Associates Inv. Co. v. Comm'r of Internal Revenue

• Citation: 59 T.C. 441
• Decision Date: 20 December 1972
• Docket Number: Docket No. 1426-69.
• Parties: ASSOCIATES INVESTMENT COMPANY, ALLEGED TRANSFEREE OF THE PROTECTIVE LIFE INSURANCE COMPANY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

59 T.C. 441

ASSOCIATES INVESTMENT COMPANY, ALLEGED TRANSFEREE OF THE PROTECTIVE LIFE INSURANCE COMPANY, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 1426-69.

United States Tax Court

Filed December 20, 1972.

William A. Cromartie, Patrick A. Heffernan, and Peter B. Freeman, for the petitioner.

Rex A. Guest, for the respondent.

Protective, a Nebraska corporation, was dissolved and during the 2-year period following its dissolution, its vice president executed consents which purported to extend the period for assessment of tax deficiencies for the years 1958 through 1962. The Nebraska Business Corporation Act, which is based on the Model Business Corporation Act, provides that upon dissolution, a corporation's existence ceases, except for certain limited purposes. Held, under Nebraska law, the execution of the consents during the post-dissolution period was authorized.

OPINION

SIMPSON, Judge:

The respondent determined that the petitioner was liable as transferee for deficiencies in the income tax of the Protective Life Insurance Co. as follows:

+--------------------+
                ¦Year  ¦Deficiency   ¦
                +------+-------------¦
                ¦      ¦             ¦
                +------+-------------¦
                ¦1958  ¦$200,589.67  ¦
                +------+-------------¦
                ¦1959  ¦156,645.21   ¦
                +------+-------------¦
                ¦1960  ¦212,785.62   ¦
                +------+-------------¦
                ¦1961  ¦338,490.63   ¦
                +------+-------------¦
                ¦1962  ¦76,142.43    ¦
                +------+-------------¦
                ¦1966  ¦471.28       ¦
                +--------------------+
                

The issues in this case have been severed, and the only issue to be decided herein is whether consents executed by an officer of Protective, subsequent to— but within 2 years after— its dissolution, were valid and extended the period of limitations on assessments against Protective.

All of the facts have been stipulated, and those facts are so found.

Associates Investment Co., the petitioner, is a corporation which maintained its principal place of business in South Bend, Ind., at the time of filing its petition in this case.

In 1962, the petitioner acquired all of the stock of the Protective Life Insurance Co. (Protective), a Nebraska corporation. On December 7, 1964, the board of directors of Protective adopted a plan of liquidation and dissolution, and the petitioner, as owner of all of the outstanding stock of Protective, executed a unanimous consent to the plan of liquidation of December 8, 1964. The plan provided that it was the intent of Protective to dissolve and that Protective would discontinue the active conduct of its business on December 17, 1964, and wind up its affairs.

On March 31, 1966, Protective transferred all of its assets to the petitioner. A statement of intent to dissolve was filed with the secretary of state of Nebraska on April 13, 1966, and on April 14, 1966, such statement was recorded in Douglas County, Nebr. On April 21, 1966, Protective filed its articles of dissolution with the secretary of state of Nebraska, and the secretary issued a certificate of dissolution, which was recorded on April 22, 1966, in Douglas County, Nebr. Beginning on May 3, 1966, notice of Protective's dissolution was published once each week for 3 successive weeks in a legal newspaper printed in Omaha, Nebr.

Protective had previously filed a Form 966 (corporate dissolution or liquidation) with the Internal Revenue Service on or about January 7, 1965. Attached to this form was a copy of Protective's plan of liquidation. Protective had also filed its 1964 Federal income tax return, on or about September 17, 1965, and attached to this return a statement that Protective had adopted a plan of liquidation and a copy of such plan. On or about August 17, 1966, Protective filed its final return, and this return included the statement that pursuant to the previously filed plan, Protective was liquidated on March 31, 1966.

In 1961, the respondent commenced an audit of the Federal income tax returns of Protective for the years 1958 through 1960. The audit proceedings were suspended in 1964 pending the decision in Alinco Life Insurance Co. v. United States, 373 F.2d 336 (Ct. Cl. 1967). Both Alinco Life Insurance Co. and Protective were wholly owned subsidiaries of the petitioner, and the respondent and the representatives of Protective believed that the decision in the Alinco case might provide a basis for resolving the questions posed in a 10-day letter which had been sent to Protective in 1963 concerning its lax liability for the years 1958 through 1960. While the outcome of the Alinco case was awaited, Mr. R. F. Lindquist, as vice president and comptroller of Protective, executed consents for the extension of the period for the assessment of income tax deficiencies against Protective. In 1963 and 1964, he executed consents with respect to the years 1958 through 1960; in 1965, he executed consents with respect to the years 1958 through 1961; in 1966, he executed consents purporting to extend the period of assessment until June 30, 1967, with respect to the years 1958 through 1962; and in 1967, he executed consents purporting to extend the period to December 31, 1967, with respect to the years 1958 through 1963. In the absence of the 1966 and 1967 consents, the period for assessment of income tax liabilities against Protective for the years 1958 through 1962 would have expired on or before June 30, 1967, and for the year 1963 on August 17, 1967. When Mr. Lindquist signed the consents in 1966 and 1967, he signed as vice president of Protective, but he was also vice president and comptroller of the petitioner. After the Alinco decision, the respondent took the position that such decision was not dispositive of the Protective controversy, and an officer of the petitioner notified the respondent that Protective would execute no additional consents.

The respondent issued his notice of liability to the petitioner on December 30, 1968. Prior to that time, the respondent had not issued a notice of deficiency to Protective; nor had he issued either a 10-day or a 30-day letter to either Protective or the petitioner, except for the 10-day letter he issued to Protective in 1963.

The notice of liability sent to the petitioner was untimely, unless the consents executed by an officer of Protective in 1966 and 1967 after dissolution of the corporation were valid and extended the periods for assessing the deficiencies. Therefore, the validity of such consents is the issue that we must decide.

At common law, the dissolution of a corporation terminated its legal existence: Corporate debts were extinguished, undistributed corporate realty reverted to its grantor, corporate personalty escheated, and the corporation could not sue or be sued. See Ballantine Corporations, sec. 312 (1946); Lattin, Corporations, sec. 176 (2d ed. 1971); 16A Fletcher, Cyclopedia of Corporations, sec. 8113 (1962). However, equity, through the application of the trust fund doctrine, permitted defrauded creditors to reach the assets of the former corporation (16A Fletcher, supra sec. 8159; Lattin, supra sec. 176), and ultimately every State enacted dissolution statutes which generally provided for a limited extension of the corporate existence beyond the time of dissolution. See 16A Fletcher, supra sec. 8166; 2 O'Neal, Close Corporations, sec. 9.28 (1971).

Since Protective was a Nebraska corporation, the parties have agreed that the issue of whether one of its officers was authorized to execute the consents must be determined by Nebraska law. See Title Co. v. Wilcox Bldg. Corp., 302 U.S. 120 (1937). The Nebraska statutes relating to the powers of a business corporation and its officers are based on the Model Business Corporation Act (MBCA). Compare Neb. Rev. Stat. secs. 21-2081 through 21-20,104 (1970)¹ with MBCA secs. 82 through 105. Under Nebraska law, after the corporate decision to dissolve is made (secs. 21-2081— 21-2083), the corporation files a statement of intent to dissolve with the secretary of state. Sec. 21-2084. Following such filing, ‘the corporation * * * (ceases) to carry on its business, except insofar as it may be necessary for the winding up thereof.’ Sec. 21-2085. During this winding-up period, the corporation is to notify its creditors and, ‘after paying or adequately providing for the payment of all its obligations,‘ distribute the remainder of its assets to its shareholders. Sec. 21-2086. Following the distribution, the corporation files its articles of dissolution. Sec. 21-2092. The secretary of state then issues a certificate of dissolution, and the existence of the corporation ceases ‘except for the purpose of suits, other proceedings and appropriate corporate action by shareholders, directors and officers as provided in sections 21-2001 to 21-20,134.’ Sec. 21-2092; see MBCA sec. 93. The issuance of the certificate does:

not take away or impair any remedy available to or against such corporation, its directors, officers, or shareholders, for any right or claim existing, or any liability incurred, prior to such dissolution if action or other proceeding thereon is commenced within two years after the date of such dissolution. Any such action or proceeding by or against the corporation may be prosecuted or defended by the corporation in its corporate name. The shareholders, directors and officers shall have power to take such corporate or other action as shall be appropriate to protect such remedy, right or claim. * * * (Sec. 21-20, 104; see MBCA sec. 105.)

Since the outcome of this case turns on whether the officers of Protective had the power to execute the consents in 1966 and 1967 under Nebraska law, we must construe the Nebraska law and attempt to carry out its purposes as if we were a Nebraska court. Commissioner v. Estate of Bosch, 387 U.S. 456, 466 (1967). We should also recognize that our interpretation of the Nebraska law will affect parties in a variety of other circumstances and that our decision will not be confined to cases involving the Federal tax laws. On...