*1521 1. TRANSFEREES - DIVIDEND - IMPAIRMENT OF CAPITAL STOCK. Section 40, chapter 53, of Barnes West Virginia Code prohibits a corporation chartered under West Virginia laws from paying a dividend which impairs the capital stock of the corporation, and provides that every stockholder who received any such dividend shall be liable to the creditors for the amount of the capital of the corporation so received by him. Held, petitioners in this proceeding are liable as transferees of property under section 280 of the Revenue Act of 1926, to the extent of the percentage of the dividend which they received which was paid out of the capital of the transferor corporation, a West Virginia corporation.
2. Where the facts show that in addition to the foregoing dividend, and at a later date, petitioners, as stockholders of a corporation in liquidation, received as a liquidating dividend certain shares of preferred stock in another corporation and the evidence does not show what, if any, value such preferred stock had at the time of distribution and does not show there were any sales or market for the stock and no showing is made of the assets and liabilities underlying the stock, and the*1522 evidence shows that subsequently the corporation became insolvent and went into the hands of a receiver, and petitioners never received anything of value by reason of their ownership of said preferred stock, and it is now worthless, respondent has not sustained the burden of proof that, as to such distribution of stock, petitioners are liable as transferees of property within the meaning of section 280 of the Revenue Act of 1926.
*1298 These cases, consolidated for hearing, relate to the alleged liabilities of the petitioners as transferees of the property of the Consolidated Glass Company, Empire Glass Company and Camp Glass Company, under section 280 of the Revenue Act of 1926. The amounts of the deficiencies involved are as follows:
| Taxpayer | Fiscal year ended Aug. 31 | Amount |
| Consolidated Glass Company | 1918 | $27,845.29 |
| Consolidated Glass Company | 1919 | 24,397.83 |
| Consolidated Glass Company | 1920 | 10,411.17 |
| Consolidated Glass Company | 1921 | 872.33 |
| Empire Glass Company | 1917 | 3,988.03 |
| Empire Glass Company | 1918 | 3,896.15 |
| Empire Glass Company | 1920 | 13,443.71 |
| Comp Glass Company | 1918 | 7,536.46 |
| Total | 92,390.97 | |
| Less reduction in tax of Consolidated Glass Company for fiscal year ended August 31, 1918, set forth on p. 5, item 5(b) of consolidated amended petition filed Sept. 7, 1927 (Dockets Nos. 27324-27329, inclusive) and admitted in respondent's answer filed Dec. 3, 1927 (p. 4, items V 5(a) and (b) | 6,522.86 | |
| Or a net unpaid balance of tax alleged by the Commissioner to be due from Consolidated Glass Company of | $57,003.76 | |
| And in total from the Consolidated, Empire and Camp Companies of | 85,868.11 |
*1523 On motion of the petitioners, the hearing in the first instance was limited to the question of whether there is any liability against petitioners as transferees, and, if so, the extent of such liability. The amount of the deficiencies due from the Consolidated Glass Company and its subsidiaries and how much remains unpaid are to be determined in a later hearing, in the event this Board determines that petitioners, or any of them, are liable as transferees. By *1299 amended answers filed shortly before the hearing, respondent seeks to increase the liabilities of petitioners by additional amounts representing the value of preferred stock in the Interstate Glass Company received by them, and which distribution was alleged to have been discovered since the mailing of the deficiency notices.
Petitioners deny that they are liable as transferees in any amount. We will discuss their contentions in this respect in our opinion.
FINDINGS OF FACT.
The Consolidated Glass Company was a holding corporation, organized under the laws of West Virginia, and owned all of the capital stock of its subsidiaries, the Camp Glass Company, Empire Glass Company, Smethport Glass Company and*1524 McCoy Machine Glass Company, all West Virginia corporations. For brevity, these various companies will be hereafter referred to respectively as Consolidated, Camp, Empire, Smethport and McCoy. All the petitioners are residents of the State of Pennsylvania, except trustees of the F. S. Sherman Estate, who reside in the State of New York.
The subsidiary companies of Consolidated were all operating companies and engaged in the manufacture of window glass, using a certain character of machinery in the process of manufacturing, which infringed patent rights belonging to the American Window Glass Company. As a result of successful legal actions for patent infringement, instituted by the American Window Glass Company, a forced consolidation of these various corporations was brought about, so that they could operate under a license agreement from the American Window Glass Company to use its patents. The Interstate Window Glass Company was organized under the laws of West Virginia, to absorb, reorganize and operate Empire, Camp, McCoy, Smethport, and about a dozen other companies and plants. This company will hereafter be referred to as Interstate. Under the plan of organization of*1525 Interstate on February 1, 1921, the assets of Empire, Camp, McCoy, and Smethport were conveyed to Interstate in return for stated amounts of cash and its preferred and common stock.
In the agreement between the parties, enough cash was to be paid to the respective corporations to pay them for their inventories of manufactured goods on hand at the time of transfer. The amounts of cash paid by Interstate to the respective corporations in consideration of their transfer of assets was not shown at the hearing. However, this is not material, because respondent does not claim that petitioners received any cash as transferees of the respective corporations. The transferor corporations, Camp and Empire, received *1300 around July 1, 1922, the following amounts of stock from Interstate in consideration of the transfer:
| Stock of Interstate Window Glass Co. received | ||
| Property transferred | Total par value of preferred stock | Shares of common stock of no par value |
| Assets, property, etc., of Camp Glass Co | $175,500 | 3,510 |
| Assets, property, etc., of Empire Glass Co | 278,400 | 5,568 |
Thereafter, on July 1, 1922, Camp and Empire were dissolved and the stock of*1526 Interstate which they had received from Interstate was paid over to the parent corporation, Consolidated Glass Company, in liquidation of the stock of Camp and Empire, all of which the parent corporation owned and held. This Interstate stock received by Consolidated from its subsidiaries was subsequently transferred to the stockholders of Consolidated, as will more fully appear hereafter. Petitioners were stockholders of Consolidated.
Distribution of preferred shares of Interstate.
On August 15, 1922, Consolidated owned 6,502 shares of preferred stock of Interstate. Of this, 1,755 shares had been received from Camp and 2,784 had been received from Empire, and the balance from Smethport and McCoy. No claim is being made in this proceeding against petitioners as transferees of Smethport and McCoy. On that day, August 15, 1922, the stockholders ordered 6,000 shares of Interstate preferred stock distributed as a dividend to Consolidated stockholders. The resolution was as follows:
RESOLVED:
WHEREAS: the Empire Glass Company, Sethport Glass Company, McKean Gas & Oil Company, McCoy Machine Glass Company, and the Camp Glass Company, all being subsidiaries of this company, *1527 have been lawfully dissolved, and all their assets have passed to this corporation as the sole stockholder of each of them, and
WHEREAS: It is deemed advisable to liquidate this corporation and to dispose of its assets by distribution thereof among the several stockholders so soon as practicable, and
WHEREAS: By resolution of the stockholders passed November 30, 1920, the officers were authorized to distribute all shares of preferred and common stock of Interstate Window Glass Company received by this corporation among the several stockholders hereof, Now, Therefore, be it
RESOLVED:
That the officers and Directors be instructed to institute proper proceedings for the dissolution of this corporation so soon as in their judgment the same *1301 may be instituted without hazard to the interests of the stockholders, and be it further instructed to place the affairs of this corporation in position for liquidation so soon as practicable.
FURTHER RESOLVED:
That the treasurer be directed to pay to the stockholders of record this day a dividend, to be payable forthwith, of 70 per cent of the par value of their holdings, payable by distribution in kind of 6,000 shares of preferred*1528 stock of Interstate Window Glass Company, having a value, together with the common stock of said Interstate Window Glass Company, previously distributed to the stockholders of this corporation in accordance with the resolution above mentioned, of $70 per share of preferred stock, the said common stock being of nominal value only, and that the said dividend be paid in liquidation of the capital of this corporation and in impairment of the capital stock now outstanding.
* * *
RESOLVED:
That from the dividends of Interstate Window Glass Company stock this day authorized, the Treasurer be instructed to withhold sufficient preferred stock in the case of any individual stockholder indebted to this company, to fully secure such indemnity.
In conformity with the above resolution, 6,000 shares of preferred stock of Interstate of the par value of $100 each were distributed to stockholders and 502 shares of such preferred stock were held in the treasury of the company. Petitioners received of this distribution as follows: Thomas W. Camp, 1,120 shares; Mrs. Thomas W. Camp, 70 shares; J. B. Barber Estate, 187 shares; J. S. Walker, 204 shares; J. E. Walker, 332 shares; F. S. Sherman Estate, *1529 122 shares; F. F. Riggall, 418 shares; H. E. Camp Estate, 588 shares; C. D. Comes, 150 shares; Marion L. Boyle, nee Camp, 139 shares; F. D. Gallup, 202 shares; Pearl McQuilken, 373 shares; Emily T. Camp, 373 shares; R. E. Burdick, 19 shares. The stock was not actually distributed to the stockholders until August, 1924, although it was authorized by the above resolution on August 15, 1922. There were no sales of Interstate preferred or common stock shown by the evidence, either around August 15, 1922, or from then until August, 1924, when the stock was actually distributed to stockholders. The stock was not listed in any exchange and there was no market for it anywhere, Interstate was a reorganization and consolidation of about fifteen glass factories, but no evidence was introduced to show the value of the assets underlying its stocks and bonded indebtedness. No statement showing its assets and liabilities was introduced. The bonded indebtedness was $3,000,000, with interest at 8 per cent, making an interest charge of $240,000 a year, and there was a requirement for a sinking fund payment of $300,000 a year, being a total of $540,000 a year to cover bond payments. Interstate*1530 started business in 1921, but with the exception of a small book profit that year, lost steadily, *1302 defaulted in interest on bonds and sinking fund payments in 1925, and that year was placed in the hands of a receiver. Its management was bad from the beginning and did not improve. No dividends were ever paid on either preferred or common stock of Interstate, and petitioners have never received anything from their shares. There was no sale of the assets of Interstate by the receiver after receivership was inaugurated in 1925, as it was considered impossible. It was reorganized under a plan by which bondholders took bonds at a lower rate of interest, but petitioners received nothing. They have not sold their stock and still have it, and it is worthless.
Distribution of bills receivable.
In 1920 it was determined to increase the capital stock of Consolidated from $400,000 to $600,000. Of this increase 53 shares of $5,300 par value were used to purchase a minority interest in Empire, leaving $194,700 of the increase available for subscription by the stockholders. On February 23, 1920, the board of directors of Consolidated adopted the following resolution:
*1531 Moved and seconded, that Resolution #2 of September 22, 1919, for an increased issue of capital stock to the extent of $400,000.00 as passed at stockholders' meeting, February 29, 1919, be changed to read that we offer the stockholders of record February 23, 1920, the rights to purchase 1,947 shares of capital stock at the par value of $100 per share pro rata to the present holdings. Carried.
Moved and seconded, that 1.947 shares new issue capital stock be approved and made effective as of February 23, 1920.
In accordance with this resolution, the stockholders of Consolidated, including petitioners, subscribed to the new issue of 1,947 shares pro rata according to their then holdings of stock and on February 28, 1920, executed their demand noninterest-bearing notes in payment of the amount of stock subscribed for and received by each. Of the $194,700 notes thus executed and delivered to Consolidated, petitioners executed and delivered the following:
| R. E. Burdick | $600 |
| Thomas W. Camp | 36,300 |
| Mrs. Thomas W. Camp | 2,300 |
| Estate of J. B. Barber | 6,100 |
| F. D. Gallup | 6,500 |
| C. D. Comes | 4,800 |
| Estate of J. E. Walker | 10,800 |
| J. S. Walker | 6,600 |
| Estate of F. S. Sherman | $4,000 |
| Mrs. Emily T. Camp | 12,100 |
| Mrs. Pearl McQuilken | 12,100 |
| Estate of H. E. Camp | 19,200 |
| Marion L. Camp | 4,500 |
| E. A. Riggall | 1,000 |
| F. F. Riggall | 12,600 |
*1532 On November 30, 1920, the stockholders of Consolidated adopted a resolution as follows:
Resolved, that the treasurer be authorized and directed to pay a dividend of $194,700.00 pro rated to stockholders of record as of this date, payable *1303 January 1, 1922, and that if the effect thereof be to impair the capital stock of the companies, the treasurer be authorized to pay such dividends notwithstanding. Seconded and carried.
The resolution was carried out by canceling the promissory notes January 1, 1922, which the stockholders had given Consolidated in 1920, and all liability thereon on the books of the corporation was canceled and the canceled notes were surrendered to the respective stockholders who had executed them.
At the time of this cancellation and distribution of notes, the following journal entry on the journal of Consolidated was made:
Jan. 1 - 1922. As per resolution, Nov. 30, 1920, dividend of 32.45 per cent declared in liquidation of capital assets. Payment to be made in notes receivable held by the company and paid as directed by the resolution of stockholders $194,700.
The principal assets which Consolidated had left on hand after making distribution*1533 to its stockholders of these bills receivable were the shares of its subsidiaries, carried on its books at $405,300, for which it was to receive, and did receive, July 1, 1922, 6,502 shares of preferred stock in Interstate and $217,243.20 claimed book value common stock in Interstate, but which we find had no actual value. Consolidated had a surplus of $98,704.85, November 30, 1920, and $68,029.45, January 1, 1922, without at either date giving effect to the dividend of $194,700.
Consolidated was never formally dissolved, but in 1926 its charter was forfeited by the State of West Virginia for nonpayment of license fees. It has no assets and the deficiencies asserted against it remain unpaid, except as hereafter shown. Likewise, the deficiencies asserted against Empire and Camp remain unpaid, except that some time after deficiencies were asserted, Interstate paid respondent $25,000 as an offer in compromise of its liability as transferee of Consolidated, Empire and Camp, as well as the Crescent Glass Company and the West Forks Glass Company. Just how this $25,000 was credited to the respective deficiencies the record does not disclose. The note and the shares of preferred stock*1534 of Interstate received by petitioner E. A. Riggall as dividends were the property of F. F. Riggall. E. A. Riggall received such property for and on behalf of F. F. Riggall.
OPINION.
BLACK: The only issue for us to decide at this time is whether petitioners are liable as transferees of the assets of Consolidated, Empire and Camp, and, if so, to what extent each is liable.
At the outset it should be stated that the proof conclusively shows that the dividends which were paid to E. A. Riggall were paid to him in name only and that such dividends were the property of *1304 petitioner F. F. Riggall, and petitioner E. A. Riggall had no property interest therein. We therefore hold that petitioner E. A. Riggall is not liable as transferee.
By reason of section 602 of the Revenue Act of 1928, the burden of proof is upon the Commissioner to show that petitioners are liable as transferees of property of these several taxpayer corporations. In seeking to meet this burden of proof, respondent at the hearing introduced considerable evidence, both oral and documentary, and, based upon such evidence, makes certain contentions which we shall state and discuss in this opinion, although*1535 not in the precise order which respondent has stated them in his brief.
We shall first discuss the following contention of respondent, listed under No. 2 in his brief: "Any distribution to stockholders of the assets of a corporation, either while in process of dissolution or by way of ordinary cash dividends, from which a condition of insolvency results, gives rise to a liability to creditors on the part of the stockholders receiving such distribution, to the extent of the value of assets received. This liability arises under the common law and is general and independent of state statutes." In support of this contention respondent cites Edward H. Garcin, 22 B.T.A. at pages 1027, 1034-1036. We think the case cited supports respondent's contention. Cf. John Gerosa,21 B.T.A. 1027">21 B.T.A. 1027, 1034; J. G. Nicholas,22 B.T.A. 477">22 B.T.A. 477. In the application of the principles of law laid down by respondent in this contention, it will be seen that respondent has two things to prove in order to establish the liability which he is asserting against petitioners in this proceeding, viz, (1) he must prove that the distribution of assets rendered the transferor*1536 corporation insolvent (Kinnett-Odom Co.,19 B.T.A. 1124">19 B.T.A. 1124; Samuel W. Keller,21 B.T.A. 84">21 B.T.A. 84; Frances W. Haines,20 B.T.A. 721">20 B.T.A. 721; eliza J. Wray,24 B.T.A. 94">24 B.T.A. 94); and (2) he must prove the value, if any, of the assets which each petitioner received at the time such assets were received. For, regardless of the amount of the tax which the transferor may owe, the liability in equity of a transferee of property is limited by the net value of the property which he has received (Phillips v. Commissioner,283 U.S. 589">283 U.S. 589; United States v. Updike,281 U.S. 489">281 U.S. 489; United States v. McHatton,266 Fed. 602; Capps Mfg. Co. v. United States, 15 Fed.(2d) 528). If the respondent does not sustain the burden of proof as to either (1) or (2), he fails. It therefore becomes our task to study the facts in this proceeding and determine whether the respondent has sustained the burden of proof placed upon him by the statute.
As will be seen by an examination of our findings of fact, Consolidated made two distributions to stockholders, viz., (1) a dividend of $194,700, *1537 which was paid by a distribution to each stockholder *1305 of his demand note, and a cancellation of his liability thereon, which had been previously given to the corporation in payment of stock; (2) a distribution to its stockholders, in partial liquidation, of 6,000 shares of preferred stock of the Interstate Glass Company of a par value of $100 per share. These distributions took place at different dates and under different circumstances and were not a part of the same transaction and therefore must be considered separately. We will first consider the distribution of promissory notes.
Distribution of promissory notes.
Petitioners contend that these demand notes were executed and delivered by the several stockholders of Consolidated as a part of a plan for a declaration of a stock dividend; that the stockholders had agreed among themselves and with the officers of Consolidated that such notes should never be paid; that they were unenforceable in the hands of the corporation; that creditors of the corporation have no equitable claim upon them; and that their distribution to stockholders in the form of a dividend was a distribution of something which had no value, *1538 and hence petitioners could not be held liable as transferees as a result of such distribution.
There was considerable testimony at the hearing to support these contentions, but, even if we take the view that the notes were given as a part of a plan for the declaration and payment of a stock dividend, we do not think that fact would have any bearing on the determination of transferee liability. If the question before us was one as to whether the distribution of the notes was taxable income, it would probably be very important to determine whether the notes were part of a plan to bring about a stock dividend distribution, just as it was to determine the character of the check payments involved in Jackson v. Commissioner, 51 Fed.(2d) 650, cited by petitioner, but the question now before us is not to determine income-tax liability, but transferee liability.
These demand notes, when they were paid in for capital stock, became the property of the corporation just as effectively as if they had been cash and the corporation could not subsequently cancel them or distribute them to the stockholders of the corporation as a dividend if to do so impaired the rights*1539 of creditors. Fogg v. Blair,139 U.S. 118">139 U.S. 118; Camden v. Stuart,144 U.S. 104">144 U.S. 104.
Petitioners, in support of their contention that the distribution of these notes to the stockholders as a dividend did not create a transferee liability, cite Jackson v. Commissioner, supra;Joseph A. Steinle,19 B.T.A. 325">19 B.T.A. 325. For reasons which we have already briefly stated, we do not think Jackson v. Commissioner, supra, is in point. *1306 In Joseph A. Steinle, supra, the taxpayer corporation was the Four Lakes Ordnance Company, and the promissory notes which were executed by the stockholders were made payable to the Steinle Turret Machine Company and delivered to it and were never at any time delivered or held by the taxpayer corporation, the Four Lakes Ordnance Company. Upon the facts of that case we said: "Upon the facts we can not conclude that these several petitioners paid in to the taxpayer for their stock assets in amounts totaling $100,000 and thereafter received back in distribution assets of that company in similar amounts." Therefore, *1540 Joseph A. Steinle, supra, is distinguishable on the facts from the instant case, because in the instant case we do find as an affirmative fact that petitioners paid in to Consolidated their promissory notes for capital stock and this capital stock was issued to them. These promissory notes became assets of the corporation and the evidence shows that on several occasions some of the notes were discounted at the bank and cash was procured thereon and used in the business of the corporation. We hold, therefore, that when the notes were distributed to the stockholders in the payment of a dividend previously declared, and all liability to the corporation on the notes was canceled, it was a distribution of property belonging to the corporation, and if this distribution created a condition of insolvency in the taxpayer corporation, then under authority of cases which we have already cited, petitioners are liable as transferees to the extent of the face value of their notes, that amount being in each instance a less amount than the amount of the deficiency due.
In determining whether this distribution created a condition of insolvency, petitioner contends that the basic*1541 date should be November 30, 1920, the date when the dividend was declared.
Respondent contends that the basic date is January 1, 1922, the date when the dividend was, by the express terms of the resolution declaring it, made payable. In the view we take we find it unnecessary to discuss at length these respective contentions of the parties.
If we take January 1, 1922, as the basic date (as contended for by respondent), the facts show that the distribution of the promissory notes which was made on that date, while it impaired the capital stock of the corporation to some extent, did not create a condition of insolvency. The corporation was left with assets of value ample to pay its debts, including the deficiencies involved in this proceeding. These deficiencies, although unknown at that time, must be considered in determining whether or not the transferor corporation was made insolvent by the distribution. Samuel Keller,21 B.T.A. 84">21 B.T.A. 84. At the time this distribution was made, and immediately after, Consolidated still owned all the capital stock of its four subsidiaries, Camp, Empire, *1307 Smethport and McCoy, which had a value considerably in excess*1542 of all its liabilities, besides other assets. It seems clear to us that the distribution of the $194,700 dividend on January 1, 1922, by the method of cancellation of notes, did not create a condition of insolvency of Consolidated.
In Samuel Keller, supra, we discussed at length the effect of a partial distribution of assets to stockholders, where, although such distribution did impair the capital stock of the corporation, it did not leave the transferor corporation insolvent and unable to pay its debts and it continued in business until some years later. We there held that such partial distribution of assets, creating no condition of insolvency, did not make petitioners liable as transferees of property within the meaning of section 280. Cf. Eliza J. Wray,24 B.T.A. 94">24 B.T.A. 94.
On the authority of the above cited cases, we hold that the distribution of promissory notes to petitioners on January 1, 1922, did not create a liability against them as transferees of property under the general rules governing transferee liability, because it did not create a condition of insolvency. If such transferee liability exists, it is by reason of certain provisions*1543 of the West Virginia statute. This phase of the proceeding will be discussed later on in this opinion.
Distribution of stock of Interstate.
As has been pointed out in our findings of fact, on August 15, 1922, Consolidated declared a dividend of 70 per cent of the par value of its capital stock, payable in shares of the preferred stock of Interstate, valued for the purpose of the distribution at $70 per share. Clearly, this distribution was to be made as a part of the plan of final liquidation of Consolidated. Respondent contends that the distribution was as of August 15, 1922, the date of the dividend declaration, because such declaration of dividend was complete and unconditional, and provided that it should be paid forthwith. Petitioner contends that the basic date of distribution should be held to be in August, 1924, which is the time the preferred shares of Interstate were actually distributed to the shareholders of Consolidated.
In the view we take of the evidence, it is unimportant that we determine which is the basic date, because we are unable to determine from the evidence what, if any, value these shares of preferred stock in Interstate had at either date. *1544 Even if it be conceded, as respondent contends, that August 15, 1922, is the basic date, and that he has proved that the distribution of 6,000 shares of preferred stock of Interstate rendered Consolidated insolvent (a fact which petitioners vigorously dispute because Consolidated still retained *1308 502 shares of Interstate preferred stock and other property for the very purpose of paying any liabilities which it might owe), respondent still has not made out his case to hold petitioners liable as transferees of property, for he has failed to prove the value of the property which they received. Ludwig Vogelstein,16 B.T.A. 947">16 B.T.A. 947; Angier Corporation,17 B.T.A. 1376">17 B.T.A. 1376; Eliza J. Wray, supra;American Feature Film Co.,24 B.T.A. 18">24 B.T.A. 18.
The only evidence of the value of Interstate preferred stock introduced by respondent was the stockholders' resolution of August 15, 1922, declaring the dividend payable in preferred stock of Interstate, and reciting that such stock had a value of $70 per share, but statements of value in corporate minutes are not conclusive and are subject to rebuttal and explanation. This is particularly*1545 true in a case like the present one, where the corporation itself is not before us, but only the stockholders, whom respondent is seeking to hold as transferees. Cf. Pacific Coast Pipe Line Co.,11 B.T.A. 1329">11 B.T.A. 1329; Sterling & Welch Co.,15 B.T.A. 925">15 B.T.A. 925.
Two witnesses called by respondent, F. F. Riggall and R. A. Hill, both testified in substance that Interstate was a failure from the beginning and that its management was bad from the beginning. Thomas W. Camp, called by petitioners, testified to the same effect. F. F. Riggall had been in the glass business for about thirty years and was secretary and treasurer of Consolidated and some of its subsidiaries, and was purchasing agent of Interstate. He is one of the petitioners in this proceeding. He testified that Interstate preferred stock had no value either in August, 1922, or in August, 1924. R. A. Hill was an officer and stockholder of Interstate and was its receiver appointed in 1925 to take charge of its affairs. His testimony as to the value of this preferred stock of Interstate in 1922 was as follows:
Q. Now have you any opinion as to whether that stock had any value in August 1922, the*1546 preferred stock we are talking about here?
A. Well, it would have a book value which should be established. Whether it had a fair value, I would not think it had very much.
Q. And, of course, when we got into August 1924, your opinion as to its value would be less, that is, if it was worth nothing in 1922, it would be worth nothing in 1924?
A. I would not say it was worth nothing in 1922, but it was not worth as much in 1924 as 1922, for outside of the first year they operated at a loss.
The witness, R. A. Hill, who was called by respondent, is not a petitioner in this proceeding and, so far as the record discloses, has no interest in its outcome.
Thomas W. Camp, one of the petitioners herein, was in the glass business fifty years, was president of Consolidated and several of its subsidiaries, and was general manager of Interstate. His testimony *1309 was that Interstate stock, preferred or common, never had any market value or actual value. It was never listed on any exchange and he never knew of any sales being made of it. He testified that it was unsalable.
These three witnesses attributed Interstate's failure to bad management from the beginning, *1547 inclusion of antiquated plants in its organization, and discovery and use of newer and cheaper processes by competitors and consequent reduction in price.
No evidence of the assets and liabilities of Interstate was introduced, except as to the liability of Interstate for a $3,000,000 bond issue. In the absence of any evidence showing market quotations of the stock, or of any actual sales, or of the value of the underlying assets of the corporation, we are unable to make any finding as to the value of preferred shares of Interstate, either in 1922, at the time the dividend payable in preferred shares of Interstate was declared, or in 1924, when such shares were actually distributed to petitioners. All that we could do on this point would be to hazard a guess, and we do not think transferee liability should be determined that way.
On the authority of the cases already cited, we hold that respondent has failed to show that petitioners are transferees of property by reason of their receipt of the Interstate preferred stock, because he has failed to show what, if any, value the stock had at the time it was received by petitioners.
West Virginia statute regarding impairment*1548 of capital.
But, respondent contends, as to the dividend distribution of the promissory notes, that, even if it did not create a condition of insolvency in the corporation, nevertheless such distribution impaired the capital stock of Consolidated and that to the extent the capital stock was impaired thereby, the stockholders are liable to creditors under the laws of the State of West Virginia.
In support of this contention, respondent cites sec. 40, West Virginia Code, 1916, which reads: "If the board declare a dividend by which the capital of the corporation shall be diminished, all the members present who do not dissent therefrom and cause said dissent to be entered on the record of their proceedings, shall be jointly and severally liable to the creditors of the corporation for the amount the capital may have been so diminished, and may be decreed against therefor on a bill in equity filed by any creditor, and moreover, every stockholder who has received any such dividend shall be liable to the creditors for the amount of capital so received by him." (Italics supplied.)
This same provision is carried in Barnes West Virginia Code, Annotated, 1923, as section 40, chapter*1549 53. The Supreme Court *1310 of Appeals of the State of West Virginia had occasion to construe this statute in Arnold v. Knapp,75 W. Va. 804">75 W.Va. 804; 84 S.E. 895">84 S.E. 895. In that case, plaintiff Arnold, as trustee in bankruptcy of the Knapp-Sanderson Company, a corporation adjudged a bankrupt in January, 1911, filed a bill in equity, the object of which was, among other things, to recover from defendant Knapp the sum of $287.50 paid to him as a dividend on the stock held by him in said company, declared by the board of directors on January 20, 1910, but not paid to Knapp or credited to him until November 16, 1910, such dividend as alleged having been made when said company was insolvent and had no surplus out of which to declare a dividend and made in impairment of its capital stock.
In holding that the bill in equity was property brought, the court said: "Was there complete and adequate remedy at law and was equity without jurisdiction to grant the relief prayed for? We think jurisdiction in equity well grounded. The statute, sec. 40, ch. 53, serial section 2873, Code 1913, gives equity jurisdiction at the suit of creditors to recover the amount the capital*1550 may have been diminished by the distribution and payment of dividends. If creditors may so sue, the trustee in bankruptcy representing them, we think, should also be entitled to go into equity for the same purpose."
To the same effect is Bennett v. Bank,80 W. Va. 554">80 W.Va. 554; 93 S.E. 353">93 S.E. 353. Thus it will be seen that, under authority of the above cited cases, creditors of a West Virginia corporation have the right to sue in equity the stockholders who have received a dividend, the payment of which impaired the capital stock of the corporation, and secure a decree against them to the extent of the dividend so received. The Government is a creditor of the corporation to the extent of the tax due, and, as to general creditors, it is a preferred creditor. Section 280 of the Revenue Act of 1926 gives the Government the right to assess and collect against a transferee any tax due by the transferor, to the extent of any liability at law or in equity of the transferee of property of the taxpayer.
Since, under the laws of the State of West Virginia, a stockholder who has been paid a dividend in impairment of the capital stock of the corporation is liable in*1551 equity to the creditors of the corporation for the amount of the dividend which he has so received, we hold that the Government has a claim in equity against the petitioners in this proceeding.
Respondent contends that the basic date for determining the extent of the liability of each petitioner in this proceeding is January 1, 1922, the date when the dividend was payable, rather than November, *1311 1920, the date of declaration of the dividend. We do not agree with this contention.
This question of the effect upon a corporation's capital stock and surplus account of the declaration of a dividend was fully discussed in connection with determining the taxpayer's invested capital in W. E. Caldwell Co.,6 B.T.A. 47">6 B.T.A. 47. We there held that the date of declaration of the dividend was the basic date for determining its effect on invested capital. In the instant case we have for our construction a West Virginia statute which makes the stockholders liable to the creditors for a dividend which they have received, which said dividend when declared by the directors was declared in impairment of the capital of the corporation. *1552 In view of the express language of the West Virginia code by which petitioner's liability, if any, exists, and the authorities above cited, we hold that the date of the declaration of the dividend, November 30, 1920, is the basic date for determining what, if any, extent the capital of the corporation was impaired thereby. Cf. United States v. Guinzburg,278 Fed. 363; Weed v. United States, 38 Fed.(2d) 935. The cases cited by respondent have to do with the taxation of dividends as income to the recipients and as to when such dividends become available to the taxpayer for the purposes of taxation, and are not in point.
At the time the dividend of November 30, 1920, of $194,700 was declared, the surplus of Consolidated was $98,704.85, and to the extent of the difference between $194,700 and $98,704.85 (surplus available for dividends), the capital of the corporation was impaired thereby. Therefore we find that 507/1000 of the amount which each petitioner received was paid out of surplus and we hold that as to that amount of their distribution petitioners are not liable as transferees.
We further find that 493/1000 of the amount which*1553 each petitioner received was paid out of the capital of the corporation, and we hold that, under the statutes of West Virginia and the decisions of the Supreme Court of that State, each recipient can be compelled to account for such payments to creditors of the corporation. We therefore hold that petitioners are liable to this extent as transferees of property of Consolidated.
We hold that there is no liability of petitioners as transferees of property of Camp and Empire, because at the time this dividend of $194,700 was paid by Consolidated to its stockholders, Consolidated had not become liable as transferee of Camp and Empire. It was not until July 1, 1922, that Camp and Empire were dissolved and their assets, consisting principally of stock in Interstate, were distributed to Consolidated.
*1312 For reasons already stated, we hold that petitioners are not liable as transferees of property either of Consolidated, Camp, or Empire in so far as the receipt of the stock of Interstate is concerned, because respondent has failed to show what, if any, value said stock had at the time of its distribution.
In Docket No. 27328, E. A. Riggall, petitioner, decision will be*1554 entered that there is no liability as transferee.
As to the remaining dockets, these proceedings will be restored to the Day Calendar for further hearing on the amount of the deficiencies due for the respective years from the Consolidated Glass Company.
No hearing will be had as to the deficiencies asserted against the Empire Glass Company and Camp Glass Company, because for reasons already stated we hold petitioners are not liable as transferees of the property of these two corporations, either on account of the distribution of notes or of the stock of Interstate.
Reviewed by the Board.
STERNHAGEN, TRAMMELL, and ARUNDELL concur in the result.
Footnotes
1. Other parties petitioning, whose cases were consolidated herewith for hearing, are: Thomas W. Camp; Mrs. Thomas W. Camp; Estate of J. B. Barber; F. D. Gallup; C. D. Comes; Estate of J. E. Walker; J. S. Walker; Estate of F. S. Sherman; Mrs. Emily T. Camp; Mrs. Pearl McQuilken; Estate of H. E. Camp; Marion L. Camp; E. A. Riggall; F. F. Riggall. ↩