,000 [450] 101441 Joseph C. Botz 13,500 [150] 101443 Frank C. Botz 18,000 [200] 101454 Wm. B. Malone 9,000 [100] Totals $97,125 1,175 [1935] Docket No. Name Amount in cash, bonds, or stock in other corporations Shares 101439 Otto C. Botz 101440 Renee O. Botz 101441 Joseph C. Botz $9,000 [90] 101442 Katherine Botz 101443 Frank C. Botz 5,800 [58] 101454 Wm. B. Malone 101455 Ada G. Malone Totals $14,800 [1936] Docket No. Name Amount in cash, bonds, or stock in other corporations Shares 101439 Otto C. Botz $6,500 [100] *1048 *973 (10). In 1933 the corporation paid to its stockholders for shares of stock so purchased, $217,090 for 2,241 shares. In 1934 the corporation paid to its stockholders for shares of stock so purchased, $97,125 for 1,175 shares. In 1935 the corporation paid to its stockholders for shares of stock so purchased, $14,800 for 148 shares. In 1936 the corporation paid to its stockholders for shares of stock so purchased, $6,500 for 100 shares. (11). After the foregoing purchase of the stock of the corporation, there remained outstanding 852 shares belonging to petitioners Otto C. Botz, William B. Malone, Joseph C. Botz, and Frank C. Botz, out of 4,516 shares outstanding at the time of the sale of the physical assets. (12). On January 13, 1936, the Commissioner of Internal Revenue mailed a deficiency letter to the Botz Printing & Stationery Company determining a deficiency in federal income tax for the year 1933 of $24,751.96, and excess profits tax of $6,934.77. Said corporation filed an appeal with the United States Board of Tax Appeals, being docket No. 83,624. On October 24, 1938, a stipulation of deficiency in income tax for the year 1933 of $10,964.89 and excess*1049 profits tax of $1,921.30 was filed with the Board of Tax Appeals; and on October 26, 1938 the Board entered its decision in accordance with said stipulation. No appeal was taken, and on November 18, 1938 the said taxes were duly assessed, together with interest to November 18, 1938; in all, $16,500.68. Notice and demand was issued but no assets belonging to the Botz Printing & Stationery Company were found upon which to levy, and said assessment remains unpaid. On October 16, 1939, the Botz Printing & Stationery Company, by its president, Otto C. Botz, submitted an offer in compromise of $5,000 in lieu of said liability of $16,500.68, alleging that the corporation was defunct, insolvent, and unable to meet this obligation. This offer was declined. (13). On November 15, 1939, the deficiency notices were mailed to the petitioners herein, from which these appeals are taken. (14). The Botz Printing & Stationery Company still exists as a Missouri corporation, retains its charter, and has not been dissolved as a corporation, but it has no assets. The additional facts found upon the evidence submitted at the hearing follow: The deficiency against the Botz Printing & Stationery*1050 Co. was determined upon gain that company realized on the sale of its physical assets on August 1, 1933. The repurchases referred to in paragraph (9) of the foregoing stipulation were made as rapidly as funds could be obtained from liquidation of its assets. After August 1, 1933, during that year and 1934, 1935, and 1936, all available funds were so used and the stock thus acquired was retired. For distributions in such liquidation securities of the purchasing corporation and other corporations were also thus used. No funds or marketable assets were withheld to meet any taxes that might be later found to be due for the year 1933. No business was carried on by the corporation subsequent to the sale of its physical assets, and the assets remaining after such sale, besides the $300,000 in bonds and cash received therefrom, consisted of accounts and notes receivable, a small amount of office furniture, and the corporation's good will. The accounts and notes receivable had little or no market value after this sale. The corporation's balance sheet for the year ending December 31, *974 1933, as prepared by a revenue agent from an examination of its books, shows the following: *1051 Assets Cash $2,381.31 Notes receivable 9,501.13 Accounts receivable 37,955.56 Bonds 114,000.00 Trust fund 119.38 Total 163,957.38 Liabilities Notes payable $12,500.00 Accounts payable 1,819.35 Vouchers payable 2,915.61 Capital and surplus 146,722.42 Total 163,957.38 For the years 1934, 1935, and 1936 some collections of the corporation's accounts receivable were made. At the time the corporation was notified in 1936 of the deficiency in taxes for 1933 the only assets remaining were an uncertain amount of accounts and notes receivable which it had carried since it ceased active business in 1933. At that time these had no market value. At the February 1941 term of the Circuit Court of Cole County, Missouri, each of the petitioners filed suits therein against the Botz Printing & Stationery Co., alleging in each instance that on December 23, 1921, the defendant through its predecessor, the Hugh Stephens Printing & Stationery Co., offered a contract to its employees which was accepted and pursuant thereto stock was purchased in the defendant corporation on the basis of 90 cents on the dollar and that the purchases were made by the plaintiffs*1052 upon the express reliance as set forth in the contract to repurchase the stock at $100 per share; that upon demand only part of such stock was repurchased. Petitioners asked judgments for such repurchase price of the stock not repurchased, unpaid dividends, salaries, and loans. In each suit an answer was filed by an attorney for the defendant, Botz Printing & Stationery Co., admitting the allegations in the respective petitions and liability for the amounts there claimed, but praying for judgments in its behalf. On March 28, 1941, findings and judgments in each of the suits were rendered as prayed for in the respective petitions. OPINION. LEECH: The issue is whether petitioners are liable as transferees of the assets of the Botz Printing & Stationery Co., hereinafter called the Botz Co., under section 311 of the Internal Revenue Code. Respondent has the burden of proof. The amount of the tax assessed against the Botz Co., the transferor, is not in issue. The collector of internal revenue having failed to collect this tax from that transferor, because no assets belonging to it could be found, proposed the liabilities here contested against each of the petitioners as*1053 transferees of the assets of the Botz Co. It is admitted that assets of that company were transferred to and received *975 by petitioners in exchange for shares of their stock in that corporation. Petitioners contend that the distributions made to them in 1933, 1934, 1935, and 1936, or, in any event, those for 1933 and 1934, did not render the corporation insolvent; that, under the contract of December 23, 1921, they were creditors, and, as such, the corporation had a right to prefer them over other creditors, even if insolvent; and that the judgments of the Circuit Court of Cole County established their status as creditors and are controlling here. We agree with none of these contentions in so far as they affect the issue here. Assuming that the Botz Co. accepted or was bound by the contract evidenced by the offer of the "Hugh Stephens Printing & Stationery Company" dated December 23, 1921, and the inferred acceptance by buying the stock, certainly, petitioners buying stock of the Botz Co. became shareholders in and not creditors of that company. *1054 Helvering v. Richmond, Fredericksburg & Potomac R.R.Co., 90 Fed.(2d) 971; Dayton & Michigan Railroad Co.,40 B.T.A. 857; affd., 112 Fed.(2d) 627. And that conclusion is in no way disturbed by the judgments of the Circuit Court of Cole County mentioned in our findings of fact. It is true that the Board is generally bound by local law with respect to title to property within a state. Blair v. Commissioner,300 U.S. 5. But that rule is ineffective here. The judgments mentioned, at most, merely purported to decide that these petitioners became creditors of the Botz Co. after and because of the failure of that company to repurchase their stock upon demand made after August 1, 1933. Moreover, when the proceedings in the Missouri courts were brought upon which these judgments were entered, the Botz Co. was without assets of any value. It had carried on no business for eight years and therefore had no adverse interest, in fact, to the petitioners. The judgments were clearly entered by the consent of the Botz Co. The answers filed by the attorney for that company in each of these suits specifically admit not only*1055 the allegations of the petition but the liability of the Botz Co. in the amounts severally claimed there by the plaintiffs, and on this admission pray for a judgment in each case for the defendant. The collusive character of the proceedings (see Freuler v. Helvering,291 U.S. 35), we think, is clearly established. These judgments, even if material to the issue here, are in no way binding upon us. Cf. Freuler v. Helvering, supra;Blair v. Commissioner, supra;Poe v. Seaborn,282 U.S. 101; Hugh D. Rhodes et al., Administrators,41 B.T.A. 62; affd., 117 Fed.(2d) 509; Estate of Frederick R. Shepherd,39 B.T.A. 38. Since the rights of a shareholder in the assets of a corporation are undoubtedly subordinate to those of a creditor, it would scarcely seem possible that the corporation, by contract with its shareholders *976 alone, could alter that priority. See Cook on Corporations, sec. 9. However, in any event, the status of the petitioners as stockholders was not changed until and unless the "repurchase" of their stock or the failure to do so upon*1056 petitioners' demand, both of which occurred after August 1, 1933, effected such change. The debt for the tax, basing the present proceedings, arose on August 1, 1933, when the sale or exchange by the Botz Co. occurred, giving rise to the tax. Benjamin E. May,35 B.T.A. 84. Thereafter the Botz Co. carried on no business except that of realizing on its assets and "purchasing" its stock. The subsequent agreements to "repurchase" all of its outstanding stock, carried out during 1933, 1934, 1935, and 1936 - in so far as its assets permitted - and the cancellation of the stock thus reacquired, despite the fact that these several reacquisitions may have taken the form of "purchases" of the stock, constituted a series of distributions in partial liquidation of the Botz Co. L. B. Coley,45 B.T.A. 405, and cases therein cited. In 1933, the corporation distributed $217,090 in liquidation of 2,241 shares of its stock; in 1934 it distributed $97,125 in liquidation of 1,175 shares; in 1935 it distributed $14,800 in liquidation of 148 shares; and in 1936 it distributed $6,500 in liquidation of 100 shares. By the end of 1936 the corporation had distributed*1057 a total of $335,515 to its stockholders (petitioners included), in liquidation of 3,664 shares of its stock, thereby leaving no assets except some accounts and notes receivable which had no market value. It may be true that these distributions in the earlier years did not bring about insolvency of the Botz Co., but the important and controlling fact is that the distributions were each made as one of a series of distributions in partial liquidation, which unquestionably rendered the corporation insolvent. The petitioners, distributes, are therefore liable as transferees in the respective amounts of those distributions they received. Robinson v. Wangemann, 75 Fed.(2d) 756; Edward H. Garcin,22 B.T.A. 1027; Benjamin E. May, supra. Since each of the petitioners thus received amounts in excess of the liability determined against each as transferee of the Botz Co., we sustain the respondent. Decisions will be entered for the respondent. Footnotes 1. Proceedings of the following petitioners are consolidated herewith: Renee O. Botz, Transferee of Botz Printing and Stationery Company, a corporation; Joseph C. Botz, Transferee of Botz Printing and Stationery Company, a corporation; Katherine Botz, Transferee of Botz Printing and Stationery Company, a corporation; Frank C. Botz, Transferee of Botz Printing and Stationery Company, a corporation; William B. Malone, Transferee of Botz Printing and Stationery Company, a corporation; and Ada G. Malone, Transferee of Botz Printing and Stationery Company, a corporation. ↩