Rite-Way Products, Inc. v. Commissioner , 12 T.C. 475 ( 1949 )

Rite-Way Products, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. T. H. Darnell, Petitioner, v. Commissioner of Internal Revenue, Respondent. National Bank of Commerce in Memphis, Executor Under the Last Will and Testament of John B. Snowden, II, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent

Rite-Way Products, Inc. v. Commissioner

Docket Nos. 14314, 14315, 14316

United States Tax Court

12 T.C. 475; 1949 U.S. Tax Ct. LEXIS 237;

March 29, 1949, Promulgated

---

Decision will be entered under Rule 50.

1. Transferee Liability -- Address for Notice. -- A notice of transferee liability was not shown to have been improperly addressed to a deceased transferee.

2. Abatement of Tax -- Section 421. -- The transferee liability of an individual dying in 1944 while in active service as a member of the military forces of the United States is not abated under section 421 of the Internal Revenue Code.

3. Transferee Liability -- Period of Limitation. -- The period of limitation for the assessment of the liability of an initial transferee is within one year after the expiration of the original period of limitation for assessment against the taxpayer as properly extended by consents of the taxpayer.

4. Income -- Accrual. -- A taxpayer, keeping its books and filing its returns upon an accrual basis, must accrue a claim against another as income in the year during which all of the events occur fixing the liability to the taxpayer and the amount, even though the amount is agreed upon and/or received in the following year.

5. Deduction -- Expenses -- Liquidation. -- A taxpayer corporation is entitled to deduct as ordinary and necessary expenses of its business in 1942 expenditures made for legal services rendered in that year in connection with its liquidation and dissolution begun in 1942 and completed in 1944.

6. Excess Profits Tax -- Credit Carry-Back. -- A corporation is not entitled to an unused excess profits credit carry-back from a year during which it was in the process of liquidation and conducted no operations. Wier Long Leaf Lumber Co., 990">9 T. C. 990, followed.

W. Stuart McCloy, Esq., and Allan Davis, Esq., for the petitioners.

Homer F. Benson, Esq., for the respondent.

Murdock, Judge.

---

MURDOCK

The Commissioner determined against Rite-Way Products, Inc., a deficiency of $ 152.49 in income tax for the calendar year 1940, a deficiency of $ 223.61 in declared value excess profits tax for 1942, and a deficiency of $ 12,037.28 in excess profits tax for 1942. He also determined that T. H. Darnell and John B. Snowden, II, were liable for those deficiencies in tax and interest thereon as transferees of the assets of Rite-Way Products, Inc. The taxpayer assigns as error the action of the Commissioner in holding that:

(1) $ 4,695.23 representing reimbursements received from a manufacturer on account of defective material purchased from that manufacturer was, for income tax and excess profits credit purposes, income for 1940 instead of income for 1939 "in accordance with the accrual method of accounting regularly employed in keeping the books of the taxpayer corporation";

(2) $ 1,001.75, a lawyer's fee, was not deductible as an ordinary and necessary business expense incurred and paid during 1942 or, in the alternative, for 1944;

(3) $ 6,734.94 representing proceeds from use and occupancy insurance, was income for 1942 instead of for 1943;

(4) The taxpayer was not entitled to any unused excess profits credit carry-back from the year 1943 under section 710 (c) of the Internal Revenue Code because it was a personal holding company under section 501 during the years 1943 and 1944, whereas the taxpayer was not a personal holding company during the years 1940 through 1943 and was entitled to an unused excess profits credit carry-back from the year 1943;

(5) The statute of limitations had not run against collection of the deficiencies.

The petitioners in the two transferee cases rely upon the errors assigned in the petition of the taxpayer and further assign as error the action of the Commissioner in holding that:

(a) The petitioners are liable as tranferees for the deficiencies determined against the taxpayer;

(b) Both taxpayers are liable as transferees for all of the taxes;

(c) The statute of limitations has not barred the collection of the deficiencies from the petitioners as transferees.

FINDINGS OF FACT.

Rite-Way Products, Inc., (hereinafter called Rite-Way) was incorporated under the laws of Tennessee in 1935. Its capital stock was owned 48 per cent by T. H. Darnell and 52 per cent by John B. Snowden, II. Its returns for the taxable years were timely filed with the collector of internal revenue for the district of Tennessee. It kept its books and filed its returns upon an accrual method.

One of the products manufactured by Rite-Way was a patch for rubber inner tubes. It manufactured and sold during 1939 a quantity of useless patches as a result of defective rubber purchased by it from Miller Tire Division (hereinafter called Miller). It replaced some of the defective patches in 1939 and made claims, in the form of invoices, against Miller in 1939 for the cost to Rite-Way of replacing the patches. A representative of Miller was informed of the situation in 1939 and instructed Rite-Way to file the claims, which he indicated would be paid. Miller paid Rite-Way, on the claims filed in 1939, $ 3,508.41 in January 1940 and $ 434.96 in December 1940. The total amount of $ 3,943.37 was accruable as income for 1939. Rite-Way erred in failing to accrue and report that amount as income for 1939 and the Commissioner erred in including it in income for 1940.

There was an explosion and fire in the plant of Rite-Way on May 22, 1942. Operation of the business was interfered with for a few weeks and Rite-Way thereby became entitled to reimbursement from four insurance companies with which it carried use and occupancy insurance on the premises damaged by the fire and explosion. One man died following the explosion and a question arose as to possible liability of Rite-Way.

Rite-Way endeavored to collect the insurance during 1942 by negotiating with the adjuster for the four companies, but it failed to agree upon the amount due, to collect any amount, or to learn why the payment was not forthcoming. The insurers did not deny liability during 1942. Rite-Way employed an attorney in 1943 to assist in obtaining payment of the insurance. He was authorized to enter suit, but a settlement was made by the payment of $ 6,754.94 to Rite-Way in August 1943. That amount was based upon the estimated loss of profits by Rite-Way during the time the use and occupancy of the premises was interfered with as a result of the fire and explosion. Rite-Way reported the $ 6,754.94 as income for 1943. The Commissioner shifted it to 1942 upon the ground that it was accruable in 1942. It was accruable as income in 1942.

Rite-Way paid a firm of attorneys $ 1,000 in 1942. $ 500 thereof was for services in connection with the fire and explosion and the possibility of liability for the death of the man. The remainder was for services in connection with the dissolution of Rite-Way. The entire $ 1,000 was properly accrued as an ordinary and necessary expense of 1942 and the Commissioner erred in disallowing it as a deduction for 1942.

Rite-Way adopted a plan of liquidation and dissolution on August 31, 1942. Assets distributed on September 1, 1942, were used by a partnership of Darnell and Snowden which thereafter carried on the business. Final distribution was made on March 11, 1944, and the charter was surrendered in December 1944.

The value of the assets of Rite-Way received by T. H. Darnell in complete liquidation of that corporation was in excess of the transferee liability determined by the Commissioner. The value of the assets of Rite-Way received by John B. Snowden, II, in complete liquidation of that corporation was in excess of the transferee liability determined by the Commissioner. Rite-Way had no assets with which to pay the taxes here in question after making the liquidating distributions to Darnell and Snowden.

The period for collection of the deficiencies determined against Rite-Way was extended by properly executed consents beyond March 5, 1947, when the deficiency notice was mailed.

John B. Snowden, II, was killed in action in France on September 7, 1944, while serving as an officer in the United States Army. The National Bank of Commerce in Memphis qualified as executor of Snowden's estate on September 28, 1944, and is still acting in that capacity. The executor on October 13, 1944, notified the Commissioner of its appointment as executor and subsequently filed returns with him.

The notice of transferee liability was mailed March 5, 1947, addressed:

Mr. John B. Snowden, II, Transferee

C/o Snowden, Davis and Brown

Commerce Title Building

Memphis, Tennessee

It was received by National Bank of Commerce in Memphis, as executor under the last will and testament of John B. Snowden, and a petition was timely filed on behalf of John B. Snowden, II, by the aforesaid executor of his estate. The notice of transferee liability to T. H. Darnell was mailed to him on March 5, 1947, properly addressed.

OPINION.

The executor of Snowden challenges the jurisdiction of this Court by alleging that the transferee notice to Snowden was improperly addressed. The point seems to be that Snowden was dead at the time the notice was mailed, the Commissioner should have known that from returns filed by and communications from his executor, and the Commissioner should have addressed the notice to the executor. There may be more than one person having the name of a decedent. The respondent may not safely assume that Snowden, the transferee of Rite-Way, is the same person as Snowden, a deceased taxpayer, despite identity in the names. The record does not show that this notice was mailed to other than the last known address of Snowden, the stockholder of Rite-Way, nor does it show that the Commissioner had been notified of the death of that particular Snowden. However, even if there had been error in the address as alleged, it would not have been fatal, since the proper representative of the deceased transferee actually received the notice in due course and filed a timely petition with this Court. Kay Manufacturing Co., 18 B. T. A. 753; affd., 53 Fed. (2d) 1083; Daniel Thew Wright, 34 B. T. A. 84; affd., 101 Fed. (2d) 309.

The petitioners concede that Darnell and Snowden each received assets from the liquidation of Rite-Way which had a value in excess of the deficiencies and interest involved herein and that the period of limitations for assessment and collection against Rite-Way was extended by proper consents filed by Rite-Way. It is also clear that the liquidating distributions were complete and thereafter Rite-Way was without any funds with which to pay the deficiencies and interest. The petitioners contend, nevertheless, that the period of limitations for assessment against and collection from the transferees expired within one year after the expiration of the original period of limitations with respect to the taxpayer; that is, that the consents had no effect in so far as the transferees are concerned. This question was decided long ago against the petitioners. The statute provides that the period of limitations for assessment of the transferee liability in the case of initial transferees of the property of the taxpayer shall be within one year after the expiration of the period of limitations for assessment against the taxpayer. Sec. 311 (b) (1). That means the original period of limitation for assessment against the taxpayer as properly extended by consents. W. O. Menger, 17 B. T. A. 998. Cf. Lucas v. Hunt, 45 Fed. (2d) 781. That period had not expired when the transferee notices were mailed.

The petitioner in the case of Snowden claims that his transferee liability for the taxes of Rite-Way was abated by section 421. That section provides that the "tax" imposed by chapter 1 for the taxable year in which his death occurs shall not be assessed and if assessed or collected shall be abated, credited or refunded in the case of an individual who dies on or after December 7, 1941, and prior to January 1, 1948, while in active service as a member of the military forces of the United States. That provision obviously refers to income taxes imposed upon the individual as a taxpayer. There is nothing in the wording of the provision or in its legislative history to indicate that it meant to relieve such persons of other liabilities which they or their estates might have for taxes of other taxpayers. Incidentally, only $ 152.49 of the total deficiency of $ 12,413.38 represents a tax imposed upon Rite-Way by chapter 1. The remainder of the deficiency represents taxes imposed by chapter 2. Thus, even if the petitioner's argument had any merit, it could prevail only to the extent of the deficiency of $ 152.49 in income tax.

The argument was made on behalf of Darnell that, since Snowden was not liable as a transferee, then Darnell should not be either, or, at the most, should be liable for only a portion of the deficiency and interest. That argument falls with the holding that Snowden and his estate were liable as transferees. Furthermore, the case of W. O. Menger, supra, is also authority for the proposition that each of these transferees is liable for the full amount of the deficiencies and interest thereon, since each received assets of the taxpayer in excess of that amount and the Commissioner is not required to apportion the taxes and interest between the two.

Rite-Way contends that the amount which it received in 1940 on claims filed with Miller Tire Division in 1939 was not income for 1940, as determined by the Commissioner, but had accrued for 1939 under its system of accounting. The evidence shows that all of the events had occurred in 1939 which fixed not only the liability of Miller Tire Division to reimburse the petitioner for the defective material, but also to fix the amount, most of which was paid in the first month of 1940. There was at the end of 1939 no dispute between Rite-Way and Miller Tire Division in regard to these claims. A finding has been made that the amount of the claims made in 1939 and paid in 1940 should have been accrued as income for 1939. Cf. United States v. Anderson, 269 U.S. 422">269 U.S. 422; Spring City Foundry Co. v. Commissioner, 292 U.S. 182">292 U.S. 182.

The largest item in dispute is the amount which Rite-Way received in 1943 from insurance companies under use and occupancy policies to compensate the petitioner for profits which it was prevented from earning in 1942 as the result of the disruption of its plant following a fire and explosion which took place on May 22, 1942. Here the parties are in the opposite positions from those in which they appear on the preceding issue. The taxpayer wants to report this amount as income for 1943, when it was received, and the Commissioner contends that it should have been accrued as income of 1942. Here again the evidence shows that all of the events occurred in 1942 which fixed the liability and the amount. Rite-Way and the representative of the insurance companies had not come to any agreement in regard to the amount of compensation, but the insurance companies had never denied liability and the evidence does not show a dispute as to amount in 1942 which would justify a delay in accrual. The insurance companies paid Rite-Way $ 6,754.94 in 1943. The record does not show how they arrived at that amount, but there is no evidence to show that any fact entering into the computation occurred after the close of 1942. The president of Rite-Way testified that the insurance companies never denied liability and were only in disagreement with him as to the amount and how it should be computed. An attorney for Rite-Way who was not hired until 1943 and was incompetent to testify in regard to what happened in 1942, said he rather thought that the insurance adjuster had said that one of the four companies was denying liability. His testimony would not support a finding that one of the companies denied liability even in 1943. He also gave testimony which was equally vague about the amount claimed by Rite-Way. The president of Rite-Way referred to some suggestion by the insurers or their adjuster that settlement be delayed to see what the earnings would be for the twelve months following the explosion, but there is nothing in the policies to indicate that such a delay was required or permissible under the policies. The evidence as a whole does not justify disturbing the Commissioner's determination that the reimbursement on the insurance should have been accrued and reported as income for 1942. It was held in Max Kurtz, 8 B. T. A. 679, that insurance is accruable by the insured in the year of the fire where the insurer does not deny liability and it only remains to determine the amount.

The Commissioner disallowed a deduction of $ 1,000 for legal expenses which Rite-Way claimed for 1942. He apparently concedes in his brief that $ 500 of that amount was a proper deduction for 1942 and the other $ 500 was a proper deduction for 1944, the year in which Rite-Way dissolved. The entire $ 1,000 was deductible in 1942 as an ordinary and necessary expense. Pacific Coast Biscuit Co., 32 B. T. A. 39.

The petitioners allege that the Commissioner erred in failing to allow the unused excess profits credit carry-back from the year 1943 in determining the deficiency in excess profits tax for 1942. The Commissioner explained that he had disallowed that carry-back because Rite-Way was a personal holding company in 1943 and no carry-back would be allowable for a year in which it qualified as a personal holding company. Section 502 provides that personal holding company income means that portion of the gross income which consists, inter alia, of rents, unless rents constitute 50 per cent or more of the gross income. Since more that 50 per cent of the gross income of the petitioner for 1943 consisted of rents, rents are not a part of its personal holding company income and, as a consequence, less than 80 per cent of its gross income for that year was personal holding company income. It follows that Rite-Way, during 1943, was not a personal holding company within the meaning of section 501. However, this Court has recently held in Weir Long Leaf Lumber Co., 990">9 T. C. 990, that a corporation is not entitled to the benefit of unused excess profits credit carry-backs from years during which it was in the process of liquidation. Cf. Mesaba-Cliffs Mining Co., 10 T. C. 1010. This petitioner had ceased its normal operations prior to 1943 and during that year was in the process of liquidation and dissolution. It is not entitled to an excess profits credit carry-back from that year to any prior year.

Decision will be entered under Rule 50.