Limroth v. Commissioner

CAROLINE V. LIMROTH AND SECURITY TRUST COMPANY, EXECUTORS UNDER THE WILL OF CHARLES W. LIMROTH, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

RAYMOND L. WARREN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

WILLIAM C. DAVIS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

EDWARD WEST, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Limroth v. Commissioner

Docket Nos. 42201, 42218, 42219, 42238.

United States Board of Tax Appeals

22 B.T.A. 595; 1931 BTA LEXIS 2097;

March 6, 1931, Promulgated

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The petitioners are not liable as transferees, the respondent having failed to sustain the burden of proof placed upon him by the taxing act.

Frank S. Norcross, Esq., and S. Louis Davis, Esq., for the petitioners.

Edward West pro se.

J. O. Rhyne, Esq., and Warren F. Wattles, Esq., for the respondent.

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ARUNDELL

These proceedings, which were consolidated for hearing and decision, involve the liability of the petitioners as transferees for unpaid income tax of the County Realty Company for 1925 in the amount of $1,189.24.

FINDINGS OF FACT.

On the organization in 1923 of the taxpayer corporation its capital stock of $1,000 was issued to Charles W. Limroth, Raymond L. Warren, William C. Davis, and Edward West, and an undisclosed individual, in equal amounts without consideration. The par value of the stock was charged to the accounts of the stockholders on the corporation's books, and the balancing entry of $1,000 was made in a capital stock account. These entries were made for the purpose of showing that the taxpayer's stock was issued in accordance with its certificate of incorporation. The subscribers did not give the corporation notes for the amount of their subscriptions, and the taxpayer did not consider the charges made in their accounts as sums due it. The undisclosed stockholder sold his stock to Limroth, Warren, Davis, and West. The transaction was recorded on the corporate books in 1926 by making a charge of $50 in the account of each remaining stockholder.

The taxpayer liquidated its affairs in 1926. On August 20 of that year its capital stock account and the accounts of the stockholders were closed by an entry charging the capital stock account with $1,000, and crediting the account of each of the four stockholders with $250. No cash payments were made to the stockholders in connection with the transaction. The entries were made to offset the opening and subsequent stock entries in the accounts and to close the taxpayer's books.

In 1926 the taxpayer paid Limroth, Davis, and West each the sum of $2,171.56, and Warren the sum of $2,171.58. These sums constituted reasonable compensation for services rendered. The only cash received by the stockholders from the corporation was in payment of loans and salaries.

OPINION.

ARUNDELL: The respondent asserts that the payments made to the stockholders in 1926 represent distributions of corporate assets in the guise of salaries. To sustain his burden of proof he produced as a witness the taxpayer's bookkeeper, whose uncontradicted testimony was that the payments made to the stockholders in 1926 represented compensation for services rendered. His further testimony was that the sums were reasonable for the services performed. In our opinion respondent has completely failed in his proof.

Decision will be entered for the petitioners.