Frost v. Commissioner , 23 B.T.A. 411 ( 1931 )

HERMAN FROST, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Frost v. Commissioner

Docket No. 25184.

United States Board of Tax Appeals

23 B.T.A. 411; 1931 BTA LEXIS 1873;

May 27, 1931, Promulgated

---

1. A corporation discontinued business on March 31, 1921, and transferred all of its assets to the petitioner, sole stockholder of the corporation, who continued the business previously carried on by the corporation. The transfer was effected through a bill of sale to a trustee or agent of petitioner, in which it was recited that such trustee or agent assumed all outstanding indebtedness then accrued or owing. The consideration named was not paid, but instead a smaller amount which passed from the petitioner to the trustee or agent and back through a fictitious name to the petitioner. Held, that the transaction was in substance a liquidation of the corporation to the petitioner and that the petitioner is accordingly liable as transferee under the provisions of section 280 of the Revenue Act of 1926 on account of such transfer.

2. The value of assets received by the petitioner in the foregoing transfer determined.

3. The corporation filed its return for 1918 on April 15, 1919. A waiver, unlimited as to time for assessment and collection, was filed on January 17, 1924. Assessment of a deficiency was made in January, 1924, and is now outstanding. Held, that the Commissioner had a reasonable time within which to make collection under the foregoing waiver and that, under the circumstances of this case, such time had not expired at the time of the passage of the Revenue Act of 1926. Greylock Mills v. Commissioner, 31 Fed.(2d) 655, followed.

4. Notice of liability to the petitioner as transferee on account of the aforementioned assessment for 1918 was mailed on January 14, 1927. Held, that section 280(b)(1) of the Revenue Act of 1926 is applicable and accordingly the collection of the assessment from the petitioner is not barred.

R. C. Ogden, Esq., for the petitioner.

J. E. Mather, Esq., for the respondent.

---

SEAWELL

This proceeding involves the liability of the petitioner as transferee under the provisions of section 280 of the Revenue Act of 1926 on account of deficiencies in income and profits taxes which were asserted against the Gnu Investment Company for the years 1917, 1918, and 1919 and the three-month period ended January 31, 1921. The total liability proposed for assessment against the petitioner by the Commissioner in his notice is $21,619.96. While the foregoing amount is not clearly reconcilable with the statement attached showing deficiencies determined against the Gnu Investment Company for each of the years involved, it was shown at the hearing that the amounts now outstanding are as follows:

1917	$4,952.11
1918	9,032.42
1919	6,150.55
Three-month period ended January 31, 1921	119.87
	20,254.95

FINDINGS OF FACT.

On and prior to March 31, 1921, the Gnu Investment Company, a California corporation (hereinafter referred to as the "corporation"), was engaged in the saloon and cafe business. From the time it began business in 1916 until it discontinued business on March 31, 1921, the corporation occupied certain premises under a lease dated July 28, 1916, which ran for three years with the option of renewal for an additional two years. The option was exercised, and subsequent to the discontinuance of business by the corporation a new lease was negotiated by or for the party who took over such business.

The corporation's entire outstanding capital stock of 1,000 shares, par value $10 per share, was owned by petitioner on March 31, 1921, on which date the corporation discontinued business and transferred all of its assets to William Glover, who was acting as trustee or agent for the petitioner. Thereafter petitioner carried on the business which was formerly conducted by the corporation. The bill of sale under which the transfer took place recited:

That the undersigned, Gnu Investment Company, a corporation, by its President and Secretary thereunto duly authorized, for and in consideration of the sum of Five Thousand ($5000.00) Dollars, this day paid by William Glover to said corporation, does hereby sell, assign, transfer, convey and set over all of its good will, stock in trade, appliances, equipment, utensils, books of account, accounts and bills receivable, choses in action, all assignable leasehold interests, and all other property of said corporation, wheresoever situate or being.

TO HAVE AND TO HOLD said assets and property to the said William Glover, his heirs and assigns forever; it being understood and agreed that in further consideration of the execution of this bill of sale, that the said William Glover will pay all existing indebtedness and obligations of said corporation accrued or owing on this date.

At the time the above transfer took place there was certain litigation pending against the petitioner, but such litigation was not on account of Federal taxes.

The actual transfer was not made in accordance with the terms of the bill of sale, but was effected in the following manner: The sum of $2,000 was turned over by the petitioner to the said Glover, who deposited the same in his own (Glover's) account. Glover then drew his personal check for $2,000 to the order of "James Wilson" who cashed the check. "James Wilson" was, in fact, the petitioner in this proceeding. In making the transfer to Glover, he (Glover) was acting as trustee or agent for the petitioner and on June 9, 1925, assets received by him were retransferred to petitioner by bill of sale which provided that:

This bill of sale is made for the purpose of reconveying to the said Herman Frost all of the property conveyed to the said William Glover by that certain bill of sale dated the 31st day of March, 1921, executed by the Gnu Investment Company, a corporation, to the said William Glover, wherein the said property herein transferred and conveyed was transferred and conveyed to the said William Glover; it being understood that the said property so transferred to the said William Glover by said Bill of Sale dated March 31, 1921, was assigned and transferred to him in trust only for the use and benefit of said Herman Frost, the said Herman Frost being the sole beneficiary of said trust; and the said Herman Frost does hereby acquit, discharge and release the said William Glover from any and all claims of every kind and nature whatsoever, existing in his favor against the said William Glover from the beginning of the world to date, and the said Herman Frost does hereby admit and acknowledge that the said William Glover has made a full, complete, fair, accurate and correct accounting of his trust, and that he, the said Herman Frost, has accepted the same, and that there are no differences existing between them, and that all adjustments have been made between the said parties in a manner satisfactory to both of them.

On or about March 31, 1921, all of the outstanding capital stock of the corporation was surrendered to the corporation by petitioner and canceled. On March 4, 1922, the charter of the corporation was suspended for failure to pay the State license tax.

The petitioner received assets from the corporation of a fair market value of $3,700 through the transfer of March 31, 1921.

The returns of the corporation were filed on the following dates: 1917, on March 26, 1918; 1918, on April 15, 1919; 1919, on March 20, 1920; and 1921, on November 24, 1923. An additional assessment for 1917 was made in March, 1923, in the amount of $12,253, of which amount $7,719.88 was subsequently abated. A further assessment of $418.44 was made in January, 1924, which is still outstanding. The deficiencies now outstanding for the other years here involved were assessed in January, 1924. A waiver for 1917, unlimited as to time for assessment, was executed by the corporation on February 18, 1921, and filed with the Commissioner. A second waiver for 1917, unlimited as to time for "determination, assessment and collection" and dated January 12, 1923, and a third waiver identical in form for the same year and dated February 15, 1923, were filed with the Commissioner. Likewise a waiver similar in form to the two last named and dated January 17, 1924, was filed for 1918. Each of the waivers for 1917 was signed "Gnu Investment Co., by Herman Frost, President" and that for 1918 was signed "Gnu Investment Co. by Herman Frost." Herman Frost (petitioner in this proceeding) was president of the corporation at and prior to the time it discontinued business on March 31, 1921. All waivers, with the exception of the first and second waivers filed for 1917, are signed "D. H. Blair, Commissioner." The Commissioner's notice to the petitioner advising him of his liability as transferee for the several years in question was mailed January 14, 1927.

OPINION.

SEAWELL: No question is raised in this proceeding as to the correctness of the deficiencies asserted against the Gnu Investment Company, but errors were assigned by the petitioner to the effect that no liability exists on his part as transferee under the provisions of section 280 of the Revenue Act of 1926, and that even if such liability arose by reason of the transfer of assets from the corporation to him, any deficiencies which may be due from the corporation are now barred from collection from him. With respect to the first error, we think it clear from the record that, while the form of conveyance by which the assets of the corporation were transferred to the petitioner was through a bill of sale, in effect and in substance what occurred was nothing more than a liquidation by the corporation to its sole stockholder. A consideration of $5,000 was named in such bill of sale, but the petitioner purported to pay only $2,000 and this amount merely passed from the petitioner to a so-called trustee or agent and back through a fictitious name to the petitioner himself. The amount of the consideration named or paid was thus immaterial. The reason for the use of Glover in connection with the transfer was because of certain litigation then pending against the petitioner, but this litigation was in no sense connected with Federal taxes and the Commissioner stipulated that the purpose of the transfer in the manner carried out was not to avoid Federal taxes. On the whole, in so far as our present question is concerned, we think the transfer may be viewed as if made to the petitioner instead of Glover, and both parties seem to accept this view of the situation. The Commissioner, however, urges that in view of the terms of the bill of sale to the effect that Glover, who was acting for the petitioner, obligated himself to pay all existing indebtedness and obligations accrued or owing on the date of the transfer, the petitioner should be held liable under the bill of sale for the deficiencies here in question, regardless of the value of assets received by the petitioner. In view of all the circumstances, however, we are of the opinion that this is not the ordinary case of an outright purchase of the assets for a stated consideration and the assumption of liabilities as additional consideration, but rather a liquidation of the corporation to its sole stockholder. When looked at in this manner, we have the usual situation of a transferee within the meaning of section 280 who may be held liable for taxes of the transferor in an amount not in excess of the value of assets received by him.

The evidence offered as to the value of assets received by petitioner was both indefinite and inconclusive in many respects. A balance sheet was presented which purported to show the financial condition of the corporation on March 31, 1921, but the testimony showed that it was prepared only in part from the books of the corporation and could not be relied upon even to show a financial condition from a book standpoint. Evidence was presented as to the value of various assets which appeared on the balance sheet and which were taken over by the petitioner and this evidence showed a value much smaller than that indicated by the balance sheet. For example, the Commissioner's witness testified that the corporation's furniture and fixtures, which were listed on the balance sheet at approximately $21,000, would have had a value of approximately $10,000 with a five-year lease on the premises, but that their value independent of the lease was not in excess of $1,500. On March 31, 1921, the lease had only three months to run. Similar evidence was offered with respect to good will - $20,000 with a five-year lease, but "would not be worth anything to speak of" with a lease for only three months. In short, the evidence introduced with respect to all assets did not show a value in excess of $3,700 on the basis of conditions existing at March 31, 1921, and since section 912 of the Revenue Act of 1926, added to that act by section 602 of the Revenue Act of 1928, places the burden of showing the extent of petitioner's liability upon the Commissioner, we are unable to find a liability in excess of that amount.

The final issues relate to the statute of limitations. The return for 1917 was filed on March 26, 1918, and prior to the expiration of the statutory period applicable thereto three waivers, unlimited as to time for assessment and collection, were filed. All three waivers were given on or before February 15, 1923, and under the pronouncement of the Commissioner, expired not later than April 1, 1924. The additional assessments which are now outstanding for 1917 were made prior to April 1, 1924, which was likewise prior to the passage of the Revenue Act of 1924. While the aforementioned act provided that a timely assessment made thereunder might be collected at any time within six years after it was made, such provision did not operate to extend the time for the collection of assessments made prior to its passage. . The collection of the assessments for 1917 from the transferor was accordingly barred after April 1, 1924, which was, of course, prior to the passage of the Revenue Act of 1926. . Notice of liability to the petitioner as transferee was mailed on January 14, 1927. However, as indicated in , section 280 of the Revenue Act of 1926 was not intended to, and did not, revive remedies for enforcing liabilities which were unenforceable before its passage because of the bar of the statute of limitations. In accordingly follows that the deficiency for 1917 is barred from collection from the petitioner.

As to the year 1918, the return was filed on April 15, 1919, and within five years therefrom, or on January 17, 1924, a waiver was filed in the name of the corporation and signed by the petitioner, which provided for the "determination, assessment and collection" of any tax which might be found to be due under the return for 1918, without any limitation as to the time within which such determination, assessment and collection might be made. The execution of the waiver by the petitioner for the corporation was within the powers conferred upon him by section 400 of the Civil Code of California, which was in effect for the years here in question. We have heretofore held that where a waiver is filed (other than one of the character referred to under the preceding issue for 1917), which provides for a determination, assessment and collection, irrespective of any period of limitations, the Commissioner has a reasonable time within which to act. ; (affd., , and certiorari denied, ); ; and . What is a reasonable time may vary according to the peculiar circumstances of a given case. In the case under consideration the original statutory period for collection for 1918 expired on April 15, 1924, and the Revenue Act of 1926 was passed on February 26, 1926, making an extended period of approximately 22 months within which the Commissioner might have acted before the aforementioned act was passed. In the Cunningham Sheep & Land Co. and William S. Doig, Inc., cases, supra, we held that 20 months and 2 years, respectively, did not constitute unreasonable lengths of time within which the Commissioner might act. As in the Doig case, the petitioner is not here contending, and we find no evidence to warrant the conclusion, that the Commissioner failed to determine the deficiency within a reasonable length of time. We do know that at or about the time the waiver was filed an assessment was made and that an abatement claim was filed on account thereof. It further appears that the abatement claim contained a request for consideration under the relief provisions (sections 327 and 328) of the Revenue Act of 1918, and that a very confused state of affairs existed with respect to the records of the corporation and the liability of the parties concerned on account of the dissolution of the corporation and the transfer of the assets to Glover in 1921 as trustee for petitioner and later in 1925 a retransfer to petitioner by Glover. In view of the record here presented, we are of the opinion that a reasonable time within which the Commissioner might act had not expired at the time of the passage of the Revenue Act of 1926, and therefore the collection of the deficiency from the corporation (transferor) was not barred at that time. We have also held that where the period of limitation for collection from the taxpayer or transferor expires after the enactment of the Revenue Act of 1926, the Commissioner has the additional period of one year provided by section 280(b)(1) of the Revenue Act of 1926 for assessment against the transferee. ; ; and . The notice of liability to the petitioner as transferee was mailed on January 14, 1927, or within one year after the passage of the Revenue Act of 1926, and it accordingly follows that the notice was timely and that the collection of the deficiency of the transferor from the petitioner is not barred.

The return for 1919 was filed on March 20, 1920, and prior to the expiration of the statutory period for assessment, but prior to the enactment of the Revenue Act of 1924, the assessment was made of the deficiency for that year. The statutory period for collection expired on March 20, 1925 (section 250(d) of the Revenue Acts of 1918 and 1921). No waivers were filed for such year. An almost identical situation existed in the case of , with respect to the same year, where we held, on the authority of , that since the assessment was made prior to the passage of the 1924 Act and the period for assessment expired thereafter, but prior to the enactment of the Revenue Act of 1926, the collection of such assessment was barred at the time of the enactment of the Revenue Act of 1926. The notice of liability to the petitioner was mailed on January 14, 1927, and therefore under the same reasoning which we followed with respect to the return in this case for 1917 collection may not now be made from the petitioner. As to the deficiency for the three-month period ended March 31, 1921, the return was not filed until November 24, 1923, and the statutory period for collection thereunder was four years from the date the return was filed. (Section 250(d) of the Revenue Act of 1921). The notice of liability to petitioner as transferee was mailed on January 14, 1927, or within one year after the passage of the Revenue Act of 1926. Since the four-year period did not expire until after the passage of the Revenue Act of 1926, the same reasoning which we applied with respect to the return in this case for 1918 makes necessary the conclusion that such deficiency is not now barred from collection from the petitioner.

Reviewed by the Board.

Judgment will be entered under Rule 50.