*1793 By a plan of reorganization effected through cooperation of the stockholders and principal creditors, all claims held by the creditors, both secured and unsecured, against the taxpayer were acquired by the petitioner in exchange for its stock, the petitioner corporation having been organized for that purpose. The petitioner also acquired in exchange for shares of its stock all outstanding stock of the taxpayer. The Government did not participate in or assent to said reorganization. Petitioner then being the sole stockholder and creditor of the taxpayer, foreclosed its mortgage lien and purchased the assets, which subsequently were resold by the petitioner and the proceeds applied in payment of the lien debts. The assets were insufficient to satisfy the lien debts and nothing remained to apply in payment of the unsecured debts or for distribution to the stockholders. Held, the petitioner is not liable, at law or in equity, as a transferee of the property of the taxpayer, within the meaning of section 280(a) of the Revenue Act of 1926.
*979 *1794 This is a proceeding for the redetermination of the liability of the petitioner, as a transferee of the assets of the McKeefrey Iron Company, for deficiencies in income and profits taxes of the latter company for the years 1917 and 1918 in the amounts of $40,394.48 and $98,303.17, respectively. The pleadings raise issues respecting the correctness of the deficiencies determined by the respondent, but, upon motion duly granted, the sole issue submitted for consideration here is whether or not the respondent "erred in proposing to assess tax against the petitioner as the transferee of property of the McKeefrey Iron Company of Pittsburgh, Pa."
FINDINGS OF FACT.
The petitioner is a Delaware corporation, with its principal office at Pittsburgh, Pa.
The respondent determined deficiencies in income and profits taxes against the McKeefrey Iron Company for the years 1917 and 1918 in the respective amounts of $40,394.48 and $98,303.17 and by letter dated September 13, 1927, advised the petitioner that said amounts were proposed for assessment against it as constituting its liability as a transferee of the assets of said McKeefrey Iron Company. Said deficiency letter is the only formal*1795 notice received by the petitioner *980 respecting any claim of the United States for taxes against the McKeefrey Iron Company for the years 1917 and 1918.
The McKeefrey Iron Company was incorporated under the laws of the State of Delaware by charter dated July 16, 1915, and on or about July 29, 1915, purchased the merchant blast furnace formerly owned by the Leetonia Steel Company.
The furnace was operated by the McKeefrey Iron Company from the latter part of 1915 or early part of 1916 until some time in 1920, when it was shut down and has not since that date been operated. The property was operated at a profit during 1917 and 1918, but losses were incurred during 1919 and 1920. During the period of operations the company became largely indebted through moneys borrowed at banks and for amounts due trade and other creditors, and from 1920 to 1924 had no operating revenues from which to liquidate this indebtedness or to meet current expenses covering taxes, insurance and similar items. In default of payment it was necessary to furnish creditors with collateral security for the renewal of old loans and to secure new borrowings to meet current expenses.
Accordingly, *1796 on October 1, 1922, the McKeefrey Iron Company placed a mortgage on its property in the amount of $700,000, naming the Peoples Savings and Trust Company of Pittsburgh as trustee under the mortgage.
This mortgage was duly recorded on February 2, 1923, in the County of Columbiana, State of Ohio, in the office of the recorder of said county, in volume 458, page 473, and on February 6, 1923, said mortgage was also filed with the county recorder of said County of Columbiana as a chattel mortgage. The mortgage was refiled with a new affidavit thereto attached in accordance with law on the 21st day of January, 1926.
Immediately after recording said mortgage or deed of trust, 700 bonds of the par value of $1,000 each were duly executed by the McKeefrey Iron Company, certified by the trustee and redelivered to the McKeefrey Iron Company. The bonds were thereupon hypothecated as collateral security on loans, and became outstanding and constituted a first lien on the property specifically described in the deed of trust, being all of the real and personal property of the McKeefrey Iron Company, with the exception of certain designated raw material, iron ore, coal, coke, limestone, dolomite*1797 and flue dust.
Said bonds were specifically issued as collateral to secure new loans, or upon the renewal of old loans, and pursuant thereto were hypothecated as security for the following:
| TO FIRST NATIONAL BANK AT PITTSBURGH | ||
| Date of note | Face of note | Bonds as collateral |
| Jan. 24, 1923 | $408,000 | $408,000 |
| Apr. 16, 1923 | 20,000 | 20,000 |
| May 21, 1923 | 10,000 | 10,000 |
| May 29, 1923 | 10,000 | 10,000 |
| June 5, 1923 | 20,000 | 20,000 |
| June 12, 1923 | 20,000 | 20,000 |
| June 18, 1923 | 20,000 | 20,000 |
| June 28, 1923 | 20,000 | 20,000 |
| July 16, 1923 | 40,000 | 3,000 |
| July 23, 1923 | 40,000 | 3,000 And other collateral. |
| Total | 608,000 | 534,000 |
| TO McKEEFREY AND COMPANY | ||
| Date of note | Face of note | Bonds as collateral |
| Jan. 24, 1923 | $102,000 | $102,000 |
| Apr. 14, 1923 | 10,000 | 10,000 |
| May 21, 1923 | 5,000 | 5,000 |
| May 28, 1923 | 5,000 | 5,000 |
| June 5, 1923 | 10,000 | 10,000 |
| June 12, 1923 | 10,000 | 10,000 |
| June 16, 1923 | 10,000 | 10,000 |
| June 30, 1923 | 10,000 | 10,000 |
| July 14, 1923 | 20,000 | 2,000 |
| 20,000 | 2,000 And other collateral. | |
| Total | 202,000 | 166,000 |
*981 As further security on the above enumerated loans, the McKeefrey Iron Company*1798 executed two chattel mortgages, the first chattel mortgage being dated January 24, 1923, and given to Graham Kearney as trustee. This chattel mortgage covered all iron ore, limestone, dolomite and flue dust, and certain accounts receivable as enumerated therein. Said chattel mortgage was filed with the county records of Columbiana County, Ohio, on February 2, 1923, and was refiled in accordance with law on June 14, 1926.
The second chattel mortgage was dated August 15, 1923, and was given to J. B. Lane as trustee. This chattel mortgage covered all pig iron stored upon the McKeefrey Iron Company property. The second chattel mortgage was filed with the county records of Columbiana County on September 1, 1923.
The trustees under these chattel mortgages collected moneys from the sale or collection of assests pledged thereunder, and from time to time made payments to the holders of the notes secured by the chattel mortgages until the mortgaged property was all disposed of. To December 31, 1923, collections and payments by the trustees were sufficient to reduce the above enumerated indebtedness in the *982 sum of $60,000, with interest on payments made, so that on January 1, 1924, the*1799 secured indebtedness stood as follows:
| Due to - | Balance due on notes with interest | secured by - |
| First National Bank at Pittsburgh | $568,000 | 534 bonds and chattel mortgages. |
| Mc,Keefrey Co | 182,000 | 166 bonds and chattel mortgages. |
| Total | 750,000 | 700 bonds and chattel mortgages. |
From January 1 to May 7, 1924, the trustees realized additional funds from the pledged assets, and on or after May 7, 1924, made a further distribution to creditors under the chattel mortgages of $115,465.21, of which amount $107,641.88 applied on the principal of the above indebtedness and $8,823.33 applied as interest.
As of May 7, 1924 (after giving effect to the above distribution), the indebtedness of McKeefrey Iron Company represented by notes outstanding secured by collateral amounted to $642,358.12 and interest, as follows:
| Due to - | Balance due on notes with interest | Secured by - |
| First National Bank at Pittsburgh | $496,241.52 | 534 bonds and chattel mortgages. |
| McKeefrey and Company | 146,116.60 | 166 bonds and chattel mortgages. |
| Total | 642,358.12 | 700 bonds and chattel mortgages. |
Early in 1924 a petition in bankruptcy was filed against the McKeefrey*1800 Iron Company, and to prevent the assets being dissipated and the rights of creditors being jeopardized, the creditors and stockholders of the McKeefrey Iron Company drew up and executed an agreement dated March 15, 1924. This agreement was signed by all the stockholders of the McKeefrey Iron Company and by its four principal creditors, the First National Bank at Pittsburgh; N. J. McKeefrey; McKeefrey and Company; and Producers Coke Company. All of the creditors of the McKeefrey Iron Company, except those shown to have been paid fully in cash, entered into this said agreement. The United States was not a party thereto.
On August 23, 1926, an order was entered in the District Court of the United States for the Northern District of Ohio, Eastern Division, dismissing the involuntary proceedings in bankruptcy against the McKeefrey Iron Company, by consent of its sole creditor, the Leetonia Furnace Company, which last-named company had theretofore acquired by purchase or otherwise and then owned all claims against said McKeefrey Iron Company.
On May 1, 1924, the board of directors of the Leetonia Furnace Company, composed of F. F. Brooks, W. D. McKeefrey, N. J. McKeefrey, *983 *1801 J. H. Hillman, Jr., G. P. Rhodes, Wiley L. Byers and Lawrence E. Sands, held an organization meeting of the Leetonia Furnace Company, notice of which had been given according to law, whereat the following officers of the Leetonia Furnace Company were duly elected:
President, F. F. Brooks,
Vice president, L. E. Sands,
Secretary and treasurer, H. K. Holmes.
The president then took the chair and placed before the board the agreement dated March 15, 1924, signed by the various stockholders of the McKeefrey Iron Company and the principal creditors of the McKeefrey Iron Company hereinbefore stated, providing for the incorporation of the Leetonia Furnace Company and the purchase by it of the stock of the McKeefrey Iron Company and of the claims against McKeefrey Iron Company, both those held by the signers of the said agreement and any other stock or claims which might be presented within such period as the board should determine.
All of the stockholders of the McKeefrey Iron Company, having entered into the agreement, surrendered the stock which they held in the McKeefrey Iron Company to the Leetonia Furnace Company, and there was issued to them one share of no par value common*1802 stock of Leetonia Furnace Company for each share of common or preferred stock formerly held in McKeefrey Iron Company. The stockholders of McKeefrey Iron Company held a total of 10,000 shares of common stock and 10,000 shares of preferred stock of said company, each share of which had a par value of $100. Upon the surrender of this stock, the Leetonia Furnace Company was then the owner of all the capital stock of McKeefrey Iron Company, and this ownership continued to the time of the foreclosure proceedings, which were carried out in the latter part of the year 1926, and until the dissolution of McKeefrey Iron Company. The McKeefrey Iron Company, a Delaware corporation, was voluntarily dissolved in the latter part of the year 1926, and a certificate of consent of stockholders to the dissolution was received and filed in the office of the Secretary of State of the State of Delaware on January 25, 1927.
Pursuant to the plan and agreement hereinbefore mentioned, the Leetonia Furnace Company on or about May 7, 1924, issued fully paid up and nonassessable stock as follows:
To First National Bank at Pittsburgh, 4,166 shares of preferred stock, with a par value of $100 per share, *1803 and 41,660 shares of no par value common stock;
To McKeefrey and Company 1,043 shares of preferred stock, with a par value of $100 per share, and 10,430 shares of no par value common stock;
*984 To Producers Coke Company, 548 shares of preferred stock, with a par value of $100 per share, and 5,480 shares of no par value common stock;
To N. J. McKeefrey, 13 shares of preferred stock, with a par value of $100 per share, and 130 shares of no par value common stock.
In addition thereto, said company issued to the former stockholders of the McKeefrey Iron Company no par value common stock of the Leetonia Furnace Company one share for each share of common or preferred stock formerly held by them, respectively, in the McKeefrey Iron Company, making a total of 20,000 shares in all. No other stock was issued by the Leetonia Furnace Company than that stated above. Voting rights attached to the preferred as well as to the common stock of the Leetonia Furnace Company.
The Peoples Savings and Trust Company of Pittsburgh, trustee, under date of August 26, 1926, at the instance of the Leetonia Furnace Company, instituted mortgage foreclosure proceedings in the Court of Common*1804 Pleas of Columbiana County, Ohio, in Cause No. 17843, in which the McKeefrey Iron Company, Graham Kearney, Leetonia Furnace and the Hanna Furnace Company were parties defendant; thereafter the McKeefrey Iron Company under date of September 13, 1926, waived summons and entered an appearance. An answer and cross petition was filed by the Hanna Furnace Company, and an answer and cross petition was filed also by Leetonia Furnace Company on October 5, 1926. The other parties defendant above named duly appeared and answered in said proceeding, and under date of October 18, 1926, a decree was entered in favor of the plaintiff for $884,228.33, and an order of sale was issued pursuant thereto, dated October 26, 1926, to the sheriff of Columbiana County, Ohio. An appraisement was filed, dated October 29, 1926, showing the total appraised value of the property covered by the order of sale as $275,000; proof of publication was thereafter filed, and the property was sold at public sale by the sheriff of said county to the Leetonia Furnace Company for a bid price of $185,000. This sale was duly confirmed by order of court, and the sheriff's deed was executed and delivered to the Leetonia Furnace*1805 Company conveying all the property of the McKeefrey Iron Company covered by the mortgage.
On May 7, 1924, on which date the capital stock, common and preferred, of the Leetonia Furnace Company, was issued as hereinbefore stated, the bonds of the McKeefrey Iron Company in ths sum of $700,000 theretofore held by the First National Bank at Pittsburgh and by McKeefrey and Company as collateral security were released and assigned to the Leetonia Furnace Company, with the assignments to it of the claims secured thereby.
*985 A complete statement of the claims purchased by the Leetonia Furnace Company pursuant to the agreement of March 15, 1924, as hereinbefore set forth, is shown by the following:
| Creditor | Amount of claim | Payment made | Claims secured by - |
| Secured claims purchased: | |||
| First National Bank at Pittsburgh (notes). | $88,241.52 | Cash, $88,241.52 | |
| Do | 408,000.00 | ||
| First National Bank at Pittsburgh (interest). | 12,852.00 | Capital stock and $86 cash | 534 bonds and chattel mortgages. |
| McKeefrey & Co. (notes) | 44,116.60 | Cash, $44,116.60 | |
| Do | 102,000.00 | ||
| McKeefrey & Co. (interest) | 3,378.84 | Capital stock and $35.84 cash. | 166 bonds and chattel mortgages. |
| Unsecured claims purchased: | |||
| Producers Coke Co | 55,387.50 | Stock and $39.50 cash | |
| N. J. McKeefrey | 1,333.33 | Stock and $20.33 cash | |
| Columbiana County treasurer | 5,271.01 | Cash | |
| Holden, Masten, Duncan & Leckie | 3,052.48 | do | |
| Reed, Smith, Shaw & McClay | 2,013.20 | do | |
| Billingsley & Moore | 1,857.30 | do | |
| W. D. McKeefrey | 270.50 | do | |
| Richter & Co | 1,044.65 | do | |
| Crowther & Co | 1,468.55 | do | |
| Grafton Supply Co | 1,470.71 | do | |
| McKeefrey Coal Co | 40.00 | do | |
| Director General of Railroads | 3,228.00 | do | |
| Erie Railroad Co | 7,248.45 | do | |
| R. W. Campbell | 250.00 | do | |
| Pennsylvania Railroad | 361.71 | do | |
| Total | 742,886.35 |
*1806 No capital was paid in at the organization of the Leetonia Furnace Company other than the claims and stock hereinbefore stated for which its capital stock was issued.
The mortgage foreclosure proceedings in the Court of Common Pleas of Columbiana County, Ohio, were in foreclosure of the mortgage which had been given to secure the bonds above stated in the total sum of $700,000, which had been held as collateral security by the First National Bank at Pittsburgh and by McKeefrey and Company, and which were released and delivered to the Leetonia Furnace Company as above stated.
After the organization of the Leetonia Furnace Company and to December 15, 1926, the date of the sheriff's deed, the Leetonia Furnace Company had become indebted to the First National Bank at Pittsburgh as shown by the following statement:
| Advanced to Leetonia Furnace Company to finance the purchase of creditors' claims against McKeefrey Iron Company | $115,000 |
| Advanced to Leetonia Furnace for expenses of maintenance, etc | 59,500 |
| Gross Amount to December 15, 1926 | 174,500 |
| Less collections on property covered by chattel mortgages turned over to the First National Bank at Pittsburgh | 19,087 |
| Leaving a net balance due the First National Bank at Pittsburgh, for indebtedness incurred for and after the organization of Leetonia Furnace Company, in the amount of | 155,413 |
*1807 *986 After the bonds of McKeefrey Iron Company in the total sum of $700,000 had been released pursuant to the agreements hereinbefore stated, they were rehypothecated as collateral security to the First National Bank at Pittsburgh to secure it for the payment of the advances above stated. At the time the mortgage foreclosure was instituted, the Leetonia Furnace Company was the owner of the bonds above stated, which were held by the First National Bank at Pittsburgh as collateral security for the said advances to the Leetonia Furnace Company.
At December 1, 1926, the Leetonia Furnace Company had claims against the McKeefrey Iron Company as shown by the following statement:
| Claims purchased and/or assigned to Leetonia Furnace Company pursuant to the agreement between stockholders and creditors herein before referred to, secured by bonds and chattel mortgages | $584,853.09 |
| Unsecured claims purchased | 84,297.39 |
| Current advances, May 27, 1924 to December 1, 1926 | 39,395.36 |
| Total | 708,545.84 |
By the summer of 1926 it had been demonstrated that there was no possible outcome but to dismantle the plant and effect a sale of the premises in parcels, as there was*1808 no market for a merchant blast furnace of this nature. Consequently, the Leetonia Furnace Company, being the holder of all of the bonds secured by the mortgage or deed of trust, directed the foreclosure proceedings, which culminated in the purchase by the Leetonia Furnace Company of the property covered by the mortgage for the sum of $185,000, of which $3,249.28 was paid by the purchaser in cash to cover costs and taxes, and the balance of $181,750.72 was credited on the bonds pro rata in accordance with the decree of the court in the foreclosure proceedings.
OPINION.
TRAMMELL: The respondent proposes to assess against the petitioner, Leetonia Furnace Company, as a transferee, deficiencies in income and profits taxes determined by him to be due from the McKeefrey Iron Company for the years 1917 and 1918. The sole issue for decision here is whether or not the petitioner is liable at law or in equity as a transferee of property of the taxpayer corporation within the meaning of section 280(a) of the Revenue Act of 1926. The burden of proof is upon the respondent to show that the petitioner is liable as such transferee, but not to show that the taxpayer was liable for the tax. *1809 Section 602, Revenue Act of 1928. The facts were stipulated by the parties substantially as set out in our findings of fact above.
*987 A transferee is one who takes the property of another without full, fair and adequate consideration therefor, to the prejudice of the rights of creditors. Do the stipulated facts show the petitioner to be a transferee of the property of the taxpayer?
The record discloses that the taxpayer corporation, McKeefrey Iron Company, operated its business at a profit during the years 1917 and 1918, but sustained losses in the subsequent years, so that it became largely indebted for money borrowed from banks and for amounts due trade and other creditors. In 1922, the iron company placed a mortgage on its property in the amount of $700,000 to secure the payment of its bonds in said amount, which bonds were hypothecated as collateral security on loans. In 1923 the Iron Company executed two chattel mortgages to cover certain property excepted from the bond mortgage. At the beginning of 1924, a petition in bankruptcy was filed against the iron company. By this time it had become reasonably apparent that the business, under conditions then existing, *1810 could not be operated profitably, and it appeared with certainty that the assets of the iron company in a bankruptcy proceeding would not be sufficient to pay the secured creditors. Accordingly, a plan of reorganization was adopted through cooperation of the stockholders and principal creditors. The Government was not a party thereto.
The primary, if not in fact the only, purpose of the reorganization plan was to conserve the assets with a view to realizing the maximum amount therefrom for the benefit of the creditors. It was not hoped that anything would remain for distribution to the stockholders, nor that the business could be operated at a profit.
Pursuant to such plan, the petitioner corporation was organized, and in exchange for its stock acquired all secured and unsecured claims held by creditors against the iron company, except that of the Government for taxes. The Government's claim was not known at that time; it had not been asserted, nor the amount determined. The petitioner also acquired, in exchange for shares of its stock, all outstanding stock of the debtor corporation. Being then the sole stockholder and sole creditor of the iron company, the bankruptcy*1811 proceeding was dismissed. Thereafter, by appropriate court action, the petitioner foreclosed its mortgage on the assets of the iron company and purchased same at sheriff's sale for the bid price of $185,000. Prior to sale, an appraisal was filed showing the appraised value of the property as $275,000.
To sustain his contention that these facts establish the liability of the petitioner as a transferee, respondent relies upon the decision of the Supreme Court of the United States in , and the court's later approving opinion in *988 . These decisions, in our opinion, do not support the respondent's position, but impel us to a contrary conclusion.
In the Northern Pacific case, the court approved in principle reorganizations such as that involved here, provided the reorganization is so effected as not to deprive creditors of their preferential rights over stockholders. Capital contributed to a corporation and represented by its shares of stock constitutes a fund subject to the payment of the corporate debts, and*1812 the rights of creditors therein are superior to the rights of the stockholders. Hence, no part of such fund may be distributed to the stockholders until the claims of all creditors, both secured and unsecured, are satisfied. In this respect, there is no distinction between creditors, except that the secured creditor is entitled to have his debt paid first and the unsecured creditor is entitled to what remains to the extent of his debt. On this point, the court in its opinion, said:
Corporations, insolvent or financially embarrassed, often find it necessary to scale their debts and readjust the stock issues with an agreement to conduct the same business with the same property under a reorganization. This may be done in pursuance of a private contract between bondholders and stockholders. And though the corporate property is thereby transferred to a new company, having the same shareholders, the transaction would be binding between the parties. But, of course, such a transfer by stockholders from themselves to themselves cannot defeat the claim of a non-assenting creditor.
* * *
That was done in the present case. * * * if purposely or unintentionally a single creditor was*1813 not paid, or provided for in the reorganization, he could assert his superior rights against the subordinate interests of the old stockholders in the property transferred to the new company. They were in the position of insolvent debtors who could not reserve an interest as against creditors. Their original contribution to the capital stock was subject to the payment of debts. The property was a trust fund charged primarily with the payment of corporate liabilities. Any device, whether by private contract or judicial sale under consent decree, whereby stockholders were preferred before the creditor was invalid. Being bound for the debts, the purchase of their property, by their new company, for their benefit, put the stockholders in the position of a mortgagor buying at his own sale.
The court further quoted with approval from its prior opinion in , as follows:
Assuming that foreclosure proceedings may be carried on to some extent at least in the interests and for the benefit of both mortgagee and mortgagor (that is, bondholder and stockholder) no such proceedings can be rightfully carried to consummation*1814 which recognize and preserve any interest in the stockholders without also recognizing and preserving the interests, not merely of the mortgagee, but of every creditor of the corporation. * * * Any arrangement of the parties by which the subordinate rights and interests of the stockholders are attempted to be secured at the expense of the prior rights of either class of creditors comes within judicial denunciation.
*989 In the Northern Pacific case, as the court pointed out, the property of the old company was purchased by the new or reorganized company, under the foreclosure sale held pursuant to the consent decree, for the benefit of the stockholders, and the interests of those stockholders were preferred over the rights of the creditor, Boyd, for the payment of whose claim no arrangement had been made. The railroad cost $241,000,000. The reorganization contract contained the recital that the property at that time was of the full value of $345,000,000. There were lien debts against it in the amount of $157,000,000. It was bid in for $61,000,000 and the new company immediately issued bonds in the amount of $190,000,000 and stock in the amount of $155,000,000, *1815 or an aggregate of bonds and stock in the amount of $345,000,000, the agreed value, against property which it had bought a month before for $61,000,000. Thus, by means of the reorganization sale, the new company acquired property worth approximately $127,000,000 for which it paid nothing. To that extent the interests of the stockholders were preferred over the rights of the nonassenting creditor, and the court held that he was entitled to have his claim satisfied out of such property.
In the instant case, a wholly different situation is presented. The reorganization plan and the foreclosure suit under the consent decree pursuant thereto were primarily for the benefit of the creditors. It was a plan designed to reduce to the minimum a loss which it was apparent must fall upon the secured creditors. The assets were not sufficient to pay the lien debts and nothing would be left for the unsecured creditors or for the stockholders. At the time of the foreclosure sale, the mortgaged property was appraised at $275,000, the unpaid mortgage was then $584,853.09. The property was bid in by the petitioner for $185,000, and both the bid price and the appraisal appear from subsequent*1816 events to have been in excess of the fair market value of the property. The business could not be operated profitably, nor could the plant be sold as a unit. The property was sold piecemeal, as purchasers could be found, and the total amount of the proceeds was less than the price at which the petitioner purchased at the foreclosure sale.
In , approving and applying the Northern Pacific decision, the court said:
Unsecured creditors of insolvent corporations are entitled to the benefit of the values which remain after lien holders are satisfied, whether this is present or prospective, for dividends or only for purposes of control. But reasonable adjustments should be encouraged. Practically, it is impossible to sell the property of a great railroad for cash; and, generally, the interests of all parties, including the public, are best served by cooperation between bondholders and stockholders. If creditors decline a fair offer based upon the principles above stated, they are left to protect themselves. After such refusal, they cannot attack the reorganization in a court of equity.
*990 The*1817 respondent does not contend here that the Government ever at any time had a lien on the assets of the taxpayer corporation for the claimed taxes, or that it is entitled to be preferred before the lien holders. The Revenue Act of 1928, in section 613, provides that the amount of any tax, if not paid upon demand, shall be a lien in favor of the United States upon all property of the taxpayer from the time the assessment list was received by the Collector, but further provides that such lien shall not be valid as against any mortgagee, purchaser or judgment creditor until notice thereof has been filed as therein provided. The tax involved in this proceeding has never been assessed, nor notice thereof recorded. Hence, in respect of the lien holders the Government is in the position of an unsecured creditor, who is entitled to the benefit of the values which remain after the lien holders are satisfied, but in this case no value remained after satisfaction of the lien holders' claims. In fact, the assets were sufficient to pay only a portion of the claims of the lien holders.
The respondent lays stress upon the fact that the stockholders of the iron company exchanged their shares*1818 for stock in the furnace company, but this fact is unimportant, unless thereby the stockholders were to some extent at least preferred over the creditors, as occurred in the Northern Pacific case, supra. In that case, the court pointed out that the creditor was entitled to subject to the payment of his debt any interest sought to be retained by the stockholders, whether present or prospective, and whether for purposes of dividends or control. But in the instant case, the stockholders did not retain control of the corporate assets by obtaining control of the new corporation. In the process of reorganization they became minority stockholders. Nor was the stock issued to them for dividend purposes; no dividends were anticipated and none was ever derived. The old stockholders were given stock in the new corporation to enable them to participate in the liquidation of the assets for the benefit of the creditors, and the creditors themselves, upon exchange of their claims for preferred stock having voting rights, were in control.
The assets of the taxpayer corporation were entirely consumed in paying the mortgage debts. No portion remained to apply against the debts owing*1819 to the unsecured creditors or for distribution to the stockholders. As the result of the reorganization, the stockholders of the old corporation were in no sense preferred over the creditors. They got nothing, neither assets, dividends nor control. The petitioner corporation, as the sole stockholder of the taxpayer after reorganization, acquired nothing which it did not apply in payment of the secured debts.
*991 If the respondent had sought to collect the taxes in controversy prior to the reorganization, he could have reached only the equity interest of the iron company in its assets, and since those assets were then mortgaged beyond their value, such procedure would not have resulted in satisfaction of the tax claim. The Government's claim prior to the reorganization was subordinate to the recorded mortgages, and certainly no superior rights accrued to it by reason of the reorganization, under the circumstances described.
Applying the generally accepted trust-fund doctrine and the principles recognized by the Supreme Court in the cases above cited, it is our opinion that under the agreed facts of this case the petitioner is not shown to be liable at law or in quity, *1820 as a transferee of property of the taxpayer corporation in respect of any portion of the tax determined against it. Cf. .
Judgment will be entered for the petitioner.