*52 Decision will be entered for the petitioner.
Petitioner corporation purchased an abstract and title plant from another corporation pursuant to an option contained in a lease of such assets, paying therefor full value in cash in the amount of $ 40,000. Incident to the purchase, petitioner required the production of all of the capital stock of the transferor corporation and its predecessor in order to show clear title to the plant. Upon the production of the stock, petitioner issued checks for the full amount of the purchase price to the transferor corporation in the name of its president and then sole stockholder for which a receipt was executed in the name of the transferor corporation. Thereafter, checks representing accrued rents payable under the prior lease were issued by the petitioner in the name of the transferor corporation in amounts exceeding the deficiencies in tax subsequently determined by the Commissioner against the transferor corporation. Held: That the petitioner corporation incident to the exercise of the option contained in the lease agreement purchased only the abstract and title plant of the transferor corporation and at no time, either directly or*53 indirectly, purchased any of the stock of the transferor corporation. Held, further, that the petitioner is not liable as a transferee for the tax indebtedness of the transferor corporation, the Commissioner having failed to establish that the latter corporation's president and sole stockholder was not authorized to accept payment on behalf of the transferor corporation or that the transferor corporation, following the sale and as a result thereof was rendered insolvent as to its creditors.
*566 The respondent determined that the petitioner was a transferee of the assets of a dissolved corporation and was liable for deficiencies in income and declared value excess profits taxes for the fiscal years ending April 30, 1944, and April 30, 1945, in the following amounts:
| Declared value | ||
| Income | excess profits | |
| Year ending April 30, 1944 | $ 1,623.89 | $ 871.53 |
| Year ending April 30, 1945 | 4,364.03 | 252.49 |
| $ 5,987.92 | $ 1,124.02 |
The sole issue herein is whether petitioner is liable as a transferee for the deficiencies*54 determined by the respondent as set out above.
FINDINGS OF FACT.
The petitioner, Stewart Title Guaranty Co., is a Texas corporation engaged in the title insurance business with its principal office at 801 Caroline Street, Houston, Texas.
*567 The Southwestern Title Guaranty Co., hereinafter referred to as Old Southwestern, was organized as a Texas corporation in 1923 to engage in the title insurance and abstracting business in and around Corpus Christi, Texas. The president and majority stockholder of Old Southwestern, W. A. Wakefield, Sr., had been engaged in the real estate, abstracting and title insurance business since 1907. Old Southwestern was at all times and until 1938 engaged in the abstracting business and from 1929 to 1938 also sold title insurance policies issued by the petitioner.
On October 20, 1938, Old Southwestern secured from the petitioner a loan of $ 20,000. As a condition to making the loan, petitioner required that the abstract and title plant of Old Southwestern be leased to the Stewart Abstract Co., a subsidiary of petitioner, for a period of 10 years. The lease provided, inter alia, that the lessee should have the right and option to purchase *55 the abstract and title plant of Old Southwestern for the sum of $ 40,000.
On April 29, 1941, Old Southwestern was dissolved and all of its assets transferred to the Southwestern Title Guaranty Co., Inc., hereinafter referred to as New Southwestern, organized on the same date. The stockholders and their respective interests in New Southwestern were the same as those of Old Southwestern and all of the assets and liabilities of Old Southwestern were carried over to the new corporation. On August 10, 1942, the board of directors of New Southwestern authorized the execution of a new note and chattel mortgage for the unpaid balance due the petitioner on the $ 20,000 loan of October 20, 1938.
From and after October 20, 1938, the Stewart Abstract Co. was in complete control of the management and operation of the business formerly operated by Old Southwestern. Old Southwestern and its successor New Southwestern never thereafter actively engaged in the title insurance or abstracting business and the only source of income to either corporation consisted of the rental payments provided for under the lease which were credited to the repayment of the $ 20,000 owing to the petitioner.
By January*56 15, 1945, the $ 20,000 loan owing to the petitioner had been paid off by the application of rental credits under the lease agreement.
Some time in January 1945, the petitioner notified New Southwestern, through W. A. Wakefield, its president, of its intention to exercise the option contained in the lease of October 20, 1938.
On or before January 23, 1945, petitioner informed Wakefield that as president of New Southwestern he would be required to produce the stock record books and also the shares of stock of New Southwestern in order to establish title to the abstract and title plant and to show his authority to act in the transaction. Wakefield advised the *568 officers of petitioner that he then owned 397 of the 500 outstanding shares of New Southwestern stock and would purchase the minority interests of the other stockholders. On January 23, 1945, Wakefield borrowed the sum of $ 5,000 from petitioner for the purpose of purchasing such stock, and pledged his 397 shares with petitioner as security for the loan. By February 9, 1945, Wakefield acquired the stock interests of the minority stockholders and thereby became the sole stockholder of New Southwestern.
At a meeting of*57 the board of directors of New Southwestern on or before February 15, 1945, "it was decided that the company should sell for $ 40,000.00 cash the abstract and title plant * * *." At a meeting of the stockholders of New Southwestern held on February 15, 1945, it was resolved:
* * * that the offer of Stewart Title Guaranty Company to purchase for the sum of $ 40,000.00 cash the abstract and title plant owned by this corporation * * * be accepted and that W. A. Wakefield, as president of the company, together with the Secretary or Assistant Secretary, be authorized to execute a proper conveyance of said property to said Stewart Title Guaranty Company.
On February 15, 1945, a bill of sale was executed transferring the assets specified in the option agreement from New Southwestern to petitioner, which read as follows:
THAT Southwestern Title Guaranty Co., Inc., a corporation, acting by and through its duly authorized officers, of the County of Nueces, State of Texas, W. A. Wakefield and J. F. Wakefield, acting by and through his duly authorized agent and attorney-in-fact, L. Y. Herold, Individually and as all of the stockholders of Southwestern Title Guaranty Co., Inc., and all the stockholders*58 of Southwestern Title Guaranty Company, a dissolved corporation, for and in consideration of the sum of Forty Thousand and No/100 ($ 40,000.00) Dollars, to them in hand paid by Stewart Title Guaranty Company, a Texas corporation, the receipt of which is hereby acknowledged, have bargained, sold and delivered, and by these presents do bargain, sell and deliver unto the said Stewart Title Guaranty Company, the abstract and title plant located on the second floor of the Nixon Building in the office of Southwestern Title Guaranty Company, Inc., in Corpus Christi, Texas * * *.
Upon the execution of the bill of sale, petitioner paid $ 10,000 to New Southwestern in the form of two checks of $ 5,000 each, made payable to Wakefield. A third check was drawn by petitioner in the amount of $ 25,000 which was made payable to Wakefield and was placed in escrow pending Wakefield's production of the shares of Old Southwestern, as the petitioner had learned that some of those shares were still pledged as collateral for debts of Wakefield. The shares in Old Southwestern were thereafter produced by Wakefield and final payment on the purchase price of the abstract plant was made by two checks drawn*59 to Wakefield's order, one in the amount of $ 5,000 dated February 20, 1945, and one for $ 20,000 dated May 3, 1945.
*569 In connection with the transaction, a receipt was executed by W. A. Wakefield in the following form:
2-15-45
Received $ 40,000 from Stewart Title Guaranty Co. for sale of title plant, furniture & fixtures & all other title data & property etc. good will & use of name located on second floor Nixon Bldg. Corpus ChristiTexas.
Southwestern Title Guaranty Co., Inc.
By W. A. Wakefield, Pres.
On March 9, 1945, a resolution was passed by the board of directors of Stewart Title Guaranty Co. "that the act of the officers in exercising the option to purchase the plant at Corpus Christi for $ 40,000.00 be ratified and confirmed in all respects".
The purpose of the petitioner in requiring Wakefield to produce the stock of Old Southwestern and New Southwestern in connection with the purchase of the abstract and title plant was to insure the validity of the transfer of such assets from Old Southwestern to New Southwestern in 1941, to secure the consent of all stockholders of New Southwestern to the sale of the plant under the option agreement, and to ascertain whether*60 any of the stock of either Old Southwestern or New Southwestern had been pledged by the stockholders as collateral with creditors.
The assets conveyed under the option agreement on February 15, 1945, possessed a value of $ 30,000.
In order to establish a record of its title to the abstract and title plant, petitioner caused photostatic copies to be made of various corporate records, stockbook, stock certificates, and other documents of Old Southwestern and New Southwestern and thereafter returned such documents to the accountant for New Southwestern.
The checks totaling $ 40,000 received by W. A. Wakefield from petitioner, representing the purchase price of the title and abstract plant, were deposited by him in an account maintained in the Corpus Christi Bank and Trust Co. in the name of "W. A. Wakefield, Trustee." No bank account was maintained in the name of New Southwestern at the time of the sale.
On February 15, 1945, Stewart Title Guaranty Co. delivered to Wakefield three checks in the amounts of $ 2,893.89, $ 2,018.09, and $ 1,500 drawn in the name of New Southwestern, representing accrued rentals under the lease agreement. These checks were endorsed by Wakefield in the name*61 of New Southwestern by himself as president and by himself individually and deposited in the "W. A. Wakefield, Trustee" account. On February 16, 1946, a check in the amount of $ 991.14, representing a reserve fund which had been accumulated on the books of petitioner to the credit of Old Southwestern and New Southwestern prior to February 15, 1945, was issued by petitioner in *570 the name of New Southwestern. This check was endorsed by Wakefield as president of New Southwestern, cashed, and the proceeds deposited in the "W. A. Wakefield, Trustee" account.
Long term capital gain in the amount of $ 837.02 from the sale of the abstract and title plant to petitioner on February 15, 1945, was reported by New Southwestern in its corporate income tax return for the fiscal year ended April 30, 1945. Attached to the return were statements to the effect that 100 per cent of the stock of New Southwestern was owned by W. A. Wakefield, Sr., and that New Southwestern possessed assets consisting of accounts receivable in the amount of $ 38,034.36 and no liabilities other than its capital stock liability as of April 30, 1945.
A certificate of dissolution was filed with the Secretary of State*62 of the State of Texas dissolving New Southwestern as of May 10, 1945.
The deficiencies in income and declared value excess profits taxes shown above and interest in the amount of $ 140.02 for the fiscal year ended April 30, 1944, and interest in the amount of $ 25.41 for the year ended April 30, 1945, were assessed by the Commissioner against New Southwestern on March 13, 1947. The deficiencies and interest assessed by the Commissioner against New Southwestern as set out above are outstanding and have not been paid. The principal part of the deficiencies in income and declared value excess profits taxes determined by the Commissioner for the year ending April 30, 1945, represents tax on the profit realized by New Southwestern from the sale of its abstract and title plant to petitioner.
On April 16, 1948, the Commissioner mailed a notice to the petitioner asserting its liability as a transferee for the unpaid income and declared value excess profits taxes and interest assessed by the Commissioner against New Southwestern for the fiscal years ended April 30, 1944, and April 30, 1945.
The petitioner at no time entered into negotiations for the purchase of the capital stock of either*63 Old Southwestern or New Southwestern, nor did it in fact either directly or indirectly purchase any shares of such stock in connection with the transaction of February 15, 1945, or at all.
OPINION.
The deficiencies in tax which have been determined by the respondent and assessed against New Southwestern are not here in issue, the sole question being whether the petitioner is liable therefor as a transferee.
The respondent contends that the transaction in question should be characterized in one of two ways: as one in which the petitioner purchased all of the stock and thereafter dissolved New Southwestern, or, in the alternative, as one in which the petitioner purchased the abstract *571 and title plant under the option provided for in the lease agreement and by paying the purchase price of $ 40,000 to Wakefield rather than to the corporation rendered the corporation insolvent and incapable of satisfying the claims of its creditors, including the tax liability due the respondent.
The record clearly does not support the respondent's suggestion that the transaction was one whereby petitioner acquired the stock of New Southwestern and thereafter directed its dissolution. The option*64 demanded by and granted to petitioner in the lease of October 20, 1938, pertained solely to certain specified physical assets in the abstract and title plant. The minutes of the meeting at which the directors of petitioner ratified the exercise of the option and the minutes of the meeting of the stockholders of New Southwestern at which the sale was approved disclosed no intention on the part of either party to purchase or sell anything more than the abstract and title plant covered by the option. The bill of sale and the receipt executed on February 15, 1945, also states that the property conveyed to the petitioner consisted of the abstract and title plant of New Southwestern.
Although various corporate records of Old Southwestern and New Southwestern were delivered to petitioner by Wakefield in connection with the transaction, such records, including the stock certificates in New Southwestern, were returned by petitioner to New Southwestern's accountant after photostats had been made for its files. The tax returns of New Southwestern for the year ending April 30, 1945, represented that Wakefield was the owner of 100 per cent of its stock and reported the gain from the sale of*65 the assets in question to the petitioner. The certificate of dissolution likewise showed full stock ownership in W. A. Wakefield.
Respondent would have us regard the interest of the petitioner in the whereabouts of the stock of Old Southwestern and New Southwestern at the time it exercised the option and actually concluded the transaction on February 15, 1945, as evidence that the stock rather than the abstract and title plant was the subject of the sale. However, this interest was in our opinion based on sound business reasons. After exercising the option, petitioner learned that Wakefield had pledged his stock in Old Southwestern with creditors as collateral for debts which at the time of the transaction had not been paid. It had no knowledge of the status of the other shares of stock in Old Southwestern and, therefore, was concerned with the validity of the transfer of the assets and liabilities of Old Southwestern upon its dissolution in 1941 to New Southwestern. Moreover, as the abstract and title plant constituted the principal asset of New Southwestern and its sale would serve to put the corporation out of business, it was important that the consent of all stockholders*66 be secured in order to block any later attempt by a minority stockholder to set aside the sale.
*572 However, the most damaging circumstance to the respondent's case is that while he maintains that petitioner purchased the stock rather than the assets of New Southwestern, the deficiencies he has determined for the fiscal year ending April 30, 1945, stem almost entirely from the gain realized by New Southwestern from the sale of the abstract and title plant to petitioner. The inconsistency of this position is obvious.
For the reasons stated above, we have concluded that the petitioner purchased the abstract and title plant from New Southwestern and in no way negotiated for or actually purchased any stock in either Old Southwestern or New Southwestern in the transaction of February 15, 1945.
Nor do we think that the respondent's contention that the result of the transaction in question was to render New Southwestern insolvent as to its creditors is well taken. It is true that the payment of the purchase price of $ 40,000 was made by checks drawn and issued in the name of W. A. Wakefield, but the facts show that at the time of the transaction Wakefield was the president and the*67 sole stockholder of New Southwestern and the receipt he executed shows that he accepted payment on behalf of and in the name of the corporation and signed the receipt as the president of New Southwestern.
The purchase price of $ 40,000 was deposited in an account entitled "W. A. Wakefield, Trustee". However, it is clear that no account existed in the name of New Southwestern at the time of the transaction and it is doubtful whether a bank account had ever been maintained in the name of New Southwestern. We find not the slightest inference in the facts of this case to indicate that Wakefield intended to or did in fact defeat the claims of corporate creditors by so depositing the proceeds of the sale of the abstract plant.
On February 15, 1945, checks representing rental payments totaling $ 6,411.98 were issued by petitioner in the name of New Southwestern which were endorsed by Wakefield as president of New Southwestern, and individually, and deposited in the "W. A. Wakefield, Trustee" account. Another check was drawn on February 16, 1946, by petitioner to the order of New Southwestern in the amount of $ 991.14 which Wakefield endorsed as president, cashed, and deposited in the *68 same account. Therefore, within a period of approximately one year after the transaction in question, checks were issued to New Southwestern by petitioner in the name of New Southwestern in amounts exceeding the total tax liability determined by the respondent.
Furthermore, Wakefield testified that New Southwestern had no liabilities at the time of the sale of the abstract plant to petitioner on February 15, 1945. No liabilities other than for its capital stock were *573 disclosed in the balance sheet attached to the income tax return of New Southwestern for the year ended April 30, 1945.
Respondent relies upon the rule that where one dispossesses a company of all its assets, pays the consideration therefor to a third party, and leaves the propertyless corporation unable to pay its debts, one becomes a trustee and is liable for the taxes and other debts of the corporation to the extent of the value of the property taken. ; ; , certiorari denied, .*69 However, those same cases recognize the rule that where one corporation in good faith purchases or acquires all of the assets of another for fair consideration, the transferee is not liable for the debts and liabilities of the transferor. In our opinion, the facts in the instant case call for the application of the latter rule.
Petitioner paid New Southwestern fair consideration in the amount of $ 40,000 for an abstract and title plant with an agreed value of $ 30,000 and the respondent has not sustained his burden of proving that Wakefield was not authorized to or did not in fact accept payment on behalf of New Southwestern or that New Southwestern was rendered insolvent as to its creditors by reason of the sale. Therefore,
Decision will be entered for the petitioner.