1931 BTA LEXIS 1547">*1547 1. Held, that petitioner is liable as a transferee and that the deficiency is not barred by the statute of limitations.
2. Invested capital of the transferor corporation for 1920 should not be reduced on account of outlawed taxes for 1918.
3. The transferor corporation held affiliated with a corporation in which it owned all the stock. Claimed affiliation with two other companies denied.
4. Fair market value of stock received for assets determined,
24 B.T.A. 1061">*1061 The respondent determined a deficiency of $104,285.91 in income and profits taxes of the Empire Art Metal Company for the year 1920, and entered a jeopardy assessment in that amount against petitioner as a transferee.
The issues relate to both the amount of the deficiency and the liability of petitioner as a transferee.
FINDINGS OF FACT.
The Empire Art Metal Company, hereinafter called the Empire Company, was incorporated in 1913 by John W. Rapp, now deceased, for the purpose of manufacturing hollow metal doors and trim, which business1931 BTA LEXIS 1547">*1548 had theretofore been conducted by Rapp.
After the incorporation of the Empire Company, Rapp assigned to it a contract that he had to furnish and install doors, trim, and other interior equipment in the Equitable Building in New York City. The original contract called for installations amounting to $350,000, upon which Rapp and his associates estimated a profit of about $100,000. The gross amount realized, however, greatly exceeded the original contract price and the Empire Company ultimately realized a profit of about $250,000. The Empire Company subsequently obtained a contract for equipment for the Widener Building in Philadelphia, which called for an expenditure of approximately $320,000 upon which the Empire Company estimated a profit of about $60,000.
In 1920 the Geiger-Jones Company, of Canton, Ohio, which was engaged in underwriting and selling industrial securities, formulated a plan for consolidating the Empire Company with the Zahner 24 B.T.A. 1061">*1062 Metal Sash & Door Company, hereinafter called the Zahner Company, which was engaged in the same business.
A plan of consolidation was agreed upon and a series of agreements were entered into under which Geiger-Jones Company1931 BTA LEXIS 1547">*1549 agreed to and did incorporate a new company, the Central Metal Products Company, hereinafter called the Central Company, for the purpose of taking over the assets and business of the Zahner and Empire Companies. The Central Company had an authorized capital of $3,000,000 par value preferred stock and 300,000 shares no par common stock. Of this stock $2,280,000 preferred (22,800 shares) and 120,000 shares of common were to be issued to Geiger-Jones Company, which company in turn was to transfer 8,800 preferred and 35,200 common shares to the Zahner Company, and 4,000 shares preferred and 8,000 shares common to the Empire Company for the transfer of their assets to the Central Company, and 17,000 shares of common to Rapp in consideration of his agreeing not to engage in a competitive business. In addition, the Geiger-Jones Company was to pay Central Company $800,000. The consolidation as contemplated was consummated on August 10, 1920. On that date the assets of the Zahner and Empire Companies (except certain designated assets of the latter) were transferred to the Central Company subject to mortgage bonds in the amount of $350,000 previously issued by the Zahner Company and mortgage1931 BTA LEXIS 1547">*1550 notes of $225,000 issued by the Empire Company, which liabilities were assumed by the Central Company. Other agreements entered into at the same time, as far as material here, may be briefly described as follows:
1. Agreement between Empire Company and Rapp. - By this agreement the Empire Company transferred to Rapp the assets reserved under the prior bill of sale to the Central Company and also the stock of the Central Company "delivered or to be delivered" to the Empire Company. By this same instrument Rapp agreed to pay and discharge the debts and liabilities of the Empire Company "to the extent of the value of the assets, rights, property, and stock transferred to him or hereby coming into his hands by virtue thereof."
2. Agreement between Geiger-Jones Company and Rapp. - By this agreement the Geiger-Jones Company agreed to purchase Rapp's 4,000 shares of preferred and 8,000 shares of common stock of the Central Company at the price of $85 per unit, each unit to consist of 1 share of preferred and 2 shares of common, the aggregate price being $340,000. Geiger-Jones further agreed to, and did, execute notes aggregating $100,000 payable October 10, 1920, and one1931 BTA LEXIS 1547">*1551 note in the amount of $25,000 payable November 10, 1920. Geiger-Jones Company further agreed to pay to Rapp $25,000 on December 10, 24 B.T.A. 1061">*1063 1920, and on the tenth day of each month from January to July, 1921, both months inclusive, and $15,000 on August 10, 1921. These payments were to be made at a designated trust company with which Rapp agreed to deposit the stock and the stock was to be released to the Geiger-Jones Company in specified amounts as it met its payments. It was agreed that "time is of the essence of this contract" except that in case of "a general period of depression or panic of such importance and character as to materially affect the general sale of industrial securities," then Geiger-Jones Company was to have an extension of not to exceed four months to complete the purchase of Rapp's stock.
3. Agreement between Geiger-Jones Company and the Central Company. - By this agreement Geiger-Jones Company, "in consideration of the issue to it of certain shares of the preferred and of the common stock" of the Central Company, agreed to pay to the Central Company the sum of $800,000 in ten equal monthly installments, beginning September 10, 1920. It was further1931 BTA LEXIS 1547">*1552 agreed that out of the preferred stock withheld by the Central Company as security for the performance of the agreement, the Central Company was to release to the Geiger-Jones Company one share for each $85 paid over by the latter. This agreement contained a provision similar to that between the Geiger-Jones Company and Rapp granting additional time to complete payment in the event of depression or panic.
As a result of the above transactions the Geiger-Jones Company had available for sale 14,000 shares of Central Company preferred stock, being the 10,000 shares retained by it and the 4,000 shares it agreed to purchase from Rapp, and 67,800 shares of common stock, being the 59,800 shares issued to it and the 8,000 shares it agreed to purchase from Rapp. Under the above agreements the Geiger-Jones Company was obligated to pay within a year $340,000 to Rapp and $800,000 to the Central Company, a total of $1,140,000.
Upon completion of the consolidation in August, 1920, the Geiger-Jones Company attempted to market the Central Company stock. As a part of its campaign, the Geiger-Jones Company prepared and issued a prospectus purporting to set forth the financial condition of the1931 BTA LEXIS 1547">*1553 Central Company. Among assets listed were "properties, plants, and equipment" at $1,850,000. This figure was $1,000,000 in excess of the actual worth of those assets, the excess having been arbitrarily added by the president of the Geiger-Jones Company. Unissued bonds were shown at a value of $110,000, when as a matter of fact the bonds had been pledged as security for a loan. Contracts and good will were listed at $732,000, which was greatly in excess of their value. It listed as an asset the $800,000 which the Geiger-Jones 24 B.T.A. 1061">*1064 Company had contracted to pay the Central Company. The value of that receivable was extremely doubtful, because of the fact that the ability of the Geiger-Jones Company to liquidate the amount depended upon its ability to sell the Central Company stock. At that time the Geiger-Jones Company was heavily indebted to banks in the community in which it operated, and the banks refused to make any further loans to it.
The Geiger-Jones Company had a force of about 150 salesmen and of this number about 25 per cent refused to handle the Central Company stock, believing that it was not a safe investment. In the latter part of 1920 the depressed state1931 BTA LEXIS 1547">*1554 of the security market made it exceedingly difficult to sell stock. Listed stocks, including those that were regarded as high-grade investment issues, were selling far below the prices established earlier in the year. The Central Company stock was not listed on any exchange and there are no bid or asked prices for it of record. In order to dispose of the stock, the Geiger-Jones Company resorted to what it termed "extraordinary methods." Its salesmen covered the State of Ohio and parts of Pennsylvania and New York, but sales were slow. During 1920 sales of preferred stock were as follows: October, 2,828 shares; November, 1,518 shares; December, 199 shares, or a total for the year of 4,545 shares. During the entire year 1921 it sold only 646 shares of preferred stock. In each case common stock was given as a bonus with the preferred. The total number of purchasers was about 1,200 and the gross receipts were about $493,145. The sales, which averaged about 4 shares to each purchaser, were made to doctors, lawyers, school teachers, farmers, and others who had no knowledge of the actual value of the stock.
Because of the difficulty in selling the Central stock, the Geiger-Jones1931 BTA LEXIS 1547">*1555 Company was unable to meet in full its obligations to the Central Company and to Rapp. On December 1, 1920, it notified the escrow holder of the stock that it would require an extension of time on the note due December 10, 1920, and also on the payments due in January, February, and March, 1921. On December 29, 1920, it gave notice that due to the depressed state of the security market it would be compelled to exercise the option of extension under the agreement with Rapp for a period of four months. During 1920 the Geiger-Jones Company paid Rapp $83,000 of the amount it had contracted to pay and in 1921 it paid further sums aggregating $85,125, a total of $168,125. The balance of $171,875 has never been paid.
In 1920 the Geiger-Jones Company paid $212,831.02 of its obligation to the Central Company and in 1921 the further sum of $105,924.92, a total of $318,755.94.
24 B.T.A. 1061">*1065 In the latter part of December, 1921, a petition for receivership was filed against the Geiger-Jones Company, which was granted shortly thereafter.
The Central Company sustained a net loss of $31,926.45 for the period August 10 to December 31, 1920, and on December 31, 1921, it went into the hands1931 BTA LEXIS 1547">*1556 of a receiver.
The Central Company preferred stock had a fair market value not in excess of $50 per share. The common stock had no fair market value.
A consolidated return of the Empire Company and three other companies for the year 1918 was filed on June 16, 1919, and a consolidated return for the same companies for 1919 was filed on July 16, 1920. The respondent, upon audit of those returns, determined an additional tax of $50,542.01 against the Empire Company for the year 1918 and $454.68 against that company for 1919, both of which amounts were assessed on May 29, 1925.
For the year 1920 the Empire Company filed a consolidated return with the Perfection Metal Products Company, Queensboro Trucking Company, and Empire Metal Aircraft Company, showing the total income and deductions of all four companies. This return was filed on September 15, 1921, proper extension to that date having been obtained. The amount of income or net loss attributable to each company was shown on the return as follows:
| Company | Profit | Net loss |
| Empire Company | $10,059.84 | |
| Perfection Metal Company | $450.92 | |
| Queensboro Trucking Company | 1,658.67 | |
| Empire Metal Aircraft Company | 15,480.97 |
1931 BTA LEXIS 1547">*1557 The stockholders of the above four companies from January 1 to August 10, 1920, were as follows:
| Empire Art Metal Co. | Perfection Metal Products Co. | Queensboro Auto Trucking Co. | Empire Metal Aircraft Co. | |||||
| Stockholder | Shares | Per cent | Shares | Per cent | Shares | Per cent | Shares | Per cent |
| John W. Rapp | 2,050 | 82 | 12 | 60 | 13 3/4 | 55 | ||
| A. J. Connell | 150 | 6 | 4 | 20 | 3 3/4 | 15 | ||
| W. C. Lange | 150 | 6 | 4 | 20 | 3 3/4 | 15 | ||
| Jacob Cohen | 150 | 6 | 3 3/4 | 15 | ||||
| Empire Art Metal Co | 5 | 100 | ||||||
| Total | 2,500 | 100 | 20 | 100 | 25 | 100 | 5 | 100 |
On August 10, 1920, Rapp was the sole stockholder of the Empire Company.
Under date of February 20, 1926, respondent ruled that the above four companies were not affiliated prior to August 10, 1920. On that date he assessed an additional tax of $66,108.42 against the Empire 24 B.T.A. 1061">*1066 Company for the period January 1 to August 9, 1920, and an additional tax of $38,177.49 against the Empire Company and its affiliated companies for the period August 10 to December 31, 1920.
In its return for 1920 the Empire Company computed the profit on the sale of its assets to the Central Company as follows: 1931 BTA LEXIS 1547">*1558
| Net value of | $187,569.30 | |
| assets sold | ||
| Sale price | $340,000 | |
| Less commission | 19,000 | |
| Net sale price | 321,000 - 100% | |
| Net assets sold | 187,569.30 - 58.4328+% | |
| Net profit on | 133,430.70 - 41.5671+% | |
| assets sold | ||
| Amount realized from | 150,000.00 | |
| sale in 1920 | ||
| Net profit on | 62,350.71 | |
| above at 41.5671+% | ||
| Unrealized profit | 71,079.99 | |
| Total profit | 133,430.70 |
The figure of $187,569.30 was supported by schedules showing in detail the assets and liabilities. Among the assets was listed good will at $90,000. From the figure of $62,350.71 given as the net profit, the Empire Company deducted $80,220.97 as a loss on the sale of stock in the Empire Tube & Steel Corporation, leaving a loss on the sale of capital assets in the amount of $17,870.26.
In determining the deficiency, respondent excluded the $90,000 good will item from assets and used $444,843.80 as the sale price instead of $340,000 used by the Empire Company. The use of the larger figure as the sale price is now conceded by the respondent to be error. Respondent made no change in the claimed loss on the sale of Empire Steel & Tube Company stock.
In computing invested capital for 1920, 1931 BTA LEXIS 1547">*1559 respondent reduced the amount shown on the return by $90,000 claimed as good will. He also reduced it by $50,542.01 on account of additional tax liability for 1918, and 1919 taxes prorated from the due date of the installments. He also eliminated invested capital of the companies with which the Empire Company claimed affiliation for the period prior to August 10, 1920.
On February 19, 1927, respondent mailed a notice to the Central Company notifying it of its liability, as a transferee, for taxes of the Empire Company for 1920. On March 5, 1927, he assessed the deficiency against the Central Company, as transferee.
On March 5, 1927, respondent assessed against petitioner, as transferee, the deficiency determined for 1920 in the amount of $104,285.91, and notified petitioner thereof by letter dated March 22, 1927.
The respondent has exhausted all his remedies against the Empire Company and has been unable to collect the deficiency here in controversy.
24 B.T.A. 1061">*1067 OPINION.
ARUNDELL: The several issues in this case may be grouped under two heads. In the first group there are the questions of whether Rapp is a transferee of the Empire Company and whether the assessment1931 BTA LEXIS 1547">*1560 against his estate was timely made. The second group goes to the amount of the deficiency, it being claimed: (a) That the Empire Company was affiliated with three other companies in that part of 1920 prior to August 10; (b) that invested capital was erroneously reduced by excluding claimed good will and on account of taxes for 1918 and 1919; (c) that the sale of assets by the Empire Company was not taxable; and (d) that if it was taxable it was an installment sale.
The material facts relating to the transferee liability may be briefly restated. In 1920 the Empire Company conveyed a part of its assets to a newly organized corporation in exchange for stock of the latter, which stock, pursuant to an agreement with the Empire Company, was issued directly to the Empire's sole stockholder, John W. Rapp. The brokerage concern that handled the consolidation agreed to purchase a part of the stock thus acquired by Rapp at a fixed price, which agreement it partially performed.
We think these facts are sufficient to establish liability on the part of Rapp. By the conveyances of the Empire's assets, that company was left without means of satisfying its tax liability, and the assets taken1931 BTA LEXIS 1547">*1561 over by Rapp and the proceeds of those conveyed to a third party, were taken subject to the liabilities of the transferor. . Moreover, under the agreement between Rapp and the Empire Company, the Central stock and the remaining Empire assets were expressly taken by Rapp subject to the Empire's liabilities.
The Empire Company's return for 1920 was filed on September 15, 1921. Assessment was made against it on February 20, 1926, which was well within the five-year statutory period. A jeopardy assessment of the Empire Company's deficiency was entered against petitioner on March 5, 1927, and petitioner was notified thereof by letter of March 22, 1927. The statutory period for assessment against the Empire Company did not expire until September 16, 1926, which was after the enactment of the Revenue Act of 1926, and the assessment against petitioner having been made within one year thereafter, the case falls within section 280(b)(1) of the Revenue Act of 1926, and the assessment was timely made. 1931 BTA LEXIS 1547">*1562 ; .
The amounts and percentages of stock owned by the several stockholders in the Empire Company and the three others with which it claimed affiliation are set out in the findings of fact. The tabulation 24 B.T.A. 1061">*1068 set out shows that the Empire Art Metal Company owned all the stock of the Empire Metal Aircraft Company. On this showing there can be no doubt that these two companies were affiliated and entitled to file a consolidated return. The Empire Company owned no stock in the other two concerns, the Perfection Metal Products Company and Queensboro Trucking Company, and no control on the part of the Empire Company is shown. Accordingly, if these two companies are to be included in the affiliation, it must be under section 240(b)(2) of the Revenue Act of 1918. All the stock of the Perfection Metal Products Company was owned by three individuals. These three owned only 85 per cent of the Queensboro Trucking Company stock and 94 per cent of the Empire Company stock. In view of the widely varying percentage of stock ownership and the absence of any showing of control or economic unity, 1931 BTA LEXIS 1547">*1563 we are of the opinion that respondent's refusal to allow the affiliation of the Perfection and Queensboro companies with the Empire Company should not be disturbed. .
The claim for the inclusion in invested capital of the Empire Company of good will in the amount of $90,000 is based on the fact that upon organization Rapp assigned to it a contract for equipment of a building in New York and that after incorporation the company itself obtained a contract for equipping a building in Philadelphia, from both of which contracts it expected to realize substantial profits. The evidence is insufficient to sustain the claim. The ability to secure contracts may in some measure be determined by good will, but the fact that a corporation has two contracts does not establish the existence of that intangible, much less its value. Any profits realized under the contracts would find their way into invested capital through earned surplus.
We further hold, on the same evidence, that there was no error in respondent's exclusion of $90,000 as cost of good will in determining profit on the sale of the Empire Company's assets. Whatever1931 BTA LEXIS 1547">*1564 assets the Empire Company sold were acquired by it after March 1, 1913, and the basis is therefore cost. What the cost was does not appear from the evidence.
The Empire Company's return for 1918 was filed June 16, 1919, and the statute of limitations, unless waived, ran against assessment five years later, or on June 16, 1924. Respondent introduced no waivers in evidence and we accordingly hold that the assessment of additional taxes for 1918 made on May 29, 1925, was too late. Under our holdings in , and , it was error for the respondent to reduce invested capital for 1920 on account of the barred tax for 1918.
24 B.T.A. 1061">*1069 The 1919 return was filed July 16, 1920, and the assessment for that year made on May 29, 1925, was timely. Accordingly, there was no error in reducing invested capital on account of that assessment. Section 1207, Revenue Act of 1926.
The remaining questions have to do with the amount of profit realized by the Empire Company on the sale of assets for the Central Company's stock. There is no merit in the contention that the profit should be computed1931 BTA LEXIS 1547">*1565 on the installment basis, as the entire consideration, namely, stock of the Central Company, was received at once by the Empire Company. The fact that Rapp received in cash within the year less than one-fourth of the price at which he agreed to sell the stock does not affect the question, as he was not the vendor of the Empire Company's assets.
Section 202(b) of the Revenue Act of 1918, under which the profit to the Empire Company is to be computed, provides that:
When property is exchanged for other property, the property received in exchange shall, for the purpose of determining gain or loss, be treated as the equivalent of cash to the amount of its fair market value, if any; * * *.
Respondent computed the gain under this section, but in so doing he used $444,843.80 as the sale price and now concedes that that figure is in error in so far as it exceeds the $340,000 shown as the sale price in the return. There is no dispute between the parties that the amount of $187,569.30 listed in the return as the value of assets sold is the correct basic figure - except for the $90,000 good will item eliminated by the respondent, which elimination we have sustained.
The sale price1931 BTA LEXIS 1547">*1566 of $340,000 now contended for by respondent represents a value of $85 per unit for the stock received by the Empire Company, each unit consisting of one share of preferred and two shares of common stock. We are satisfied that the figure of $85 per unit is higher than the fair market value. The evidence shows that despite extraordinary efforts exerted by the Geiger-Jones Company, sales were exceedingly slow and in very small blocks. The stock was peddled in three States and common stock offered as a bonus, and yet the sales dwindled with the passage of each month. The stock was not listed and there are no bid or asked prices of record. Banks refused to accept the stock as collateral. The issuing company, Central, was losing money in 1920. The Geiger-Jones Company was in a bad way financially. The Central Company, it is shown, was tremendously overcapitalized. The agreement of the Geiger-Jones Company to purchase Rapp's holdings at a stipulated price is no evidence of market value. The figure agreed upon was purely an artificial price fixed before any market value was established. The widely scattered purchasers of the stock had no knowledge of the value of the stock, and1931 BTA LEXIS 1547">*1567 it appears that they were induced to buy 24 B.T.A. 1061">*1070 through the efforts of Geiger-Jones salesmen and on the basis of the fictitious statements in the prospectus put out by that company. The sales made, in our opinion, do not establish the fair market value of the stock.
We do not believe that petitioner makes his case solely by establishing that $85 was not the fair market value of the preferred shares. The evidence is all to the effect that Geiger-Jones arbitrarily wrote up the assets and the plant account alone was increased $1,000,000 above its actual worth as a justification for the basis on which the financing of the Central Company was being undertaken. The fact that shares of stock may not be marketed at an excessive price does not establish the lack of a market for the same shares at a fair price. The new company had the assets of two companies that had previously been operating, and, as far as we know, had been successful concerns. The former president of the Zahner Company, who also acted as consulting accountant to the Geiger-Jones Company prior to the consolidation, and who was familiar with the plants and operations of both companies, testified that consolidation1931 BTA LEXIS 1547">*1568 would have been an excellent thing for both companies if the capitalization had been kept down to a basis commensurate with the value of the assets, and he expressed it as his opinion that the preferred stock was worth from $25 to $35 per share on the basis of the combined value of the assets of the two companies. Upon careful consideration of all of the evidence we feel warranted in fixing a fair market value on the preferred stock, and in our opinion its fair market value was not in excess of $50 per share. It follows that the amount realized by the Empire Company on the exchange of its assets for stock should be computed on that basis.
Decision will be entered under Rule 50.