Botz v. Helvering
| Decision Date | 26 April 1943 |
| Docket Number | No. 12342-12348.,12342-12348. |
| Citation | 134 F.2d 538 |
| Parties | BOTZ v. HELVERING, Commissioner of Internal Revenue, and six other cases. |
| Court | U.S. Court of Appeals — Eighth Circuit |
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Malcolm I. Frank, of St. Louis, Mo. (William M. Fitch, of St. Louis, Mo., on the brief), for petitioners.
Warren F. Wattles, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen. on the brief), for respondent.
Before STONE, WOODROUGH and RIDDICK, Circuit Judges.
These are separate reviews of determinations by the Board of Tax Appeals (now Tax Court) that each of the petitioners is liable, as transferee, for income and excess profits taxes of $12,886.19 and interest due from the Botz Printing & Stationery Company (a Missouri corporation) for the year 1933. Since the situation is the same as to all petitioners, the matters were consolidated before the Board and are here presented together.
There is no challenge of the liability of the company for the taxes. There is no dispute that the company was solvent in 1933 and well able to pay these taxes nor that it had distributed to petitioners and others like situated practically all of its assets by the end of 1936 — the year when this tax deficiency of the corporation was determined by the Commissioner. The controversy is over the liability of the several petitioners to pay this tax as transferees of the assets of the company. The Commissioner contends — and the Board held — that the distribution to petitioners was to them as stockholders while petitioners contend it was to them as creditors under a certain contract of December 23, 1921, whereunder they purchased stock. Also, petitioners contend that their status as creditors has been established by judgments of a Missouri trial court and that such status so established must be accepted by the Commissioner in this proceeding.
Fact Situation.
The facts involved in the above contentions are as follows: The Hugh Stephens Printing & Stationery Company was a Missouri corporation of which petitioner Otto C. Botz was president. Late in 1921, a merger of that company with others was contemplated whereby the entire assets of all were to be transferred to a new Missouri corporation, the Botz Printing & Stationery Company. To induce additional subscriptions to the stock of the new company, the Stephens Company made a written offer or statement that such stock would be sold "to employees" on certain terms, one of which was as follows: "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 new company was incorporated January 3, 1922. Thereafter at various times, the petitioners and others bought stock therein under the terms of the above offer or statement. The main business of the new company was doing printing for and furnishing stationery to the State offices. A change in the politics of the State officials resulted in surrender of the contracts for this State business. As a consequence, the company, on Aug. 1, 1933, sold its physical assets to the Midland Printing Company for $300,000, payable $75,000 cash and $225,000 in bonds of the purchaser. The assets not so sold consisted of accounts and notes receivable, a small amount of office furniture and the good will — these retained assets had little or no market value after the sale.
On or about the above sale date, these petitioners and others gave notice to redeem the above purchased stock in accordance with the above offer or statement. The Botz Company accepted these notices and proceeded to make payments thereon from the assets as and when realized. These payments extended through 1933 to 1936.1 The shares thus involved were 3,664 out of a total issue of 4,516, leaving 852 shares (owned by four of petitioners) not thus disposed of and outstanding.
The company carried on no business after the sale. Its activities seem thereafter to have been confined to making some small collections on accounts receivable and in liquidation of its assets and making payment therefrom for these 3,664 shares of stock. There is a balance sheet, prepared from the books of the company by a revenue agent, for the year ending December 31, 1933, as follows:
Assets Liabilities
Cash .................... $ 2,381.31 Notes payable .......... $ 12,500.00
Notes receivable ........ 9,501.13 Accounts payable ....... 1,819.35
Accounts Receivable ..... 37,955.56 Vouchers payable ....... 2,915.61
Bonds ................... 114,000.00 Capital and surplus .... 146,722.42
Trust fund .............. 119.38
____________ ___________
Total ............... $ 163,957.38 Total .............. $163,957.38
Also, there is evidence that there was a book value even at the end of 1936. However, the evidence is convincing that, except for a very small value in receivables and furniture, the sole value of the assets was in the above purchase price paid by the Midland Printing Company.
In January, 1936, notice of deficiency assessment for these taxes was given. The taxes were for gains realized by the above sale of physical assets to the Midland Printing Company.
The position of petitioners as to this issue is that the proposition to repurchase became a contract creating the position of debtor-creditor; that there was a valid consideration given by petitioners; that a corporation has a legal right to discharge such a contract obligation; that the payments here did not render the corporation insolvent; and that the obligee does not become liable, as a transferee, for the unpaid income tax of the corporation.
It is true that the proposal in the statement by the Stephens Company2 and the subsequent subscriptions for stock in reliance thereon constitute a contract based upon a consideration passing from such subscribers. Likewise, it is true that, ordinarily, a corporation may discharge a contract obligation by payments and that such payees do not thereby become liable for federal income taxes of the corporation as transferees. Also, the above is true even if the obligee creditor to whom such payments are made be also a stockholder in the corporation. However, these general legal truths do not solve the problem here.
We have here a particular kind of contract. If the contract is sufficient to establish a debtor-creditor relation between petitioners and the company, yet the subject matter of the contract is the repurchase of their stock by the corporation. The purposed and the effectual result of performance of the contract would be to take assets from the corporation in exchange for nothing of any value to its creditors. Such a situation brings into play established rules of law concerning the nature and functions of capital stock in corporations and the usually stringent rules against withdrawal thereof.
Thus because of the particular subject matter of this contract we have considerations of public policy which bear directly upon the application of the contentions of the petitioners. Our problem is how far these considerations control the situation here.
In the statutory method of collecting income taxes is provided the liability of transferees of the taxpayer. That liability is "the liability, at law or in equity, of a transferee of property of a taxpayer" Int.Rev.Code, § 311(a) (1), 26 U.S. C.A. Int.Rev.Code § 311(a) (1). Whether a transferee is liable "at law or in equity" depends upon State law. Helvering v. Stuart, Nov. 16, 1942, 317 U.S. 154, 63 S. Ct. 140, 87 L.Ed. ___; Blair v. Commissioner, 300 U.S. 5, 9, 57 S.Ct. 330, 81 L.Ed. 465; Freuler v. Helvering, 291 U.S. 35, 54 S.Ct. 308, 78 L.Ed. 634. Here, it is the law of Missouri as to stockholders who are transferees of the property of the corporation. One of the statutory powers of Missouri corporations is: "To purchase, hold, sell and transfer shares of its own capital stock: Provided, that no such corporation shall use its funds or property for the purchase of its own shares of stock when such use would cause an impairment of the capital of the corporation or perpertrate a fraud upon its creditors or other stockholders." R.S.Mo.1929, § 4940, same R.S. Mo.1939, § 5345, Mo.R.S.A. § 5345. Other sections, R.S.Mo.1929, §§ 4948-4950, same R.S.Mo.1939, §§ 5353-5355, Mo.R.S.A. §§ 5353-5355, prescribe the conditions and methods of diminishing capital stock.
Missouri decisions hold that the only way by which capital stock can be diminished is as required by the above sections, and that a contract by a corporation to repurchase its stock is ultra vires and void as against public policy. David v. B. L. Fry Mfg. Co., 209 Mo.App. 134, 236 S.W. 1103; Hunter v. Garanflo, 246 Mo. 131, 151 S.W. 741; Wilson v. Torchon Lace & Mercantile Co., 167 Mo.App. 305, 149 S.W. 1156; and see Potts-Turnbull Adv. Co. v. Gatchell, Mo.Sup., 257 S.W. 134, 139; and Stringfellow v. Rosebrough Monument Co., Mo.App., 196 S.W. 1050, 1052, 1053. In Hunter v. Garanflo, supra, 151 S.W. at page 742, the court stated: "The withdrawal of this fund, or any part of it, by the stockholders, otherwise than under the sanction of the law in conformity with which it is created, or its application to other uses than those authorized by the laws under which the corporation exists, is a clear violation of the policy of the state as expressed in its Constitution."
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