Harvey Coal Corp. v. Commissioner

Harvey Coal Corporation, Transferee, Petitioner, v. Commissioner of Internal Revenue, Respondent Harvey Coal Corp. v. Commissioner Docket Nos. 2451, 5896 United States Tax Court 12 T.C. 596; 1949 U.S. Tax Ct. LEXIS 223; April 21, 1949, Promulgated *223 Decision will be entered for the petitioner. 1. Jurisdiction -- Second Notice of Transferee Liability. -- The Commissioner on April 22, 1943, mailed the petitioner a first notice of transferee liability of $ 8,979.89, including tax and penalty, on account of taxes due from its predecessor company for the first ten months of 1924, and on June 1, 1944, a second notice of transferee liability of $ 51,532.24, including tax and penalty, for taxes due from the predecessor company for the entire calendar year 1924. The petitioner filed separate petitions with this Court from both notices. Held, that the second notice was prohibited, under section 272 (f), Internal Revenue Code, and that this Court is without jurisdiction in the proceeding based thereon. 2. Statute of Limitations -- Sufficiency of Return Filed To Start the Running of the Statute. -- A return was timely filed for 1924 purporting to be the return of a new corporation for the last two months of 1924 and its predecessor corporation for the first ten months of that year. The return bore the name of the successor corporation only in the caption, but contained items of income and deductions of both corporations. The*224 Commissioner used the return as a basis for an additional assessment against the successor corporation and made computations, after examination of the companies' books, of the tax liabilities of both corporations for the respective periods. Held, that the return filed was a sufficient return of the predecessor corporation to start the running of the statute of limitations. Geo. E. H. Goodner, Esq., and Scott P. Crampton, Esq., for the petitioner. F. L. Van Haaften, Esq., for the respondent. LeMire, Judge. LeMIRE *596 These proceedings, consolidated for hearing, involve transferee liabilities against the petitioner, Harvey Coal Corporation, for income taxes and penalties allegedly due from Harvey Coal Co. for 1924. The notice of deficiency in Docket No. 2451 discloses a deficiency of $ 7,183.91 in income tax and a penalty of $ 1,795.98 for the period January 1 to October 31, 1924. In Docket No. 5896 the proposed deficiency is for the entire calendar year 1924 in the amount of $ 41,225.79 and a penalty of $ 10,306.45. An amended answer has been filed in Docket No. 2451, in which it is affirmatively alleged that the deficiency therein determined of $ 8,979.89*225 is for the entire calendar year 1924. The parties agree that the petitioner is liable in any event for only one of the proposed deficiencies and that one or the other of the proceedings should be dismissed for want of jurisdiction. Aside from the jurisdictional question, the issues as framed by the pleadings are as follows: *597 (1) Are the deficiencies herein determined barred by the statute of limitations? (2) Is the respondent estopped from determining any deficiency in the taxes of the Harvey Coal Co. for 1924? (3) Is the petitioner liable as transferee for any deficiency in the tax of the Harvey Coal Co. for 1924? (4) Did the Harvey Coal Co. realize income in 1924 of $ 87,118.77 from the cancellation of a lease of certain coal lands in that year? (5) Did the Harvey Coal Co. realize income in 1924 of $ 278,543.29 upon the transfer of its assets to the petitioner? (6) Did the Harvey Coal Co. have any net income for the calendar year 1924, or for the period January 1 to October 31, 1924? (7) Is the Harvey Coal Co. subject to a penalty for failure to file a return for 1924? FINDINGS OF FACT. The petitioner, Harvey Coal Corporation, is the successor to, and the transferee of*226 the assets of, Harvey Coal Co. These corporations will be referred to hereinafter, sometimes, as the company and the corporation. The company was organized under the laws of Tennessee early in 1915. In May of that year it acquired by assignment a leasehold on certain properties known as the Harvey Mine and located at Harveyton, Kentucky. Under the lease agreement the company was obligated to pay the lessor a royalty of 8 cents per ton and to pay one-half of the taxes on the leased premises and all taxes on improvements thereto and the coal mined thereon. On October 30, 1917, the company subleased this property to the Hazard-Jellico Coal Co. The sublease was renewed on May 27, 1919, for a term ending October 31, 1929. The sublease, as extended, provided for a rental of $ 36,000 per year for its entire term. One of the provisions of the lease was that all improvements made to the property during the term of the lease "shall become and remain" the property of Harvey Coal Co. The Hazard-Jellico Co. operated the property until 1924, when it became insolvent and was placed in the hands of a receiver. Harvey Coal Co. then demanded that the property be returned to it. The court issued*227 an order on September 25, 1924, that the property first be offered at public sale on October 28, 1924, and, in the absence of any satisfactory bid, that it be returned to Harvey Coal Co. on condition that the company pay or assume certain of Hazard-Jellico Co.'s obligations. On October 31, 1924, pursuant to court order, the leasehold premises, with all improvements thereon, reverted to Harvey Coal Co. as of *598 October 31, 1924, and the company assumed obligations of Hazard-Jellico Co. in the amount of $ 52,086.16. The stockholders of the company decided to organize a new corporation to take over and operate the Harvey Mine properties. Accordingly, on November 19, 1924, Harvey Coal Corporation, the petitioner herein, was organized under the laws of the State of Tennessee, with an authorized capital stock of 5,000 shares of a par value of $ 100 each. All of the company's assets were transferred to the corporation in exchange for 4,000 shares, par value $ 400,000, of its capital stock and the assumption by the corporation of "all debts, obligations, contracts, taxes, and assessments of every kind and character which now exist or which may hereafter be levied upon or accrue against*228 said Harvey Coal Company." The deeds were executed by the receivers to the company and by the company to the corporation on November 28, 1924. The 4,000 shares of the corporation's capital stock were distributed to the shareholders of the company and the remaining 1,000 shares were sold to the public at par. The corporate charter of the company was surrendered and canceled on December 10, 1924, pursuant to a resolution of the company's stockholders at a meeting held December 1, 1924. The company's books were closed as of October 31, 1924, with the following debit and credit entries: Dr. Cr. Associated Engineering Co. accounts payable $ 732.49 Capital stock 100,000.00 Depreciation reserve 128,555.18 Contingency fund 6,314.86 Reserve for bad debts 8,504.50 Accident and insurance fund 12,645.70 Surplus account $ 19,416.31 Merchandise account 16,330.48 Real estate 2,427.50 Buildings 53,247.17 Mine equipment 76,185.37 Development and engineering 15,631.90 Entries and narrow work 3,572.90 Tipple 18,150.07 Broad gauge railroad 23,160.91 Leasehold 23,568.92 Overhead and fixed charges 5,061.20 Total 256,752.73 256,752.73 Corresponding*229 opening entries were made in the books of the corporation. The transferred assets were carried in the books of the corporation at the same figures appearing in the books of the company, except that the leasehold was marked up from $ 23,568.92 in the company's books to $ 392,464.65 in the books of the corporation. The liabilities set up in the corporation's books correspond to those in the books of the company, except that there were added the obligations which the corporation assumed under the court order referred to above, *599 amounting to $ 19,000 for compensation claims, $ 23,000 for Federal income taxes, and $ 7,479.42 of accounts payable. The assumed obligations of the company in the total amount of $ 52,086.16 were subsequently paid by the corporation. Neither the company's nor the corporation's books contained any entry showing the receipt of any assets placed on the leasehold by the Hazard-Jellico Co. during its occupancy. No gain or loss was ever reported by the company or the corporation on the forfeiture of the Hazard-Jellico Co. lease or on the transfer of the Harvey Coal Co.'s assets to the corporation. Harvey Coal Co. kept its books on an accrual basis and *230 made its returns for a calendar year. It filed income tax returns for 1921, 1922, and 1923 with the collector of internal revenue at Louisville, Kentucky. It filed no separate return for 1924. A return for that year was filed in the name of Harvey Coal Corporation on March 5, 1925. It was made out on Form 1120. The question appearing under the name of the taxpayer on the first page of the return: "Is this a consolidated return?", was answered "Yes." However, none of the questions appearing on the last page of the return relating to "affiliations with other corporations" was answered. The return had attached to it a schedule which purported to show the income and deductions attributable to Harvey Coal Co. for 1924. The entire schedule was as follows: : Income: Rents $ 9,000.00 Deductions: Tax $ 70.00 Depreciation 12,853.80 Expense 40.00 12,963.80 Net loss 3,963.80 The above net income of Harvey Coal Company has been consolidated with that of Harvey Coal Corporation as both was [sic] owned by exactly the same stockholders and percentages. There were also attached to the return a "Certificate of Inventory," *231 showing a closing inventory of $ 11,212.93 for Harvey Coal Corporation, a financial statement showing the corporation's assets and liabilities as of December 31, 1924, a statement of the corporation's operations for the two months ended December 31, 1924, showing a net income of $ 5,709.07, and other schedules showing the cost of mining coal, the operations of the commissary, and the depreciation and depletion allowances. On its face the return showed a net income of $ 1,745.27 for the corporation, after deduction of the $ 3,963.80 loss attributed to the company, so that no taxable income was reported on *600 the return. No other return for 1924, or for any portion of that year, has ever been filed by either the company or the corporation. The Commissioner computed separate tax liabilities for the company and the corporation for 1924, in the respective amounts of $ 1,380.62 and $ 1,024.20, and so notified them by letter dated June 28, 1928. The corporation, through its bookkeeper, filed a protest with the Commissioner under date of July 16, 1928, in which objection was made to computing the tax liabilities of the company and the corporation separately. The letter stated, *232 in part, as follows: (f) (1) The Harvey Coal Company and Harvey Coal Corporation are all the same, property, capital, surplus, income, men and everything. The company was so heavily damaged by those who had operated the mine under lease that additional capital had to be paid in and at the same time the charter was changed, increasing the capital. The income was not kept separate and no one could definitely show it at this time. * * * * (9) As stated in No. F (1) above the Harvey Coal Company and Harvey Coal Corporation is all one and the same company and the Income is all on the same books, accounts, etc., and cannot be separated accurately. No loss could be established for one and thereby show an income for the other. Under date of March 5, 1929, the Commissioner sent a notice of deficiency to Harvey Coal Corporation, the petitioner herein, determining a deficiency against it for the two-month period ended December 31, 1924, in the amount of $ 2,040.25. The letter stated: "The Revenue Agent's reports, supplemental valuation report and your several briefs have been made the basis of this examination." The letter contained separate computations for the company for the period January*233 1 to October 31, 1924, and for the corporation for the period November 1 to December 31, 1924. A net loss of $ 25,637.31 was shown for the company and a net income of $ 16,655.34 for the corporation. The corporation filed a petition with this Court, then the United States Board of Tax Appeals, under Docket No. 43194, and, after hearing thereon, the determination of the Commissioner was sustained. See Harvey Coal Corporation, 24 B. T. A. 793. One of the issues in the proceeding referred to above was a claim for additional depreciation deductions on the so-called Hazard-Jellico assets which Harvey Coal Co. received upon the recovery of the leasehold from that company. The claim for such additional depreciation was rejected because of the failure of proof as to the cost basis of such assets to Harvey Coal Corporation, and also the lack of evidence as to the actual ownership of the assets. The Board determined, however, that the assets in question were acquired not in a reorganization of Harvey Coal Co., but by purchase and in exchange for the capital stock of Harvey Coal Corporation. *601 On February 12, 1934, Harvey Coal Corporation filed suit*234 in the Court of Claims for the recovery of income taxes allegedly overpaid for 1925, 1926, 1928, 1929, and 1930. The claimed overpayment was based upon the failure of the Commissioner to allow depreciation deductions in those years on account of the Hazard-Jellico assets. It was alleged in the petition that: As of November 1, 1924, plaintiff acquired all the assets of the Harvey Coal Company, a corporation, for $ 400,000.00 par of its (plaintiff's) capital stock and the assumption of certain liabilities, such acquisition not being the result of a non-taxable reorganization. Among the assets so acquired were the following depreciable and depletable assets which had a fair market value at that time of not less than the amount set opposite each item: Mine buildings $ 53,247.17 Mine equipment 76,185.37 Mine tipple 18,150.07 Mine railroad 23,160.91 Furniture and fixtures 1,330.15 Certain other depreciable assets which the Harvey Coal Company recently received from the Hazard-Jellico Coal Company 186,000.00 Certain coal lands, leaseholds, coal rights, development and entry work thereon 361,862.62 A similar petition involving the year 1931 was filed in the Court*235 of Claims by the corporation on July 23, 1936. The Court of Claims decided the issue relating to the depreciation deductions on the Hazard-Jellico assets in the petitioner's favor. Harvey Coal Corporation v. Commissioner, 35 Fed. Supp. 756. In so holding it ruled that the decision of the Board of Tax Appeals was res judicata as to the ruling that the Hazard-Jellico assets were not received in a reorganization, but that the decision was not res judicata as to the question of the cost of the assets to the plaintiff, this fact not having been determined by the Board. The Hazard-Jellico assets were found to have a cost basis of $ 139,204.93 and a remaining useful life of fifteen years. Depreciation deductions were allowed accordingly for each of the years 1925 to 1931, inclusive, except 1927, which was not involved. The first notice of transferee liability, that involved in Docket No. 2451, was mailed to the petitioner on April 22, 1943. It covered the period January 1 to October 31, 1924, and determined a deficiency in taxes due from Harvey Coal Co. of $ 8,979.89, including a deficiency of $ 7,183.91 and a penalty of $ 1,795.98. The second*236 notice, in Docket No. 5896, was mailed to the petitioner on June 1, 1944, and covered the entire calendar year 1924. The liability determined in that notice was for $ 51,532.24, including a deficiency of $ 41,225.79 and a penalty *602 of $ 10,306.45. In both of the computations there was included in income an item of $ 87,118.77 representing the company's gain on the cancellation of the Hazard-Jellico lease, computed as follows: Fair market value of assets received $ 139,204.93 Less liabilities of the lessee assumed on account of repossession of the leasehold for: Attorney fee $ 12,407.00 Federal tax 19,812.91 Sanford-Day Iron Works 7,479.49 Compensation claim 12,386.76 52,086.16 Taxable income received 87,118.77 The principal difference in the two computations is the inclusion in the second of $ 278,543.29 as gain to the company on the disposition of its assets to the corporation, computed as follows: (c) Gain realized through transfer of all properties to Harvey Coal Corporation in exchange for $ 400,000.00 par value of the capital stock of Harvey Coal Corporation and the assumption of all debts, liabilities and obligations*237 by the Harvey Coal Corporation. Amount received -- Value of capital stock, measured by value of assets transferred: Leasehold $ 250,000.00 Real estate 2,427.50 Buildings 29,802.27 Equipment 6,109.28 Tipple 197.92 Railroad 4,916.51 Furniture and fixtures 625.12 Hazard-Jellico assets 139,204.93 Cash 4,451.11 Total $ 437,734.64 Liabilities assumed: Attorney Fee $ 12,407.00 Federal income tax 19,812.91 Account payable to Sanford-Day Iron Works 7,479.49 Compensation claim 12,386.76 Deficiency of Federal income tax and additions thereto for the year 1924 as determined herein 51,532.24 Total $ 103,618.40 Total amount received 541,353.04 Basis of property transferred 262,809.75 Taxable gain realized $ 278,543.29 *603 OPINION. The statute of limitations issue, which we have decided for the petitioner, hinges upon the question of whether the return filed March 5, 1925, purporting to be a consolidated return for the petitioner and the Harvey Coal Co. for 1924, was a sufficient return to start the running of the statute in favor of the company. It is agreed that*238 if the return was a valid return, the collection of the proposed deficiency has long since been barred. However, before ruling on the statute of limitations issue, we must first determine the jurisdictional question, for without jurisdiction we would have no authority to rule on the statute of limitations in either proceeding. It is obvious, we think, and the parties agree, that one or the other of the deficiency notices is invalid, either because it does not cover the taxpayer's taxable year or, as to the second, because it covers the same period as the first and is prohibited under section 272 (f), Internal Revenue Code. A preliminary motion was filed by the petitioner to require the Commissioner to make an election as to which notice he would rely upon and for dismissal of the other petition. A later motion was filed by the petitioner for dismissal of the petition based on the second deficiency notice. Both of these motions were denied without prejudice to the petitioner to renew them at the trial of the case on the merits. At such hearing the petitioner did renew both motions. The Court took the motions under advisement and reserved its ruling as to the jurisdictional question. *239 On that issue we hold that the first deficiency notice of transferee liability, that of April 22, 1943, was a proper notice in that it covered the entire period of the taxpayer's operations for the year 1924, and was in effect a notice for the entire year. See Commissioner v. Forest Glen Creamery Co., 98 Fed. (2d) 968; certiorari denied, 306 U.S. 639. The proceeding under Docket No. 5896, based upon the second deficiency notice, that of June 1, 1944, will therefore be dismissed for want of jurisdiction. The essential requirement of a valid return, as set forth by section 239 of the Revenue Act of 1918, and subsequent acts, and as often emphasized by this and other courts, is that it shall state specifically the items of gross income and the allowable deductions and credits upon which the tax may be computed. Thus, in Lucas v. Colmer-Green Lumber Co., 49 Fed. (2d) 234, the court said: * * * Section 239 of the Revenue Act of 1918 * * * required every corporation to "make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title." *240 This information is essential *604 to an assessment of the tax, and to procure it is the object of requiring the return. * * * See also United States v. National Tank & Export Co., 45 Fed. (2d) 1005; F. A. Hall Co., 3 B. T. A. 1172; American Vineyard Co., 15 B. T. A. 452; Peerless Iron Pipe Exchange, Inc., 23 B. T. A. 900; Cem Securities Corporation, 28 B. T. A. 102; affd., 72 Fed. (2d) 295; certiorari denied, 293 U.S. 613. F. A. Hall Co., supra, involved facts much like those in the instant case. There the taxpayer and another corporation which acquired all of its stock on August 1, 1918, filed a consolidated or joint return for the entire year 1918. The Commissioner contended that the taxpayer should have filed a separate return for the period January 1 to July 31, 1918, and that the return filed was not a valid return and did not start the running of the statute. We held that the return was sufficient to start the running of the*241 statute in favor of the taxpayer. See also National Tank & Export Co., 3 B. T. A. 1217; affd., 35 Fed. (2d) 381; and Stetson & Ellison, 11 B. T. A. 397; affd., 43 Fed. (2d) 553. In Stetson & Ellison, supra, we said that: Where a consolidated return has been prepared and filed in good faith, and the names of the companies included in the consolidation are made clear to the respondent, and all of the "items of gross income and the deductions" are included therein, although said items of income and deductions may not be in sufficient detail to enable the respondent to accurately compute the tax against each of the companies, there is a "substantial" compliance with the statute. In American Vineyard Co., supra, we held that a joint return filed for 1918 by a corporation which had been organized during the year and its predecessor corporation, whose assets it had acquired upon organization, was not the return required by law for either company and did not start the running of the statute of limitations. In so*242 holding we pointed out that: * * * The two corporations were not affiliated and it is not contended that they were. They did not file a consolidated return, and it is not contended that they were entitled to file such a return. The return simply included the income of one corporation for one portion of the calendar year 1917 and of the other corporation for the remainder of the year, but made no segregation or separation of the income, gain, profits or deductions of the two corporations. This return did not specify nor give any information by which the income of either of the companies could be determined. There was no specification as to what proportion of the income was received by one or the other. As a further reason for our holding in the American Vineyard Co. case, we pointed out that the statute did not provide for or warrant the filing for 1917 of joint returns by two corporations for a taxable year when one retires from business at some time during the period. *605 In Cem Securities Corporation, supra, we held that a return similar to that considered in American Vineyard Co., supra: * * * in failing*243 to show separately the items of its income, deductions, and credits, did not meet the requirements of the statute and was inadequate to start the running of the limitations period. The only difference between the two cases was that in the American Vineyard Co. case the return bore the names, in its heading, of both corporations. We said that that was not an effective distinction; that: * * * The substance of the matter in both cases is that the return includes the operations of two companies without a segregation of items as required by statute and hence is not the statutory return of the company filing it. * * * The return under consideration contained the separate items of gross income and deductions of both Harvey Coal Co. and Harvey Coal Corporation. The items pertaining to Harvey Coal Co. were set out in a separate schedule and were plainly identified. While the return may not have been in proper form and may not have met all the requirements of the law and the Commissioner's regulations, we think that it was adequate to start the running of the statute of limitations, as the petitioner contends. The Commissioner used the return as a basis for an additional assessment*244 against the petitioner for 1924, and in so doing the Commissioner made separate computations for each of the corporations. The notice of deficiency for 1924, sent to the petitioner March 5, 1929, was said to be based upon "The Revenue Agent's reports, supplemental valuation report and your several briefs" filed in the case. The computation attached to the notice showed an increase in the loss of Harvey Coal Co. for the period January 1 to October 31, 1924, from $ 5,673.87, as shown in the company's books, to $ 25,637.31. That loss, however, was not allowed to Harvey Coal Corporation. The Commissioner did not at any time call upon the petitioner or Harvey Coal Co. to file any additional return for any portion of the year 1924, or question the adequacy of the return filed by them until the present controversy arose. In the absence of any concealment or misrepresentation on the part of the taxpayer, and with all of the essential facts upon which the present action is based having been known to the Commissioner for many years, little can be said to justify so long a delay in his efforts to collect the taxes which he now claims to be due. In any event, we think, for the reasons stated*245 above, that any tax liability of Harvey Coal Co. for 1924 is barred by the statute. Decision will be entered for the petitioner.