Exclusive Prescription Pharmacy, Inc. v. Commissioner , 21 B.T.A. 33 ( 1930 )

EXCLUSIVE PRESCRIPTION PHARMACY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Exclusive Prescription Pharmacy, Inc. v. Commissioner

Docket No. 34062.

United States Board of Tax Appeals

21 B.T.A. 33; 1930 BTA LEXIS 1939;

October 14, 1930, Promulgated

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An individual transferred certain assets of a drug business to a corporation for its entire capital stock. At or about the same time the individual sold the remaining assets of the drug business to the same corporation, receiving payment in notes which were subsequently paid. No evidence was introduced to the effect that these transactions were not bona fide, and for a fair consideration, or that the value of the consideration received was less than the amount of the tax sought to be collected from the corporation as "transferee." Held, the corporation is not a "transferee" within the meaning of section 280 of the Revenue Act of 1926.

Walter I. Lyon, Esq., for the petitioner.

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

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SEAWELL

The Commissioner determined deficiencies in income and profits taxes due from Lewis B. Chase for 1920, 1921, 1922, and 1923 in the respective amounts of $3,560.32, $396.71, $535.50, and $2,401.51. After assessment against the said Chase, the liability for the foregoing deficiencies was asserted by the Commissioner against the petitioner as transferee under the provisions of section 280 of the Revenue Act of 1926.

The several errors assigned in the petition may be grouped in two general classes: (1) The constitutionality of section 280 and whether the transaction under which certain assets were acquired brings the petitioner within the purview of the said section, and (2) the extent to which the deficiencies are barred by the statute of limitations. An additional error was assigned as to the correctness of the Commissioner's determination for 1923, but no evidence was introduced from which a finding could be made on account thereof and no reference was made thereto in the brief as submitted on behalf ot the petitioner.

FINDINGS OF FACT.

Lewis B. Chase was conducting a pharmacy business from 1920 to September 14, 1923, inclusive, such business being owned by him.

On March 15, 1923, the petitioner was organized as a corporation under the laws of California, with its principal office at Los Angeles, for the purpose of taking over the pharmacy business theretofore conducted by the said Lewis B. Chase. On September 14, 1923, the assets of the said business having a net value of approximately $50,000 were transferred to the petitioner in consideration for the issuance to Chase of the petitioner's entire capital stock (580 shares) except certain qualifying shares. Chase has continued as president of the petitioner since its organization. With the exception of one share, all of the stock received by Chase was subsequently transferred by him to other individuals. The transfers made included 478 shares transferred to Chase's wife on March 4, 1924, on account of loans previously made by her to him in 1915 and 1916 in the amount of $1,500. The only property owned by Chase in the drug business which was not included in the sale to the petitioner was a quantity of liquor which was sold to the petitioner the following day for $25,100, payment therefor being made in notes. These notes were subsequently paid by the petitioner.

The said Lewis B. Chase duly filed income-tax returns for 1920, 1921, 1922, and 1923, the return for 1920 having been filed on or about March 15, 1921. On August 10, 1925, a deficiency notice was mailed by the Commissioner to the said Chase advising him of the deficiencies in income tax for 1920 to 1923, inclusive, involved in this proceeding. On October 5, 1925, Chase filed the following letter with the Board:

SEPT. 29, 1925.

U.S. BOARD OF TAX APPEALS

Washington, D.C.

GENTLEMEN: I wish to appeal from findings that the income tax deficiency of 1920 to 1923, inclusive, in the amount of $6894.04 -

Refers to I.T.; B.A.:4-60-D. I.M.G.-401.

I desire a hearing before the Board of Tax Appeals in Los Angeles. Please advise when hearing can be had.

Very truly yours,

(Signed) LEWIS B. CHASE.

On February 25, 1926, the Commissioner notified the Board that on March 15, 1926, he would move for dismissal of Chase's appeal on the ground that it was not prepared in the manner and form prescribed by the Board's rules of practice. On March 4, 1926, Chase asked for an extension of 30 days within which to prepare a petition in accordance with the Board's requirements, and on April 2, 1926, Chase was advised by the Board that he would be allowed until April 15, 1926, to file a completed petition. No amended or completed petition was filed by Chase. Accordingly, on November 18, 1926, a formal motion was filed by the Commissioner asking a dismissal of Chase's appeal and such motion was granted on December 9, 1926, the Board stating that the proceeding was dismissed "because not prepared in the manner and form prescribed by the Board's Rules of Practice."

On February 19, 1927, assessments were made by the Commissioner on account of the deficiencies mentioned in the proceeding referred to above, and such assessments have not been paid.

During the years 1923 to 1927 Chase suffered heavy losses. On March 15, 1927, he submitted to the Commissioner an offer in compromise of the foregoing assessments in which his assets and liabilities were shown in the respective amounts of $1,325 and $34,600. At the date of the hearing in this proceeding Chase had no property in his own name.

On November 19, 1927, the Commissioner notified the petitioner of the proposed assessment against it of the deficiencies theretofore asserted against Lewis B. Chase for the years 1920 to 1923, inclusive, and on January 18, 1928, a petition was duly filed on account thereof. No lien was filed by the Commissioner with the recorder of the county in which petitioner is located on account of the aforesaid liability until May 25, 1929, nor in the office of the United States District Clerk until March 24, 1930.

OPINION.

SEAWELL: The Commissioner seeks to collect certain additional taxes from the petitioner on the ground that it is a "transferee" within the meaning of section 280 of the Revenue Act of 1926 on account of assets received from Lewis B. Chase shortly after incorporation. The substance of what occurred was that Chase, who was the owner of a drug business, formed the petitioner corporation and transferred thereto assets having a net value of approximately $50,000 in consideration for the issuance to him of the corporation's entire stock then issued (except certain qualifying shares). By a separate transaction, but carried out at or about the same time, Chase sold to the petitioner a stock of liquors, which had been retained by him in the sale of the drug business, for $25,100, receiving payment in notes which were subsequently paid. So far as the record goes the transfer of assets for stock and the sale of liquors for notes were for a fair consideration and bona fide in every respect. In any event, the burden of establishing that a fair consideration was not received or that the transactions were not bona fide rested upon the Commissioner. Chase testified that he had no known creditors at the date of the transfer and that assets then held by him were sufficient to take care of any contingent liabilities which then appeared possible of arising.

In view of the foregoing, we are of the opinion that the petitioner is not a "transferee" within the meaning of section 280 of the Revenue Act of 1926 and therefore the contention of the Commissioner that the petitioner is liable for the taxes of Chase which arose prior to the transfer must be denied. , and . It is of no more materiality that Chase afterwards disposed of the stock received by him (perhaps without receiving full consideration therefor) and that he subsequently sustained losses in other ventures which made him insolvent by 1927 and rendered it impossible for the Commissioner to collect the tax in question from him, than if he had received cash and squandered it. Certainly, if cash had been received by Chase instead of stock and notes, we would not say that a "transferee" situation exists as contemplated by the statute and we think a like conclusion must follow from the record before us. Cf. .

Since we have held that the petitioner is not liable as a transferee, it becomes unnecessary to pass upon the other assignments of error presented.

Judgment will be entered for the petitioner.