author: Love : Smith,

text:
    The Newport Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Youngstown Sheet and Tube Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 28149, 35431, 35511.
    Promulgated December 24, 1931.

      Charles F. Fawsett, Esq., Joseph C. 'White, Esq., and Richard 8. Doyle, Esq., for the petitioners.

      J. R. Johnston, Esq., and J. A. Lyons, Esq., for the respondent.
   OPINION.

Love :

The only question in these proceedings to be decided at this time is that involving the statute of limitations. The notices which form the bases for the petitions filed herein propose to assess certain liabilities against petitioners as transferees under the provisions of section 280 of the Revenue Act of 1926. Subdivision (b) of this • section provides in part as follows:

The period of limitation for assessment of any such liability of a transferee or fiduciary shall bo as follows:
(1) Within one year after the expiration of the period of limitation for assessment against the taxpayer * * *.

The period of limitation for assessment against each taxpayer involved in these proceedings is within five years after the return was filed (sec. 250 (d), 1918 and 1921 Acts; sec. 277 (a) (2), 1924 Act; sec. 277 (a) (3), 1926 Act) unless both the Commissioner and the taxpayer _ should consent in writing to a later assessment (sec. 250 (d), 1921 Act; sec. 278 (c) 1924 and 1926 Acts), in which event the tax could be assessed at any time prior to the expiration of the period agreed upon, unless, further, the Commissioner should post a notice of deficiency by registered mail either within the five-year period or the extended period from which an appeal is filed with the Board, in which event “ The period within which an assessment is required to be made * * * shall be extended * * * by the number of days between the date of the mailing of such notice and the date of the final decision by the Board.” Sec. 277 (b), 1924 Act. See also sections 274 (a) and 277 (b) of the Revenue Act of 1926. If, how-evci’, the period of limitation for assessment against the taxpayer expired before the passage of the Revenue Act of 1926, then section 280 (b) (1), supra, is not applicable. Caroline J. Shaw, Executrix, 21 B. T. A. 400; and Barron-Anderson Co., 17 B. T. A. 686, cited therein.

The petitioners contend that, with but three exceptions mentioned below, all of the “ consents in writing ” hereinafter referred to as “ waivei’S ” were filed with the respondent at his request after the particular corporation taxpayer for which they were filed had been dissolved, which fact was known to the respondent, and after the time provided for by the laws of the corporation’s domicile for winding up its affairs had expired; that waivers filed under such circumstances could have no legal effect whatever; that the notices had been mailed to petitioners more than six years after the return for each of the said taxpayers had been filed; and that the period for making any assessment against either the taxpayer or the alleged transferee under the above cited statutes had, therefore, expired at the time the said notices were mailed.

The three exceptions referred to in the preceding paragraph pertain to (1) The Dunn Iron Mining Company, (2) The Harvest Farms Company, and (3) The Newport Turpentine & Eosin Company, Inc. (Alabama). Petitioners concede that since The Dunn Iron Mining Company was not dissolved, the waivers given on behalf of that corporation were valid, and that, therefore, at the time the said deficiency notices were mailed the period for making any assessment against that corporation had not expired. The situation is the same with respect to The Harvest Farms Company although petitioners do not expressly concede it in their briefs. The exception as to The Newport Turpentine & Eosin Company, Inc., is found in paragraph 51 of our findings, wherein we find that the first of four waivers was filed after that corporation had been legally dissolved but before the five-year period for winding up its affairs under the laws of Alabama had expired. This exception, as will appear later, becomes immaterial.

The respondent contends that the notices, which form the bases for the petitions filed herein were mailed within the period of limitations provided by the above cited statutes, and in support thereof relies upon the following thirteen points:

(1) That statutes of limitations should be strictly construed, and all doubts, if any, should be resolved in favor of the Government;

(2) That the effect of the various successorships under the several contracts and agreements should be determined according to the rules of Federal equity jurisprudence, and that under such rules there resulted from the transactions aforesaid, with respect to the powers, duties, liabilities, etc., of petitioners, and their officers and agents, “ a merger or suooessorship in interest, rather than the status of an assignee of the rights, privileges, and interests of the former companies ”;

(3) That by reason of the said mergers and/or successorships, petitioners, although proceeded against as transferees, are, nevertheless, “ taxpayers ” as that term is defined in section 1 of the Eevenue Acts of 1918 and 1921, and, therefore, all waivers signed by either or both petitioners as successors in interest are valid;

(4) That no special form of waiver is required under the statute and that a waiver signed by either or both petitioners as “ Successor in Interest,” but executed in the name of the dissolved corporation would be sufficient;

(5) That the dissolution proceedings of the several corporations in the several States were but mere formalities in the perfection of the said mergers and/or successorships in interest, and that since the predecessor companies had been divested of all their properties they were no longer in any position to respond and petitioners were the only entities from which any unpaid taxes could have been collected;

(6) That statutes of the state of origin and the general rules applicable to dissolved corporations in the respective states of origin can not be held to restrict the rights given to creditors under Wisconsin statutes as to foreign corporations which had been dissolved while doing business in Wisconsin (not applicable to Docket No. 28149);

(7) That foreign corporations doing business in Wisconsin which were legally dissolved in the state of their incorporation, nevertheless, continued as corporations de facto in Wisconsin and that their business was thereafter operated in unbroken sequence by their successors in interest (Not applicable to Docket No. 28149);

(8) That even if point (7) is not true, petitioners, through their officers and agents, having been responsible for and party privy to the execution of the waivers executed for each of their predecessor companies in their respective corporate names, and under their

■respective corporate seals, for the purpose of obtaining further consideration of their protests and claims by the respondent, for their benefit, may not now be heard to say that the waivers given as aforesaid were executed without authority;

(9) That petitioners are bound by the waivers given under the law of implied agency and implied warranty of the authority of those who executed the respective waivers at petitioners’ instance and under their direction, “ in the absence of a showing that it (;petitioners) made a full and comflete disclosure — of all the material facts and circumstances ” which might affect their validity;

(10) That the taxes imposed upon all of the corporations herein involved except The Dunn Iron Mining Company may be assessed and collected at any time under the provisions of section 278 (b) of the Eevenue Act of 1926;

(11) That the returns mentioned in our findings 42 to 45, inclusive, were not “ the returns ” required by law, and were not, therefore, sufficient to start the running of the statute of limitations;

(12) That a transferee of a transferee is liable for taxes imposed upon the transferor which had accrued when the first transfer wns made; and

(13) That an assignee of the rights of a transferee, which receives a conveyance of property as the nominee of the transferee under the contract of purchase, is not itself a transferee.

In regard to the first point relied upon the respondent, it seems only necessary to quote the language of the Supreme Court in the case of United States v. Updike, 281 U. S. 489, as follows:

* * * In any event, we think this is the fair interpretation of the clause, and the one which must be accepted, especially in view of the rule which requires taxing acts, including provisions of limitation embodied therein, to be construed liberally in favor of the taxpayer. Bowers v. N. Y. & Albany Co., 273 U. S. 346, 349, 47 S. Ct. 389, 71 L. Ed. 676.

The above-mentioned points (2) to (9) inclusive, are substantially the same as were argued by the respondent in a prior proceeding entitled The Newport Company, 22 B. T. A. 833, which dealt with two of the corporations herein involved, except for an earlier year. The same counsel appear in both proceedings. In the earlier proceeding the respondent proposed to assess against The Newport Company as transferee a liability for a deficiency in income and excess-profits taxes of The Newport Chemical Works, Inc., for the year 1917. The petitioner resisted on the ground that the statute of limitations for making any such assessment had expired and advanced the same arguments in support thereof as have been made in the instant proceedings.

A brief summary of the salient facts in the earlier proceeding will show the similarity of the questions involved there and here. All the general facts found in the instant proceedings pertaining to The Newport Chemical Works, Inc., and The Newport Company relating to such matters as 1919 reorganization transactions, dissolutions, notices to respondent of dissolutions, etc., are the same in both cases. On April 1, 1918, The Newport Chemical Works, Inc., originally filed separate income and excess-profits-tax returns for the year 1917. The respondent later determined that it was affiliated with The Newport Mining Company for that year for excess-profits-tax purposes only. Six waivers were filed on behalf of The Newport Chemical Works, Inc., for 1917, the last five of which were filed after that corporation had been legally dissolved for more than three years. The first waiver was executed on December 15, 1920, was signed “ Newport Chemical Works, Incorporated by Edw. G. Wilmer, Vice-President,” and expired, in accordance with respondent’s Mimeograph 3085, on April 1, 1924. The second waiver was executed on December 11, 1923, on behalf of “ The Newport Mining Company and affiliated companies ” and was signed “ The Newport Mining Company Taxpayer By H. J. Schlesinger Vice-President.” The next three waivers were executed on or about February 26,1924, December 23, 1924, and January 12, 1926, respectively, and were all signed “ Newport Chemical Works, Inc., Taxpayer by II. J. Schlesinger Vice-President.” The sixth waiver was executed on November 6, 1926, on behalf of the “ Newport Chemical Works, a taxpayer of Milwaukee, Wisconsin,” and was signed “ The Newport Company Taxpayer By A. A. Schlesinger President As successors in Interest to the Newport Chemical Works.” The transferee liability notice was mailed to The Newport Company on March 14, 1927.

We decided for the petitioner in the earlier proceeding and held, among other things, that the last five waivers were invalid, as far as The Newport Chemical Works, Inc., was concerned, because executed more than three years after that corporation had been legally dissolved and had ceased to exist for all purposes, and that the statute of limitations for assessing any tax against either that corporation or The Newport Company expired on April 1,1924. We know of no valid reason why our decision in the instant proceedings, as- far as respondent’s points (2) to (9"), inclusive, are concerned, should not be the same as it was in the earlier one, and we, therefore, pass on to the consideration of the remaining four points. See also Barron-Anderson Co., supra; petition for review dismissed September 16, 1930; Farmers & Planters Tobacco Warehouse Co., 22 B. T. A. 1331; and Continental Oil Co., 23 B. T. A. 311, 327.

The tenth point relied upon by the respondent is that when he disallowed the deduction for amortization of war facilities claimed by certain of the corporations on their original returns, that part of the deficiencies which result from such disallowance is “ attributable to a change in a deduction tentatively allowed under * * * paragraph (8) of subdivision (a) of section 234, of the Revenue Act of 1918 ” and, under section 278 (b) of the Revenue Act of 1926 just quoted, “ may be assessed * * * at any time.” He argues that the acceptance of the returns and the original assessments thereon and the acceptance of the payment of the tax as shown by the returns was a “ tentative ” allowance of the deductions there claimed within the meaning of the words “ tentatively allowed ” as used in section 278 (b), supra. We have decided this contention adversely to the respondent in the cases of W. G. Duncan Coal Co., 13 B. T. A. 672; and Ohio Falls Dye & Finishing Works, 16 B. T. A. 1038; affirmed by the Sixth Circuit at 50 Fed. (2d) 660.

The eleventh point relied upon by the respondent is that the returns mentioned in our findings at paragraphs 42 to 45, inclusive, were not such returns as would start the statute of limitations running as to any of the transferors involved herein for the 6-month period ending June 30, 1919. As shown in our preliminary statement, the only transferors against whom the respondent has determined deficiencies for this period are The Northwestern Iron Company, The Dunn Iron Mining Company, and The Newport Chemical Works, Inc. Since petitioners concede that the statute has not run (on account of valid waivers being given) as to The Dunn Iron Mining Company, we need only consider this point as it affects the other two transferors. The facts pertaining to The Northwestern Iron Company on this point are set out in full in our findings at paragraphs 44 to 47, inclusive, and those pertaining to The Newport Chemical Works, Inc., at paragraphs 42, 43, 46 and 47.

It is the respondent’s contention that since neither of these trans-ferors was affiliated with either The Steel and Tube Company of America or The Newport Company for the first six months of 1919, the inclusion by them of their income and invested capital in the consolidated returns of the latter was erroneous, and that the statute of limitations for making any assessment against such trans-ferors could not commence to run until the return mentioned in paragraph 47 was filed. This contention has been presented before this Board and the Circuit Courts many times and it is now well established that where several corporations in good faith file a consolidated return in which the separate gross income and deductions of each corporation are reported, the filing of such return is such a substantial compliance with the statute relating to the filing of reurns as will start the statute of limitatioíls running with respect to each corporation included therein, although it later be determined that one or more of such corporations were not affiliated with the other or others. F. A. Hall Co., Inc., 3 B. T. A. 1172; Matteawan Manufacturing Co., 4 B. T. A. 953; Kellog Commission Co., 6 B. T. A. 771; Fibre Container Co., 9 B. T. A. 575; Stetson & Ellison, 11 B. T. A. 397, affd., 43 Fed. (2d) 553; Matteawan Manufacturing Co., 14 B. T. A. 789; Converse Cooperage Co., 17 B. T. A. 1285; and Continental Oil Co., supra. If, however, the gross income and deductions of each corporation are not separately disclosed in the consolidated return, the Fifth Circuit has ruled otherwise, in United States v. National Tank & Export Co., 45 Fed. (2d) 1005; certiorari denied, 283 U. S. 839; and Lucas v. Colmer-Green Lumber Co., 49 Fed. (2d) 234. Cf. also Paso Robles Mercantile Co. v. Commissioner, 33 Fed. (2d) 653; Myles Salt Co. v. Commissioner, 49 Fed. (2d) 232; Goldman v. Commissioner, 51 Fed. (2d) 427; and Valentine-Clark Co. v. Commissioner, 52 Fed. (2d) 346.

The respondent, in support of his contention that the statute did not commence to run until the return mentioned in paragraph 47 was filed, has cited Pilliod Lumber Co., 281 U. S. 245; Norwich Woolen Mills Corp., 18 B. T. A. 303; Sweets Co. of America, 12 B. T. A. 1285; Green River Distilling Co., 16 B. T. A. 395; Fidelity National Bank & Trust Co. v. Commissioner, 39 Fed. (2d) 58; and Lucas v. St. Louis National Baseball Club, 42 Fed. (2d) 984.

The question in the first case just cited was whether the filing of an unsigned and unsworn return would start the statute running where section 239 of the Revenue Act of 1918 specifically provided that “ The return shall be sworn to by the president, vice president, or other principal officer and by the treasurer or assistant treasurer.” The Supreme Court held in the negative. But this question is not involved in the instant proceedings, as all the returns in question met this requirement of the statute. The second case cited by the respondent is not in point, for the reason that the petitioner there was contending that a return filed by a corporation for the 9-month period ending December 81, 1920, should, nevertheless, be considered a return for 12 months ending March 31, 1921, in order that the statute might start to run from the daté of the filing of such return as to income earned between January 1, 1921, and March 7, 1921, when the corporation was dissolved. The other four cases cited by the respondent do not involve the question of whether the return filed in those cases was such a return as would start the statute running, and, therefore, need not be further considered.

As stated in our findiifgs, the gross income and deductions of The Northwestern Iron Company and The Newport Chemical Works, Inc., were fully reported in considerable detail in the consolidated returns of The Steel and Tube Company of America and The Newport Company, respectively, and, in view of what we have said above, we hold that the statute of limitations for making any assessment against such transferors started to run when the consolidated returns mentioned in paragraphs 42 to 45, inclusive, were filed.

The last two points relied upon by the respondent concern principally the determination whether The Youngstown Sheet and Tube Company or The Mayville Iron Company is the final transferee of the assets of The Northwestern Iron Company. As recited in our preliminary statement, the questions to be decided at this time were, by motion duly made and granted, limited to those arising under the statute of limitations. In view of our holding on the question of. the statute of limitations respecting the deficiencies determined against The Northwestern Iron Company, we do not-deem it necessary to further discuss these points even if they were, at this time, properly before us.

Applying the principles discussed above to the essential facts set out in our findings, we hold that the assessment of any taxes against the several transferors was or was not barred by the statute of limitations on the respective dates that the transferee notices were mailed to petitioners as set forth in the schedule below:

There is no evidence that any of the deficiencies shown in column (S) above were ever assessed against any of the said transferors, and since, as shown in column (10) above, the period within which an assessment of any taxes against any of the said transferors (except The Dunn Iron Mining Company and The Harvest Farms Company) expired prior to the passage of the Eevenue Act of 1926, the assessment and collection of the proposed liabilities for such taxes against petitioners as transferees are also barred. Caroline J. Shaw, Executrix, supra.

The period within which an assessment could be made against The Harvest Farms Company did not expire until after the passage of the Eevenue Act of 1926, and, therefore, the extra year provided for in section 280 (b) (1), supra, of the Eevenue Act of 1926 is applicable. Louis Costanzo, 16 B. T. A. 1294; J. A. Kemp, 20 B. T. A. 875. The respondent, therefore, had until December 31,1927, to notify a transferee of its liability for unpaid taxes of this corporation. Petitioners were notified on December 29, 1927, and, therefore, if they are liable as transferees, the notices to them were timely.

We, therefore, hold that the assessment and collection of all of the proposed liabilities against petitioners are barred by the statute of limitations except those relating to The Dunn Iron Mining Company (which petitioners have conceded are not barred provided they are liable as transferees) and The Harvest Farms Company.

Reviewed by the Board.

Further proceedings may be had upon the remaining issues contained in the pleadings.

Smith,

dissenting: In holding that onr decision in The Newport Co., 22 B. T. A. 83B, controlled the issue presented by these proceedings, I believe that the prevailing opinion ignores certain salient facts involved herein.

I do not agree with the holding that the petitioners’ liabilities were barred by the statute of limitations. The facts set forth in paragraph nine of our findings show that the transferees assumed all liabilities of the transferors. Thereafter, the parties concerned treated the tax questions as matters to be settled by the transferees (see p. 11, et seg). The transferees became, by succession, the “ taxpayers.” See Routzahn v. Tyroler, 36 Fed. (2d) 208. In United States v. Updike, 281 U. S. 489; 50 Sup. Ct. 367, 369, the Supreme Court said:

* * * Indeed, when nsed to connote payment of a tax, it puts no undue strain upon the word “ taxpayer ” to bring within its meaning that person whose property, being impressed with a trust to that end, is subjected to the burden. Certainly it would be hard to convince such a person that he had not paid a tax.

In. this view of the case, the transferees as taxpayers executed waivers which, under Stange v. United States, 282 U. S. 270 ; 51 Sup. Ct. 145, I consider sufficient to prevent the bar of the statute of limitations. In this case, we may disregard those waivers executed in the name of the dissolved corporations, and consider only those waivers executed by either petitioner as “ successor in interest.” The parties to these waivers benefited by the determinations and deliberations thereunder, and, without advancing any thought as to an equitable estoppel (but see Lucas v. Hunt, 45 Fed. (2d) 781), I believe that they were valid waivers. In the Stange case, where as here the tax liability was barred prior to the execution of the waivers, the Supreme Court said:

* * * That the parties at the time may have believed that collection was possible independent of any waiver, does not make less effective the instrument given for the purpose of tolling the limitation on the ultimate determinatio'n and collection of the tax. It must be assumed that an effective and not a futile act was intended.


source: Caselaw Access Project

author: Love : Murdock,

license: Public Domain

text:
    Furniture Exhibition Building Company and Klingman Sample Furniture Company, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 18596.
    Promulgated December 24, 1931.

      J. 8. Seidman, Esq., and F. E. Seidmam, 0. P. A., for the petitioners.

      Brooks Fullerton, Esq., for the respondent.
   OPINION.

Love :

By agreement of counsel at the hearing only four issues are submitted for our determination. All other issues raised by the pleadings are disposed of either by the admissions of the respondent or are waived by the petitioners. The issues before us for determination are (1) whether the consolidated invested capital as determined by the respondent for each of the years in question is understated by the amount of $200,000; (2) whether invested capital for 1919 should be reduced on account of the prorated 1918 income and profits taxes; (8) whether taxes for 1919 and 1920 are to be apportioned between petitioners on the basis of the net income properly assignable to each, and (4) whether the Board has jurisdiction with respect to any deficiency against the Klingman Company for the years 1917 through 1920.

With respect to issue No. 1, petitioners contend that the respondent has erroneously understated the paid-in consolidated invested capital by $200,000 as a result of his treatment of intercompany stockhold-ings. The respondent, however, contends that his action is correct. The computations of both parties are set forth in our findings.

In July, 1914, the Building Company purchased all of the capital stock of the Klingman Company of a par value of $150,000; About the same time the Klingman Company purchased 50 per cent of the capital stock of the Building Company, the total par value of whose stock was $800,000: The respondent has determined that the cost to the Building Company of the stock of the Klingman Company so acquired, was $50,000, and that the cost to the Klingman Company of the stock acquired by it in the Building Company, was also $50,000. There is no controversy between the parties with respect to the respondent’s determination as to these costs. All of the $150,000 par value of the capital stock of the Klingman Company and the $300,000 par value of the capital stock of the Building Company was paid in in full and at no time was any part of these amounts of paid-in capital ever distributed or liquidated.

Consolidated invested capital is to be determined by computing separately the statutory invested capital of each corporation as defined by section 326, and then eliminating- from the combined statutory invested capital of the affiliated group, so determined, the amount of cash or its equivalent, paid out by the group in the acquisition of subsidiary stock.

In addition to the amount so paid out, if any, the statutory invested capital, as defined by section 326, must also be reduced by the amount of an;f liquidating dividend, or amount otherwise withdrawn from the original investment and returned to the stockholders. Middlesex Ice Co. et al., 9 B. T. A. 156; American Bond & Mortgage Co., 15 B. T. A. 264; Grand Rapids Dry Goods Co., 12 B. T. A. 696; Golden Cycle Corporation v. Commissioner, 18 B. T. A. 118; affd., 51 Fed. (2d) 927.

Applying the foregoing principles to the instant case, we conclude that in determining the consolidated invested capital of petitioners, the invested capital of each should be computed separately in accordance with the provisions of section 326, and there should then be eliminated from the combined statutory invested capital the amount of $100,000 representing the total cost to the group of the intercompany stockholdings which was paid out of the group and returned to the estate of P. J. Klingman. In other words, we hold that the item subtracted in petitioners’ computation of consolidated invested capital originally reported and adopted by the respondent in his computation should have been $100,000, instead of $300,000; from which it follows that the consolidated invested capital, as determined by the respondent, is understated by the difference, or $200,000. Petitioners’ contentions on this issue are sustained.

With respect to the respondent’s reduction of consolidated invested capital for 1919 on account of 1918 income and profits taxes prorated in accordance with the dates upon which the four installments of such taxes became payable, petitioners contend that such action was erroneous and rely upon the decision in Fawcus Machine Co. v. United States, 68 Ct. Cls. 784. This decision, which has been affirmed by the United States Supreme Court in Famous Machine Co. v. United States, 282 U. S. 375, since the briefs were filed, is adverse to the contention here advanced. On this issue we sustain the action of the Commissioner.

The petitioners contend that since they did not enter into nor file with the respondent any agreement with respect to the apportionment of the taxes for 1919 and 1920, the respondent erred in failing to apportion such taxes between them on the basis of the net income properly assignable to each. The respondent contends that since the petitioners filed consolidated returns for 1919 and 1920, and as the entire amounts of the tax shown thereon were assessed against and paid by the Building Company during 1920 and 1921, respectively, and as no question as to apportionment of taxes was raised by either of the petitioners until about the time of the hearing, when the petition was amended to raise this issue, the petitioners should not now be heard to complain because the deficiencies for these years were not apportioned between them.

The petitioners in support of their contention rely, among other cases, on Essex Coal Co. v. Commissioner, 39 Fed. (2d) 892, wherein the court reversed our decision reported at 12 B. T. A. 994. In that case the two affiliated corporations had the same officers, used the same office and had a common control and management. The two corporations filed a consolidated return. No express agreement was entered into between them as to how the taxes due for the taxable year in controversy should be assessed against them nor did they notify the Commissioner as to how he should assess such taxes. The amount of the tax shown on the consolidated return was assessed against the Essex Coal Company. The second and third installments of the tax were paid by checks of the Essex Coal Company, while the first and fourth installments were paid by checks of the other corporation. In reaching the conclusion that the acts of the parties and the other circumstantial evidence established that there Avas an understanding or agreement between the two corporations that the tax should be assessed against the Essex Coal Company, we said:

The agreement referred to in this statute is one between the corporations included in the consolidated return. It is not required to be in writing or to be in any particular form or language. Such a contract may be implied as well as express. Such an agreement does not relate to the payment of the tax but only to its assessment. Whether such an agreement was made may be shown by circumstantial evidence and the conduct of the parties as well as the testimony of witnesses. Here the officers of the two corporations were the same individuals. The individual who represented and acted for one company as president, acted in the same capacity for the other. An agreement between the said officers in one capacity and the same individuals in another capacity might have been a mere mental process evidenced only by the outAvard acts and conduct of the parties. It would have been a useless process for the president of one company to agree Avith himself as president of another company, and for the other officers in their respective capacities to agree with themselves by any express language. An agreement which is inferred from the acts and conduct of parties is just as effective as any other hind of an agreement.
We think that this case is governed by the principles set forth in the case of In re Temtor Corn & Fruit Products Co., 299 Fed. 326, wherein the court stated:
It is finally contended on behalf of the trustee in bankruptcy that, even though the tax here in question was properly computed on the basis of the consolidated return, the government in making the assessment should have apportioned the tax between the two companies, as provided in section 240 of the Revenue Act of 1918. The evidence shows that the tax was computed as a unit, and was not apportioned, but was all assessed against the Temtor Company. Under the statute it was proper for the two corporations concerned to agree as between themselves as to the proportion of the entire tax to be assessed against each. As the entire tax appears to have been assessed against the Temtor Company, and as that company, without objection or request for an apportionment, paid three quarterly installments of the tax, it must be inferred that both companies agreed to the assessment as made. As already stated, the companies had practically the same officers and directors, and the course followed by them was the legal equivalent of an agreement and request that the entire tax be assessed against the Temtor Company. In the present posture of the case, I do not think it is open to either company to object to the course taken by the government in assessing the tax.
Considering all the evidence in the case, it is our opinion that an agreement was entered into between the two corporations to the effect that the total tax might be assessed against the petitioner.

In American Textile Woolen Co. et al., 23 B. T. A. 670, we considered tbe decision of the Circuit Court of Appeals and there said:

We have considered the decision of the Circuit Court of Appeals for the Sixth Circuit, 39 Fed. (2d) 892, reversing our determination in the Esse® case, swpra. We are of opinion, however, that the principle laid down in the determination mentioned is sound and that the court’s decision is only that the facts presented did not warrant our conclusion that an agreement for allocation of the tax existed among the corporations therein involved.

In the instant case the petitioners filed consolidated returns in which no mention was made as to any agreement between them as to how the tax should be assessed against them. Neither did either of them file with the respondent any agreement with respect to the apportionment of the taxes between them. The amount of the tax shown on the returns was assessed against the Building Company. The evidence shows that when the tentative return for 1919 was filed for the petitioners on March 16, 1920, the Building Company made a payment of $2,125, which was more than one-half of the consolidated tax liability reported on the completed return for that year. The amounts paid by the Building Company on September 14, 1920, and December 15, 1920, completed the payment of the tax shown on the consolidated return for 1919. Payments of the tax shown on the consolidated return for 1920 were made by the Building Company during 1921, on May 31, June 15, September 13, and December 14. The same persons were officers in each of the petitioners and the petitioners occupied the same office. Yanden Bosch had general supervision over the activities of both corporations and had particular supervision over their tax matters. So far as the record shows, the parties made no objection to the respondent’s action in assessing against the Building Company the tax reported on the consolidated returns or his determination of the deficiencies against that company until the hearing in June, 1930, when an amendment to the petition was filed raising the question. Thus it is seen that for about 10 years with respect to the 1919 taxes and for about 9 years with respect to 1920 taxes, the petitioners remained silent as to the respondent’s action with respect to the original assessments, apparently acquiescing in what had been done. It was more than four years after the respondent made his determination of the deficiencies here involved before the petitioners raised any objection as to the action of the respondent with respect to this issue.

In support of their contention the petitioners submitted the testimony of Yanden Bosch, who testified that no agreement was made between the two corporations for the apportionment between them of the taxes for 1919 and 1920. As against this testimony of Van-den Bosch, who was an officer in both corporations and who, according to his own testimony, was in direct charge of the tax matters of both corporations, we have his course of dealings for a period of some 9 or 10 years. If, as he testified, there was no agreement as to the apportionment of the taxes, why did he remain silent when the taxes were assessed against the Building Company or why did he permit that company to pay such assessments? Or why was this contention not raised before the respondent when other contentions respecting the tax liability for these years were presented to him? These and other questions remain unanswered by. the record. Considering as a whole the evidence on this point, we are not prepared to reverse the action of the respondent. See Popular Price Tailoring Co. v. Commissioner, 33 Fed. (2d) 464; In re Temtor Corn & Fruit Products Co., supra, affd. sub nom. Schlafly v. United States, 4 Fed. (2d) 195; Morganite Brush Co., Inc., 24 B. T. A. 776.

While the petition as amended raises the question as to whether we have jurisdiction with respect to any deficiency against the Kling-man Company for the years 1917 through 1920, the petitioners in their briefs direct their argument only to the years 1919 and 1920, making no reference to that portion of the issue relating to 1917 and 1918.

The petitioners contend as to the years 1919 and 1920 that we have no jurisdiction with respect to the Klingman Company, since the deficiency notice was addressed to the Building Company and nowhere in it is there any mention made of there being a deficiency in the taxes of the Klingman Company for these years. The respondent contends that, since the petitioners filed consolidated returns for these years that authorized and invited a joint deficiency notice, and the notice having been directed to the Building Company, notice to one was notice to both.

Since the petition as amended has raised tbe question of our jurisdiction of the tax liability of the Klingman Company for all the years 1917 through 1920, oür discussion of the matter will not be limited to the years 1919 and 1920.

In this case the Commissioner determined a deficiency against the Klingman Company for the years 1917 and-1918, and sent a notice of such deficiency to the Furniture Company, but did not send a notice to the Klingman Company, and both companies appealed to the Board.

Under the authority of the case of C. A. Bryan et al., 19 B. T. A. 111, we hold that for the years 1917 and 1918 the Board has jurisdiction of the Klingman Company.

For the years 1919 and 1920, the Commissioner did not determine a deficiency against the Klingman Company, but that company joined in the appeal with the Furniture Company.

On authority of the following cases, we hold that the Board does not have jurisdiction of the Klingman Company for the years 1919 and 1920: Caughey-Jossman Co., 8 B. T. A. 201; New York Talking Machine Co. et al., 13 B. T. A. 154; Phoenix National Bank et al., 14 B. T. A. 115; American Creosoting Co., 12 B. T. A. 247.

Reviewed by the Board.

Judgment will be entered under Rule SO.

Murdock,

dissenting: I 'dissent in so far as the opinion holds that we have jurisdiction as to the Klingman Sample Furniture Company for the years 1917 and 1918.

Marquette, Smith, Sternhagen, TRAmmell, and McMahon agree with this dissent.


author: Smith :

text:
    Richards & Hirschfeld, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 21715.
    Promulgated December 24, 1931.

      Bern Budd, Esg., and Kenneth G. Quencer, Esg., for the petitioner.

      J. A. Lyons, Esg., and H. B. Hunt, Esg., for the respondent.
   OPINION.

Smith :

The respondent’s determination that the petitioner and the Contractors Company were affiliated during the taxable year 1920 is based upon a holding “ that in this case husband and wife constitute one interest.” The statute (section 240 (b) of the Eevenue Act of 1918) provides that:

* ⅜ * two or more domestic corporations shall be deemed to be affiliated * * * if substantially all the stock of two or more corporations is owned or controlled by the same interests.

The petitioner contends that since 68 per cent of its stock was held by Claire B. Kichards and Lillie S. Hirschfeld, who owned no stock in the Contractors Company, and since the laws of the State of New York recognize the separate property rights of husband and wife, substantially all of the stock of the two companies was not owned by the same interests, but petitioner fails to show that Richards and Hir.sch.feld did not beneficially own or control the stock held by their wives. It is incumbent upon the petitioner to show that neither ownership nor control reposed in the same interests. While the property rights of husband and wife under the laws of the State of New York may be entirely separate and distinct, it does not follow that husband and wife may not constitute the same interests within the meaning of the taxing statute.

In Handy & Harman v. Commissioner, 41 Fed. (2d) 184; affd. 284 U. S. 136, the Supreme Court had under consideration the interpretation of section 240 of the Revenue Act of 1918. The court stated:

The purpose of § 240 was, by means of consolidated returns, to require taxes to be levied according to the true net income and invested capital resulting from and employed in a single business enterprise even though it was conducted by means of more than one corporation. Subsection (b) clearly reflects the intention, by means of such returns, to secure substantial equality as between shareholders who ultimately bear the burden. That intention is shown by the legislative history and was given effect by the regulations contemporaneously promulgated. It requires no discussion to show that such returns will not make against inequality or evasion unless the same interests are the beneficial owners in like proportions of substantially all of the stock of each of such corporations. Alameda Investment Co. v. McLaughlin, 28 F. (2d) 81. Montana Mercantile Co. v. Rasmusson, 28 F. (2d) 916. Commissioner v. Adolph Hirsch & Co., 30 F. (2d) 645, 646. Commissioner of Internal Revenue v. City Button Works, 49 F. (2d) 705. Affiliation on any other basis would not make against inequality or evasion. It would require very plain language to show that Congress intended to permit consolidated returns to depend on a basis so indefinite and uncertain as control of stock without title, beneficial ownership or legal means to enforce it. Control resting solely on acquiescence, the exigencies of business or other considerations having no binding force is not sufficient to satisfy the statute.

At tlie hearing of this proceeding counsel for the petitioner stated: “ It is upon the dissimilarity of the stock — of the stockholdings that we base our contentions that the interests controlling these corporations are not the same.” No evidence was introduced as to whether the shares of stock of the petitioner owned by the wives of Hirsch-feld and Richards were beneficially owned by their husbands nor was any evidence introduced to the effect that such shares of stock were not “ controlled ” by Hirschfeld and Richards. It is furthermore to be noted that on January 5,1922, the shares of stock of the petitioner issued to the Contractors Machinery & Export Company for its assets were distributed to the wives of the petitioners even though they never owned any shares of stock of such company. Upon the evidence of record it must be held that the evidence adduced at the hearing does not overcome the prima facie correctness of the respondent’s determination that husband and wife constituted the same interests in the instant case and that the petitioner and Contractors Machinery & Export Company were affiliated. His determination is accordingly sustained. Cf. Hancock Construction Co., 11 B. T. A. 800; Hewett Grain & Provision Co. of Escanaba, 14 B. T. A. 281; Wells Brothers Co. of Illinois, 16 B. T. A. 19.

The second issue relates to the alleged bad debt deductions taken by the Contractors Company. To be deductible, such debts must be ascertained to be worthless and charged off within the taxable year. There is no question as to the charge-off of the debts in the amount claimed.

The Purdy & Henderson account for the taxable year 1920 shows charges and credits thereto in approximately equal amounts. The exact debit balance in this account at the end of year is not shown, but we assume that it was $8,294.96, since that is the amount claimed as a bad debt deduction. Shortly after the close of the taxable year 1920, the debtor paid $6,200 on this account, and in March, 1921, the Contractors Company’s books show a charge of $436.20. Such facts do not support the petitioner’s claim that this account was worthless on December 31,1920. The debtor was not insolvent at that time but was temporarily short of operating funds due to unusual conditions then prevailing in Cuba; it had a large cash balance in one of the Cuban banks under the protection of the moratorium. The evidence does not establish the worthlessness of this debt.

The record discloses a different situation with respect to the Bah-mann Iron Works debt in the amount of $2,288.58, which was properly ascertained to be worthless and charged off within the taxable year under consideration. At the close of the year 1920, that company was in the hands of a receiver and upon the best information available it was ascertained by an 'officer of the Contractors Company that the creditors of the bankrupt would probably recover nothing. The fact that the receiver made small payments on this account in later years does not affect the reasonable ascertainment of its worthlessness at the close of 1920. The claimed deduction of this debt should be allowed.

Reviewed by the Board.

Further proceedings will be had wider Rule 6% (5).

Love and Murdock concur in the result.

MARQUETTE, StERNHAGEN, TRAMMELL, and GOODRICH dissent.


text:
    Richards & Hirschfeld, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51512.
    Promulgated December 24, 1931.

      Bern Budd, Esq., and Kenneth 0. Quencer, Esq., for the petitioner.

      J. A. Lyons, Esq., and H. B. Hunt, Esq., for the respondent.
   OPINION.

Smith :

This proceeding is for the determination of the petitioner’s liability as transferee of the assets of the Contractors Machinery & Export Company (hereinafter referred to as the Contractors Company) for income and profits tax in the amount of $5,177.08 due from the Contractors Company for the year 1920. In the statement attached to the respondent’s notice of the proposed assessment against the petitioner is the following explanation :

The records of this office indicate that the Contractors Machinery and Export Company was dissolved and the assets transferred to you on or about December 31, 1920.

For a proper disposition of the instant proceeding parties have submitted the following stipulation:

1. The evidence of record in the appeal of Richards & Hirschfeld, Inc., Docket #21715 shall be taken and accepted as the evidence of record in this case to the same extent and with the same effect as though it were introduced originally in the hearing of this appeal.
2. (a) It is further stipulated and agreed that, by the terms of an instrument executed January 24, 1921, the petitioner acquired all of the assets of the Contractors Machinery & Export Co., subject to the liabilities, as they existed at the close of business on December 31, 1920.
(b) The net assets had a value in excess of the proposed deficiency and interest.
(c) The consideration for said transfer was 370 shares of the capital stock of petitioner which were issued to the Contractors Machinery & Export Co. on January 25, 1921.
(d) On July 1, 1921, the capital stock of the Contractors Machinery & Export Co. owned by M. Aviles, was acquired in equal portions by Harry Hirschfeld and Chas. H. Richards.
(e) On January 5, 1922, the said 370 shares of the capital stock of petitioner were distributed by Contractors Machinery & Export Co. in equal proportions to Lillie Hirschfeld and Claire B. Richards and the. entire capital stock, of 230 shares, of the Contractors Machinery & Export Co. being then owned by Harry Hirschfeld and Chas. H. Richards was surrendered to the company.
(f) The Contractors Machinery & Export Co. was declared dissolved and its charter forfeited by a proclamation of the Secretary of the State of New York dated December 16,1929.

The 370 shares of the petitioner’s capital stock, constituting the entire consideration for the assets of the Contractors Company acquired by it, were issued to and held by the Contractors Company until January 5,1922, when the said shares were distributed to Lillie S. Hirschfeld and Claire B. Richards, at which time the capital stock of the Contractors Company, theretofore held by the husbands of the distributees, was surrendered to and canceled by the Contractors Company.

Section 280 of the Revenue Act of 1926 provides in part as follows:

(a) The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this title (including the provisions in case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds) :
(1) The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this title or by any prior income, excess-profits, or war-profits tax Act.

The petitioner contends that it is not liable for the taxes of the Contractors Company under the decision of the Board in Metropolitan Securities Corporation, 19 B. T. A. 299. In that case the Metropolitan Securities Corporation had acquired the assets of the Union Finance Company subject to known liabilities in consideration for 5,886 shares of its preferred" stock, which were later distributed by the Union Finance Company to its stockholders. We held that the Metropolitan Securities Company was not liable for the taxes due from the Union Finance Company for the years 1921 and 1922 under section 280 of the Revenue Act of 1926. In the course of our opinion we said:

* * * The taxes involved in this proceeding were not determined or proposed for assessment until subsequent to that date [January 4, 1923] and did not constitute any part of the known liabilities of the Union Finance Co. which the Metropolitan Securities Co.. expressly agreed to assume. * * *

The situation in the instant proceeding is different. Here the parties have stipulated that:

* * * by .the terms of an instrument executed January 24, 1921, the petitioner acquired all of the assets of the Contractors Machinery & Export Co., subject to the liabilities, as they existed at the close of business on December 31, 1920.

Clearly, one of the liabilities of the Contractors Company at December 31,1920⅛ was its liability for income and profits taxes which accrued upon its. income for the year 1920. United States v. Anderson et al., 269 U. S. 422.

In Reid Ice Cream Corporation, 24 B. T. A. 823, we stated:

* • * we do not agree with petitioner’s contention that a liability assumed by contract in acquisition of assets is not a liability as transferee in contemplation of section 280 of the Revenue Act of 1926. We can see no distinction in so far as the liabilities contemplated by that section are concerned, between one attaching to transferred property by reason of the circumstances of the transfer and one attaching by reason of specific agreement as a condition of such transfer. In fact, if petitioner has agreed to pay the income tax for 1925 as one of the considerations for the transfer of the taxpayer’s assets, it has not paid the full consideration until it satisfies such obligation and may not, until such condition is met, claim immunity from liability as a purchaser for value.

Inasmuch as the stipulation shows that the net assets received by the petitioner from the Contractors Company had a value in excess of the proposed deficiency and interest, and that those assets were acquired subject to existing liabilities, we hold that the petitioner is liable as a transferee for the income and profits tax due from the Contractors Company for the calendar year 1920. The tax liability of the Contractors Company is subject to adjustment under the opinion of the Board in the correlated proceeding in Docket No. 21715.

Reviewed by the Board.

Judgment will be entered imder Rule 50.

Steenhagen, Tkammell, and Love concur in the result.


author: Black:

text:
    R. E. Burdick, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 27109-27116, 27274, 27324-27329.
    Promulgated December 24, 1931.

      M. L. Seidman, G. P. A., and Benjamin Grundy O. P. A., for the petitioners.

      J. R. Johnston, Esq., for the respondent.

       Other parties petitioning, whose cases were Consolidated herewith for hearing, are: Thomas W. Camp; Mrs. Thomas W. Camp; Estate of J. B. Barber; F. D. Gallup ; C. D. Comes; Estate of .1. E. Walker; J. S. Walker; Estate of F. S. Sherman; Mrs. Emily T. Camp; Mrs. Pearl McQuilken; Estate oí H. E. Camp; Marion L. Camp; E. A. Riggall; F. F. Riggall.

   OPINION.

Black:

The only issue for us to decide at this time is whether petitioners are liable as transferees of the assets of Consolidated, Empire and Camp, and, if so, to what extent each is liable.

At the outset it should be stated that the proof conclusively shows that the dividends which were paid to E. A. Riggall were paid to him in name only and that such dividends were the property of petitioner F. F. Riggall, and petitioner E. A. Riggall had no property interest therein. We therefore hold that petitioner E. A. Rig-gall is not liable as transferee.

By reason of section 602 of the Revenue Act of 1928, the burden of proof is upon the Commissioner to show that petitioners are liable as transferees of property of these several taxpayer corporations. In seeking to meet this burden of proof, respondent at the hearing introduced considerable evidence, both oral and documentary, and, based upon such evidence, makes certain contentions which we shall state and discuss in this opinion, although not in the precise order which respondent has stated them in his brief.

We shall first discuss the following contention of respondent, listed under No. 2 in his briéf: “Any distribution to stockholders of the assets of a corporation, either while in process of dissolution or by way of ordinary cash dividends, from which a condition of insolvency results, gives rise to a liability to creditors on the part of the stockholders receiving such distribution, to the extent of the value of assets received. This liability arises under the common law and is general and independent of state statutes.” In support of this contention respondent cites Edward H. Garcin, 22 B. T. A. at pages 1021, 1034-1036. We think the case cited supports respondent’s contention. Cf. John Gerosa, 21 B. T. A. 1027, 1034; J. G. Nicholas, 22 B. T. A. 477. In the application of the principles of law laid down by respondent in this contention, it will be seen that respondent has two things to prove in order to establish the liability which he is asserting against petitioners in this proceeding, viz, (1) he must prove that the distribution of assets rendered the transferor corporation insolvent (Kinnett-Odom Co., 19 B. T. A. 1124; Samuel W. Keller, 21 B. T. A. 84; Frances W. Haines, 20 B. T. A. 721; Elisa J. Wray, 24 B. T. A. 94); and (2) he must prove the value, if any, of the assets which each petitioner received at the time such assets were received. For, regardless of the amount of the tax which the transferor may owe, the liability in equity of a transferee of property is limited by the net value- of the property which he has received (Phillips v. Commissioner, 283 U. S. 589; United States v. Updike, 281 U. S. 489; United States v. McHatton, 266 Fed. 602; Capps Mfg. Co. v. United States, 15 Fed. (2d) 528). If the respondent does not sustain the burden of proof as to either (1) or (2), he fails. It therefore becomes our task to study the facts in this proceeding and determine whether the respondent has sustained the burden of proof placed upon him by the statute.

As will be seen by an examination of our findings of fact, Consolidated made two distributions to stockholders, viz., (1) a dividend of $194,700, which was paid by a distribution to each stockholder of his demand note, and a cancellation of his liability thereon, which had been previously given to the corporation in payment of stock; (2) a distribution to its stockholders, in partial liquidation, of 6,000 share,s of preferred stock of the Interstate Glass Company of a par value of $100 per share. These distributions took place at different dates and under different circumstances and were not a part of the same transaction and therefore must be considered separately. We will first consider the distribution of promissory notes.

Distribution of promissory notes.

Petitioners contend that these demand notes were executed and delivered by the several stockholders of Consolidated as a part of a plan for a declaration of a stock dividend; that the stockholders had agreed among themselves and with the officers of Consolidated that such notes should never be paid; that they were unenforceable in the hands of the corporation; that creditors of the corporation have no equitable claim upon them; and that their distribution to stockholders in the form of a dividend was a distribution of something which had no value, and hence petitioners could not be held liable as transferees as a result of such distribution.

There was considerable testimony at the hearing to support these contentions, but, even if we take the view that the notes were given as a part of a plan for the declaration and payment of a stock dividend, we do not think that fact would have any bearing on the determination of transferee liability. If the question before us was one as to whether the distribution of the notes was taxable income, it would probably be very important to determine whether the notes were part of a plan to bring about a stock dividend distribution, just as it was to determine the character of the check payments involved in Jackson v. Commissioner, 51 Fed. (2d) 650, cited by petitioner, but the question now before us is not to determine income-tax liability, but transferee liability.

These demand notes, when they were paid in for capital stock, became the property of the corporation just as effectively as if they had been cash and the corporation could not subsequently cancel them or distribute them to the stockholders of the corporation as a dividend if to do so impaired the rights of creditors. Fogg v. Blair, 139 U. S. 118; Camden v. Stuart, 144 U. S. 104.

Petitioners, in support of their contention that the distribution of these notes to the stockholders as a dividend did not create a transferee liability, cite Jackson v. Commissioner, supra; Joseph A. Steinle, 19 B. T. A. 325. For reasons which we have already briefly stated, we do not think Jackson v. Commissioner, supra, is in point. In Joseph A. Steinle, supra, the taxpayer corporation was the Four Lakes Ordnance Company, and the promissory notes which were executed by the stockholders were made payable to the Steinle Turret Machine Company and delivered to it and were never at any time delivered or held by the taxpayer corporation, the Four Lakes Ordnance Company. Upon the facts of that case we said: “ Upon the facts we can not conclude that these several petitioners paid in to the taxpayer for their stock assets in amounts totaling $100,000 and thereafter received back in distribution assets of that company in similar amounts.” Therefore, Joseph A. Steinle, supra, is distinguishable on the facts from the instant case, because in the instant case we do find as an affirmative fact that petitioners paid in to Consolidated their promissory notes for capital stock and this capital stock was issued to them. These promissory notes became assets of the corporation and the evidence shows that on several occasions some of the notes were discounted at the bank and cash was procured thereon and used in the business of the corporation. We hold, therefore, that when the notes were distributed to the stockholders in the payment of a dividend previously declared, and all liability to the corporation on the notes was canceled, it was a distribution of property belonging to the corporation, aDd if this distribution created a condition of insolvency in the taxpayer corporation, then under authority of cases which we have already cited, petitioners are liable as transferees to the extent of the face value of their notes, that amount being in each instance a less amount than the amount of the deficiency due.

In determining whether this distribution created a condition of insolvency, petitioner contends that the basic date should be November 30,1920, the date when the dividend was declared.

Respondent contends that the basic date is January 1, 1922, the date when the dividend was, by the express terms of the resolution declaring it, made payable. In the view we take we find it unnecessary to discuss at length these respective contentions of the parties.

If we take January 1, 1922, as the basic date (as contended for by respondent), the facts show that the distribution of the promissory notes which was made on that date, while it impaired the capital stock of the corporation to some extent, did not create a condition of insolvency. The corporation was left with assets of value ample to pay its debts, including the deficiencies involved in this proceeding. These deficiencies, although unknown at that time, must be considered in determining whether or not the transferor corporation was made insolvent by the distribution. Samuel Keller, 21 B. T. A. 84. At the time this distribution was made, and immediately after, Consolidated still owned all the capital stock of its four subsidiaries, Camp, Empire, Smethport and McCoy, which had a value considerably in excess of all its liabilities, besides other assets. It seems clear to us that the distribution of the $194,700 dividend on January 1, 1922, by the method of cancellation of notes, did not create a condition of insolvency of Consolidated.

In Samuel Keller, supra, we discussed at length the effect of a partial distribution of assets to stockholders, where, although such distribution did impair the capital stock of the corporation, it did not leave the transferor corporation insolvent and.unable to pay its debts and it continued in business until some years later. We there held that such partial distribution of assets, creating no condition of insolvency, did not make petitioners liable as transferees of property within the meaning of section 280. Cf. Eliza J. Wray, 24 B. T. A. 94.

On the authority of the above cited cases, we hold that the distribution of promissory notes to petitioners on January 1, 1922, did not create a liability against them as transferees of property under the general rules governing transferee liability, because it did not create a condition of insolvency. If such transferee liability exists, it is by reason of certain provisions of the West Virginia statute. This phase of the proceeding will be discussed later on in this opinion.

Distribution of stock of Interstate.

As has been pointed out in our findings of fact, on August 15, 1922, Consolidated declared a dividend of 70 per cent of the par value of its capital stock, payable in shares of the preferred stock of Interstate, valued for the purpose of the distribution at $70 per share. Clearly, this distribution was to be made as a part of the plan of final liquidation of Consolidated. Respondent contends that the distribution was as of August 15, 1922, the date of the dividend declaration, because such declaration of dividend was complete and unconditional, and provided that it should be paid forthwith. Petitioner contends that the basic date of distribution should be hold to be in August, 1924, which is the time the preferred shares of Interstate were actually distributed to the shareholders of Consolidated.

In the view we take of the evidence, it is unimportant that we determine which is the basic date, because we are unable to determine from the evidence what, if any, value these shares of preferred stock in Interstate had at either date. Even if it be conceded, as respondent contends, that August 15, 1922, is the basic date, and that he has proved that the distribution of 6,000 shares of preferred stock of Interstate rendered Consolidated insolvent (a fact which petitioners vigorously dispute because Consolidated still retained 502 shares of Interstate preferred stock and other property for the very purpose of paying any liabilities which it might owe), respondent still has not made out his case to hold petitioners liable as transferees of property, for he has failed to prove the value of the property which they received. Ludwig Vogelstein, 16 B. T. A. 947; Angier Corporation, 17 B. T. A. 1376; Eliza J. Wray, supra; American Feature Film Co., 24 B. T. A. 18.

The only evidence of the value of Interstate preferred stock introduced by respondent was the stockholders’ resolution of August 15, 1922, declaring the dividend payable in preferred stock of Interstate, and reciting that such stock had a value of $70 per share, but statements of value in corporate minutes are not conclusive and are subject to rebuttal and explanation. This is particularly true in a case like the present one, where the corporation itself is not before us, but only the stockholders, whom respondent is seeking to hold as transferees. Cf. Pacific Coast Pipe Line Co., 11 B. T. A. 1329; Sterling & Welch Co., 15 B. T. A. 925.

Two witnesses called by respondent, F. F. Riggall and R. A. Hill, both testified in substance that Interstate was a failure from the beginning and that its management was bad from the beginning. Thomas W. Camp, called by petitioners, testified to the same effect. F. F. Riggall had been in the glass business for about thirty years and was secretary and treasurer of Consolidated and some of its subsidiaries, and was purchasing agent of Interstate. He is one of the petitioners in this proceeding. He testified that Interstate preferred stock had no value either in August, 1922, or in August, 1924. R. A. Hill was an officer and stockholder of Interstate and was its receiver appointed in 1925 to take charge of its affairs. His testimony as to the value of this preferred stock of Interstate in 1922 was as follows:

Q. Now have you any opinion as to whether that stock had any value in August 1922, the preferred stock we are talking about here?
A. Well, it would have a book value which should be established. Whether it had a fair value, I would not think it had very much.
Q. And, of course, when we got into August 1924, your opinion as to its value would be less, that is, if it was worth nothing in 1922, it would be worth nothing in 1924?
A. I would not say it was worth nothing in 1922, but it was not worth as much in 1924 as 1922, for outside of the first year they operated at a loss.

The witness, R. A. Hill, who was called by respondent, is not a petitioner in this proceeding and, so far as the record discloses, has no interest in its outcome.

Thomas W. Camp, one of the petitioners herein, was in the glass business fifty years, was president of Consolidated and several of its subsidiaries, and was general manager of Interstate. His testimony was that Interstate stock, preferred or common, never had any market value or actual value. It was never listed on any exchange and he never knew of any sales being made of it. He testified that it was unsalable.

These three witnesses attributed Interstate’s failure to bad management from the beginning, inclusion of antiquated plants in its organization, and discovery and use of newer and cheaper processes by competitors and consequent reduction in price.

No evidence of the assets and liabilities of Interstate was introduced, except as to the liability of Interstate for a $3,000,000 bond issue. In the absence of any evidence showing market quotations of the stock, or of any actual sales, or of the value of the underlying assets of the corporation, we are unable to make any finding as to the value of preferred shares of Interstate, either in 1922, at the time the dividend payable in preferred shares of Interstate was declared, or in 1924, when such shares were actually distributed to petitioners. All that we could do on this point would be to hazard a guess, and we do not think transferee liability should be determined that way.

On the authority of the cases already cited, we hold that respondent has failed to show that petitioners are transferees of property by reason of their receipt of the Interstate preferred stock, because he has failed to show what, if any, value the stock had at the time it was received by petitioners.

West Virginia statute regarding impairment of capital.

But, respondent contends, as to the dividend distribution of the promissory notes, that, even if it did not create a condition of insolvency in the corporation, nevertheless such distribution impaired the capital stock of Consolidated and that to the extent the capital stock was impaired thereby, the stockholders are liable to creditors under the laws of the State of West Virginia.

In support of this contention, respondent cites sec. 40, West Virginia Code, 1916, which reads: “ If the board declare a dividend by which the capital of the corporation shall be diminished, all the members present who do not dissent therefrom and cause said dissent to be entered on the record of their proceedings, shall be jointly and severally liable to the creditors of the corporation for the amount the capital may have been so diminished, and may be decreed against therefor on a bill in equity filed by any creditor, and moreover, every stockholder who has received any such dividend shall he liable to the creditors for the amount of capital so received by him." (Italics supplied.)

This same provision is carried in Barnes West Virginia Code, Annotated, 1923, as section 40, chapter 53. The Supreme Court of Appeals of the State of West Virginia had occasion to construe this statute in Arnold v. Knapp, 75 W. Va. 804; 84 S. E. 895. In that case, plaintiff Arnold, as trustee in bankruptcy of the Knapp-Sanderson Company, a corporation adjudged a bankrupt in January, 1911, filed a bill in equity, the object of which was, among other things, to recover from defendant Knapp the sum of $287.50 paid to him as a dividend on the stock held by him in said company, declared by the board of directors on January 20,1910, but not paid to Knapp or credited to him until November 16,1910, such dividend as alleged having been made when said company was insolvent and had no surplus out of which to declare a dividend and made in impairment of its capital stock.

In holding that the bill in equity was properly brought, the court said: “Was there complete and adequate remedy at law and was equity without jurisdiction to grant the relief prayed for? We think jurisdiction in equity well grounded. The statute, sec. 40, ch. 53, serial section 2873, Code 1913, gives equity jurisdiction at the suit of creditors to recover the amount the capital may have been diminished by the distribution and payment of dividends. If creditors may so sue, the trustee in bankruptcy representing them, we think, should also be entitled to go into equity for the same purpose.”

To the same effect is Bennett v. Bank, 80 W. Va. 554; 93 S. E. 353. Thus it will be seen that, under authority of the above cited cases, creditors of a West Virginia corporation have the right to sue in equity the stockholders who have received a dividend, the payment of which impaired the capital stock of the corporation, and secure a decree against them to the extent of the dividend so received. The Government is a creditor of the corporation to the extent of the tax due, and, as to general creditors, it is a preferred creditor. Section 280 of the Revenue Act of 1926 gives the Government the right to assess and collect against a transferee any tax due by the transferor, to the extent of any liability at 1cm or in equity of the transferee of property of the taxpayer.

Since, under the laws of the State of West Virginia, a stockholder who has been paid a dividend in impairment of the capital stock of the corporation is liable in equity to the creditors of the corporation for the amount of the dividend which he has so received, we hold that the Government has a claim in equity against the petitioners in this proceeding.

Respondent contends that the basic date for determining the extent of the liability of each petitioner in this proceeding is January 1, 1922, the date when the dividend was payable, rather than November, 1920, the date of declaration of the dividend. We do not agree with this contention.

This question of the effect upon a corporation’s capital stock and surplus account of the declaration of a dividend was fully discussed in connection with determining the taxpayer’s invested capital in W. E. Caldwell Co., 6 B. T. A. 47. We there held that the date of declaration of the dividend was the basic date for determining its effect on invested capital. In the instant case we have for our construction a West Virginia statute which makes the stockholders liable to the creditors for a dividend which they have received, which said dividend when declared by the directors was declared in impairment of the capital of the corporation. In view of the express language of the West Virginia code by which petitioners’ liability, if any, exists, and the authorities above cited, we hold that the date of the declaration of the dividend, November 30, 1920, is the basic date for determining what, if any, extent the capital of the corporation was impaired thereby. Cf. United States v. Guinzburg, 278 Fed. 363; Weed v. United States, 38 Fed. (2d) 935. The cases cited by respondent have to do with the taxation of dividends as income to the recipients and as to when such dividends become available to the taxpayer for the purposes of taxation, and are not in point.

At the time the dividend of November 30, 1920, of $194,700 was declared, the surplus of Consolidated was $98,704.85, and to the extent of the difference between $194,700 and $98,704.85 (surplus available for dividends), the capital of the corporation was impaired thereby. Therefore we find that 507/1000 of the amount which each petitioner received was paid out of surplus and we hold that as to that amount of their distribution petitioners are not liable as transferees.

We further find that 493/1000 of the amount which each petitioner received was paid out of the capital of the corporation, and we hold that, under the statutes of West Virginia and the decisions of the Supreme Court of that State, each recipient can be compelled to account for such payments to creditors of the corporation. We therefore hold that petitioners are liable to this extent as transferees of property of Consolidated.

We hold that there is no liability of petitioners as transferees of property of Camp and Empire, because at the time this dividend of $194,700 was paid by Consolidated to its stockholders, Consolidated had not become liable as transferee of Camp and Empire. It was not until July 1, 1922, that Camp and Empire were dissolved and their assets, consisting principally of stock in Interstate, were distributed to Consolidated.

For reasons already stated, we hold that petitioners are not liable as transferees of property either of Consolidated, Camp, or Empire in so far as the receipt of the stock of Interstate is concerned, because respondent has failed to show what, if any, value said stock had at the time of its distribution.

In Docket No. 21328, E. A. Riggall, petitioner, decision will be entered that there is no liability as transferee.

As .to the remaining dockets, these proceedings will be restored to the Day Calendar for further hearing on the amount of the deficiencies due for the respective years from the Consolidated Glass Company.

No hearing will be had as to the deficiencies asserted against the Empire Glass Company and Camp Glass Company, because for reasons already stated we hold petitioners are not liable as transferees of the property of these two corporations, either on account of the distribution of notes or of the stock of Interstate.

Reviewed by the Board.

Sternhagen, TRAmmell, and Arundell concur in the result.


author: Aeundell:

text:
    John L. Hall and James Garfield, Executors of the Estate of Charles F. Choate, Jr., Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50410.
    Promulgated December 29, 1931.

      Charles 0. Pengra, Esq., for the petitioners.

      C. A. Bag, Esq., for the respondent.
   OPINION.

Aeundell:

The facts in this case are on all fours with those in Maurice L. Goldman et al., Executors, 15 B. T. A. 1341, in which we held that there should be included in decedent’s income the share of partnership income allocable to the decedent to the date of his death. See also Clarence B. Davison, 20 B. T. A. 856; affd., C. C. A., 2d Cir., in which the only distinction was that the partnership was on the accrual basis, and we held the principle of the Goldman case applicable. Petitioners here contend that the decision in R. W. Archbald et al., Executors, 4 B. T. A. 483, is in conflict with the Goldman decision and the principle of the Archbdld case should be applied here. In the Goldmam case we specifically overruled the Arohbald case in so far as the two were in conflict. This leaves the Goldman case as representing our present view, under which the position taken by respondent in the present case is correct.

While .it appears that according to the partnership books, the decedent’s correct distributive share of partnership income was $141,426.24 (excluding the $15,167.95 carried over from 1926), the executors made certain adjustments and reported decedent’s share as $139,016.05. We understand from the statements of counsel at the hearing that there is no dispute as to the adjustments so made by the executors, and that the figure of $139,016.05 is accepted by the parties as correct. In determining the deficiency the respondent made certain adjustments in the income reported and the deductions claimed. As no error is alleged with respect to such adjustments, the respondent’s determination is affirmed.

Some attempt is made to show that under Massachusetts law — the partnership here being within that jurisdiction — a partnership is not necessarily dissolved by the death of a partner. The cited cases, as we read them, do not so hold. Murphy v. Murphy, 217 Mass. 233, merely sustains a contract for the carrying on of the business of the partnership after the death of one or more of the partners. Wolbach v. Commissioner, 268 Mass. 365; 167 N. E. 677, cited by both parties, holds that:

The death of a partner commonly has the effect of dissolving a partnership, at least in the sense that the deceased partner is no longer associated in the active business. This is so, both at common law * * * and under the uniform partnership act [in effect in that jurisdiction]. Whatever may be the succeeding partnership, the one of which the deceased partner was a member has ceased so far as he was concerned.

No decision is pointed to which construes an agreement to continue the business as one continuing the partnership itself. We see no ground for distinguishing this case from the Goldman and Davison cases and we accordingly hold that the principle of those cases applies here.

Decision will be entered for the respondent.