In re Wolf Mfg. Industries

• Decision Date: 24 February 1932
• Docket Number: No. 4612.,4612.
• Citation: 56 F.2d 64
• Parties: In re WOLF MFG. INDUSTRIES. TUDOR v. UNITED STATES.
• Court: U.S. Court of Appeals — Seventh Circuit

56 F.2d 64 (1932)

In re WOLF MFG. INDUSTRIES.

TUDOR v. UNITED STATES.

No. 4612.

Circuit Court of Appeals, Seventh Circuit.

February 24, 1932.

Frank C. Olive, of Indianapolis, Ind., for appellant.

George R. Jeffrey, U. S. Atty., of Indianapolis, Ind.

Before ALSCHULER and SPARKS, Circuit Judges, and LINDLEY, District Judge.

LINDLEY, District Judge.

This appeal involves the question of whether the District Court rightfully overruled the objections of the trustee in bankruptcy to the claim of the government for income taxes.

Wolf Manufacturing Company, an Illinois corporation, on December 31, 1920, transferred all its assets to Fred Wolf, Paul A. Wolf, Leo F. Wolf, and Fred A. Wolf, as trustees under a so-called common-law trust, upon the consideration that the trustees discharge the liabilities of the corporation. In the trust agreement, it was provided that the trustees should use and employ the trust property "first in paying the corporate debts of the Wolf Company and discharging the liabilities of said corporation," and further that they should conduct the business and manage the property as previously. On March 21, 1921, the stockholders voted to dissolve the corporation, and on December 28, 1921, report of such dissolution was filed with the secretary of state, who, on the same date, issued certificate of dissolution. At that time there were in existence at least two federal tax liabilities, one for the year 1919, which is here in controversy, and another for the year 1920, which appeared in the balance sheet of assets and liabilities taken over by the trust.

The government, investigating the corporation's tax report for 1919, requested and received from it, on February 26, 1925, a waiver of the statute of limitations extending the statutory period for assessment to December 31, 1925. On September 1, 1925, the Commissioner sent by registered mail to the corporation notice of assessment of additional income tax for 1919 in the amount of $31,443.70. On October 31, 1925, the corporation filed with the United States Board of Tax Appeals its appeal from said assessment. Both the waiver and petition for appeal were executed in the name of the corporation by Fred A. Wolf, as secretary and treasurer of the same. On March 5, 1928, the Board made its decision finding that there was a deficiency in the income tax paid by the corporation for the year 1919 in the amount of $28,673.72. No review of this decision was ever sought.

The trust became bankrupt June 12, 1929. The original claim for the aforesaid additional tax, plus interest, was filed on September 17, 1929, and the amended claim, here relied upon, on March 17, 1930. The trustee objected to allowance of the claim upon the grounds that collection was barred by the statute of limitation and that the bankrupt was not liable for the taxes as a transferee of the corporation. The referee sustained the objections. Upon review, the District Court reversed and set aside the order of the referee and directed the allowance of the claim.

The appellant contends that the waiver by the corporation, its appeal and its appearance before the Board of Tax Appeals, were the acts of a dissolved corporation, and therefore void, and that there has been no compliance with the statutory requirements necessary in order to hold the trust liable for the assessment.

The statute of Illinois (Smith-Hurd Rev. St. Ill. 1931, c. 32, § 75 (4) (b, c), (5) (d, e), upon voluntary dissolution of a corporation, provides that, before a dissolution shall be accomplished, a corporation shall "pay and discharge all its corporate debts and liabilities," and "distribute its corporate assets and property among the persons entitled thereto." Having complied with these mandatory directions, the corporation shall then report to the secretary of state "a complete itemized list of all the corporate debts and liabilities" and "the date and manner of payment of each debt and liability existing." Another section of the statute (section 79 provides in effect that the remedies of third persons against the corporation shall not be affected by the dissolution, if asserted within two years from the date thereof. This latter provision is not material upon the issue herein presented.

The statute here under consideration is a comparatively recent one, and the Supreme Court of Illinois has not passed upon the effect of a failure to comply with the provisions thereof. It becomes our duty, therefore, to determine the intent of the act. Obviously, proceedings to bring to an end a corporation, a creature of the state, empowered to acquire property, transact business, and incur debts, is one that must be guarded with the strictest of supervision by the state. Having brought the corporation into the world, and having authorized incurrence of liabilities to others, the state's evident obligation before ending the existence of its creation is to place all possible reasonable guards against injustice and injury to third persons. In recognition of that duty, and in order to protect creditors, its mandate in the statute allowing dissolution is that all debts and liabilities shall be discharged, and the property delivered to such persons as are entitled to the same, and full and complete verified report of the manner of payment of the debts be made of record. These are conditions precedent to the cessation of existence of the legal entity. Consequently, if the corporation does not comply with the statute, so far as the rights of third persons are concerned, the dissolution is inoperative and void.

In American Bank & Trust Co. v. Hon, 48 F.(2d) 588, this court approved the decision of the lower court to the effect that failure to give the requisite statutory notice prevented an effective dissolution as to such creditors as were not notified. In Frank v. Wedderin, 68 F. 818, 824 (C. C. A. 5), it was remarked, "when such dissolution is brought forward to defeat attaching creditors, we think the court should see that all the formalities prescribed by the laws of the state and the charter of the corporation to bring about a legal dissolution of the corporation are strictly complied with." These pronouncements are consonant with the public policy of the state of Illinois as announced by the Supreme Court in repeated decisions. Thus, in Commercial Loan & Trust Co. v. Mallers, 242 Ill. 50, 89 N. E. 661, 662, 134 Am. St. Rep. 306, 17 Ann. Cas. 224, the court said: "It is a part of the settled public policy of this state that upon the dissolution of a corporation, no matter how the...