U.S. v. Adams Bldg. Co., Inc.

• Decision Date: 09 February 1976
• Docket Number: No. 75--1784,75--1784
• Citation: 531 F.2d 342
• Parties: 76-1 USTC P 9221 UNITED STATES of America, Plaintiff-Appellant, v. The ADAMS BUILDING COMPANY, INC., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 342

531 F.2d 342

76-1 USTC P 9221

UNITED STATES of America, Plaintiff-Appellant, v. The ADAMS BUILDING COMPANY, INC., et al., Defendants-Appellees.

No. 75--1784.

United States Court of Appeals, Sixth Circuit.

Argued Dec. 15, 1975.

Decided Feb. 9, 1976.

Fredrick M. Coleman, U.S. Atty., Cleveland, Ohio, Scott P. Crampton, Gilbert E. Andrews, Jeffrey S. Blum, Chief, Appellate Section, Tax Div., Dept. of Justice, Washington, D.C., for plaintiff-appellant.

Marston G. Bergman, A. Albert Perelman, Cleveland, Ohio, for defendants-appellees.

Before PHILLIPS, Chief Judge, MILLER, Circuit Judge, and MARKEY, ^* Judge.

WILLIAM E. MILLER, Circuit Judge.

The government has appealed from a judgment of the district court, Northern District of Ohio, in favor of the defendants involving taxes assessed against the defendant corporation ('Adams, Inc.').

Dan Adams and Edward Witkowski were carpenters and small-scale builders who incorporated Adams, Inc., in 1958 to conduct their business in corporate form. Edward Witkowski and Margaret, his wife, jointly owned one-half of the corporate stock. Delores Adams, the wife of Dan Adams, owned the other one-half. Dan Adams was the president and Edward Witkowski the secretary of the corporation.

When Adams, Inc., was organized the shareholders sought to elect Subchapter S status for the corporation under the Internal Revenue Code of 1954. ¹ Adams, Inc., apparently filed tax returns as a Subchapter S corporation. Subsequently, the government determined that Adams, Inc., had failed to satisfy the preconditions necessary to qualify as a Subchapter S corporation and thus became liable for taxes on the same basis as any other corporation. ²

In April, 1959, about 15 months after the corporation was organized, the shareholders unanimously agreed that the corporation should be dissolved. On July 30, 1959, the Ohio Secretary of State issued a 'Receipt and Certificate' certifying that the dissolution agreement had been filed on that date. It was agreed that an amount should be set aside for the payment of corporate income taxes based on the earnings of the corporation to the date of liquidation. For this purpose the sum of $500 was placed in escrow. The balance of the corporation's assets were distributed to the shareholders.

In March, 1962, Edward Witkowski as secretary and Dan Adams as president of Adams, Inc., executed IRS Forms 872 thereby purportedly extending until June 30 1963, the statutory period for assessing taxes due from Adams, Inc., for the taxable periods ending December 31, 1958, and June 24, 1959. In 1963 and 1964, Dan Adams as president of Adams, Inc., executed additional 'waivers' purportedly extending the period for assessment until June 30, 1964, and June 30, 1965, respectively. The waivers executed in 1964 provided that if a notice of deficiency was sent to the corporation on or before June 30, 1965, then the time for making an assessment was to be extended 'by the number of days during which the making of an assessment is prohibited and for sixty days thereafter.' During the period thus extended, the taxes in issue here were assessed against Adams, Inc. When the corporation failed to pay the taxes, the government initiated the present action in the district court.

The district court concluded (1) that the assessment of taxes was invalid because it was not made within the statutory period of three years for assessment and because the purported waivers were ineffective due to the fact that Adams, Inc., had ceased to exist before the first waiver was executed; and (2) that although the distributions in dissolution of the corporation may have left the corporation insolvent, the distributions were not fraudulent as to the government because 'defendant corporation probably never had any assets to begin with, and that what the (shareholders) took back was no more than what they had put in.'

The government first argues that the district court erred in holding that the waivers were ineffective to extend the statutory period for assessment. It is asserted that Adams, Inc., continued in existence for the purpose of winding up its affairs, including the payment of taxes, and that Dan Adams as president of the corporation had authority to execute the waivers on behalf of the corporation.

The authority of the agents of a corporation in the process of winding up its affairs is governed by state law. United States v. Krueger, 121 F.2d 842 (3d Cir.), cert. denied, 314 U.S. 677, 62 S.Ct. 185, 86 L.Ed. 542 (1941). Under the Ohio statutes applicable in this case, a corporation which has been dissolved 'shall cease to carry on business and shall do any such acts as are required to wind up its affairs, but for such purpose it shall continue as a corporation.' Ohio Revised Code § 1701.88(A). The time within which a corporation must wind up its affairs is not specifically prescribed. Ohio Revised Code § 1701.88(D) provides:

The directors of the corporation and their survivors or successors shall act as a board of directors in accordance with the regulations and bylaws until the affairs of the corporation are completely wound up. Subject to the orders of courts of this state having jurisdiction over the corporation, the directors shall proceed as speedily as is practicable to a complete winding up of the affairs of the corporation and, to the extent necessary or expedient to that end, shall exercise all the authority of the corporation. Without limiting the generality of such authority, they may fill vacancies, elect officers, carry out contracts of the corporation, make new contracts, borrow money, mortgage or pledge the property of the corporation as security, sell its assets at public or private sale, make conveyances in the corporate name, lease real estate for any term, including ninety-nine years renewable forever, settle or compromise claims in favor of or against the corporation, employ one or more persons as liquidators to wind up the affairs of the corporation with such authority as the directors see fit to grant, cause the title to any of the assets of the corporation to be conveyed to such liquidators for that purpose, apply assets to the payment of obligations, and, after paying or adequately providing for the payment of all known obligations of the corporation, distribute the remainder of the assets either in cash or in kind among the shareholders according to their respective rights and interests, and perform all other acts necessary or expedient to the winding up of the affairs of the corporation.

Thus, the directors and officers continue to perform their duties under the regulations and bylaws of the corporation 'until the affairs of the corporation are completely wound up.' (emphasis added)

In construing § 1701.88, the court in Chadwick v. Air Reduction Co., 239 F.Supp. 247 (N.D.Ohio 1965), stated at page 251:

Statutes extending the vitality of a dissolved corporation for purposes of suit are remedial in nature and should be given a liberal construction, 16 A Fletcher Cyclopedia Corporations § 8143; American Oak Leather v. Peck, Ohio B.T.A., 48 Ohio O. 291, 296, 108 N.E.2d 179, 183 (1951).

Applying this rule of construction, it appears that the affairs of a corporation should not be deemed to have been completely wound up while there remains a possibility that the government could make an assessment of taxes due for a period ending prior to dissolution of the corporation.

In Monarch Mills v. Jones, 59 F.2d 502 (4th Cir. 1932), the treasurer of a corporation executed tax waivers about two and one-half years after dissolution of...