Cellers v. Commissioner ( 1929 )

A. CELLERS, J. W. BAILEY, C. B. BUCHANAN, AND H. F. REESE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Cellers v. Commissioner

Docket Nos. 21911, 21913, 21918, 21944.

United States Board of Tax Appeals

16 B.T.A. 411; 1929 BTA LEXIS 2594;

May 8, 1929, Promulgated

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1. Henry Cappellini et al.,14 B.T.A. 1269">14 B.T.A. 1269, followed.

2. The assessment of a liability under section 280 of the Revenue Act of 1926 is not barred by limitation if the assessment is proposed by the Commissioner at a time when the liability of the taxpayer is not barred and is proposed within the periods provided by section 280, and an appeal is taken to the Board within the statutory period.

Charles E. McCulloch, Esq., and Ivan F. Phipps, Esq., for the petitioners.

Albert S. Lisenby, Esq., for the respondent.

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MILLIKEN

The above proceedings were consolidated for hearing and decision and involve the redetermination of liabilities determined by respondent against petitioners under section 280 of the Revenue Act of 1926, as transferees of the property of C. B. Buchanan & Co., Inc., in the following respective amounts:

A. Cellers	$189.63
J. W. Bailey	252.84
C. B. Buchanan	4,347.36
H. F. Reese	265.48

The errors alleged are (1) that section 280 is unconstitutional; (2) that the liabilities of petitioners are barred by the statute of limitations; (3) that the liabilities of petitioners as stockholders are barred by the statute of limitations and that the attempt on the part of respondent under section 280 to revive such liabilities against petitioners not specifically granted under the Revenue Acts of 1917 and 1918 is abortive; and (4) that respondent in applying section 210 of the Revenue Act of 1917 and section 328 of the Revenue Act of 1918 has not selected proper comparatives. On motion, it was ordered that the hearing be limited to errors (1), (2) and (3). The facts were stipulated and from the stipulation and from the pleadings we make the following findings of fact.

FINDINGS OF FACT.

Petitioners are individuals who reside and have their respective places of business as follows: A. Cellers in McMinnville, Yamhill County, Oreg.; J. W. Bailey and C. B. Buchanan in Hillsboro, Washington County, oreg.; and H. F. Reese in Tillamook, Tillamook County, Oreg. The taxes in controversy are income and profits taxes for the fiscal year ending June 30, 1918, against C. B. Buchanan & Co., Inc., which was a corporation organized under the laws of Oregon.

C. B. Buchanan & Co., Inc., of Hillsboro, Oreg., hereinafter referred to as the transferor, filed its income and profits-tax returns under the Revenue Acts of 1916 and 1917 for its fiscal year ended June 30, 1918, on July 23, 1918, and filed an income and profits-tax return for the said fiscal year under the Revenue Act of 1918 on or after June 9, 1919, and during the month of June 1919.

On February 8, 1924, the transferor executed and on February 16, 1924, filed with the Commissioner of Internal Revenue a waiver for the said fiscal year ended June 30, 1918, which reads:

IT:E:SM

RCH-3770

A-3265

FEBRUARY 8, 1924.

INCOME AND PROFITS TAX WAIVER.

In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, C. B. Buchanan & Co., Inc., of Hillsboro, Oregon and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said corporation for the year ended June 30, 1918 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes," approved August 5, 1909, irrespective of any period of limitations.

C. B. BUCHANAN & CO., INC.,

Taxpayer.

(Signed) By C. B. BUCHANAN, President.

(Signed) D. H. BLAIR, Commissioner.

After the filing of the above waiver the commissioner corresponded and negotiated with the transferor with respect to the said transferor's claim for the determination of its excess-profits-tax liability under the provisions of section 210 of the Revenue Act of 1917 and section 328 of the Revenue Act of 1918. A part of said correspondence consists of the following: A letter dated May 16, 1924, from the Deputy Commissioner to the transferor, notifying it that its appeal had been transmitted to the Committee on Appeals and Review. A letter from the transferor to respondent dated May 23, 1924, which reads:

COMMISSIONER OF INTERNAL REVENUE,

Washington, D.C.

SIR: Acknowledgment is made of letter dated May 16, 1924, enclosing copy of letter of transmittal from Special Assessment Section, Income Tax Unit to Committee on Appeals and Review, involving additional assessment for the fiscal year ended June 30, 1924. [The last mentioned date undoubtedly should refer to fiscal year ended June 30, 1918.]

Under date of August 22, 1923, we wrote the Department (IT:SA:SM:RCH-3770) requesting that this appeal be expedited in order that we might appear personally before the Sub-Committee during their sitting at Portland, Oregon, owing to the expense involved in conducting the hearing at Washington. Our corporation is comparatively small, and we have already incurred the expense of a personal hearing before the Transportation and Public Utilities Section, which was held May 3, 1921, as reflected in the letter of transmittal.

We request, therefore, that the hearing by the Committee on Appeals and Review be held at the next sitting of the Sub-Committee at the nearest point to our home office, provided the committee will hold such hearings in the future at points along the Pacific Coast. The advantage of such hearings at points convenient to the home of the taxpayer is evident, and our corporation will appreciate any courtesy in this connection which the plans of the Committee on Appeals and Review will permit. Our only regret is that the case was transmitted too late for a hearing during the fall of 1923.

A letter from the transferor to the Field Section of the Review Division, Soliticor of Internal Revenue, Washington, D.C., dated August 2, 1924, notified that Division that the transferor would be represented at a hearing to be held at Seattle, Wash., on Monday, August 18, 1924. On June 10, 1925, the Special Assessment Section of the Commissioner's office recommended that special assessment be granted the transferor under the aforesaid provisions of law.

On August 12, 1925, the Commissioner notified the transferor that it had been granted special assessment and that a deficiency existed against it for the fiscal year ended June 30, 1918, in the amount of $5,055.31. The deficiency previously claimed by the Commissioner to exist upon the basis of the same amount of net income but without computing the transferor's excess-profits-tax liability under sections 210 of the Revenue Act of 1917 and 328 of the Revenue Act of 1918, was $6,262.87.

On September 26, 1925, the Commissioner by registered mail notified the transferor of a final determination of deficiency against it for the fiscal year ended June 30, 1918, in the amount of $5,055.31.

No appeal from such final determination was filed by the transferor with the United States Board of Tax Appeals. On December 29, 1925, the Commissioner assessed the said amount of $5,055.31 against the transferor. No portion thereof has been paid by or for the transferor.

The transferor was dissolved on December 2, 1924.

The petitioners were all of the stockholders of the transferor at the time of its dissolution, and upon such dissolution received all of its assets. Each of the petitioners received in cash in liquidation of his capital stock upon such dissolution an amount in excess of the liability asserted herein against such petitioners.

The respective liabilities asserted against the petitioners herein are in proportion to their respective stockholdings in the transferor and in proportion to the assets of the transferor received by each of them respectively upon the dissolution and liquidation of the transferor.

No waivers of the statute of limitations have been filed by the petitioners or any of them in respect of the individual liabilities asserted against them in these proceedings.

Respondent on October 25, 1926, mailed to each of the petitioners the deficiency letter on which each respective proceeding is based.

OPINION.

MILLIKEN: Petitioners' first contention is that section 280 of the Revenue Act of 1926 is unconstitutional. This question is foreclosed by our decision in , where we held that where transferees have invoked the provisions of this section by appealing to the Board they may not in such proceedings question its validity.

The only remaining question that is before us at this time is whether the assessment and collection of the liabilities against the various petitioners are barred by the statute of limitations. It is proper to state at this point that although the transferor was dissolved in December, 1924, it continued to exist as a corporate entity for the period of five years thereafter for the purpose of winding up its affairs and prosecuting and defending actions or proceedings by or against it. Sec. 6875, Oregon Laws (1920).

Petitioners rely on section 250(d) of the Revenue Act of 1918, which reads:

(d) Except in the case of false or fraudulent returns with intent to evade the tax, the amount of tax due under any return shall be determined and assessed by the Commissioner within five years after the return was due or was made, and no suit or proceeding for the collection of any tax shall be begun after the expiration of five years after the date when the return was due or was made. In the case of such false or fraudulent returns, the amount of tax due may be determined at any time after the return is filed, and the tax may be collected at any time after it becomes due.

Since the return of the transferor was not fraudulently made, the first issue is whether the five-year period above described began to run from July 23, 1918, when it filed its first return, or from June, 1919, when it filed its second return. The transferor kept its accounts and made its income and profits-tax returns on the basis of fiscal years ending June 30. The fiscal year involved in these proceedings ended June 30, 1918, and thus included one-half of the calendar year 1917 and one-half of the calendar year 1918. The transferor was thus taxable under the Revenue Act of 1916 as amended by the Revenue Act of 1917, and also under the Revenue Act of 1918. The latter act was approved February 24, 1919, but, in so far as the issues before us are concerned, was made retroactive to January 1, 1918. The question here presented was before us in . The Davis Feed Co. kept its accounts and made returns on the basis of a fiscal year ending May 31 and filed two returns for the fiscal year ending May 31, 1918. The first return was filed in July, 1918, and the second in May, 1919. After quoting and citing the pertinent parts of the Revenue Act of 1918, we there said:

There can be no doubt, in our opinion, that the above-quoted provisions of the Revenue Act of 1918 required taxpayers having a fiscal year ending during the calendar year 1918, and who have consistently filed returns on a fiscal-year basis, to make return of net income for the entire period and pay the tax thereon computed in accordance with section 205. Although this taxpayer filed a return for the fiscal year under the provisions of the prior revenue acts before the Revenue Act of 1918 was enacted, the 1918 Act was retroactive and required taxpayer to file a return of its income for its fiscal year beginning in 1917 and ending in 1918, and to pay the tax imposed thereon. The provisions of the Revenue Act of 1918 relative to returns, therefore, superseded the provisions of the Revenue Act of 1916, as amended by the Act of 1917, and the return filed on May 1, 1919, pursuant to the provisions of the Revenue Act of 1918 must be held to be the return referred to in section 250(d) of the Revenue Act of 1918. The assessment in March, 1924, of the tax determined under the provisions of the Revenue Act of 1918 for the fiscal year ending May 31, 1918, was, therefore, within the statutory period of five years.

In , the question before us was whether the Board had jurisdiction. There the taxpayer on October 8, 1918, filed its income and profits-tax returns for its fiscal year ending July 31, 1918. This return showed a tax amounting to $41,390.97. Thereafter, on September 29, 1919, petitioner filed its second return under the Revenue Act of 1918, and its return showed a total tax of $15,978.62. The Commissioner determined a tax liability of less than that shown by the first return and larger than that shown by the second return. The question there was whether the Commissioner had determined a deficiency. After referring with approval to , we said:

Although the assessment by the Commissioner on November 9, 1918, of the tax shown due on the return filed under the provisions of the Revenue Act of 1917 was not an assessment of a deficiency, the portion of the assessment became a deficiency when, pursuant to the Revenue Act of 1918, the petitioner's return required by that Act showed a tax at less than the amount assessed. When the Commissioner, therefore, on July 16, 1925, finally determined petitioner's claim for abatement and determined that the correct tax for the year was in excess of the amount shown upon its return, he determined a deficiency within the meaning of the statute, and, while the situation may not come within the letter of section 283(f) of the Revenue Act of 1926, it, in our opinion, comes well within the spirit thereof.

The situation before us is not similar to that presented by the repeal of the Revenue Act of 1918 and the enactment of the Revenue Act of 1921, and which is discussed in , and subsequent cases. In the Ley case we said:

The Commissioner relies upon the Board's decisions in , and , as authority for the proposition that it was necessary to file a return after the enactment of the Revenue Act of 1921 in order to start the running of the statute of limitations. Those decisions are not in point. They involve a fiscal year beginning in 1917 and ending in 1918. The Revenue Act of 1918 made a complete change in the Federal income and profits-tax system effective January 1, 1918. Taxes for the most part were greatly increased; invested capital was defined, larger percentages of invested capital were made deductible, and many other new features were enacted. Practically every taxpayer was subject to an additional tax for such fiscal year. If he were not subject to an additional tax there had been such changes and so many new features introduced into the Revenue Act of 1918 over the Revenue Act of 1916, as amended by the Revenue Act of 1917, as to require the filing of a return under the 1918 Act of enable the Commissioner to make an audit of the tax liability for the fiscal year. The changes in the law made it necessary to issue new and different forms of tax returns, and Form 1120, income and profits-tax return, was issued to be used by corporations in lieu in Form 1031 issued under the prior revenue acts. In , the taxpayer was subject to an additional tax and, by regulations prescribed by the Commissioner by authority of law, was required to file a return under the Revenue Act of 1918. In , the taxpayer was subject to higher rates of tax upon its income, but due to new provisions of the Revenue Act of 1918 it was entitled to deductions not previously allowable which, when it made its return under the Revenue Act of 1918, resulted in a less tax than had previously been shown. However, the underlying principle necessitating the making of a return under the 1918 Act was the same.

Under these authorities we are of opinion that the five-year period provided by section 250(d) of the Revenue Act of 1918 began to run in June, 1919, at the date of the filing of the transferor's second return. Before this period had expired and on November 23, 1921, the Revenue Act of 1921 was approved. Section 250(d) of that Act provides:

(d) The amount of income, excess-profits or war-profits taxes due under any return made under this Act for the taxable year 1921 or succeeding taxable years shall be determined and assessed by the Commissioner within four years after the return was filed, and the amount of any such taxes due under any return made under this Act for prior taxable years or under prior income, excess-profits, or war-profits tax Acts * * * shall be determined and assessed within five years after the return was filed, unless both the Commissioner and the taxpayer consent in writing to a later determination, assessment, and collection of the tax; and no suit or proceeding for the collection of any such taxes due under this Act or under prior income, excess-profits, or war-profits tax Acts * * * shall be begun, after the expiration of five years after the date when such return was filed, but this shall not affect suits or proceedings begun at the time of the passage of this Act: * * *

Under this provision and before the expiration of the five-year period and as of February 16, 1924, the transferor and respondent executed a waiver in which it was consented that the taxes due for the fiscal year ending June 30, 1918, might be assessed and collected "irrespective of any period of limitations." Respondent assessed the tax on December 29, 1925. In cases involving similar waivers we have held that respondent must make his determination or assessment within a reasonable time. In one case an assessment made 20 months after the date of the waiver was held not to have been unreasonably delayed () and in another case () it was held that respondent acted within a reasonable time when he made his determination within approximately three years after the date of the waiver. Here respondent acted in less than 23 months after the date of the waiver and during this period he and the transferor were in active correspondence. Transferor was seeking a special assessment and this relief it obtained, together with a reduction of its assessment. Under these circumstances we are of opinion that respondent acted within a reasonable time and that the assessment was made within the statutory period as extended by the waiver. See Greylock Mills v. Commissioner, recently decided by the Circuit Court of Appeals for the Second Circuit.

It is not necessary to consider the question whether the collection of the tax was further extended by the waiver, for the reason that at the time the assessment was made the Revenue Act of 1924 was in effect. Section 277 of the Revenue Act of 1924, which was approved June 2, 1924, contains the following:

SEC. 277. (a) Except as provided in section 278 and in subdivision (b) of section 274 and in subdivision (b) of section 279 -

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(2) The amount of income, excess-profits, and war-profits taxes imposed by * * * the Revenue Act of 1916, the Revenue Act of 1917, the Revenue Act of 1918, and by any such Act as amended, shall be assessed within five years after the return was filed, and no proceeding in court for the collection of such taxes shall be begun after the expiration of such period.

Section 278 of the same Act in part provides:

(c) Where both the Commissioner and the taxpayer have consented in writing to the assessment of the tax after the time prescribed in section 277 for its assessment the tax may be assessed at any time prior to the expiration of the period agreed upon.

(d) Where the assessment of the tax is made within the period prescribed in section 277 or in this section, such tax may be collected by distraint or by a proceeding in court, begun within six years after the assessment of the tax. Nothing in this Act shall be construed as preventing the beginning, without assessment, of a proceeding in court for the collection of the tax at any time before the expiration of the period within which an assessment may be made.

The assessment against the transferor having been made after the approval of the Revenue Act of 1924, the tax could be collected by distraint or a proceeding in court begun within six years after December 29, 1925. Cf. . This period has not expired. The pertinent parts of section 280 of the Revenue Act of 1926 read:

SEC. 280. (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.

* * *

(b) The period of limitation for assessment of any such liability of a transferee or fiduciary shall be as follows:

(1) Within one year after the expiration of the period of limitation for assessment against the taxpayer; or

(2) If the period of limitation for assessment against the taxpayer expired before the enactment of this Act but assessment against the taxpayer was made within such period, - then within six years after the making of such assessment against the taxpayer, but in no case later than one year after the enactment of this Act.

(3) If a court proceeding against the taxpayer for the collection of the tax has been begun within either of the above periods, - then within one year after return of execution in such proceeding.

Under the above provisions, respondent has the right to make an assessment of liability against petitioners within one year after the expiration of the period for assessment against the transferor. As we have shown, the assessment against the transferor was made in due time and is valid as against it. Although the assessment was made after the expiration of the five-year period provided in section 250(d) of the Revenue Act of 1921 and in section 277(a)(2) of the Revenue Act of 1924, it was made within that period as extended by the consent, which was executed pursuant to statutory authority. Confining our opinion to the facts presented by these proceedings, it is sufficient to point out that petitioners, as transferees, did not acquire the assets of the transferor until subsequent to the execution of the consent. They acquired such assets subject to the obligations of the transferor and thus subject to its then existing valid agreement extending the time within which the additional tax could be assessed and collected.

Under the provisions of section 280, respondent has determined the liability of petitioners in the same manner as in the case of a deficiency in tax and petitioners have availed themselves of these provisions by appealing to the Board. Respondent has not assessed but has proposed for assessment the various liabilities and he made these determinations and mailed his deficiency letters within one year after he made the assessment against the transferor and at a time when the collection of a tax was not barred by limitations as against the transferor. Cf. . Since petitioners have appealed to the Board, respondent is prohibited from making an assessment so long as the appeals are pending and the running of the statute of limitations is suspended during such period and for 60 days thereafter. See sections 274(a) and 280(d) of the Revenue Act of 1926. Under these provisions we are of opinion that since neither the assessment nor collection of the deficiency in tax is barred as against the transferor and since the assessments against petitioners were proposed by respondent within the period provided by section 280, the assessment and collection of such liabilities are not barred by the statute.

Under the order heretofore referred to, these proceedings will be restored to the Day Calendar, for the purpose of a hearing on issue (4).

Reviewed by the Board.