author: Van Fossan :

text:
    The East Ninth Euclid Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 32227.
    Promulgated May 10, 1932.

      Oscar I. Kohe, O. P. A., for the petitioner.

      J. B. Johnston, Esq., for the respondent.
   OPINION.

Van Fossan :

For the purposes of financing obligations assumed under a 99-year lease on a certain building purchased by petitioner and making alterations therein, the petitioner issued as of February 1, 1919, first mortgage bonds maturing in five years in the amount of $250,000, and as of January 15, 1919, second mortgage bonds of 2-year life in the amount of $150,000. These bonds were sold at an aggregate discount of $50,400. In 1920 petitioner issued first mortgage bonds aggregating $525,000, a certain number maturing annually from 1922 to 1932, inclusive. These bonds were sold and with part of the proceeds petitioner retired the five-year bonds. In 1923 petitioner sold the leasehold. In computing gain or loss on such sale petitioner treated the item of bond discount as part of the cost of the property sold. Respondent disallowed the same as such and found the deficiency in question. In the alternative, petitioner contends that, if the bond discount be not part of the cost of the property sold, the unrecovered cost of the first bond issues should be considered as cost of the new bond issue and spread over the life of the new bonds.

Bond discount is a cost of acquiring capital and he who incurs such cost is entitled to recover it by deductions from income. The Board, supported by the courts, has held that normally such recovery should be prorated over the life of the bonds. See Chicago, Rock Island & Pacific Railway Co., 13 B. T. A. 988; U. S. Playing Card Co., 15 B. T. A. 975; Julia Stow Lovejoy, 18 B. T. A. 1179; Western Maryland Railroad Co. v. Commissioner, 33 Fed. (2d) 895. Moreover, we have held that on sale of the property the unrecovered cost of financing is not to be added to the cost of property sold to determine gain or loss, but may be charged off and deduction taken from gross income. S. & L. Building Corporation, 19 B. T. A. 788. These decisions dispose of petitioner’s first contention.

Consideration of the second contention requires an examination of the facts. From the supplemental proof offered in the case it is clear that the original stipulation was both incomplete and inaccurate. The statement found in numbered paragraph 6 that “ the petitioner arranged for replacement of the short-term bonds with twelve-year first mortgage 7 per cent bonds to be issued February 1, 1920 ” is inaccurate in its description of the new bonds and misleading in the inference from the suggestion that there was a replacement of the short-term bonds. The new bonds were of varying maturities from two to twelve years. There was no replacement in the sense of an exchange of new bonds for old. The new bonds were sold on the market and part of the proceeds used to retire the original first mortgage issue of $250,000 five-year bonds. The failure of the circular, Exhibit F, to refer to the second mortgage bonds nr to suggest their retirement leaves doubt in our mind as to whether the statement in paragraph 7 of the original stipulation is accurate when it refers to “incidental retirement in said year 1920 of the short-term bonds hereinbefore referred to.” Petitioner has left to inference or conjecture the facts as to the retirement of the second mortgage bonds.

However, the supplemental proof makes the situation entirely clear in some respects. The short-term bonds issued in 1919 were paid off and retired in 1920. There was no exchange of bonds or substitution of the new issue for the old. The holders of the two sets of bonds were obviously not the same persons. Cf. Pig & Whistle Co., 9 B. T. A. 668.

The legal consequence of these facts is that petitioner may not claim any deduction in 1923. It was entitled to recover the unre-couped bond discount, if at all, in 1920, when the bonds were called before maturity and retired. The bond issue of which they were a part was wiped out and wholly ceased to exist at that time. By the demise of the parent bond issue to which it was attached, the unre-covered bond discount became an orphan. Thereafter, there was no parent to which it might naturally adhere. It is thus necessary to deny both of petitioner’s contentions. The respondent’s action is approved.

Reviewed by the Board.

Decision will be entered for the respondent.


source: Caselaw Access Project

author: Matthews :

license: Public Domain

text:
    Sweet Candy Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 32124.
    Promulgated May 11, 1932.

      B. H. Satmders, Esq., and Ohasrles D. Hamel, Esq., for the petitioner.

      J. L. Backstrom, Esq., for the respondent.
   ORINION.

Matthews :

The first contention of the petitioner is that it is entitled to have $90,172.46 restored to invested capital. Of this amount, it claims that $30,000 represents cash payments made to Wittenberg; $10,000, good will of Servís, Kopp, Eite and the Merchants Candy Company; and $50,172.46, amounts expended for special advertising campaigns and exhibits. As set forth in our findings of fact, the petitioner definitely established that it expended, from 1909 to 1916, $47,850.02 for special demonstrators, window displays, exhibits, samples, and other advertising, for the purpose of introducing, its special brands-, and that no part of this amount was ever capitalized. Other amounts were expended for this purpose, but the exact amount can not be determined, due to loss of records. The petitioner contends that these were capital expenditures and, though charged to expense, should now be restored to invested capital.

We can not agree with this contention of the petitioner. It is true that the amount established by the evidence, and probably more, was expended to advertise its trade-marked and special brand goods but this alone does not establish that such ambunts were of a capital nature. As the expenses were incurred they were charged to advertising or other expense accounts. The special campaign resulted not only in building up a market for the trade-marked goods, but also increased the sales of these and the petitioner’s other goods. A table admitted in evidence shows that the gross sales increased from approximately $435,000 in 1909 to over $2,000,000 in 1920. We do not know what proportion of the sales for any of these years was of trade-marked goods as, prior to 1921, there was no separate record kept of the sales of the trade-marked goods. The petitioner has thus failed to establish how much of the increase in sales was attributable to the advertising of its trade-marked goods. In such a situation, we can not'say that the amounts so expended all resulted in the development of its special lines and were of a capital nature. Although there may be a few instances in which advertising expenses have been held to constitute capital expenditures, they are primarily in the nature of current expenditures, resulting in immediate increase of sales. In the instant proceeding there is no evidence upon which we can determine or even make an estimate as to how much of the amount of $47,850.02 constituted capital expenditures. In such a situation the petitioner is not entitled to have any part of such amount restored to its invested capital.' See Northwestern Yeast Co., 5 B. T. A. 232; Mead Oyele Co., 10 B. T. A. 887; Kress & Owen Co., 12 B. T. A. 991; Richmond Hosiery Mills, 6 B.T.A. 1247, affd., 29 Fed. (2d) 262; certiorari denied, 279 U. S. 844; W. H. Hill, 22 B. T. A. 1351; Three-In-One Oil Co. v. United States, 35 Fed. (2d) 987, 68 Ct. Cls. 518.

As to the good will, the petitioner is claiming that it paid $7,500 in cash for good will acquired from Eite, Kopp and Servis; $30,000 for good will acquired from Wittenberg, and $2,500 for good will acquired from the Merchants Candy Company. The petitioner contends that the value of the assets received from Eite, Kopp and Servis and the Merchants Candy Company and junked represents the amount of the purchase price paid in each instance for good will. We can not see any merit in this contention; moreover, Saroni testi-fiéd that these companies had not been operating at a profit and that the good will was worth very little, if anything. As to the transaction with Wittenberg, it is doubtless true that there was some good will paid for in cash, but it was paid by Saroni and not by the petitioner ; moreover the payment of $30,000 was not only for the use of the name “ Sweet Candy Company,” but also for the abrogation of the agreement whereby Wittenberg was to receive one-third of the profits of the petitioner. There is no basis upon which an allocation can be made between these two items. We are, therefore, of the opinion that the petitioner has not established that it is entitled to have any part of the amount of $90,172.46 restored to its invested capital.

The petitioner’s second allegation of error relates to the respondent’s disallowance of relief under the provisions of section 327 of the Revenue Act of 1918. That section provides as follows:

Sec. 327. That in the following cases the tax shall be determined as provided in section 32S:
(a) Where the Commissioner is unable to determine the invested capital as provided in section 326;
* * * * Hí * *
(d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital * * *.

In some instances where a taxpayer has established that capital expenditures have been charged to expense and the exact amount can not be determined, we have held that “ invested capital can not be determined ” within the meaning of the statute and that relief should be granted under the provisions of section 327(a). In the case of George W. Gaswell Go., 14 B. T. A. 15, the petitioner, engaged in the coffee and tea business, had expended an aggregate amount of approximately $295,000 for route extensions, advertising special brands and creating new markets. The evidence in that case clearly showed that the petitioner’s brand sales had increased from 66 per cent of its gross sales in 1909 to 84 per cent in 1921. We held that the exact amount attributable to capital could not be determined and granted special assessment, saying:

The expenditures of the petitioner herein constituted to a substantial extent investments in capital assets which have not been and can not be included in invested capital, but which nevertheless contributed materially to the produetion of the taxable income. This is strikingly shown by the rapid increase in the petitioner’s brand sales, which in 1921 constituted 84 per cent of its gross sales.
$ # ' * * * # ❖
In our opinion, therefore, the facts in the present case bring the petitioner within the scope of section 327(a) of the Revenue Act of 1921, supra, and entitle it to have its tax determined in accordance with the provisions of section 328 of said act, upon the ground that its invested capital can not be determined as provided in section»326.

It should be noted in the Oaswell case that the amounts expended for advertising were very substantial and there was no evidence in that case as to the invested, capital allowed. In the instant case the respondent has allowed the petitioner an invested capital of $749,-423.10 and the amount which the petitioner claims can not be determined is not substantial in relation to the total capital already allowed. The statute was not intended to cover cases where the respondent has allowed a considerable invested capital and it is clear that only an inconsiderable amount can not be determined. See American Gut & String Mfg. Corporation, 19 B. T. A. 608. In the case of Wise & Cooper Co., 19 B. T. A. 1001 (affirmed by the Circuit Court of Appeals in 53 Fed. (2d) 843), we said:

As to the remaining contention under subdivision (a), all we know is that “ quite a substantial amount ” of money was expended by the partnership and the petitioner for advertising. No attempt was made to show what proportion of the whole amount spent was expended to create future sales. It may be that some part of the unknown sum expended did result in establishing petitioner’s produce in the minds of the public and thus create a capital asset, but . it is also apparent that a portion was used to bring about current sales. Without more facts than those before us we can not say that any part of the amount spent should be capitalized, and, therefore, be considered in computing invested capital.
In our opinion the petitioner has failed to show that its invested capital can not be determined.

As stated, the respondent has determined an invested capital of $749,423.10, and only an inconsiderable amount, if any, can not be determined. We are, therefore, of the opinion that the petitioner is not entitled to special assessment under the provisions of subdivision (a) of section 327.

With regard to the provisions of subdivision (d) of said paragraph, the petitioner contends that its capital is abnormal due to the fact that it owned valuable good will, trade names and trade brands which were not included in its invested capital,' and that its income is abnormal, due to the fact that the respondent has allowed, insufficient depreciation on its plant and machinery,, that salaries paid to officers were inadequate, and that petitioner used Saroni’s warehouse and office facilities in San Francisco at no cost.

The petitioner’s claim as to abnormality of capital rests upon the theory that it had acquired assets of substantial value, none of which were ever capitalized; that these assets consisted of good will and valuable trade names and trade-marks, and that they were material income-producing factors. It is true that we have held in a number of cases that in such circumstances an abnormality exists and that special assessment should be granted. See Clarence Whitman & Son, Inc., 11 B. T. A. 1192; Rothschild Colortype Co., 14 B. T. A. 718; and Oregon Brass Works, 21 B. T. A. 257. In the Whitman case the asset excluded was the most substantial part of the taxpayer’s capital and was the principal income-producing factor. In the instant proceeding the petitioner sought to establish that it had intangible assets of a value of at least $700,000. The proof, consisting of a table showing tangible assets and earnings over a limited period of years, is clearly insufficient to establish such a value and we do not consider it necessary to discuss it at any length. There is no evidence as to the value of such intangibles other than the fact that a part of amounts expended for advertising may have contributed to some extent in the building up of the trade-marks, but such amount is small in comparison with petitioner’s total invested capital, and it is clear that these assets were not material income-producing factors. See Sanford Cotton Mills, 14 B. T. A. 1210. The petitioner’s situation is not comparable with that of the taxpayer in the Whitman case. The petitioner probably did have a good will of some value, but so does almost any going concern. We have held that there is nothing abnormal in a situation where a taxpayer has by ordinary good business methods built up a valuable good will and have made a distinction between this situation and the one in the Whitman case, and others cited above. The situation herein is similar to that in the case of Raymond Syndicate, Inc., 21 B. T. A. 600, in which we said:

The second contention of the petitioner is that a good will of great value was built up during the years 1916 to 1919, inclusive, which was in no wise reflected in the invested capital of the petitioner for the years 1920 and 1921. Competent witnesses testified as to the value of the good will which had been built up by the large expenditures for advertising during the years 1916 to 1919. It is to be noted, however, that all of the payments for the advertising were treated as expenses upon the petitioner’s books of account. In no case were they capitalized. The advertising was for the sale of merchandise then on the petitioner’s shelves. Even though a good will resulted from that advertising, we think that did not create an abnormality in the invested capital. Many stores which conduct large advertising campaigns create a valuable good will which, under the provisions of the taxing statute, will not ordinarily be reflected in the invested capital determined under the provisions of the taxing acts. There is, however, nothing abnormal in this fact. A condition that is common to many corporations does not create such an abnormality in invested capital as warrants tbe application of special assessment for the purpose of determining tax liability.
The facts in this case appear to be simply that the petitioner through unique advertising had large profits in the years 1920 and 1921. The provision of- the statute is that section 327(d)—
* * * shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital * * *.
If there was any abnormality in the invested capital, it is such as results from the normal application of the statute. In our opinion it was not the intention of Congress that the special assessment provision should have application to such a case as is presented herein.

There remains only the question of abnormality of income. The first ground upon which the petitioner is basing this claim is that it was allowed depreciation on its plant and equipment on the basis of depreciated cost, rather than on its March 1, 1913, value, which it claims was greatly in excess of such cost, thus resulting in an understatement of income for 1920. The evidence introduced by the petitioner tends to show that the March 1, 1913, value of the plant was in excess of the depreciated cost used by the respondent as the basis for depreciation deductions, but was not sufficient to show what that value is. Moreover, it should be noted that the petitioner’s income for 1920 was $239,306.95 and the amount by which petitioner claims it was understated as a result of this item is only $5,900. Clearly, this is not sufficient to constitute an abnormality.

As to the remaining contentions, the evidence does not establish that the salaries paid to Leon and Arthur Sweet were inadequate, that the services of Saroni were of any great monetary value, or that the use of the warehouse resulted in any abnormality. We are, therefore, of the opinion, upon consideration of all the evidence, that the petitioner has not established that there is an abnormal condition of either capital or income sufficient to entitle it to have its tax computed under the provisions of section 328.

In view of our holding that the petitioner is not entitled to have amounts expended for advertising in prior years restored to invested capital, it is unnecessary to consider the respondent’s allegation that he erred in allowing a deduction in 1920 for amounts expended for advertising.

Reviewed by the Board.

Judgment will be entered for the respondent.

Tuawmell and Goodkich dissent.


author: Van Fossan:

text:
    Estate of George B. Leonard Holding Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 48871.
    Promulgated May 11, 1932.

      William E. Shrewsbury, Esq., for the petitioner.

      W-. F. Wattles, Esq., for the respondent.
   OPINION.

Van Fossan:

The first item in controversy is denominated “organization expenses,” incurred in connection with the organization of taxpayer corporation. We know nothing more about it. Such items as legal and accounting fees paid for similar purposes were held to be not deductible as ordinary and necessary expenses of the year in which incurred in First National Bank of St. Louis, 3 B. T. A. 807. See also Clarence Whitman & Sons, Inc., 11 B. T. A. 1192. Apparently these expenses were of similar character and they should be similarly treated.

The second item is identical with that considered by the court in Bormit Teller & Co., 53 Fed. (2d) 38, where it was held that such an expenditure should be prorated over the life of the lease, excluding possible, but not assured, renewal terms. A similar treatment should be had here. Respondent was correct in requiring proration, but erred .in the inclusion of two possible renewal terms in the period. The correct period is 21 years. See also Central Bank Bloch Association v. Commissioner, 57 Fed. (2d) 5, affirming 19 B. T. A. 1183.

The remaining item is one-half the cost of premium on a performance bond given to insure completion of a building erected by petitioner on the leased land. This item should also be prorated over the life of the lease. The reasoning underlying the above cited cases applies with equal force to this expenditure. It was a necessary incident to the erection of a building which will be utilized over the life of the lease. It takes its character from the nature of the expenditure to which it adheres. Presumptively, the building will outlast the first term of the lease, but, since renewal thereof is optional, we are of opinion that the item should be spread over the fixed life of the lease and not over an estimated life of the building.

Decision will be entered under Buie 50.


author: Love:

text:
    The Rauh Realty Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 32822.
    Promulgated May 11, 1932.

      Franle G. Olive, Esq., and George 8. Olive, G. P. A., for the petitioner.

      James L. Baelestrom, Esq., for the respondent.
    Petitioner is an Indiana corporation, with its principal office at the Union Stock Yards in Indianapolis.
   OPINION.

Love:

As previously stated, the only issue involved in this proceeding is whether petitioner sustained a loss upon the exchange of three pieces of real estate acquired after March 1, 1913, having a net depreciated cost of $40,780.77, and $14,000 in cash for all the common stock of the Fishback Realty Company.

Section 202 (a) of the Revenue Act of 1926, provides:

Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in subdivision ,(a) or (b) of section 204, and the loss shall be the excess of such basis over the amount realized. [Italics supplied.]

The basis provided in subdivision (a) of section 204, as diminished by the deductions provided for in section 202 (b) (2), is the amount of $54,780.77, upon which the parties hereto are agreed.

Section 202 (c) provides:

The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. [Italics supplied.]

The question thus narrows itself to what the “ fair market value ” of the common stock of the Fishback Realty Company was on December 17, 1925, within the meaning of that term as used in section 202 (c), supra.

With respect to the fair market value of the stock, there were no sales either prior or subsequent to December 17, 1925, the date in question. Neither were there any oilers therefor. Under such circumstances, the rule most generally applied is to determine the fair market value of the assets behind the stock. The only asset owned by the (Fishback Realty Company was the Fishback property. As far as the fair market value of the stock is concerned, the question is, therefore, finally narrowed to the determination of the fair market value of the Fishback property on December 17, 1925. In this connection, we are satisfied from the testimony of three well qualified and experienced real estate men, who had been engaged in the real estate business in Indianapolis for from 30 to 47 years, that the fair market value of the Fishback property on December 17, 1925, was $109,200, allocated $73,500 to the preferred stock, and $35,700 to the common stock. We, therefore, find that the fair market value of the common stock of the Fishback Realty Company received by petitioner on December 17, 1925, was $35,700.

At and before the date of acquisition by petitioner of the common stock of the Fishback Realty Company, petitioner owned the property north of the Fishback property and also the property south of said property. The property in that vicinity, being alongside the railroad tracks, was suitable only for warehouse purposes, and was designated locally as switch property. The Fishback property, alone, was too small to permit a switch being constructed on it, and, hence, not very desirable property. Used in connection with petitioner’s properties, it is desirable switch property. In view of the situation and the history involved in the transactions here being considered, we believe that all the parties concerned had in mind at all stages of such transactions the acquisition by petitioner of the Fishback property, the liquidation of the Fishback Realty Company corporation, and the cancellation of the leasehold.

However, the acquisition of the leasehold was by an assignment dated December 14, 1925, and the consideration named therein was the assumption on the part of petitioner of all the obligations named in the lease contract and theretofore carried by the original lessee. The assignment of the common stock in question was evidenced by a document dated December 17, 1925, and the consideration named therein was the properties listed in our findings of fact. The leasehold in question did not form a part of such consideration.

In view of the fact that the net worth of the Fishback property on December 17, 1925, after deducting the amount of outstanding preferred stock, was $35,700, we have found that amount to be the fair market value of the common stock, and since that common stock was acquired in exchange for property whose depreciated cost was $54,780.77, it follows that petitioner suffered a loss of the difference, that is, $19,080.77.

We will now consider, briefly, petitioner’s alternative proposition which in effect is that, if it be held that the acquisition by petitioner of the common stock and the acquisition of the leasehold constituted one and the same transaction, the leasehold had no fair market value, and, hence, was nil in the transaction, in which situation the result is the same.

Under the terms and conditions of the lease contract, from the lessor’s standpoint, there was no net income, for the reason that all the rentals were dedicated to the payment of the current obligations of the lessor, whose asset was the property here involved, and were limited to the amount thereof. There could be no net income from the leasehold to the lessor. By net income we do not mean no taxable income, but mean no income in excess of correlated obligations.

From the standpoint of the lessee, the leasehold had no value, for the reason that the annual rentals far exceeded the actual rental value of the premises. From the lessee’s standpoint, it was a liability rather than an asset.

At the rehearing, petitioner submitted the testimony of William T. Rasmussen, who has been in the real estate business in the city of Indianapolis, Indiana, for more more than thirty years, and thoroughly qualified as an expert witness on the subject of leasehold valuations in that city. The substance of his testimony was that the leasehold in question, under the circumstances and conditions involved, had no value whatever. Hence, even if the leasehold were held to have been included in the deal, as it had no value, it follows that what the petitioner received in the exchange was worth $19,080.77 less than the depreciated cost of the property it gave, and that, therefore, it suffered a loss in that amount.

In view of the fact that the issue involved in this proceeding does, not account for the total amount of the deficiency determined for the year 1925,

Judgement 'mil he entered under Rule 50-


author: Aeundell :

text:
    Houghton and Dutton Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 24883.
    Promulgated May 12, 1932.

      J. Robert Sherrod, Esq., for the petitioner.

      Jamies L. Bachstrom, Esq., for the respondent.
   OPINION.

Aeundell :

Petitioner claims that as a result of the abandonment of the business of the Stamp Company in 1920 it is entitled to a loss deduction of $32,500, consisting of $25,000 cash paid for stock and $7,500 organization and promotion expenses; a bad debt deduction in the amount of $7,414.06, which was the amount owed to it by the Stamp Company; and, as either an expense or loss deduction, the amount of $53,782.24, being the Stamp Company’s reserve for re-clemption of stamps, or in the alternative the portion thereof, $41,783.42, which petitioner set up on its books as a liability.

Claimed Loss on Stamp Company Stock.

A loss on the stock of an affiliate either through sale (Shepard Co., 22 B. T. A. 1368) or worthlessness (H. Liebes & Co., 23 B. T. A. 787) is allowable on the theory that the sale or worthlessness occurs outside the period of affiliation. See Manatee Crate Co., 22 B. T. A. 996, and cases there cited. We pointed out in the Liebes case that while technically affiliation might continue in the case of worthlessness, under the circumstances present there we were of the opinion that the worthlessness should be regarded as breaking the affiliation as fully as would a sale. Similarly, in Aluminum Goods Mfg. Co. v. Commissioner, 56 Fed. (2d) 568, where the business of a wholly owned subsidiary during the taxable year consisted chiefly in closing up its affairs preparatory to dissolution and it did no business after the end of the year, the court held that the parent company was entitled to deduct as losses the cost of the stock and advances made during the period of affiliation, with an adjustment for an operating loss that had been claimed and allowed in a consolidated return. In that case the subsidiary was not formally dissolved until the year following the cessation of business. In the opinion the court says that “ The statute governing affiliated returns contemplated its application to active companies only. It would be a legal and commercial impossibility for a going corporation to affiliate with a corpse — the mere shell of a former corporation.” We see no material distinction between the Aluminum Goods case and the one before us. Within the year 1920 petitioner decided to discontinue the Stamp Company’s operations and thereafter no new business was sought. At the end of the year it was entirely out of business, and was hopelessly insolvent. While the balance sheet shows assets, they were more than offset by the liabilities. In order to correctly reflect the condition of the company the so-called good will and organization item should be eliminated as an asset, and when this is done the only asset of substantial amount left is accounts receivable of $20,682.42, which was far from sufficient to meet the liabilities. It is our opinion that on the showing made in this case petitioner is entitled to deduct the cost of the Stamp Company stock as a loss sustained in 1920.

We are unable to agree with petitioner that the amount of $7,500, organization and promotion expenses, should be treated as a part of the cost of the stock. The amount in dispute was originally expended by an officer of petitioner. As far as the record shows petitioner was not contemplating the acquisition of the Stamp Company stock when in 1916 it reimbursed the officer for his outlay through a credit allowance in the Roxbury store transaction. The allowance so made gave petitioner no interest in the Stamp Company and played no part in the subsequent purchase of the stock. We accordingly hold that the cost of the Stamp Company stock to petitioner was $25,000 and the loss sustained should be computed on that basis.

Claimed Bad Debt Deduction.

The amount claimed, $7,414.06, represents the amount that the Stamp Company owed petitioner at the close of 1920 in excess of petitioner’s indebtedness to it. A similar situation existed in Aluminum Goods Mfg. Go., supra, and it was held that the amount was allowable as a loss. It seems to us that it makes no difference whether the item is characterized as a loss or a bad debt, as the essence of the transaction is that petitioner is out of pocket the sum advanced and there is no possibility of recovering it. Technically, the item involved represents a debt and we prefer to allow it as a bad debt deduction. Clearly, the account was ascertained to be worthless when the Stamp Company business was abandoned and the petitioner assumed its liabilities. It is shown that in Decenffier, 1920, petitioner credited its accounts receivable with the amount owed to it by the Stamp Company, which in our opinion constitutes a sufficient charge-off to come within the terms of the statute allowing deductions for debts ascertained to be worthless and charged off within the taxable year.

Stamp Redemption Reserve.

Among the Stamp Company’s liabilities assumed by petitioner was the one for redemption of trading stamps in the amount of $53,782.24. This liability was entered on petitioner’s books at $41,-783.42, representing 77.69 per cent of the outstanding stamps which petitioner estimated it would be required to redeem. While this item is denominated a reserve, it in fact was a liability which, under the facts here, was properly accruable on petitioner’s books in 1920. According to the evidence the Stamp Company was obligated to redeem the stamps brought in by customers at the rate of $2.175 per thousand, but the obligation to redeem was in the first instance an obligation of petitioner. The stamps issued bore a notation of the cash amount or the value in merchandise at which they were redeemable, and the stamp books issued by petitioner had its name printed thereon, with a statement that they would be redeemed upon presentation. The evidence further shows that the general practice was for customers to present the stamp book for redemption to the store or merchant whose name was printed thereon. As long as the Stamp Company continued in business there might be some question as to petitioner’s right to accrue the portion of the redemption value for which it was entitled to reimbursement from the Stamp Company, but when the Stamp Company ceased functioning and had no assets, it was proper for petitioner to accrue as a business expense the amount that it was required to pay. It does not appear that petitioner was ever called upon to pay any greater amount than it estimated and set up on its books, and in our opinion that amount, $41,783.42, is the proper amount to allow as a deduction.

Income Realized on Receipt of Petitioner's Own Stock.

It has been frequently held that the recovery of a debt previously charged off as worthless and allowed as a deduction constitutes income in the year of recovery. See Putnam National Bank, 20 B. T. A. 45; affd., 50 Fed. (2d) 158. In this case some $74,000 owed to petitioner by Alexander McGregor when he retired from the company was claimed and allowed as a bad debt deduction for the year 1919. In 1920 petitioner obtained a partial recovery through the act of Mrs. McGregor in turning in 250 shares of petitioner’s preferred stock. Petitioner ascribed a value of $80 per share to the stock and on that basis reported income of $20,000, which respondent increased to $25,000. Petitioner now claims that it realized no income on the receipt of its own stock, citing Houston Brothers Co., 21 B. T. A. 804, and S. A. Woods Machine Co., 21 B. T. A. 818. Since the submission of this case the S. A. Woods Machine Co. case has been reversed by the Circuit Court of Appeals for the First Circuit (57 Fed. (2d) 635). The effect of the opinion of the court is to hold that a corporate taxpayer realizes income in accepting its own stock in satisfaction of an obligation owing to it. As the present case arises in the First Judicial Circuit, that decision is controlling here, and we accordingly hold that petitioner realized income on the receipt of its stock. It may be plausibly argued that, considered from Mrs. McGregor’s viewpoint the transaction represented a gift, inasmuch as she was not legally liable for the debt. But in so far as petitioner was concerned the transaction represented merely the liquidation of an account receivable and hence was income, no matter who satisfied the account.

We think, however, that the respondent erred in including the stock in income at its par value. The evidence shows that at the time of the transaction all parties interested carefully considered the matter of value and concluded that $80 per share was the market value. The history of the company and its record of earnings convinces us that the market value was no greater than that amount, and the stock should be included in income at that figure.

In. addition to the stock, respondent included in income $5,687.50 as dividends accrued thereon from January 1, 1917, to April 1,1920. We are unable to perceive on what theory he did so. As far as the record shows, no dividends were declared or paid during that period, and if there were any they were the property of the then owner of the stock. Certainly, after petitioner acquired the stock it would not pay dividends on it.

Reviewed by the Board.

Decision will he entered under Rule 50.


author: Trammell : Smith,

text:
    Oswego Falls Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 25229, 28301, 32673, 34352.
    Promulgated May 12, 1932.

      James P. Quigley, Esq., and Alexander H. Gowie, Esq., for the petitioner.

      James A. Lyons, Esq., for the respondent.
   OPINION.

Trammell :

These are proceedings for the redetermination under section 280 of the Revenue Act of 1926 of the petitioner’s liability as transferee as alleged by the respondent for income and profits taxes claimed to be due from the Oswego Falls Pulp & Paper Company and Sealright Company, Inc., for the years 1917 to 1922, inclusive, as follows:

Upon, petitioner’s motion the hearing in the first instance was limited to the questions:

(a) Did the respondent err .in determining that the petitioner is a transferee within the meaning of section 280 of the Revenue Act of 1926 in respect of the Oswego Falls Pulp & Paper Company and Sealright Company, Inc.?

(b) Are the proposed deficiencies barred by the statute of limitations ?

The petitioner also contends that the Board does not have jurisdiction in Docket 28301 with respect to the years 1920 and 1921, because it is not founded on a competent notice of deficiency from the Commissioner.

The petitioner was organized pursuant to an “ agreement of Con ■ solidation of the Oswego Falls Pulp and Paper Company, the Skaneateles Paper Company and the Sealright Company, Inc., forming Oswego Falls Corporation.” This agreement is dated January 30, 1922, and was signed by all of the directors of the Oswego Falls Pulp & Paper Company, the Skaneateles Paper Company and the Sealright Company, Inc. The said agreement was filed with the Secretary of State of New York on January 31, 1922. The portions of this agreement material to the issues presented in this case read as follows:

* * * That pursuant to Section 7 of the Business Corporation Law of the State of New Tork the parties aforesaid agree to and do hereby consolidate the said The Oswego Ralls Pulp and Paper Company, The Skaneateles Paper Company, .and Sealright Company, Inc., into a single corporation, and do hereby further consent, agree and provide as follows:
First: The name of the new corporation formed by this consolidation shall be “ Oswego Falls Corporation.”
* * * * * * #
Eighth: The shares of the capital stock of the new corporation shall be distributed in the following manner: The entire amount thereof, being Two Hundred Fifty Thousand Dollars ($250,000) of the First Preferred Stock, consisting of twenty-five hundred (2500) shares of the par value of One Hundred Dollars ($100) each, seven Hundred Fifty Thousand Dollars ($750,000) of the Preferred Stock, consisting of seventy-five hundred (7500) shares of the par value of One Hundred Dollars ($100.00) each, and One Million Five Hundred Thousand Dollars ($1,500,000) of the Common Stock, consisting of fifteen thousand (15,000) shares of the par value of One Hundred Dollars ($100) each, shall be issued and delivered to H. Lester Paddock, as Trustee for the stockholders of the consolidating corporations and be distributed and used by him iu the manner set forth in a certain agreement between all of the stockholders of said consolidating corporations as parties of the first part and the said H. Lester Paddock as party of the second part, the original of which agreement is annexed hereto, and, by reference, made a part hereof.

The trust agreement between the stockholders of the consolidating corporations and H. Lester Paddock, above referred to, provided, in so far as material here, that the new consolidated corporation should issue and deliver to Paddock, as trustee, all of the capital stock of the new corporation authorized by such consolidation; that the trustee should then deposit all of said stock in a five-year voting trust, except 2,500 shares of first preferred stock, which were to be sold, or, if not sold, should be transferred to the treasury of the consolidated corporation; and that the trustee should thereupon issue to each stockholder of the consolidating corporations voting trust certificates representing shares of preferred and common stock of the new consolidated corporation, in certain specified ratios to the stock held in the respective consolidating corporations.

The net value of the assets of the Oswego Falls Pulp & Paper Company on January 31,1922, was in excess of any liability asserted against the petitioner as transferee of the aforesaid Oswego Falls Pulp and Paper Company- The net value on January 31, 1922, of the assets of the Sealright Company, Inc., was in excess of any liability asserted against the petitioner as a transferee of the aforesaid Sealright Company, Inc.

The original income and profits-tax returns of the Oswego Falls Pulp & Paper Company for the years 1917 to 1921, inclusive, were filed on the following dates: for 1917, on March 30, 1918; for 1918, on June 4, 1919; for 1919, on May 11, 1920; for 1920, on March 15, 1921; and for 1921, on August 15, 1922.

The Sealright Company, Inc., filed no income and profits-tax return for the month of January, 1922., On January 12, 1927, the respondent determined that there was due from the Sealright Company, Inc., for the month of January, 1922, income and profits taxes in the amount of $4,128.83 and mailed to the petitioner a notice of tax liability against the petitioner as a transferee of the assets of the Sealright Company, Inc.

Prior to November 19, 1925, a series of income and profits-tax waivers purporting to extend the period within which assessment of tax liability of the Oswego Falls Pulp & Paper Company for 1917 and siibsequent years could be made, was filed in the name of or in behalf of that company.

All of such prior waivers had expired more than a year prior to the dates on which notices of deficiency were mailed with respect to the tax liabilities involved therein. It is therefore unnecessary to discuss any of such prior waivers. However, a waiver was filed for the years 1917,1918,1919, and 1920, on November 19,1925, which was to remain in effect until December 31, 1926. This was executed in the name of Oswego Dalis Pulp & Paper Company by H. L. Paddock, president, and bore the corporate seal of that company. On the same date the following waiver was filed:

November 19, 1925.
In pursuance of the provisions of existing Internal Revenue Laws Oswego Falls Pulp and Paper Co. (Parent), a taxpayer of Fulton, New York, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the four years 1917, 1918, 1919 and 1920 under existing revenue acts, or under prior revenue acts.
(See another waiver of same date for years 1909 to 1916 incl.)
This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice of a deficiency in tax is sent to said .taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.
[Signed] Oswego Falls Pulp & Paper Co.
By its sole beneficiary and successor through consolidation to wit:
Oswego Falls Corporation, Taxpayer.
[seal.] By H. L. Paddock, President.
Attest: A. M. Hurd,
Asst. Secretary.
D. H. Blair, Commissioner.

The above waiver bears the corporate seal of the petitioner, Oswego Falls Corporation. An income and profits-tax waiver for the year 1921 was executed under date of May 3, 1926, and stated: “ This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926 * * The instrument was signed “ Oswego Falls Pulp & Paper Company, by Its Successor and Sole Beneficiary through Merger January 1,1922, Oswego Falls CORPORATION, Taxpayer, by H. L. Paddock, President.” This instrument also bore the corporate seal of the petitioner, Oswego Falls Corporation.

A similar waiver for the year 1921, extending the time for making assessment to December 31,1927, and bearing the same signature and seal as the document last above mentioned, was executed on July 21,1926.

The following tax collection waiver was filed on November 18, 1927:

Tax Collection Waiver
November 18, 1927.
It is hereby agreed by and between Oswego Falls Ptjlp and Paper. Company, of Fulton, New York, party of the first part, and the Commissioner of Internal Revenue, Party of the second part, that the amount of $7,642.98, representing an assessment of income tax for the year 1919 made against the said party of the first part, appearing on the May, 1920 Income Tax Assessment list, page 4480, line 8, for the 21st District of New York, may be collected (together with such interest, penalties, or other additions as are provided for by law) for said party of the first part by distraint or by a proceeding in court begun at any time prior to December 31, 1928.
This document is executed for the purpose of extending the period stated" in a similar waiver dated June 22, 1927, which expires December 31, 1927.
Executed for the Oswego Falls Pulp and Paper Company by the Transferee of all of its assets.
[Signed] Oswego Falls Corporation
Taxpayer
By H. L. Paddock, President.
D. H. Blair,
Commissioner of Internal Revenue
By J. W. Clark,
CoXleotor of Internal Revenue

Similar tax collection waivers for 1919 taxes were filed on October 30, 1928, and November 18, 1929, the last named expiring December 31, 1930. All of these collection waivers as to the 1919 tax waived collection of a definite amount, to wit, $7,642.98, which had been assessed in May, 1920. Regardless of the validity of any other such collection waiver, the one filed in October, 1928, after the passage of the 1928 Act and before January 1, 1929, is valid and effective as to the amounts stated therein under the express terms of section 506 (b) of the Revenue Act of 1928, which amends section 278 of the Revenue Act of 1926, provided it was signed by proper authority. B. Hayman & Co., 25 B. T. A. 736. By its terms this waiver extended the time for collection only of the amount specifically stated therein and not any additional amount subsequently determined by the resjiond-ent. The question as to whether this waiver was signed by proper authority so as to bind the petitioner is hereinafter discussed.

Notices of tax liability under section 280 of the Revenue Act of 1926, upon which these proceedings are based, were mailed to the petitioner as follows:

Docket No. Notice mailed
32673_October 4, 1927
34352_November 29, 1927
28301_March 10, 1927
25229_January 12, 1927

Within 60 days from the mailing of the notices of deficiencies, petitions in the above mentioned dockets were filed with the Board.

With respect to the question of jurisdiction in Docket No. 28301, it is claimed that the notice of tax liability under section 280 of the Revenue Act of 1926 upon which the petition was filed was n.ot a notice either by or from the Commissioner for the reason that the signature is not in the handwriting of the Commissioner or any other person. The notice of tax liability is signed as follows: “D. H. Blair, Commissioner, by - Assistant to the Commissioner.”

There is nothing in the statute which requires that the Commissioner should personally sign a notice of' deficiency or a notice of tax liability under section 280, or to require him to place his signature on a notice of deficiency. The statute is complied with if the Commissioner determines the deficiency and mails a notice thereof. There is no evidence that this was not done. The notice of tax liability here in question is on a letterhead of the Commissioner and no fair question can be raised but that it is valid notice of tax liability within the requirement of the statute. It was accepted as such by the petitioner, and from it the petitioner appealed to this Board for a redetermination of its liability. We can not concur in the petitioner’s contention on this point. Cf. Tameling v. Commissioner, 43 Fed. (2d) 814.

The two remaining questions for consideration are (1) whether the respondent erred in determining that the petitioner is a transferee within the meaning of section 280 of the Revenue Act of 1926, and (2) whether the proposed deficiencies are barred by limitation.

The question whether the proposed deficiencies, or some of them, are barred by limitation is not dependent solely upon the validity of the waivers above referred to. There is also the question whether the waivers, even if valid, extended the time for assessment of the taxes until the date of the mailing of the deficiency notices. This latter question is dependent upon whether the petitioner is a transferee within the meaning of the statute.

Section 280 (b) of the Revenue Act of 1926 provides that the liability of a transferee may be assessed within one year after the expiration of the period of limitation for assessment against the taxpayer. Therefore, if this petitioner is liable as transferee, and if either of the waivers of November 19,1925, above, was a valid agreement whereby the time for making assessment for the years 1917, 1918, 1919 and 1920 was extended to December 31, 1926, then, the deficiency notices having been mailed within one year thereafter, the deficiences determined by the respondent for said years are not barred by limitation.

With, respect to the deficiency for 1921, since the waiver of July 21, 1926, covering said year, extended the time for assessment to December 31, 1927, and the notice of deficiency was mailed March 10, 1927, the period for assessment and collection has not expired, regardless of whether petitioner is a transferee, if the waiver is valid. The validity of this waiver will be discussed in connection with the other waivers. No return was filed by or on behalf of the Sealright Company, Inc., for the month of January, 1922, and no question of limitation is raised with respect to the deficiency for that period.

The waivers in question, we think, were valid and must be given effect according to their terms. At the respective dates of execution of these waivers the original taxpayer corporations had long been dissolved as a result of the act of consolidation (see People v. New York etc. R. Co., 29 N. E. 959; People v. Rice, 28 N. E. 251) and the tax liabilities therein referred to were then the direct, legal liabilities of the petitioner corporation imposed upon it by the provisions of the New York statute, hereafter discussed, under which it was created. No other person, either individual or corporate, was directly or indirectly interested as taxpayer in the matter of the correct determination and assessment of such liabilities, and, while the petitioner purported to act as the agent, beneficiary or successor of the dissolved corporations, the fact remains that it was acting solely as principal in its own behalf and for its own benefit. And all these facts were well known to both parties to the waivers. The fact that the petitioner, through an erroneous conception of the law, executed the instruments in a technically incorrect capacity, should not, in our opinion, be held to nullify the clearly indicated intention of the parties and to render invalid the consent agreements under which both acted in apparent good faith.

The consolidated corporation, having been made by statute directly liable for all obligations of its components when it executed the said waivers, agreed to an extension of the time within which its own liability might be determined and assessed. The legal effect of the waivers, in these circumstances, is the same as if the instruments had been drawn in the name of and executed by the petitioner as a principal party. The petitioner was in fact acting for itself as principal and not for another as agent. The purported principal was nonexistent, and it is well settled that a nominal agent will be held personally liable where he professes to enter into a contract for a'principal who is at the time nonexistent. 2 Corpus Juris 808; Storey’s Agency, ¶288; Magruder v. Belt, 12 D. C. App. 151; Thistle v. Jones, 92 N. Y. S. 113; Rowland v. Hall, 106 N. Y. S. 55; Hauser v. Falk, 133 N. Y. S. 438. See also Restatement of the Law of Agency by the American Law Institute, tentative draft No. 6, sec. 549. These waivers are, however, like any other waivers signed by a corporate taxpayer in its own behalf, to be given effect according to their terms, in respect to the extension of the period of limitations. See also Phillips v. Howe Films Co. (Pa.), 33 Fed. (2d) 891.

The petitioner’s waiver of November 19, 1925, covering the years 1917 to 1920, inclusive, extended the period for assessment to December 31,1926, on which date by its express terms it expired. It follows that if the petitioner is liable only as the taxpayer and not as a transferee, the deficiencies asserted for said years are barred by limitation, since the deficiency notices were mailed during the year 1927, subsequent to expiration of the period as extended by the waiver.

Also, assessment of the deficiencies for said years is barred by limitation if the petitioner is liable therefor only as a transferee, and not as the taxpayer. Section 280 (b) (1) provides that the liability of a transferee may be assessed within one year after the expiration of the period for limitation of assessment against the taxpayer. The period for assessment of the said deficiencies against the original taxpayer expired long prior to 1927, unless extended by the petitioner’s waiver of November 19, 1925. However, by that waiver the petitioner agreed to an extension of time for assessment only of its own liability, and if that liability was the liability of a transferee, the waiver can not be said to have extended the time for assessment against the taxpayer. Neither a transferee nor a successor corporation is competent to execute a waiver extending the period for assessment against “ the taxpayer ” not in existence for any purpose. Bamberg Cotton Mills Co., 8 B. T. A. 1236; Carnation Milk Products Co., 15 B. T. A. 556; Barron-Anderson Co., 17 B. T. A. 686; South Penn Oil Co., 20 B. T. A. 1180; Lillie M. Jones et al., 21 B. T. A. 275. Therefore, if the petitioner is liable only as a transferee, whether at law or in equity, then the period of assessment against the taxpayer expired more than one year prior to the date in 1927 when the notices of deficiency were mailed, and the deficiencies are barred. The correctness of this view seems to be recognized by the language used in subdivision (c) of section 280, which provides that in the case of a corporation which has terminated its existence, the period of limitation for assessment against the taxpayer shall be the period that would be in effect had the termination of existence not occurred. This provision clearly connotes the recognition on the part of Congress that the period of limitation for assessment against a corporate taxpayer, which has been fully and completely dissolved, can not be extended by a consent agreement, since obviously there could not be any authority competent to execute an agreement on behalf of such a taxpayer. The waivers can only be valid on the principles that they were the waivers of the corporation which signed them, yet if they were the waivers of the Oswego Falls corporation which signed them, the statute makes no provision for an additional year after the period therein stated. The extra or additional year allowed is from the time the period expired against the “ taxpayer ” which transferred assets. If a taxpayer who transfers assets, or the transferor, extends the time for assessment by a waiver, then the statute provides an additional year to proceed against the transferee, but if the transferee signs a waiver in its own behalf, there is no provision which extends the period beyond that stated in the waiver. The only sound conclusion to be reached is that if the waivers be held to be those of the dissolved corporation they are invalid, but if those of the corporation which signed them, the period has expired, as no additional year is provided.

While the deficiencies for the years 1917 to 1920, inclusive, are barred by limitation if the petitioner is liable (1) only as the taxpayer, or (2) only as a transferee, a different conclusion must be reached if it is liable in a dual capacity, both as taxpayer and transferee. If the petitioner is liable as the taxpayer, then its waiver extended the period for assessment against “ the taxpayer ” to December 31,1926, and if it is also liable as transferee, then the respondent moved in time, since he mailed the notices of deficiency in 1927, within one year after expiration of the period so extended for assessment against the taxpayer.” A person can not be both principal and agent, although he may purport to act as agent and be held as principal under the conditions herein stated. We think the Oswego Falls Corporation was in fact principal.

If the petitioner was liable in such dual capacity, the respondent would have had an election of remedies, and, prior to December 31, 1926, could have proceeded to collect the deficiencies from the petitioner on its liability as the taxpayer, or, prior to December 31, 1927, could have proceeded to collect from the petitioner on its liability as the transferee, by suit at law or action in equity, or under the provisions of section 280 of the Revenue Act of 1926. Respondent in fact elected to pursue the remedy last mentioned. Did he have such right of election? This depends upon whether the petitioner is liable, at law or in equity, as a transferee of assets of the original taxpayer corporation, in addition to being liable as “ the taxpayer.”

Section 280 did not create any new liability on the part of a transferee, but provides merely a new remedy for the enforcement of such liability as already exists at law or in equity. Fostoria Milling & Grain Co., 11 B. T. A. 1401; Phillips v. Commissioner 283 U. S. 589. In the latter case the court said:

Section 2S0 (a) (1) provides tlie United States witli a new remedy for enforcing tlie existing “ liability, at law or in equity.” The quoted words are employed in the statute to describe tlie kind of liability to which the new remedy is to be applied and to define the extent of such liability. The obligation to be enforced is the liability for the tax.

We think also it must he conceded without argument that the liability, at law or in equity,” for the enforcement of which section 280 provides the new remedy, is the liability of a transferee which may be enforced in the Federal courts eith&r by suit at law or action in equity, depending upon whether the liability is at law or in equity. In other words, it is that liability of a transferee for the tax of the transferor, which, prior to the enactment of section 280, could have been enforced only by an appropriate remedy available in the Federal courts, either at law or in equity. Hence, to determine whether this petitioner was or is liable both as a taxpayer and as a transferee and answerable in a suit at law or action in equity for the taxes of its component corporations, so that the respondent had an election of remedies, we must look to the decisions of the Federal courts to ascertain whether there were remedies available for the enforcement of such dual liability, independently of section 280. If such liability exists, either at law or in equity, it may be enforced by the new remedy provided by section 280; otherwise, not.

The liability of a transferee of corporate assets, either at law or in equity, for the debts of the transferor is limited to the value of the assets received by the transferee. A transferee of corporate assets was not liable at common law for the debts of the transferor. (7 E. O. L. ¶746 and authorities cited.) Hence, as there is no evidence of any assumption of liabilities by contract, this petitioner is not liable at law as a transferee unless such liability was imposed upon it by the state statute, and is not liable in equity unless the facts establish such liability under the recognized principles laid down by courts of equity.

The petitioner was organized under and pursuant to the business corporation law of New York, the pertinent provisions of which are set out in the footnote below. Section 10 of the said law provides that all the rights, privileges, franchise and interest, and all property, real, personal and mixed, of each of the consolidating corporations shall be taken and deemed to be transferred to and vested in the new corporation without further action or deed; and section 11 provides that the new or consolidated corporation “ shall succeed to and be held liable to pay and discharge all such debts and liabilities of each of the corporations consolidated in the same manner as if such new corporation had itself incurred the obligation or liability to pay such debt or damages.” Thus, the consolidated corporation is made by the state statute directly and primarily liable, as an original obligor and not as a transferee, for all the debts and liabilities of each of the component or consolidating corporations. The liability so imposed is absolute, and without limitation, and is enforceable in the same manner as if the new corporation had itself incurred the obligations. It extends to all the debts and liabilities of the old corporations without regard to the value of the assets or property transferred or “ considered or deemed ” by the statute to have been transferred. In re Utica National Brewing Co., 154 N. Y. 268; 48 N. E. 521; Irvine v. New York Edison Co., 207 N. Y. 425; 101 N. E. 358. Indeed, the language of the statute would seem to justify the conclusion that if at the date of the consolidation the debts and liabilities of one of the consolidating corporations exceeded the value of its assets, the consolidated corporation would nevertheless be liable for all such debts and obligations, in respect of which a transferee, as such, would have no liability whatever.

We can reach no other conclusion than that by the provisions of the Hew York statute, under which it was created, the petitioner corporation was made directly and primarily liable for the debts and obligations of its component corporations, without reference to the value of the assets “ deemed ” by the statute to have been transferred, and that no liability at law as a transferee was thereby imposed on it. If it were liable by virtue of the fact that it had received assets of the component corporation or as a transferee, either at law or in equity, there would be a different liability than “ as if the new corporation had itself incurred the obligations or liability to pay such debt * * The new corporation under the Hew York statute may be sued “ in the same manner ” as the component corporation could have been sued. This indicates a direct statutory liability.

Is the petitioner liable in equity as a transferee under the Hew York statute? In the case of Bowman Hotel Corporation, 24 B. T. A. 1193, we held that the consolidated corporation, under the Hew York statute, was itself “the taxpayer.” In that connection, we said:

Petitioner contends that in these dockets which we have just named the Bowman-Biltmore Hotels Corporation, as successor, is a proper party petitioner, hut that any deficiency found by this Board must be found against the corporation to whom the deficiency notice was mailed, which, as we have already pointed out, in these dockets was the Bowman Hotel Corporation. We do not agree to this latter contention, because, as we interpret the statutes of the State of New York, providing for the consolidation of corporations, the petitioner corporation in this proceeding, Bowman-Biltmore Hotels Corporation, is obligated and birthmarked by statute with all primary liability of its components — an obligation which is not measured or proven by its obligation as transferee of property under section 280 of the Revenue Act of 1926, but is determined by the primary debt or obligation of the component.
* * * * * * *
A corporation chartered under the laws of the State of New York which has had its existence terminated by reason of its consolidation with another corporation, thus forming a new corporation, presents a very different situation from that which exists where a corporation has transferred its assets to another corporation and then itself has gone into voluntary liquidation. In the latter situation the corporation which has gone into voluntary dissolution can, and is required to, wind up its affairs under section 105 (8) of the Stock Corporation Law of the State of New York, and may sue and be sued in its own name, whereas no such provision is made for corporations which are dissolved by reason of their consolidation under the cited statutes of Now York.
The rights of creditors in the latter case are determined by section 90, Consolidated Laws of New York, * * *. In the case of the consolidation involved in the instant case, if at the time the consolidation was made a suit had been pending- against the Bowman Hotel Corporation, it would not have abated by reason of the consolidation, but might have been prosecuted either against the corporation in its own name or the new corporation, Bowman-Biltmore Hotels Corporation, might have been substituted as a party. This by reason of the express language of the statute.
There can be no question, however, that any suits brought after the effective date of the consolidation, either to recover claims owing to the Bowman Hotel Corporation prior to the date of its consolidation, or liabilities existing against it at the time of the consolidation, including, of course, tax liabilities, would have to be brought by or against the Bowman-Biltmore Hotels Corporation. Capp v. Colorado Goal Co., 60 N. Y. 293. There is no provision of the New York statutes which permits a consolidating corporation to sue or be sued in its own name after the effective date of its consolidation.

For the reasons indicated in the foregoing decision, we think the petitioner in this case was by the New York statute made liable directly and primarily as the taxpayer and not secondarily liable and that no liability, either at law or in equity, as a transferee was by said statute imposed upon the petitioner. In the Bowman Hotels case, supra, we said that the cases of Pittsburgh Terminal Goal Corporation, 23 B. T. A. 248; Pittsburgh & West Virginia Ry. Co., 22 B. T. A. 876; and Gideon-Anderson Co., 18 B. T. A. 329, would not be followed.

Is the petitioner liable as a transferee under the equitable trust fund doctrine cognizable in the Federal courts, independently of the state statute ?

It is a settled principle in the Federal courts that equity will not entertain jurisdiction where there is an adequate remedy at law available in such courts, unless it is shown that there is some feature of the case peculiarly within the province of a court of equity. Bill v. Ebey, 229 U. S. 199; Boise Artesian Hot etc., Water Co. v. Boise City, 213 U. S. 276; United States v. Bitter Root Dev. Co., 200 U. S. 451; Southern Pacific R. Co. v. United States, 200 U. S. 341. The rule is stated by the court in Watson v. Sutherland, 5 Wall. 74, 79, as follows:

The absence of a plain and adequate remedy at law affords the only test of equity jurisdiction, and the application of this principle to a particular case, must depend altogether upon the character of the case, as disclosed in the pleadings.

This rule was early adopted by Congress and given the force and effect of a Federal statute. See Judicial Code, ¶267; Rev. Stat., ¶723; Act Sept, 24, 1789 (1 Stat. 82), which provide that suits in equity shall not be sustained in any court of the United States where a plain, adequate and complete remedy may be had at law. While this statute is merely declaratory of a long established principle of equity jurisdiction, it was intended to emphasize the rule and to impress it upon the attention of the courts, and its provisions are obligatory at all times and under all circumstances. 21 Corpus Juris 41; Scott v. Neely, 140 U. S. 106, 110; Wehrman v. Conklin, 155 U. S. 314.

Prior to the adoption of the New York statute, a creditor of a consolidated corporation in the situation presented here could have pursued only one remedy in the Federal courts, namely, an action in equity to subject to the satisfaction of his claim the assets of the original corporate debtor in the hands of the consolidated corporation. What effect, then, does the New York statute have upon the Federal equity jurisdiction?

It has been decided many times that the equity jurisdiction of the Federal courts can not be enlarged or diminished by state statutes, and that whether such courts have jurisdiction in a particular case will be determined by inquiring whether by the principles of the common law and equity, as distinguished and defined in this country and in England at the time of the adoption of the Constitution of the United States, the relief sought was obtainable in a court of law, or was one which only a court of equity was fully competent to give. Waterman v. Canal-Louisiana Bank Co., 215 U. S. 33; Smythe v. Ames, 169 U. S. 466; Massachusetts Mills v. Cohn, 150 U. S. 202; McConihay v. Wright, 121 U. S. 201.

While it is well settled that the Federal equity jurisdiction can not be enlarged or diminished by state legislation, it is equally well settled that where a state statute gives a new right which may be enforced by an action at law equally available in a Federal or state court, in cases where the Federal court has jurisdiction, such legal remedy may supersede and displace an equitable remedy theretofore existing in the Federal jurisdiction. A state statute which changes substantial rights of the parties by changing the substantive law of necessity effects a change in the procedure or remedy by which such new rights are enforced. This point is made clear in an interesting and well reasoned discussion by the court in Union Pacific Railroad Co. v. Board of Commissioners, 222 Fed. 651, as follows:

The statute of Colorado here under consideration changes that law, * * * This is substantive law. It gives a new right. The statute has nothing to do directly with the law of procedure. The remedy for the enforcement of the right which it gives is not prescribed by the statute. That remedy is a suit at law. It is given by the common law. That is the remedy now, was the remedy in 1789, and for some centuries before that date. This remedy, as Mr. Justice Van Devanter points out in Singer Sewing Machine Co. v. Benedict, 229 U. S. 481 * * * is available in the Federal courts the same as in the state courts.
*******
It is well established, as counsel for appellant contend, that state legislation on the subject of procedure can not impair the remedial power of Federal courts of equity. Over against this, however, stands the equally well established principle that the legislature of the state may, within constitutional limits, change the substantive law. Such changes will, of necessity, frequently produce changes in remedial, relief. A system of practice which took no account of changes in the substantial rights of litigants would be anomalous indeed. Whole departments of equitable jurisdiction have been swept away by changes in the substantive law. The rights of married women and of assignees of ehoses in action are familiar illustrations-. In 1789, and for some decades thereafter, equity had exclusive jurisdiction of such rights. Changes in substantive law have so completely obliterated that jurisdiction that a reference to it is beginning to seem antiquarian. A statute which gives a new right, that may he enforced by mi action at law, may remove the very evil which was the ground of equitable jurisdiction. When such a statute is passed, it must be taken in connection with section 723, Rev. St. U. S., and the combined result must produce a change in the right to equitable relief in the Federal courts. [Italics supplied.]

See also Brine v. Insurance Co., 96 U. S. 627.

The New York statute altered the substantive rights of the parties as they theretofore existed by making the consolidated corporations liable as an original obligor for the debts and obligations of each of the consolidating corporations, and thus made available to the creditor a new remedy in such situation. The statute changed the substantive law, and thereafter the creditor could collect his debt from the consolidated corporation by suit at law as a direct liability. This remedy was and is equally available in either the state or Federal courts, and in cases where the latter courts have jurisdiction, such remedy is exclusive. Pollard v. Bailey, 20 Wall. 520; Fourth National Bank of New York v. Francklyn, 120 U. S. 747; United States ex rel. Texas Portland Cement Co. v. McCord, 233 U. S. 157, 162; Tennessee Coad Iron & R. Co. v. George, 233 U. S. 359. See also Edison Electric Light Co. v. Westinghouse, 34 Fed. 232.

In the light of the decisions referred to, it can not be doubted that the respondent here, by virtue of the provisions of the New York Statute, could have maintained a suit at law against this petitioner in the Federal courts to collect the taxes in controversy as a primary obligation to the same extent as if it had itself incurred the liability. His right so to pursue such remedy could not be denied. That remedy in all respects was as direct and adequate, and as well designed to afford complete relief, as the equitable remedy theretofore existing in the case of a transferee under the trust fund doctrine. And the legal remedy so provided was more efficacious, in that the respondent thereby could have reached all the assets of the petitioner, which could not be done by the equitable remedy. In changing the substantive law to effect a change in the material rights and liabilities of the parties, and in providing a new remedy by which the creditor could collect his debt by suit at law, the statute removed the very evil which the equitable remedy was in the first place designed to correct.

The petitioner corporation, having been made by statute directly liable for all the debts of the old corporation, including taxes, was liable as a taxpayer as we held in the Bowman Hotel case, supra.

The liability of a transferee is a secondary liability. No secondary liability or liability as a transferee at law or in equity is imposed by the New York law. The new corporation is not liable because it received assets of the old corporation, but because of the consolidation under the statutes. Its liability is made primary and direct when corporations are consolidated pursuant to the statute, regardless of whether it received assets in excess of liabilities. It is only secondary liability which may be enforced by the procedure set out in section 280 of the statute, not a primary and direct liability for tax.

The conclusion that the petitioner is not a transferee is borne out by many court decisions.' The rule is well established that a corporation resulting from a statutory consolidation does not receive the assets of the consolidating corporations by transfer, but by universal succession. In United States v. Gillis, 95 U. S. 407, the Supreme Court had for consideration whether a consolidated corporation under New York law had received a claim against the Government which was held by a component corporation by transfer or assignment. The statute provided that if so received the assignment or transfer was null and void. The court said there are de-volutions of title by force of law, without any act of the parties, to which the statute does not apply. See also Erwin v. United States, 97 U. S. 393; Butler v. Goreley, 146 U. S. 303; Hagner v. Swayne, 149 U. S. 242. In the case of Seaboard Air Line v. United States, 256 U. S. 656, the court held that the passage of title to a claim from a component corporation to the consolidated corporation as the result of consolidation pursuant to statute was not a transfer or assignment thereof. The court referred to the union of interests effected by the consolidation.

Under a New York statute the right to file a mechanic’s lien could not be transferred, yet the New York court held that the consolidated corporation could file and perfect a lien on account of work performed or goods furnished by a component corporation when corporations were consolidated pursuant to statute. Chambers v. George Vassari's Sons Co., 148 N. Y. S. 615. See also Guaranty Trust Co. v. N. Y. & Q. C. Ry. Co., 253 N. Y. 199, wherein Justice Cordoza held the consolidated corporation to be “ the universal successor to the persona ” of the component corporations and that it did not receive the assets by transfer, assignment or purchase. In other words the new corporation acquired the assets of the component corporations by virtue of having been created out of the old corporations. The fact is that the New York statute merely provides that the new corporation shall be “ deemed ” to have received the assets of the component corporation. No actual transfer of assets occurred. The component corporations made no conveyance of any assets of the petitioner corporation. In fact, they all went out of existence on the birth or creation of the new corporation as the result of the consolidation, as the assets and rights of the component corporations became assets and rights of the new or the consolidated corporation through the corporate change, the change of persona, which stepped into the shoes of the old corporations.

For the reasons indicated, it is our opinion that the petitioner is not liable, at law or in equity, as a transferee, for the tax deficiencies asserted by the respondent, and, since section 280 of the Revenue Act of 1926 is applicable only when such liability exists, the provisions of that section do not have the effect of extending the period of collection of the taxes involved beyond the period stated in the waivers.

The petitioner is liable for any deficiencies as a taxpayer, but not as a transferee. It is not both taxpayer and transferee. Aside from the foregoing reasons, there is a natural inconsistency in saying that the same entity is both a “ taxpayer ” and a “ transferee.” The word “ taxpayer,” when used in connection with “ transferee,” connotes one from whom assets are transferred. “ Transferee ” is used to designate to whom transferred. It would mean that the same entity had transferred assets from itself to itself. A situation which calls for such designation is indeed anomalous.

To hold that the petitioner is both taxpayer and transferee in order to follow the rule applicable in transferee cases (Swan Land & Cattle Co. v. Frank, 148 U. S. 603), it would have to be shown that the tax could not be collected from the petitioner as taxpayer before resort could be had against the same entity as transferee.

The direct liability of the petitioner for the deficiencies asserted for the years 1917 to 1920, both inclusive, being barred by limitation, judgments of no deficiency in respect of said years will be entered.

However, the direct liability of the petitioner for the deficiencies asserted for the year 1921 and the month of January, 1922, is not barred.

Reviewed by the Board.

In Docket,s 88301, 38613, and, 31^58 judgments of no deficiency for the years 1917, 1918, 1919, and 1980 will he entered. Dockets 85889 and 88301 (as to the year 1981) will he restored to the Generad O' adeudar for further hearing.

SterNhageN concurs in the result only.

Smith,

dissenting: So far as the record shows there are deficiencies in tax due the United States from the Oswego Falls Pulp & Paper Company for the years 1917 to 1921, inclusive. The prevailing opinion holds that the deficiencies due for the years 1917 to 1920, inclusive, are barred by the statute of • limitations, first, upon the ground that the petitioner is not a transferee of the assets of that company, and, second, upon the ground that if it were the transferee the deficiencies are barred by reason of the fact that the petitioner had no power to file a waiver which would extend the time for making an assessment against the transferor. I think the opinion is in error upon both points.

Clearly, on and after the consummation of the act of consolidation the Oswego Falls Pulp & Paper Company had no assets from which the respondent could collect the deficiencies due from it. Those assets had by operation of law been transferred to the petitioner. Section 10 of the Act of Consolidation specifically provides that all the properties of the consolidating corporations shall be taken and deemed to be transferred to and vested in such new corporation, without further act or deed.” How, in the light of such language, can it be maintained that the new corporation is not the transferee of the assets of the constituent corporations?

Section 280 of the Revenue Act of 1926 was enacted to enable the respondent to proceed in a summary manner against the transferee of the assets of a taxpayer where the taxpayer had, without consideration, parted with its assets. See A. H. Graves et al., 12 B. T. A. 124; Phillips v. Commissioner, 283 U. S. 589, footnote 4. That section did not impose new liabilities upon the transferees of property, although it recognized the fact that in many cases the transferee had a liability for the taxes of the transferor at law as well as in equity. In Phillips v. Commissioner, supra, it was stated:

Section 280 (a) (1) provides the United States with a new remedy for enforcing the existing “liability, at law or in equity.” The quoted words are employed in the statute to describe the kind of liability to which the new remedy is to be applied and to define the extent of such liability. The obligation to be enforced is the liability for the tax. * * *

What possible difference can it make in the proceeding at bar that under the New York statute the respondent could have proceeded directly against the petitioner for the taxes owed by the Oswego Falls Pulp & Paper Co.? Does this fact make it impossible for the respondent to proceed under section 280 of the Revenue Act of 1926? I think not. In my opinion the construction placed upon section 280 in the prevailing opinion frustrates the very purpose that Congress had in mind in enacting the section. I can not subscribe to the reasoning in the majority opinion by which this petitioner is exempted from the deficiencies.

In the prevailing opinion the case of Seaboard Air Line Ry. v. United States, 256 U. S. 656, is cited for the proposition “ that the passage of title to a claim from a component corporation to the consolidated corporation as the result of consolidation pursuant to statute was not a transfer or assignment thereof.” I think that that case does not stand for the proposition stated. In that case the appellant sued in the Court of Claims to recover balances for transportation services originally payable to the Florida Central & Peninsular Railroad Company, to whose rights it had succeeded through merger or consolidation. The Court of Claims held that it could not prosecute the claim by reason of section 3477 of the Revised Statutes which prohibit “All transfers and assignments made of any claim upon the United States, or of any part or share thereof, or interest therein.” In its opinion the court stated:

We cannot believe tlmt Congress intended to discourage, hinder or obstruct the orderly merger or consolidation of corporations as the various States might' authorize for the public interest. There is no probability that the United States could suffer injury in respect of outstanding claims from such union of interests and certainly the result would not be more deleterious than would follow their passing to heirs, devisees, assignees in bankruptcy, or receivers, all of which changes of ownership have been declared without the ambit of the statute. * * *

The court simply held that it was not the intention of Congress by section 3477 to cover transfers of claims against the United States of that nature. The court did not hold that there was no transfer of the claim from the constituent corporation to the new corporation.

It is further said in the prevailing opinion that if the petitioner be held to be a transferee, the waiver given by it on behalf of the Oswego Falls Pulp & Paper Company on November 19, 1925, is invalid. I can not subscribe to that view. Under section 9 of the Consolidation Act of the State of New York the new corporation, the petitioner herein, enjoyed the “ rights, franchises and privileges possessed by each of the corporations so consolidated * * * and may prosecute or carry on any kind of business which each of the consolidating corporations was authorized by law to conduct.” How can it be contended in the light of such language that a waiver given by it to save itself from the immediate necessity of paying the tax is not a valid waiver? Substantially the question here presented was before the Court of Appeals for the Fifth Circuit in Lucas v. Hunt, 45 Fed. (2d) 781. The facts in that case were that upon dissolution a taxpayer corporation was by statute continued in existence and the management of its affairs entrusted to a liquidator for a period of three years to wind up its business. A waiver extending the time for making assessment of income and excess-profits taxes was executed after the expiration of the three-year period allowed for winding up its affairs. Without the waiver the Commissioner in the performance of his duty would have made assessment within the statutory period and circumstances show that the Commissioner relied upon the waiver. The court stated:

* * * We are of opinion that Hunt by signing the waiver estopped himself to question its validity, with the result that he was bound to respond to the assessment to the extent of funds in his hands which belonged to the dissolved corporation taxpayer. * * *

It should be noted that the question before the court there was whether a transferree could file a waiver which would have any binding effect upon the transferor.

The case of Phillips v. Howe Films Co., 33 Fed. (2d) 891, is on all fours with the proceeding at bar. In that case it was held that where a corporation formed by merger bore the name of one of the merging companies and had the same officers, directors, and by-laws as the two constituent merging companies, and the number of shares in the merged company was the same as the number in the merging companies, the stockholders of the merged corporation had the right to file a statutory waiver of limitation on assessments in behalf of the merging corporation for the purpose of procuring a refund of taxes wrongfully collected from the merging corporation. In other words, it was held that the waiver that was executed by the new corporation which had come into existence upon the consolidation or merger of the constituent companies under the Pennsylvania law was a valid waiver.

In the proceeding at bar the waiver was given by the petitioner corporation to stave off the assessment, which, undoubtedly, would otherwise have been made against the Oswego Falls Pulp & Paper Company. Can the respondent be held at fault for relying upon the waiver? Is the United States to be deprived of its taxes by reason of the fact that the respondent, acting in good faith, relied upon such waiver? To me, the case seems to admit of no doubt that the deficiencies are legally collectible from the petitioner as a transferee.

Sea well agrees with this dissent.

       Business Corporation Law (New York)
      Sec. 7. Consolidation of corporations. — Any two or more corporations organized under the laws of this state for the purpose of carrying on any kind of business of the same or of a similar nature, which a corporation organized under this chapter might carry on, may consolidate such corporations into a single corporation, as follows: The respective corporations may enter into and make an agreement signed by a majority of their respective boards of directors and under their respective corporate seals, for the consolidation of such corporations, prescribing the terms, and conditions thereof, the mode of carrying Hie same into effect, the name of the new corporation, the number of directors who shall manage its affairs, not less than three, the names and post-office addresses of the directors for the first year, the term of its existence, not exceeding fifty years, the name of the town or towns, county or counties, in which its operations are to be carried on, the name of the town or city and county in this state in which its principal place of business is to be situated, the amount of its capital stock, which shall not be larger in amount than the fair aggregate value of the property, franchises and rights of such corporations, and the number of shares into which the same is to be divided, the manner of distributing such capital stock among the holders thereof, and if such corporations, or either of them, shall have been organized for the purpose of carrying on any part of its business in any

        place out of this state, the agreement .shall so state, with such other particulars as they may deem necessary.
      « « $ # # * *
      Sec. 9. Powers of consolidated corporations. — Such new corporation in addition to the general powers of corporations shall enjoy the rights, franchises and privileges possessed by each of the corporations so consolidated, subject to the restrictions, liabilities, duties and provisions contained in this chapter so far as the same may he applicable to the purposes for which it shall have been organized and expressed in the agreement for consolidation, and may prosecute or carry on any hind of business which each of the consolidating corporations was authorized by law to conduct.
      Sec. 10. Transfer of property of old, corporations to consolidated, corporations. — Upon the consummation of such act of consolidation, all the rights, privileges, franchises and interests of each of the corporations, parties to the same, and all the property, real, personal and mixed, and all the debts due on whatever account to either of them, as well as all stock subscriptions and other things in action belonging to either of them, shall be taken and deemed to be transferred to and vested in such new corporation, without further act or deed; and all claims, demands, property and every other interest shall be as effectually the property of the new corporation as they were of the former corporations, parties to such agreement and act; and the title to all real estate, taken by deed or otherwise, under the laws of this state, vested in either of such corporations, parties to such agreement and act, shall not be deemed to revert or be in any way impaired by reason of this chapter, or anything done by virtue thereof, hut shall be vested in the new corporation by virtue of such act of consolidation; and all the rights, privileges, franchises and property of the corporations, parties to any consolidation heretofore made under this chapter, shall vest as fully in the new corporation thereby created as they were vested in the corporations, parties to such consolidations.
      Sec. 11. Rights of creditors of old corporations. — The rights of creditors of any corporation that shall be so consolidated shall not in any manner be impaired, nor any liability or obligation for the payment of any money due or to become due to any person or persons, or any claim or demand for any cause existing against any such corporation or against any stockholder thereof be released or impaired by any such consolidation ; but such new corporation shall succeed to and be held liable to pay and discharge all such debts and liabilities of each of the corporations consolidated in the same manner as if such new corporation had itself incurred the obligation or liability to pay such debt or damages and the stockholders of the respective corporations consolidated shall continue, subject to all the liabilities, claims and demands existing against them as such, at or before the consolidation; and no action or proceeding then pending before any court or tribunal in which any corporation that may be so consolidated is a party, or in which any stockholder is a party, shall abate or he discontinued by reason of such consolidation, but may be prosecuted to final judgment, as though no consolidation had been entered into; or such new corporation may be substituted as a party in place of any corporation so consolidated, by order of the court in which such action or proceeding may be pending.