Burke v. Commissioner , 21 B.T.A. 45 ( 1930 )

LILLIAN BURKE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Burke v. Commissioner

Docket No. 21557.

United States Board of Tax Appeals

21 B.T.A. 45; 1930 BTA LEXIS 1935;

October 15, 1930, Promulgated

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">*1935 1. TRANSFEREES. - A petitioner who appeals to this Board under section 280 of the Revenue Act of 1926, may not in such proceeding question they validity of said section. Henry Cappellini et al.,14 B.T.A. 1269">14 B.T.A. 1269.

2. Id. - The respondent having failed to show that the petitioner received any assets of the dissolved corporation, held that the petitioner is not liable, at law or in equity, for any unpaid tax of the corporation.

T. M. Stevens, Esq., for the petitioner.

J. A. Lyons, Esq., and John D. Foley, Esq., for the respondent.

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TRAMMELL

">*45 This is a proceeding for the redetermination of liability as a beneficiary of the estate of a transferee, determined by the respondent in the amount of $26,480.18, plus any accrued penalties and interest, for income and profits taxes of Roche & Burke Undertaking Co., as follows: For 1918, $15,753.51; for 1919, $11,903.63; for 1920, $7,826.75; for 1921, $5,966.70.

Upon motion duly made granted the petition was amended and the answer of the respondent was also amended, leaving issues arising from the following allegations of the petitioner:

(1) The petitioner contends that">*1936 section 280 of the Revenue Act of 1926 is unconstitutional;

(2) The petitioner denies liability at law or in equity for the taxes, penalties and interest of the Roche & Burke Undertaking Co.;

(3) The petitioner alleges that the collection of the unpaid taxes of the Roche & Burke Undertaking Co. for 1918 and 1919 is barred by the statute of limitations, the respondent alleging that the returns were fraudulent and there is no limitation;

(4) The petitioner alleges that the tax liability of the Roche & Burke Undertaking Co. for 1920 and 1921 is overstated;

(5) The petitioner alleges error in failing to compute the profits-tax liabilities of the Roche & Burke Undertaking Co. under the relief provisions of sections 327 and 328 of the Revenue Acts of 1918 and 1921.

At the hearing the petitioner abandoned the fifth issue with reference to special assessment.

FINDINGS OF FACT.

The petitioner is a resident of Mobile, Ala.

Roche & Burke Undertaking Co., hereinafter referred to as the corporation, was an Alabama corporation, with its principal office ">*46 at Mobile. It was engaged in carrying on an undertaking business during 1918, 1919, 1920, and in 1921 until September">*1937 30, upon which date it discontinued business and was dissolved. At the date of dissolution, Frank L. Roche, hereinafter referred to as Roche, and Peter Burke, hereinafter referred to as Burke, were the sole stockholders, each holding one-half of the outstanding stock of the corporation. During the entire existence of the corporation Roche had been its president and Burke had been its secretary-treasurer. The books were in charge of Burke.

On the date of dissolution of the corporation Roche and Burke formed a partnership, took over all of the assets of the corporation, turned them over to the partnership, and thenceforward the undertaking business was operated by the partnership. The ledger used by the corporation was continued in use by the partnership and the book values of the assets remained unchanged. The ledger was continued in use until October, 1922.

After charging off bad debts and determining the profits of the corporation to the date of the dissolution, the book values of the assets taken over from the corporation were as follows: Cash, $8,613.53; merchandise inventory, $8,000; real estate, $20,000; furniture and fixtures inventory, $700; automobiles and vehicles">*1938 inventory, $6,000; accounts receivable, including accounts of stockholders, $26,287.75, or a total book value of all assets of at least $69,601.28. Various liabilities on the ledger amounted to $4,727.72, leaving a net book value of $64,873.56.

The capital stock of the corporation was $10,000, and the amount of surplus and undivided profits, $54,873.56. The capital accounts of the partnership were opened to reflect for Roche an investment of $5,000, and for Burke an investment of $5,000, and the surplus and undivided profits were transferred to a partnership profit and loss account in the credit amount of $54,873.56.

With reference to the said accounts receivable, according to the ledger an amount of at least $10,514.11 was subsequently collected in cash and an amount of at least $8,434.49 was charged off to profit and loss account on December 31, 1921.

The real estate was located at the corner of St. Joseph and State Streets in Mobile and comprised a lot extending about 150 feet in one direction and somewhat less than 100 feet in the other; and the lot was improved by a two-story brick residence of dimensions approximately 40 feet by 100 feet, which had been acquired by">*1939 the corporation about 1907 or 1908. Real estate values declined during 1921 in Mobile, and there was a very poor market for the sale of such property; the value of the real estate was not in excess of $15,000 when taken over from the corporation.

">*47 The net values of the distributions in 1921 from the corporation to the stockholders, after deducting liabilities on the books in the amount of $4,727.72 and the additional taxes paid for the corporation in 1923 of $12,465.99, amounted as follows: To Frank L. Roche, at least $15,817; to Peter Burke, at least $15,817.

The partnership continued to operate the undertaking business until the death of Burke on July 5, 1922. Thereafter Roche operated the business for a few months, when he caused a corporation to be organized to go into the undertaking business.

The corporation filed a so-called tentative return for 1918 on March 12, 1919, reporting an estimated tax liability of $120. The return of the corporation for 1918 was filed on April 22, 1919, reporting net income of $2,976.92 and a tax liability of $117.23.

The return of the corporation for 1919 was filed on March 8, 1920, reporting a net income of $4,423.72 and">*1940 a tax liability of $242.37.

The profit and loss account in the ledger reflected a net profit amounting to $1,316.15 to the corporation for the period ended September 30, 1921.

Roche employed a firm of public accountants in 1923 to audit the accounts and records of the corporation. These accountants left the ledger unadjusted, but, upon their advice, amended returns were made up for 1918, 1919, and 1920, and they were executed and filed by Roche, as president of the dissolved corporation. At the same time and in the same manner an original return was made up, executed, and filed by Roche for the corporation, for the period in 1921 ended with the dissolution of the corporation on September 30. These returns were all filed on April 24, 1923, and they reported as follows: For 1918, net income, $21,519.23; tax liability, $7,899.84; for 1919, net income, $18,394.27; tax liability, $4,033.02; for 1920, net income, $11,450.69; tax liability, $1,270.11; for 1921, net income, $6,368.86; tax liability, $486.89.

The additional taxes paid in 1923 on behalf of the dissolved corporation amounted as follows: For 1918, $7,553.23; for 1919, $3,790.65; for 1920, $635.22; for 1921, $486.89, ">*1941 or an aggregate of $12,465.99.

The unpaid additional taxes of the corporation were assessed on or about March 10, 1924, in the following amounts: For 1918, $15,733.51; for 1919, $11,903.63; for 1920, $7,826.75; for 1921, $8,193.42, of which tax for 1921, $2,226.72 was abated on January 28, 1926.

On the day of his death Burke made a will leaving all of his property to his wife, the petitioner herein, and appointing her executrix to serve without bond. This will was admitted to probate on July 26, 1922, and the petitioner was appointed executrix. The ">*48 estate has never been settled and has never made a formal distribution of any kind.

Following the death of Burke, Roche took possession of all of the assets of the partnership, alleging that Burke was indebted to the partnership and/or to Roche. The matter of the amount of Burke's indebtedness has never been settled and is still in controversy. The real estate acquired by Roche and Burke from the corporation was sold in 1925 for a selling price of $20,000, of which a small initial payment in cash was collected and the balance of the consideration was evidenced by promissory notes. After deducting the expenses incident">*1942 to the sale there remained very little cash out of the initial payment. The notes were held for about a year, when in the fall of 1926 and subsequent to September 29, 1926, cash was borrowed on the notes from a bank, and the net cash proceeds of the sale thus realized were divided by the petitioner, as executrix of the Burke estate, and by Roche. This is the only distribution which has ever been made to the Burke estate out of the partnership assets.

The deficiency letter was mailed to the petitioner on September 29, 1926.

OPINION.

TRAMMELL: The first issue raised by the petitioner is that section 280 of the Revenue Act of 1926 is unconstitutional. We have repeatedly held that where a petitioner appeals to this Board under section 280, the validity of said section may not be questioned in such proceeding. , and subsequent approving decisions. See also , and ; certiorari denied, ">*1943 .

In addition to the question affecting the jurisdiction of the Board, above referred to, we find it necessary to consider in this case only the second issue raised by the petitioner, namely, whether in her individual capacity she is liable, at law or in equity, for any unpaid tax of the taxpayer corporation.

The evidence shows that all the assets of the corporation were distributed in 1921 to its two stockholders, Frank Roche and Peter Burke, in equal portions. On the same date Roche and Burke formed a partnership to continue the undertaking business theretofore conducted by the corporation. On July 5, 1922, Burke died testate, leaving all of his property to his widow, the petitioner herein. On the death of Burke, Roche took possession of the partnership assets and continued the business, claiming that Burke was indebted to him or to the partnership. The petitioner was appointed executrix of her deceased husband's estate, the administration of which is still pending.

">*49 In 1925 certain real estate acquired by Roche and Burke from the taxpayer corporation was sold in part for cash and in part for notes. Subsequently the notes were discounted">*1944 at the bank and the cash proceeds divided between the petitioner, as executrix of the Burke estate, and Roche. No other distribution has been made to the Burke estate out of the partnership assets and, with the exception of the real estate, it is not shown that the petitioner, individually, has at any time ever received any of the assets of the taxpayer corporation, either directly or through the estate. Respondent asserts liability against the petitioner individually and not as executrix of the estate.

The respondent does not contend that the petitioner herein is liable on account f the proceeds from the sale of the real estate received by her in 1926 as executrix of Peter Burke's estate, but asserts that immediately upon the death of her husband the title to his interest in the real estate vested in her by operation of law, and that therefore she is liable for corporate taxes to the extent of one-half the value of said real estate on July 5, 1922, the date of Burke's death.

Whether respondent's contention is sound depends upon the rule of law which obtains in the State of Alabama. The status of partnership real estate upon the death of a partner has been a subject of consideration">*1945 by the Supreme Court of Alabama in numerous cases, and with respect theret the law of that State seems to be well settled. The matter is discussed quite clearly and at length in ; , where the court in the course of its opinion, said:

The doctrine is familiar, and is illustrated by many reported cases, that when partnership funds have been used in the acquisition of real estate, whether the title be taken in the name of one partner, or in the names of all, so as to make them in law tenants in common, such property will for certain purposes be treated in courts of equity as personalty. , 8 South.Rep. 10, and authorities there cited. * * * A general partnership is a scheme of coordinate contribution, effort, and action by each for all. The property and resources contributed by the several members constitute a fund specially appropriated for use in carrying on the partnership business, for the satisfaction of partnership obligations, and for a ratable division of what may be left among the partners. None of these special purposes could be effectually carried">*1946 out as to real estate, if the incidents of the legal ownership of that kind of property are recognized in the partnership dealings. The powers of the several general partners in the acquisition, management, control and disposition of the partnership property in the course of business, would be impossible of adequate exercise if hampered by the restrictions which at law embarrass the ownership and alienation of real estate. The incidents of dower, heirship, etc., practically preclude, so far as real estate is concerned, a recognition at law of that species of title which a partnership and the several members thereof have in the firm property; for ">*50 each has the power of absolute disposition within the scope of the business, and, in the case of the death of a member, the survivor or survivors are vested with an exclusive title and right of disposition for partnership purposes. * * * In , it was said: "So far as the partners and their creditors are concerned, real estate belonging to the partnership is in equity treated as mere personalty; and so it will be deemed as to all other intents, if the partners have by agreement">*1947 or otherwise impressed upon it that character." * * * Our conclusion is that partnership real estate is, in equity and for partnership purposes, to be treated as personalty; * * *

See also ; , and ; , in which latter case the court held that the legal title of a deceased partner in firm lands does not descend to the surviving partner, but that the equitable title and interest do by operation of law pass to the surviving partner. The court further held that real estate acquired with firm funds and for firm purposes is deemed in equity firm property subject to the payment of firm debts in priority to the separate debts of the partners, whether the legal title resides in the firm, or in the partners as tenants in common, or in the name of one partner only, and is treated as personalty until the purposes of the firm are accomplished.

At the time of the hearing in this case the affairs of the partnership of Roche & Burke had not been finally wound up, and the question of the indebtedness of Burke to Roche or the partnership had not been">*1948 settled, nor had the administration of the estate of Burke been concluded. It is apparent, therefore, that at the time of Burke's death in 1922 the equitable title to his interest in the partnership real estate passed, under the Alabama law, to the surviving partner, Roche, and only the bare legal title vested in his widow, the petitioner herein. This is not sufficient, in our opinion, to fix liability on the petitioner for taxes of the corporation on the theory that she has gratuitously received assets of the corporation, in the form of partnership real estate, impressed with an equitable lien to that end.

Section 602 of the Revenue Act of 1928 provides that the burden of proof shall be upon the Commissioner to show that a petitioner in a proceeding before the Board is liable as a transferee of property of the taxpayer. A petitioner is liable as a transferee only to the extent of the value of property of the taxpayer received, and since the respondent has not in this case shown that the petitioner, in her individual capacity, has ever received any of the assets of the dissolved corporation, we hold that in such capacity the petitioner is not liable, at law or in equity, for">*1949 any unpaid taxes of the corporation.

Reviewed by the Board.

Judgment will be entered for the petitioner.