Du Pont v. Commissioner ( 1935 )

ERNEST DUPONT, PETITIONER, ET AL., ^{v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.}

Du Pont v. Commissioner

Docket Nos. 58717, 58746-58751.

United States Board of Tax Appeals

33 B.T.A. 643; 1935 BTA LEXIS 721;

December 5, 1935, Promulgated

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The respondent determined that the petitioners and the Air Reduction Co. were liable as transferees for deficiency in tax of the Western Oxygen Co., a dissolved corporation, and issued to each of them deficiency notice accordingly. Subsequent to the filing of the petitions by the petitioners and prior to the hearing, the Air Reduction Co., which filed no timely appeal with this Board, made payment of the amount of the deficiency, together with interest thereon, and submitted therewith a claim for refund which the respondent has never acted upon and which he does not here propose to allow. Held, that the amount of the deficiency in tax of the Oxygen Co. can be collected only once, and, since the respondent has collected it from the Air Reduction Co., the liability of the petitioners as transferees has been extinguished.

A. Calder Mackay, Esq., for the petitioners.

T. F. Callahan, Esq., for the respondent.

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TRAMMELL

The respondent, under the provisions of section 311 of the Revenue Act of 1928, has proposed for assessment against each of the petitioners in these proceedings, as transferee of the assets of the Western Oxygen Co., a dissolved corporation, a deficiency in income tax of that company of $14,976.55 for 1929, plus any accrued penalty and interest. Issues involved are (1) whether the respondent erred in determining that the Western Oxygen Co. realized a taxable gain in 1929 upon the sale by it in that year of 1,811 shares of stock held by it in the Air Reduction Co.; (2) whether in determining the tax liability of the Western Oxygen Co. the respondent erred in disallowing a deduction of $1,500 expended by the company for legal services; (3) whether in determining the tax liability of the Western Oxygen Co. the respondent erred in disallowing as a deduction the amount of $36,765 as commissions paid; and (4) whether the petitioners are liable as transferees of the assets of the Western Oxygen Co. The proceedings were consolidated for hearing.

FINDINGS OF FACT.

The Western Oxygen Co. was incorporated March 19, 1923, under the laws of Delaware, and at January 1, 1929, had outstanding 1,761 shares of cumulative preferred stock of the par value of $100 each and 15,522 shares of common stock of no par value. The preferred stock was redeemable on any dividend date at $105 per share plus all accumulated and unpaid dividends thereon. In event of dissolution of the company holders of the preferred stock were entitled to receive par value or $100 per share plus all accumulated and unpaid dividends thereon before any assets should be applied to the common stock.

At a special meeting held on March 6, 1929, which was called for the purpose of considering the reorganization of the structure of the Western Oxygen Co. and involved its consolidation with the Air Reduction Co., a New York corporation, the stockholders of the Western Oxygen Co. ratified and approved a contract theretofore entered into between the Western Oxygen Co., hereinafter referred to as the Oxygen Co., and the Air Reduction Co., which contemplated the acquisition by the latter of the assets of the former in exchange for shares of capital stock of the latter and the assumption by the latter of the liabilities of the former and the distribution to the stockholders of the Oxygen Co. of the shares of stock thus to be acquired by it in the Air Reduction Co.

On the same day a special meeting of the directors of the Oxygen Co. was held. The president of the board informed it that one of the holders of preferred stock of the company had refused to accept the stock of Air Reduction Co. in exchange for his preferred stock, as had been contemplated in the plan for disposing of the assets of the company. A resolution was thereupon adopted calling all of the company's preferred stock for redemption on May 31, 1929, at $105 per share plus accrued dividends. A resolution was also adopted authorizing the sale by the president and secretary of a sufficient quantity of the stock of the Air Reduction Co. to retire the preferred stock of the Oxygen Co. The directors also authorized the transfer to A. H. Peir, president of the Oxygen Co., of 342 shares of stock of the Air Reduction Co., as a commission for consummating the contract whereby the Air Reduction Co. was to acquire the assets of the Oxygen Co. and as a reward for his activities in connection with the Oxygen Co. and in appreciation for his loyalty to it.

On or about March 28, 1929, the Oxygen Co. transferred and conveyed all of its rights, title and interest in and to all of its assets, subject to its liabilities, to the Air Reduction Co. and the Oxygen Co. received in exchange for its net assets, the depreciated cost of which was $393,582.45, 16,000 shares of the capital stock of the Air Reduction Co.

Respecting the assumption of the liabilities of the Oxygen Co. by the Air Reduction Co., the agreement under which the latter acquired the assets of the former provided in part as follows:

I. The Western Oxygen Company represents and warrants:

1. That the assets and liabilities of said company are shown on financial statements dated December 31, 1928, copies of which are hereto annexed, marked Schedules "A" and "B", and made a part hereof.

2. That no changes in the assets and liabilities of said company, as shown in said Schedules "A" and "B", have occurred since the date thereof, except such as have taken place in the ordinary course of business, and except as listed in "Schedule B", made a part hereof.

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4. That the company has no contracts, agreements or obligations of any kind (except sales contracts for the products of the company executed with users thereof and except obligations for the payment of money only as shown in Exhibit "A" and "B".

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IV. Subject to the limitations and qualifications herein set forth, the Air Reduction Company, Incorporated, assumes and agrees that it will pay or cause to be paid all the obligations and liabilities of the said company that are set forth or referred to in the schedules attached hereto or which it is agreed under or by this contract that said Air Reduction Company, Incorporated will assume or cause to be paid; moreover, subject to the limitations and qualifications herein set forth, the said Air Reduction Company, Incorporated assumes and agrees that it will pay or cause to be paid all the obligations and liabilities of the said company incurred or assumed by it in the regular conduct of its business since December 31, 1928.

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VI. At the time of the transfer of the said assets, Western Oxygen Company will enter into with and deliver to Air Reduction Company, Incorporated an agreement under which it shall warrant and defend the properties and assets contracted to be transferred under this contract, and under which it shall agree to indemnify and save harmless Air Reduction Company, Incorporated and/or the nominee or nominees which it may select to take the actual title to the properties, from and against any claims against Western Oxygen Company of any and all persons or corporation, direct or contingent, whether in tort or contract arising from any cause or condition existing on or prior to the date set for the transfer of said properties, except those claims which are listed in Schedules A and B hereto attached, and from and against any and all claims of the Federal or State Governments against the Western Oxygen Company for taxes, whether ascertained or not, with respect to any period prior to January 1st, 1929, and/or with respect to the transfer of said properties, (except that Air Reduction Company, Incorporated assumes Federal Income Taxes for the year 1928 up to the amount shown in Schedule A) and under which it shall repeat the representations made herein and agree to make good any damage or loss to Air Reduction Company, Incorporated or to its nominees as aforesaid, if, upon examination, it shall be found that such representations are incorrect.

Schedule A referred to in the preceding paragraphs showed liabilities of $55,967.38 at December 31, 1928, of which amount $20,420.60 was for Federal taxes. Schedule B, which appears to have been a supplement to schedule A, showed certain other liabilities existing on December 31, 1928, which had not been discharged at the time the contract of exchange was entered into in 1929 and were also assumed by Air Reduction Co. This schedule showed undischarged liabilities of $24,135, no part of which was for Federal taxes. Neither of the schedules contained any reference to Federal taxes for 1929.

Upon receipt of the shares of stock in the Air Reduction Co., the Oxygen Co. took steps to dissolve and distribute all of the stock so received by it from the Air Reduction Co. As one of the preferred stockholders of the Oxygen Co. objected to the proration and distribution of the 16,000 shares of the Air Reduction Co., the Oxygen Co., in connection with the retirement of its preferred stock, sold during the year 1929 1,811 shares of stock of the Air Reduction Co. for $184,922.61, and the entire proceeds were used in retiring its own preferred stock. Pursuant to the resolution adopted by the directors of the Oxygen Co., 342 shares of the stock of the Air Reduction Co. were transferred in 1929 to A. H. Peir as a commission. The value of the stock at the time of the transfer was $107.50 a share. The remainder of the 16,000 shares of stock of the Air Reduction Co. was distributed by the Oxygen Co. to its common stockholders pro rata. These transactions were in liquidation of the capital stock of the Oxygen Co., which liquidation and dissolution was completed in 1929, after which no assets were left in the corporation.

The petitioners herein were stockholders in the Oxygen Co. at the time of the aforesaid liquidation of its assets and each as a stockholder received from it assets and property having a value in excess of the amount proposed for assessment against them by the respondent, together with interest thereon, as transferees of the assets of the Oxygen Co.

In 1929 the Oxygen Co. paid Walter E. Burke, an attorney, the amount of $1,500. This amount was for his services in handling the local aflairs of the company, dissolving it and handling the distribution of the stock in Air Reduction Co. to the stockholders of the Oxygen Co.

In its return for 1929 the Oxygen Co. reported a net loss of $42,318.79. It apparently reported no profit from the sale of the 1,811 shares of stock of the Air Reduction Co., but took deductions of $1,500 for attorney fees paid Walter E. Burke and $36,765 as the commission paid to A. H. Peir, represented by 342 shares of stock in the Air Reduction Co. at $107.50 per share. In an audit of the return the respondent determined that the Oxygen Co. realized a taxable profit of $140,204.22 on the sale of the 1,811 shares of stock in the Air Reduction Co., disallowed the deductions for attorney fees and commissions, determined the taxable net income to be $136,150.43, and determined a deficiency in tax of $14,976.55.

On October 11, 1930, the respondent assessed the deficiency determined by him against the Oxygen Co. for 1929 and on October 27, 1930, issued to the company a notice of dificiency for the amount determined. All the assets of the company had been distributed to its stockholders before the issuance by the respondent of the notice of the deficiency.

No payment having been made of the deficiency asserted by him against the Oxygen Co. for 1929, the respondent on or about April 4, 1931, in accordance with section 272 of the Revenue Act of 1928, issued a deficiency notice to the Air Reduction Co., wherein he proposed under section 311 of the Act of 1928 a deficiency in tax in the amount of $14,976.55 against that company as transferee of the Oxygen Co. No timely appeal having been taken by the Air Reduction Co. to this Board, the respondent made an assessment of the deficiency. The Air Reduction Co. thereafter, in March 1932, made a payment under protest of the amount of the deficiency, together with interest thereon. The payment was accompanied by a claim for refund which was based on the contention that the Air Reduction Co. was a purchaser for value of the assets and business of the Oxygen Co. and therefore was not liable as a transferee of that company. This claim has never been acted upon by the respondent. Aside from the payment made by the Air Reduction Co. no payment has been made of the deficiency determined by the respondent against the Oxygen Co. for 1929.

The deficiency notices to the petitioners in these proceedings were mailed by the respondent on or about April 4, 1931, and at or about the same time the notice of deficiency was issued by the respondent to the Air Reduction Co.

OPINION.

TRAMMELL: We will consider first the question of whether the petitioners are liable as transferees for the tax liability of the Oxygen Co., as determined by the respondent. The petitioners admit that they each as stockholders received in dissolution of the company assets and property of a value in excess of the amount proposed for assessment against them by the respondent together with interest thereon. They, however, contend that the tax liability of the Oxygen Co. has been paid by the Air Reduction Co. and, therefore, there remains no unpaid tax liability of the Oxygen Co. that may be asserted against and collected from them as transferees. The respondent contends that the record shows that the Air Reduction Co. paid considerable value for the assets of the Oxygen Co.; that for some time after the exchange the Oxygen Co. had ample assets from which to pay any asserted liability for taxes; that the payment by the Air Reduction Co. was not, and was not intended by it as, a payment of the liability herein sought to be collected. He urges that the payment by the Air Reduction Co., which was made under protest and accompanied by a claim for refund, was made for the purpose of preventing the seizure and sale of its assets and not in discharge of the tax liability of the Oxygen Co.

Ordinarily, where a corporation without providing for the discharge of its tax liability distributes all of its assets to its stockholders, thereby becoming insolvent and then dissolves, each of the stockholders is liable as transferee for the unpaid tax to the extent of the value of the assets received by him. ; affd., ; . The petitioners therefore are liable as transferees for the payment of the tax in controversy unless there is something in the facts presented that relieves them of that liability. They rely on the payment made by Air Reduction Co. as having extinguished the tax in controversy and likewise as having discharged any liability they may have had to make payment to the Government. If the tax has been paid the liability of the petitioners to make payment thereof has been extinguished. .

Can it be said on the facts here presented that the payment made by the Air Reduction Co. constituted a payment of the tax by the Oxygen Co? We think the answer must be yes. The record here shows that the respondent, in accordance with section 272 of the Revenue Act of 1928, issued a deficiency notice to the Air Reduction Co. wherein he proposed under section 311 of the Act of 1928 a deficiency in tax of $14,976.55 (the amount here in controversy) against that company as transferee of the Oxygen Co. No timely appeal to this Board was taken by the Air Reduction Co. from the respondent's determination. Thereafter the respondent made an assessment of the deficiency against the Air Reduction Co. Subsequently the Air Reduction Co. under protest made payment of the amount of the deficiency, together with interest thereon. The payment was accompanied by a claim for refund, which was based on the contention that the Air Reduction Co. was a purchaser for value of the assets and business of the Oxygen Co. and therefore was not liable as a transferee of that company. This claim has never been acted upon by the respondent.

The respondent's action in proceeding against the Air Reduction Co. is entitled to be considered as proper and correct. Whether the Air Reduction Co. was liable as a transferee is not a question for our determination, and we therefore express no opinion as to its liability. That company is not before us. Inasmuch as the respondent has never refunded to nor taken any steps to refund to the Air Reduction Co. the payment made by it, and as he here does not propose to refund it, he apparently is of the opinion that it was properly collected and therefore is not refundable. The respondent has continued for more than three years to retain the payment, notwithstanding the fact that a claim for the refunding of it has been pending before him throughout the entire period. Such action in our opinion negatives his contention here that the payment was not, and was not intended as, a payment of the liability here sought to be collected. The respondent can collect the deficiency in tax of the Oxygen Co. only once. . Having collected the amount of such deficiency from the Air Reduction Co. the liability of the petitioners was extinguished and the respondent can not collect it from them. We therefore sustain the contention of the petitioners and hold that they are not liable as transferees of the Oxygen Co.

Having reached the conclusion that the petitioners are not liable as transferees of the Oxygen Co. it becomes unnecessary to consider the remaining issues, which relate to the correctness of the amount of the deficiency in tax of that company as determined by the respondent.

Decision will be entered for the petitioners.

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Footnotes

• 1. Proceedings of the following petitioners are consolidated herewith: Kathryn G. Peir; A. H. Peir; H. J. Barneston; Guy C. Earl, Jr.; Royal Miller; and the Redondo Corporation. ↩