Phillips v. Commissioner , 26 B.T.A. 995 ( 1932 )

C. J. PHILLIPS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

A. A. GAMBILL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Phillips v. Commissioner

Docket Nos. 47901, 47902.

United States Board of Tax Appeals

26 B.T.A. 995; 1932 BTA LEXIS 1206;

September 16, 1932, Promulgated

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The petitioners, as sole stockholders of the taxpayer corporation, distributed to themselves practically all of its assets in 1925, leaving the corporation without assets of value. Held, that they are liable as transferees for the unpaid taxes of the corporation for 1925 to the extent of the assets received by them.

H. C. Kilpatrick, Esq., for the petitioners.

James H. Yeatman, Esq., for the respondent.

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SMITH

These proceedings, which were duly consolidated for hearing, are for the determination of the liability of the petitioners as transferees under section 280 of the Revenue Act of 1926 for a deficiency in income tax of $1,101.84, plus interest, assessed and outstanding against the Grand View Land Company, Inc., for the year 1925. The petitioners deny that they are liable as transferees of the assets of the Grand View Land Company, Inc., for any of the unpaid taxes of that company for 1925.

FINDINGS OF FACT.

A tax was assessed against the Grand View Land Company, Inc., hereinafter sometimes referred to as the Land Company, on April 6, 1929, in the amount of $1,101.84, plus interest at the legal rate. A warrant of distraint was issued against this assessment on July 25, 1929, which was returned nulla bona. Subsequent to the date of the assessment, $207.67 was collected thereon from a company which had a contract with the Land Company.

The Land Company was organized in 1909 under the laws of Alabama and was the owner prior to 1925 of a tract of land located on Shades Mountain, about six miles south of the city of Birmingham. This tract had been platted and divided into 202 individual lots, with streets and alleys, but in 1925 only one of the streets, Grandview Boulevard, had been cut through and graded.

Prior to 1925, 38 lots had been sold or contracted for sale. In July, 1925, the Land Company sold all of the remaining lots except one, hereinafter called the Moon lot, to the Vizard Investment Company for $35,000 in cash and a farm having a value of at least $24,000. C. J. Phillips owned 80 per cent and A. A. Gambill 20 per cent of the capital stock of the corporation. They were also officers and directors of the corporation. The contract was carried through as contemplated. The cash paid in this transaction was paid either directly to the stockholders, Phillips and Gambill, in the proportion of 80 per cent to the one and 20 per cent to the other or distributed immediately to them in the same proportion, and the farm was conveyed directly to them by the Vizard Investment Company, Phillips later purchasing from Gambill his interest in the farm.

Before the delivery of the deeds under the contract of sale to the Vizard Investment Company, the latter asked that the stock of the Land Company be also transferred to it, indicating a willingness to pay a reasonable amount therefor. Phillips thereupon suggested that if the Vizard Investment Company would assume the liabilities of the Land Company he would be willing to assign his stock without further consideration. A little later Gambill did the same.

In 1909 or 1910, one Moon had contracted to purchase one of the lots in this subdivision and had paid installments on the purchase price amounting to about $375. He defaulted in the payments under this contract and had been in default some time prior to 1923. In 1923 or 1924, however, for purely personal reasons, the vice president of the Land Company made a new agreement with Moon whereunder it was provided that if Moon would pay $200 more within a period of 60 or 90 days, he would be given a deed to lot 11 of block 12 of the subdivision (herein called the Moon lot). Moon did not comply with the terms of this contract, failing to make any part of the $200 payment, and the period given him for making this payment had long gone by at the time of the sale to the Vizard Investment Company. The company's officers intended to give Moon another chance to pay for the lot and, at the time that petitioners transferred their stock to Vizard Investment Company, Phillips requested the Investment Company to give Moon this opportunity. Moon did not, however, ever acquire this lot.

Under a contract entered into between the Birmingham Water Works Company, the Land Company, and four other property owners, dated May 5, 1925, the Birmingham Water Works Company agreed to lay certain water mains in the Land Company's subdivision and the adjoining property upon the payment to it of a stated amount, the Land Company's portion of which was $6,000, and agreed that the amount so paid over to it would be refunded to the property owners out of water rentals received over a period of ten years. The individual owners of lots in the Land Company's subdivision agreed to contribute $2,700 of the $6,000 in question and gave their notes for that amount, the arrangement being that collections on these notes would be credited against the $6,000 agreed to be deposited by the Land Company. In the trade with the Vizard Investment Company that company agreed to pay and did pay $3,600 of the said $6,000. At the time these petitioners transferred their stock in the Land Company to the Vizard Investment Company the Land Company owned the proposed streets and alleyways in said subdivision and also owned a strip of land around the boundaries of said subdivision approximately 20 feet in width.

OPINION.

SMITH: It is now well settled that when the stockholders of a corporation distribute its assets, leaving the corporation without means for paying income taxes due from it, they become liable as transferees for the unpaid taxes of the corporation, under section 280 of the Revenue Act of 1926, and that the taxes for any year, although not determined or assessed at the time of the distribution of the assets to the stockholders, must be taken into account in determining the question of the taxpayer's ability to pay the taxes at that time. ; ; affd., ; .

In these proceedings the respondent contends that the petitioners as stockholders of the taxpayer corporation received the distribution of its assets in 1925, which left the taxpayer without assets from which the tax could be collected.

The petitioners contend, on the other hand, that the Land Company had assets from which the deficiency in taxes for 1925 might have been collected.

From a careful consideration of the evidence, we are of the opinion that the petitioners are liable as transferees under section 280 of the Revenue Act of 1926. So far as appears, the only assets of value of the Land Company in 1925 had been distributed to the petitioners. These assets consisted of $35,000 in cash and a farm which had an admitted value of $24,000. The Land Company had certain liabilities and the petitioners agreed to transfer their stock in the Land Company to the Vizard Investment Company, the purchaser, upon that company agreeing to pay the liabilities of the Land Company, not including any income-tax liability. We can not find from the evidence that the assets of the Land Company after the sale of the 164 lots to the Vizard Investment Company had anything more than a negligible value. A warrant of distraint issued in 1929 was returned nulla bona. There is no evidence that the Land Company had any less assets in 1929 than in July, 1925, after the sale of the 164 lots above referred to. We accordingly find that the petitioners are liable as transferees for the amount of the unpaid tax. The asserted liability of $1,101.84, plus interest, should be reduced by the amount of $207.67, which has since been collected and applied to such liability.

Judgment will be entered under Rule 50.