Green v. Commissioner , 26 B.T.A. 719 ( 1932 )

ISAAC MICHAEL GREEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

THOMAS HENRY SMITH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Green v. Commissioner

Docket Nos. 31293, 31294.

United States Board of Tax Appeals

26 B.T.A. 719; 1932 BTA LEXIS 1265;

July 26, 1932, Promulgated

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1. The petitioners owned the capital stock and were directors of Green's Advertising Agency. During the taxable years they distributed to themselves annually as dividends, substantially all of the net surplus of the company, rendering it insolvent. Held, the surplus so distributed was impressed with a trust and under section 280 of the Revenue Act of 1926 petitioners are liable for the deficiencies in income tax here asserted.

2. Petitioners made an offer in compromise accompanied by their checks for the amount so offered. The local collector of internal revenue gave receipts to petitioners and put the checks through the bank. Held, the offers, not having been accepted, do not constitute a bar to petitioners' liabilities as transferees.

3. The Board's prior decision denying personal service classification to Green's Advertising Agency having become final, the question will not be reexamined in this proceeding.

4. The assertion of liability against petitioners as transferees is not barred by the statute of limitations.

Lloyd W. Dinkelspiel, Esq., and Jerome B. White, Esq., for the petitioners.

J. A. Lyons, Esq., and E. L. Updike, Esq., for the respondent.

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MARQUETTE

These proceedings, which were consolidated for hearing, are for the redetermination of liabilities as transferees of the assets of a corporation, asserted by the respondent against each petitioner as follows: for the year 1919, $8,020.98; for the year 1920, $19,136.99; and for the year 1921, $17,126.58. The errors alleged are: (1) That the true tax liability of the corporation for the years named has not been finally determined; (2) that the amount of assets received by each petitioner was substantially less than the tax now proposed; (3) that the proposed deficiencies are barred by the statute of limitations; (4) that the proposed deficiencies are barred by reason of a compromise payment made by petitioners and accepted by the respondent; and (5) that the corporation in question was a personal service corporation and all of its profits for each of the taxable years were distributed to these petitioners, who reported them as income in their individual income-tax returns.

Petitioners also seek refunds for alleged overpayments of income tax in the following amounts: Isaac Michael Green, $5,492.99; Thomas Henry Smith, $6,069.29.

FINDINGS OF FACT.

During the years 1919, 1920 and 1921 Green's Advertising Agency was a corporation, with its principal office at San Francisco, California. Its business was that of selling advertising through the medium of theatre programs, films, slides, etc.

The company began business in 1906. During the years here involved its capital stock of $25,000 par value was owned as follows: by Thomas Henry Smith, 50 per cent; Isaac Michael Green, 49 per cent; Isabelle Green, wife of Isaac Green, 1 per cent. The present petitioners were officers of the corporation and gave their personal attention and entire time to the conduct of its business.

Green's Advertising Agency filed income-tax returns for the taxable years as a personal service corporation. The return for 1919 was filed on March 2, 1920. Personal service classification was denied and the company was so notified. Under date of July 10, 1925, respondent sent a deficiency notice to the corporation, notifying it of a deficiency in income tax for 1919 in the amount of $8,020.98. An appeal was filed with the Board of Tax Appeals. The company's income-tax return for 1920 was filed on March 7, 1921, and its return for 1921 was filed on March 15, 1922. Personal service classification was denied and under date of November 10, 1925, a deficiency notice was sent by respondent, notifying the corporation of deficiencies in income tax in the amounts of $19,136.99 for the year 1920 and $17,126.58 for the year 1921. An appeal with respect to these deficiencies was filed with the Board of Tax Appeals. The appeals were decided and personal service classification, which was the sole issue, was denied by the Board on September 29, 1927. The corporation filed a petition for review, but did not file any bond to stay assessment and collection of the taxes. The Circuit Court of Appeals for the Ninth Circuit affirmed the Board's decision on February 11, 1929. The taxes here involved were assessed against Green's Advertising Agency on May 19, 1928. For each of the taxable years the corporation's net earnings, surplus and distributions as dividends, were:

Year	Net earnings	Surplus	Dividends
1919	$26,439.95	$26,998.70	$26,000
1920	56,548.04	57,546.74	57,000
1921	52,078.86	52,625.60	52,000
1922	29,238.87	29,864.47	29,000
1923	26,221.93	27,086.40	27,000
1924	18,545.73	18,632.13	18,000
1925	3,720.15	4,352.28	4,000

The dividends for 1925 were not distributed in that year, but were to be paid in 1926 as funds in bank became available. The petitioners shared equally in the dividend distributions and each reported as individual income the amounts so received and paid tax thereon for the respective taxable years.

No income-tax liability was set up on the books of the corporation and the petitioners had no knowledge of any claim respecting corporate income-tax liability for 1919, 1920 and 1921 until the company was so notified in 1925. The corporation earned net profits and distributed them as dividends to the petitioners in each of the years 1922 to 1925, inclusive.

Green's Advertising Agency, as a corporation, was dissolved in April, 1926, and its assets were equally divided between the petitioners, who continued the business as a partnership. The physical assets had a face value of $10,700, and included a promissory note and bills receivable. The note and some of the receivables proved to be worthless, which reduced the net value of the assets to approximately $8,200. On August 18, 1927, respondent sent to each petitioner a notice of liability as transferee of the corporate assets for the amounts of the deficiencies in tax assessed against the company for the years 1919, 1920 and 1921, and petitions were filed with the Board by each petitioner on September 17, 1927.

On June 6, 1930, two checks for $2,000 each were drawn by Green's Advertising Agency to the order of the collector of internal revenue. The checks were certified by the drawee and were sent to the collector of internal revenue at San Francisco, with an offer in compromise of the tax liability here involved. The checks were stamped on the back as follows:

14554.

Pay to the order of Federal

Reserve Bank of San Francisco,

California. June 16, 1930.

JOHN P. MCLAUGHLIN,

Coll. Int. Rev.

Received payment through the

S. F. Clearing House June 17, 1930.

37 Federal Reserve Bank

of San Francisco.

On June 10, 1930, the clerk in the collector's office in San Francisco, handed to the petitioners' attorney two receipts, one of which read as follows:

Receipt for Payment of Taxes

Duplicate

Offer in Compromise

(Class of Tax)

Collector's Office, 1st Dist. of Calif.,

at San Francisco Date, June 10, 1930.

(Name and Address of Taxpayer)

Isaac Michael Green

14 Montgomery Street,

S.F., Calif.

Amount, $2,000.00

Received Payment,

Collector of Internal Revenue.

The receipt was stamped on its face as follows:

First Calif. Dist.

PAID

June 10, 1930.

JOHN P. MCLAUGHLIN

Collector of Int. Rev.

GTG

The other receipt was identical in wording and stamping, except that it bore the name of Thomas Henry Smith instead of Isaac Michael Green.

On February 7, 1927, petitioner Thomas Henry Smith filed claims for refund on account of overpayment of income taxes as follows: For the year 1919, $991.39; for 1920, $3,495.95; for 1921, $1,577.95. On the same date petitioner Isaac Michael Green filed like claims for the following amounts: For 1919, $951.31; for 1920, $3,255.91; for 1921, $1,284.94.

OPINION.

MARQUETTE: The respondent asserts that the petitioners are liable as transferees for income taxes assessed against Green's Advertising Agency for the years 1919, 1920 and 1921. The contention is founded upon the theory that the corporation was insolvent during each of those years and remained insolvent until it was dissolved in April, 1926, and that while so insolvent it distributed to the petitioners large amounts of money as dividends. The amount of dividends to each petitioner in each of the taxable years was greater than the amount of income tax against the corporation for those years, respectively. When the corporation was dissolved the net value of its assets distributed to the petitioners amounted to $8,200.

Section 280(a)(1) of the Revenue Act of 1926 provides that there shall be assessed, collected and paid in the same manner as in the case of a deficiency in tax:

(1) The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax * * * imposed upon the taxpayer by this title or by any prior income, excess-profits, or war-profits tax Act.

The respondent invokes the trust-fund theory respecting corporate assets. But not every transferee of assets of a corporation is liable to the company's creditors under the trust-fund doctrine. This Board held in , that:

This trust can only be impressed upon assets of the corporation which are distributed upon dissolution, or during the insolvency of the corporation, or when such distribution creates a condition of insolvency.

See also ; ; .

In the case of , the court said:

We think the theory of a trust fund has no application to a case of this kind. When a corporation is solvent, the theory that its capital is a trust fund upon which there is any lien for the payment of its debts has in fact very little foundation. No general creditor has any lien upon the fund under such circumstances, and the right of the corporation to deal with its property is absolute so long as it does not violate its charter or the law applicable to such corporation.

* * *

The bank being solvent, although it paid its dividends out of capital, did not pay them out of a trust fund. Upon the subsequent insolvency of the bank and the appointment of a receiver, an action could not be brought by the latter to recover the dividend thus paid on the theory that they were paid from a trust fund, and therefore were liable to be recovered back.

It is contended on the part of the complainant, however, that if the assets of the bank are impressed with a trust in favor of its creditors when it is insolvent, they must be impressed with the same trust when it is solvent; that the mere fact that the value of the assets of the corporation has sunk below the amount of its debts, although as yet unknown to anybody, cannot possibly make a new contract between the corporation and its creditors. In the case of insolvency, however, the recovery of the money paid in the ordinary way without condition is allowed, not on the ground of contract to repay, but because the money thus paid was in equity the money of the creditor; that it did not belong to the bank, and the bank in paying could bestow no title in the money it paid to one who did not receive it bona fide and for value. The assets of the bank while it is solvent may clearly not be impressed with a trust in favor of creditors, and yet the trust may be created by the very fact of the insolvency and the trust enforced by a receiver as the representative of all the creditors.

The taxes in question, although asserted subsequent to the taxable years, constituted a potential liability of the corporation of which the stockholder must take notice. ; The basic question, then, is whether Green's Advertising Agency was insolvent when it distributed dividends to these petitioners in 1919, 1920 and 1921, or was made insolvent by such distribution. If so, they are clearly liable under section 280 of the Revenue Act of 1926.

The books of account of the advertising agency formed the basis of the respondent's evidence to sustain his contention that the company was insolvent during 1920 and thereafter. The book which was relied upon discloses that from January, 1919, until the end of 1925, the company earned net profits for each year, distributed them to stockholders, and kept its capital of $25,000 unimpaired. It also discloses that while the distribution of dividends at the close of the year 1919 did not then render the company insolvent, the further distribution of dividends in subsequent years left the company with an aggregate of capital and surplus insufficient to pay the then accumulated total of income tax. The company thus became insolvent in 1920 by reason of the dividend distributions and remained insolvent thereafter until the corporation was dissolved in 1926.

The dividends were paid to the present petitioners in equal portions. The aggregate amount received by each petitioner during the years 1919, 1920 and 1921 was more than the total of the income taxes asserted against the company for those years. In our opinion each petitioner is liable, as transferee, for payment of the company's unpaid income taxes here asserted unless that liability is barred by some valid defense. The petitioners allege as defenses that: (1) The true tax liability of Green's Advertising Agency for the years here involved has not yet been finally determined; (2) under the Revenue Act of 1926 any claim for taxes for the years in question is barred by the statute of limitations; (3) Green's Advertising Agency was a personal service corporation and not subject to the taxes here involved; and (4) the liability now asserted is barred by reason of compromise.

The record discloses that after receiving deficiency notices, Green's Advertising Agency filed appeals with this Board, and the only question presented was that of the personal service status of the advertising agency. Decision was rendered in September, 1927, and was appealed to the Circuit Court of Appeals, where it was affirmed February 11, 1929. Meanwhile, in May, 1928, the taxes here involved were assessed against the advertising agency, no stay bond having been filed. No petition was filed in the Supreme Court for a writ of certiorari, and, therefore, the decision of the Board became final, under section 1005(a)(2) of the Revenue Act of 1926, on May 11, 1929. One year longer was permitted under the statutes for making assessments against these petitioners, or until May 11, 1930, but prior to that date the petitions herein were filed and thereby again suspended the running of the statute of limitations in favor of the petitioners.

Even though the running of the statute might have been invoked by the corporation, it waived its right in that particular and the defense is not now available to these petitioners. The assessment has been made, the Board's decision has become final, and the matter is thus concluded, not only with respect to the status of the corporation as a taxable entity and the amount of taxes due from it, but also with respect to the running of the statute of limitations, which might have been offered as a defense. Cf. ; . In the Cromwell case the court said:

* * * the judgment, if rendered upon the merits, constitutes an absolute bar to a subsequent action. It is a finality as to the claim or demand in controversy, concluding parties and those in privity with them, not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose. Thus, for example, a judgment rendered upon a promissory note is conclusive as to the validity of the instrument and the amount due upon it, although it be subsequently alleged that perfect defenses actually existed, of which no proof was offered, such as forgery, want of consideration, or payment. If such defenses were not presented in the action, and established by competent evidence, the subsequent allegation of their existence is of no legal consequence. The judgment is as conclusive, so far as future proceedings at law are concerned, as though the defenses never existed. The language, therefore, which is so often used, that a judgment estops not only as to every ground of recovery or defense actually presented in the action, but also as to every ground which might have been presented, is strictly accurate, when applied to the demand or claim in controversy. Such demand or claim, having passed into judgment, cannot again be brought into litigation between the parties in proceedings at law upon any ground whatever. * * *

And in the Harshman case, the court used the following language:

* * * And, * * * "the estoppel is not confined to the judgment, but extends to all facts involved in it, as necessary steps or ground-work upon which it must have been founded." It is none the less conclusive because rendered by default. * * * Certainly nothing that contradicts the record of the judgment can be alleged in a proceeding at law for its collection by execution. * * *

While the Board's decision was rendered in an appeal by the corporation, in our opinion the present petitioners were in privity with that corporation and are bound by the decision. They owned all of the capital stock of the company, except 1 per cent, presumably qualifying shares, standing in the name of Isaac Green's wife; they were the managing officers of the company, attended to all its affairs, and formulated and directed its policies. Cf. ; ; ; . We consider the above decisions controlling on the question of privity and, the defenses not being personal to petitioners, we conclude that they are estopped from now asserting the first three of their defenses, enumerated above, affecting the liability of the corporation. We are also of opinion that the period for assertion of liability against the petitioners as transferees had not yet expired at the time the notices of liability were mailed to petitioners, to wit, on April 18, 1927.

The petitioners also contend that the liability now asserted is barred by reason of a compromise. The evidence discloses only that the petitioners sent checks, accompanied by an offer of compromise, to the collector of internal revenue at San Francisco, who gave receipts for them and collected the amounts of the checks through the usual banking procedure. The offer of compromise was neither accepted nor rejected by the respondent when the proceedings were heard. In our opinion the facts disclosed are not such as constitute an estoppel against the respondent in respect to the present proceedings.

With respect to the refunds claimed by the petitioners, this Board has no jurisdiction to consider the claims filed. These refund claims were apparently filed in connection with their personal liability for income taxes and we do not have those proceedings before us. See section 284(e) of the Revenue Act of 1926, and section 322(d) of the Revenue Act of 1928.

Decision will be entered for the respondent.