Roberto Colón Machinery & Manufacturing Co. v. Secretary of the Treasury

Mr. Chief Justice Snyder delivered the opinion of the Court. The question involved in this ease is whether the controlling stockholder is liable — either personally or as liquidating trustee — for an income tax deficiency of a dissolved corporation. In 1945 Roberto Colón Machinery & Manufacturing Co., Inc., a domestic corporation, was notified by the then Executive Secretary that it had been dissolved for failure to file its annual report for three consecutive years, as required by § 25 of the Corporation Act. Act No. 30, Laws of Puerto Rico, 1911, as amended by Act No. 154, Laws of Puerto Rico, 1948. Apparently unaware of the dissolution of the corporation, in 1950 the then Treasurer sent a notice of income tax deficiency for 1943 to the corporation.1 Roberto Colón, as liquidating trustee of the corporation, filed a motion for reconsideration and signed a waiver of the statute of limitations. In 1951 the then Treasurer notified Colón, as liquidating trustee, with a “definitive deficiency” for the dissolved corporation in the sum of $11,357.65. Colón — apparently concerned that the Treasurer would attempt to collect the tax from him by attachment of his property or otherwise — filed a complaint in the former Tax Court. The complaint does not dispute the liability of the corporation for the deficiency. Cf. Phillips v. Commissioner, 283 U.S. 589; Koch v. United States, 138 F. 2d 850 (C.A. 10, 1943). Rather it is directed solely to the problem of whether Colón, as liquidating trustee of the corporation, must pay it. The complaint alleges that Colón had taken over the assets and liabilities of the corporation as liquidating trustee; that the liabilities had exceeded the assets; that Colón paid — 871 — the obligations of the corporation to the extent that its assets permitted; that as there are no more assets of the corporation in his hands, Colón as liquidating trustee is not liable for the remaining debts of the corporation. The complaint prays for a holding (1) that Colón is not liable as liquidating trustee for the deficiency and (2) that the then Treasurer should abstain from collecting it from him. Colón posted a bond of $12,000 in order to file the suit in question. The amended answer of the then Treasurer denies that the liabilities of the corporation exceeded its assets. It alleges that although the corporation was dissolved, there was no liquidation of its assets as required by the Corporation Act. The answer also contains a “Special Allegation” in which the then Treasurer alleges in the alternative that Colón “ . . . was the owner of more than 95 per cent of the stock of Roberto Colón Machinery and Manufacturing Company, Inc. That he exercised absolute control over all the operations and transactions of the plaintiff. That on April 1, 1945 Roberto Colón acquired all the assets of Roberto Colón Machinery and Manufacturing Company, Inc. That on that same date the said corporation was dissolved by unanimous consent of its stockholders. That under these circumstances Roberto Colón is liable for the taxes that Roberto Colón Machinery and manufacturing Company, Inc. may owe.” The ease was tried on the merits before the former Tax Court. It was decided by one of its former members, as a Judge of the Superior Court, pursuant to the Judiciary Act, Act No. 11, Laws of Puerto Rico, 1952, Special Session, 4 L.P.R.A. § 1 et seq. The latter dismissed’ the complaint. Pointing out that the deficiency had not been challenged on the merits, the trial court stated: “A declaration as to the personal responsibility of Roberto Colón for this tax owed by a different taxpayer would therefore be premature, especially when the tax is duly guaranteed, by a — 872 — bond and nothing has arisen showing that the bond is not in effect and that it does not cover the entire debt.” (Italics ours). The plaintiff appealed from the judgment of the trial court. He paid the tax personally in order for this Court to obtain jurisdiction. The Superior Court erred in holding that the suit was premature as to the personal responsibility of Colón for the deficiency. That — together with the issue of his alleged responsibility as liquidating trustee — was precisely the question raised by this case. The former Tax Court had jurisdiction to pass thereon pursuant to the provision of § 2 of Act No. 328, Laws of Puerto Rico, 1949, creating the Tax Court, that it “ . . . shall have exclusive jurisdiction to take cognizance of all cases, actions and proceedings, or special or extraordinary remedies, in connection with, or affecting, the levy, collection and payment of all kinds of taxes ... ”. Under the “Special Allegation” contained in the answer of the then Treasurer, Colón could be held liable for the deficiency either as liquidating trustee or personally. The Tax Court denied the motion which the then Treasurer made during the trial to bring Colón into the case personally as a party. Although the Treasurer does not argue the question in his brief, we think the issue raised by him in his answer as to the personal liability of Colón for the deficiency required the trial court to grant this motion of the Treasurer. García v. Government of the Capital, 70 P.R.R. 312, 319. The failure of the trial court to decide the only issues presented by this case requires us to reverse the judgment and remand the case. On remand, the case should be treated as raising the questions of the liability of Colón both as liquidating trustee and personally. The “Special Allegation” asserts first that Colón is personally liable for the deficiency because he owned “more than 95 per cent of the stock” of the corporation and exercised absolute control over its operations. Colón owned all — 873 — but four shares of the 800 outstanding shares of the corporation, issued at $100 a share, But this did not automatically make him liable personally for the corporation’s deficiency. There are situations in which the corporate fiction is ignored in cases involving income taxes where one person owns substantially all the stock of a corporation. Higgins v. Smith, 308 U.S. 473, 477. “But disregard of corporate entity is still the exception to the rule.” Delaney v. Gardner, 204 F. 2d 855, 861-2 (C.A. 1, 1953) and cases cited therein; National Carbide Cory. v. Comm’r, 336 U.S. 422; 10 A Mertens, Law of Federal Income Taxation, pp. 233 et seq.; id., 1955 Supp., pp. 56 et seq.; Berger, “Disregarding the Corporate Entity” for Stockholders’ Benefit, 55 CokL.Rev. 808 (June 1955), and cases cited therein; Cleary, The Corporate Entity in Tax Cases, 1 Tax.L.Rev. 3. See Swiggett v. Swiggett, Inc., 55 P.R.R. 72. The government made no effort to show that Colón so conducted the affairs of the corporation that it was in reality a sham and that he was therefore personally liable therefor.2 On remand, the government will have another opportunity, if it so desires, to introduce additional testimony on the issue of Colon’s personal liability on the theory of piercing the corporate veil. We turn to the question of Colon’s alleged liability as transferee by purchase of the assets and liabilities of the corporation. Prior to receipt from the then Executive Secretary of the notice of dissolution of the corporation for — 874 — failure to file annual reports, a special meeting of the stockholders was held. The minutes thereof read in part as. follows: “The President of the Corporation Mr. Roberto Colón submitted to the meeting an statement of the general conditions, of the business, and suggested the convenience of dissolving the Corporation, which was accepted by all the presents. “The Treasurer presented to the meeting an inventory of all the assets and also of the liabilities of the company, to wit: “An inventory containing a detailed relation of materials,, goods, stocks and furnitures, etc. amounting to $71,543.09. “A detailed relation of all the assets and liabilities amounting to $71,543.09. “All these documents were duly examined by all the stockholders, found them correct and it was ordered that the same-be spread on this minutes forming part of it. “Mr. Roberto Colón, under the name of ‘Roberto Colón Mach. Co.’ offered to buy all the existences, and assets of the corporation, and assuming the payment of all pending liabilities, by the-price of $68,164.62 in cash, ordering that the proper document be prepared and signed by all the stockholders and by Mr. Roberto Colón. “It was also resolved that in view that the corporation had. no properties of any kind as they have been sold to Roberto. Colón Machinery Co., that this corporation be dissolved.” 2a In accordance with the foregoing, the stockholders wrote the then Executive Secretary as follows: “We acknowledge receipt of your letter of last March 23, and we are glad to-advise you that the business of Roberto Colón Machy. Co. was sold on April 1 to Mr. Roberto Colón by unanimous consent of the undersigned, the only stockholders of the corporation, and we therefore consent to declaring the corporation dissolved.” For purposes of this tax case, it is unnecessary to determine whether the corporation was dissolved in 1945 voluntarily by action of the stockholders or involuntarily by the — 875 — State for failure to file annual reports. Irrespective of the method of dissolution, Colón was liable for the deficiency if in fact he purchased its assets and assumed its liabilities for $68,16^.62 in cash prior to the dissolution: (1) primarily, he would be liable personally on the theory he assumed the liabilities of the corporation in connection with the purchase of its assets; (2) in addition, if for some reason the Secretary of the Treasury could not collect from him personally, he would be liable as liquidating trustee because it would be his duty in that capacity to pay the deficiency, ratably as provided in § 31 of the Corporation Act, from the sum of $68,164.62 paid or owed by him personally to the corporation for receiving its assets and assuming its liabilities. Sections 28-9, 31 of the Corporation Act, 14 L.P.R.A. § § 204-5, 207. At the trial Colón testified that the sale of the assets of the corporation to him was never consummated; that instead he proceeded to liquidate the affairs of the corporation; that he was able to collect only a small part of the accounts receivable of the corporation because its debtors took the position that he was not entitled to collect them in view of the dissolution of the corporation;3 that as a result the liabilities of the corporation exceeded its assets; and that he therefore paid out of his personal funds the remaining debts of the corporation. The trial court did not resolve the conflict in the testimony as to the sale of the corporation’s assets to Colón. This makes it necessary to remand the case to the Superior Court for findings of fact and a decision on this question. In view of the state of the record, the parties should be given an opportunity to present additional testimony thereon. In this connection, we note that there was some testimony at — 876 — the trial that Colón deducted as bad debts in his personal return for 1947 debts which were owed to the corporation. If this is established as a fact when the case is remanded, it would have some bearing on the contention of the Secretary of the Treasury that Colón was personally liable for the deficiency because he purchased the corporation’s assets .and assumed its liabilities. That is to say, if Colón deducted the bad debts of the corporation in his personal return on the theory that he had acquired them from the corporation as assets, by the same token he would be personally liable for the corporation’s deficiency because he assumed its liabilities.,4 The Secretary of the Treasury did not contend in the trial court or in his brief in this Court that Colón was personally liable for the deficiency of the corporation by virtue of § 35 of the Corporation Act, 14 L.P.R.A. § 232.5 However, subsequently the Secretary filed a motion suggesting that we take the case of Cruz v. Ramírez, 75 P.R.R. 889, into consideration in deciding this case “ . . . for the tan-gency which the questions discussed in it may have with this case.” The Secretary has presented no argument in support of the contention that § 35 applies here. We deem it more desirable to leave this question open so that the trial court may pass on it if on remand the Secretary makes such a contention. — 877 — The judgment of the Superior Court will be reversed and the case remanded for further proceedings consistent with this opinion. Mr. Justice Marrero and Mr. Justice Negrón Fernández, dissented. Footnotes [1] This could not occur today. Section 25 now provides that the Secretary of State shall obtain a certificate of the Secretary of the Treasury as to taxes owed by the corporation before entering the corporation as dissolved. 14 L.P.R.A. 5 181. [2] We point out subsequently that in 1947 Colón apparently deducted as bad debts in his personal returns debts owed to the corporation which proved uncollectible after the corporation was dissolved in 1945. We think — as hereinafter stated' — that this conduct, if it occurred, is evidence in support of the contention of the Secretary of the Treasury (1) that the assets and liabilities of the corporation were transferred to Colón personally in 1945, and (2) that Colón was therefore, personally responsible for the 1943 corporate deficiency which he would be considered to have assumed together with the other liabilities of the corporation. But such conduct in 1947 — after the corporation was dissolved — is . not sufficient, standing alone, to show that Colón conducted the corporation in such a manner that we are required to hold him personally liable for the corporation’s 1943 income tax deficiency by piercing the corporate veil. [2a] We have not attempted to correct the grammatical and spelling-errors in these minutes. [3] If a solvent debtor advanced such an absurd contention, it would of course be the duty of a liquidating trustee to sue him for the debt he owed the dissolved corporation. [4] Even if the trial court finds that there never was in fact an agreement for Colón to buy the corporation’s assets and assume its liabilities, it must still determine whether as liquidating trustee Colón fully discharged his obligations under § § 28-9 and 31 of the Corporation Act, 14 L.P.R.A. § § 204-5, 207. Cf. Hutton v. Commissioner of Infernal Revenue, 5.9 F. 2d 68 (C.A. 9, 1932) . [5] Section 35 reads as follows: “No corporation shall incur any indebtedness for any purpose whatever in excess of the paid-up value of its •capital stock or of the value of its property and assets. The directors who shall authorize by their votes the incurrence of any such indebtedness shall be jointly and severally liable individually for the amount of such indebtedness, and the said liability shall be enforced in any action brought by any creditor who shall establish therein that judgment has been rendered for his claim and that the liquidated assets of the corporation have been insufficient to pay the same.”