Herff v. Commissioner ( 1930 )

HERBERT HERFF, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Herff v. Commissioner

Docket No. 29036.

United States Board of Tax Appeals

20 B.T.A. 1036; 1930 BTA LEXIS 1977;

September 29, 1930, Promulgated

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1. It being conceded that petitioner is the transferee on dissolution of all the assets of the Herff Motor Corporation, and that the value of such assets exceeded the amount of deficiency as determined in this proceeding, he is liable, as transferee, for the deficiency so determined.

2. Amount of deficiency of the Herff Motor Corporation for the year ended February 28, 1923, redetermined.

F. E. Hagler, Esq., for the petitioner.

R. W. Wilson, Esq., for the respondent.

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LOVE

This proceeding is for the redetermination of petitioner's liability as transferee of the Herff Motor Corporation, against which the Commissioner asserted additional income tax in his notice of deficiency dated May 13, 1927. The taxes in controversy are corporation income taxes alleged to be due by the Herff Motor Corporation for the fiscal year ended February 28, 1923, of which corporation petitioner was the sole stockholder and transferee. The amount of the taxes thus in controversy is $1,623.10.

FINDINGS OF FACT.

Petitioner acquired all of the stock of the Herff Motor Corporation in the latter part of 1919 and in 1920, and was the sole stockholder from that time until its dissolution, the date of which does not appear in the record.

The company was operating on a very small scale in 1920 and 1921, and the cost of its overhead was so great, comparatively, that petitioner decided to liquidate the corporation as rapidly and at as small an expense as possible. He discharged all of the corporation's help, including the mechanics, and the bookkeeper and stenographer, and himself undertook the liquidation, with the assistance of one salesman, to dispose of the used cars. He shipped all parts back to the motor company whose agency he held, and then directed his efforts toward selling the few cars that his corporation had remaining on hand. There was no bookkeeper and it does not appear that any books were kept during this period of liquidation. Petitioner banked what funds were received and paid all claims that were presented. If the corporation was without funds, he issued his personal check. Inasmuch as he owned all of the stock and there was none other who had any financial interest in the corporation, he regarded himself as the company and the company as himself.

When the garage equipment, automobiles, and parts and accessories had been disposed of, petitioner went to New York in search of more promising opportunities, and turned over to his attorney at that time the unfinished business to close up the corporation and surrender its charter, which was done. All the claims that were presented were paid and no suits have been entered against the corporation.

The tax return for the fiscal year ended February 28, 1923, was prepared by the same firm of professional auditors who had prepared all of the returns of the corporation. When the internal revenue agent approached petitioner to secure the records of the Herff Motor Corporation for the last fiscal year, he was informed that they were in the custody of those auditors, but they could not be found. The revenue agent, the petitioner, and petitioner's present attorney searched for two days through possible places of deposit in the office and loft of petitioner's father-in-law, but all that was ever found was the stock record and one cash journal which was incomplete and did not contain any information by which the tax return of February 28, 1923, could be verified, nor, on the other hand, which discredited it except negatively through the inference that where the cash journal failed to show payments, none had been made. No ledger was found.

Under these circumstances, the revenue agent added to the net income reported by the Herff Motor Corporation for the fiscal year ended February 28, 1923, an amount of $544.64 for excessive depreciation taken by the taxpayer; capital expenditures charged against income, $151; miscellaneous credits amounting to $2,489.15; and contract deposits, $9,300.

Assessment against the corporation was made on the March 15, 1928, list, and it has never been paid. Petitioner is the transferee of all of the assets of the corporation; and the value of such assets, over and above the corporation's obligations, was considerably more than the amount of the tax.

OPINION.

LOVE: For the petitioner there appeared three witnesses: petitioner himself, his attorney at the time of these transactions, and the internal revenue agent who made the examination and report resulting in this asserted deficiency. Their testimony was entirely harmonious and consistent, and respondent did not attempt to controvert it. Only petitioner was cross-examined; he was asked only one question, and his reply tended to strengthen rather than to disparage his testimony on direct examination. No evidence of any kind was introduced on behalf of respondent, who stood on his answer to petitioner's pleadings.

Petitioner does not contest the amount of $695.64 added to the income of the Herff Motor Corporation for excessive depreciation and capital expenditures; but he denies that the miscellaneous credits of $2,489.15, and the contract deposits of $9,300 were properly included in its income.

In the statement accompanying the notice of deficiency, the Commissioner says:

Miscellaneous credits representing amounts due to former customers, and contract deposits representing amounts deposited with the corporation by its agents have been included in taxable income, as there is no evidence that any payments in connection with these items have been made.

Petitioner swears that these items were paid either by the corporation or by himself; his attorney at that time, to whom he turned over the unfinished business of the corporation to complete its liquidation, testified to the same effect; and the revenue agent who made the examination testified that he could not say that they had not been paid, and that these amounts could not have been built up from the cash books available.

The ledger was lost and it appears that no later balance sheet was at hand, when the agent made his examination, than that on the corporation's income-tax return for the fiscal year ended February 28, 1921, upon which these items were shown as liabilities. In the absence of any later documentary information in regard to them, and being without proof from the books that they had been paid, the agent added them to the corporation income, apparently upon the theory that if they had not been paid they constituted income. With the soundness of that reasoning we are not now concerned, for we believe that it has been adequately shown that all these liabilities, if they existed at all after February 28, 1922, had been paid and extinguished from the funds of the corporation or of petitioner by either petitioner or his attorney before the corporation was liquidated and its charter surrendered at some undisclosed date after February 28, 1923.

We therefore redetermine the deficiency of the Herff Motor Corporation for the fiscal year ended February 28, 1923, as below, and hold that by reason of the fact that petitioner is the transferee on dissolution of the Herff Motor Corporation, and received in such dissolution, assets of greater value than the amount of deficiency herein determined, that he is liable for such deficiency:

Net income reported	$3,432.64
Add:
Excessive depreciation	544.64
Capital expenditure	151.00
Adjusted net income	4,128.28
Less:
Exemption	2,000.00
Balance subject to tax at 12 1/2%	2,128.28
Tax at 12 1/2%	266.04
Original assessment	116.58
Deficiency in tax	149.46

Judgment will be entered in conformity with this opinion.