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Hoblitzell v. Howard

Decided: March 10, 1954.


Freund, J.s.c.


The plaintiff Walter R. Hoblitzell is the owner of one-third of the capital stock and is one of three directors of the defendant H.O.B. Motors, Inc., successor to and transferee of the business and property of a former partnership, trading as H.O.B. Motor Sales. The United States Treasury Department has been, and is currently, investigating the income tax returns of the partners.

This proceeding was brought to enjoin the corporation and its board of directors from using corporate funds: (a) for the payment of any income tax deficiency which may be imposed upon the partners as a result of the tax investigation; (b) for the payment of fees to John E. Toolan, attorney and Joseph J. Seaman, accountant, for services in connection with the investigation; and (c) for the payment of a pension to Walter Z. Hoblitzell, the plaintiff's father, pursuant to resolutions adopted by the board of directors over the plaintiff's objection. The plaintiff charges that there is a conflict of interest between the corporation and the former partners, and seeks an injunction restraining the defendants Toolan and Seaman from representing the corporation, and the corporation from paying them for services arising out of the tax investigation. Upon the filing of the complaint the plaintiff applied for a preliminary restraint, which Judge Stein denied. Hoblitzell v. Howard , 25 N.J. Super. 397 (Ch. Div. 1953).

At the trial, in addition to the testimony of the parties, tax experts testified as to the liability of the corporate transferee for any unpaid taxes of the partners.

There are two main issues in the case: (1) the liability of the corporate transferee for alleged unpaid income taxes of the partners arising out of the partnership business, and (2) the validity of the resolutions for the pension. The propriety of payment by the corporation of attorney's and accountant's fees for services rendered in connection with any possible tax deficiency of the partners depends upon the determination of the first issue.

For a number of years prior to November 1, 1949 the plaintiff's father, Walter Z. Hoblitzell, his brother, William

C. Hoblitzell, and his brother-in-law, W. Franck Howard, were co-partners in an automobile sales business trading as H.O.B. Motor Sales. In the latter part of October, 1949, they organized a corporation, H.O.B. Motors, Inc. By bill of sale dated November 1, 1949 the partners sold and transferred all of the assets of the partnership to the corporation in consideration of 1,500 shares of its capital stock, 500 shares to each partner. In addition, 10 shares were issued to the plaintiff, Walter R. Hoblitzell.

On October 28, 1949 the plaintiff agreed to purchase 375 shares of his father's stock, with an option to purchase the other 125 shares. However, a formal written agreement dated October 9, 1951 voided the earlier agreement and provided that the father sell to the plaintiff his 500 shares of stock for $55,000, and also his interest in real estate being used as a garage. The father then completely severed his connection with the business, and he and his son entered into another agreement whereby the son agreed to pay his father $20,000 in 48 consecutive monthly instalments of $416.66 each, commencing November 1, 1961, and in consideration thereof the father agreed not to compete with the business of the corporation for a term of 14 years. On October 9, 1951 the plaintiff paid his father $110,000 -- evidently the real estate was valued at $55,000. To enable the plaintiff to make the purchase, the corporation loaned to him the sum of $100,000, of which there remains unpaid at the present time a balance of $85,000. The indebtedness of the plaintiff to the corporation is of no pertinency in this litigation, but is mentioned merely as a fact. The plaintiff had had ten shares of stock issued to him at the time of incorporation, and by the acquisition of his father's stock became the owner of a total of 510 shares. Thereupon the corporation issued to each of the other two stockholders ten shares, so that each of the three now owns 510 shares. They are the only stockholders and constitute the entire board of directors and the officers of the corporation.

Subsequently, the Bureau of Internal Revenue initiated and has been conducting an income tax investigation of the

partnership for the years 1947, 1948 and 1949. The defendants W. Franck Howard and William C. Hoblitzell have informed the plaintiff that they intend to pay any tax deficiencies which may be assessed against the partners out of corporate funds, on the ground that the corporation assumed the payment of this liability. At meetings of the board of directors the defendants Howard and Hoblitzell introduced and adopted, over plaintiff's objection, resolutions employing John E. Toolan as attorney and Joseph J. Seaman as accountant in connection with the tax investigation, and authorized payments to them for their services.

Walter Z. Hoblitzell had been seriously injured in an automobile accident and was incapacitated from performing services to the corporation. He had resigned as a director and withdrawn from active participation in the business on January 22, 1951, and had sold his stock to his son on October 9, 1951. At a meeting held on January 29, 1953 the board of directors, over the objection of the plaintiff, adopted a resolution providing for the payment of a pension of $100 a week to Walter Z. Hoblitzell, and an accrual of $5,200 was set up for payments during the year. At an earlier meeting a pension in the sum of $6,260 had been set up as an accrual on the books of the company, but actually no disbursement had ever been made. However, William C. Hoblitzell personally advanced to his brother over $2,000. ...

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