Kemp v. Commissioner

J. A. KEMP, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Kemp v. Commissioner Docket No. 43981. United States Board of Tax Appeals 20 B.T.A. 875; 1930 BTA LEXIS 2018; September 17, 1930, Promulgated *2018 1. TRANSFEREE PROCEEDINGS. - Upon termination of a trust and distribution of the trust property the respondent may proceed against the transferee of such property under section 280 of the Revenue Act of 1926 without first exhausting any remedies he may have against the trustee personally. 2. LIMITATIONS - WAIVERS. - Where respondent fails to establish the authority of the trustee to execute waivers after distribution of the trust property and discharge of the trustee, held that such waivers are not valid to extend the statute against the distributee. Assessment against the distributee, as transferee, for 1922 held barred. Notice of deficiency for 1923 held timely following Louis Costanzo,16 B.T.A. 1294. Harry C. Weeks, Esq., for the petitioner. M. E. McDowell, Esq., for the respondent. ARUNDELL *875 By letter of March 7, 1929, the respondent notified petitioner of the assertion of a deficiency of $29,767.71 in income tax for 1922 and 1923 against him as a transferee of the City National Bank, trustee for J. A. Kemp's children. Several of the assignments of error go to the correctness of respondent's computation*2019 and others question the right of respondent to assess and collect the deficiency from the petitioner. The parties have joined in a motion to submit for decision, in advance of a hearing on the merits, the questions (a) whether the respondent is barred by the statute of limitations from asserting a liability against petitioner as transferee, and (b) whether the respondent can assert and collect said liability, if any, against the petitioner without first exhausting his remedies against the City *876 National Bank. With the motion the parties filed a stipulation of facts to serve as a basis for determining the questions of law submitted. FINDINGS OF FACT. Petitioner is an individual, residing at Wichita Falls, Tex. On November 12, 1919, by four separate instruments he conveyed to the City National Bank of Wichita Falls, Tex., a part interest in several pieces of property, in trust for his four children; that is to say, one child was named beneficiary under each of the trust instruments. These trusts were to terminate on November 3, 1928, at which time the property "then constituting the trust estate" was to be conveyed to the beneficiaries outright. During the continuance*2020 of the trusts the trustee had power to sell, convey, or mortgage the trust property and to invest and reinvest the proceeds and income. During the life of the trust the trustee was not to pay the income to the beneficiaries unless "in its discretion in thinks best," but it was to render them an annual report covering the management of the trust property. The trust instruments contained the following provision: The Trustee shall use ordinary and reasonable diligence in the performance of this Trust but shall not be liable to the beneficiary for any act, default, failure or negligence in or connected with the execution of said Trust, providing the same shall not amount to or constitute fraud, embezzlement, or wilful breach of Trust and the said Trustee shall not in any manner be liable for any debt or liability incurred by it in the administration or management of said Trust Estate. The City National Bank of Wichita Falls accepted the conveyances and acted under them until the trusts were terminated in 1923 as hereinafter related. On March 15, 1923, the City National Bank filed an income-tax return on Form 1040, reporting therein the income of the four trusts mentioned above*2021 for the calendar year 1922. On March 15, 1924, the City National Bank filed an income-tax return on Form 1040, reporting therein the income of the four trusts for the period December 31, 1922, to July 18, 1923. The respondent denies that the amounts so reported as income are correct. Each of these returns in the heading contains the name "City National Bank, Trustee for J. A. Kemp's Children." In the heading of the return filed in 1924 appears the statement: "Period from December 31, 1922, to July 18, 1923, when trust was closed." Under dates of July 14, 1923, and July 16, 1923, petitioner's four children, who were beneficiaries under the trust instruments above described, and the City National Bank executed trust releases *877 wherein all their rights and interest under the trust deeds were released and conveyed to the petitioner, and wherein the children requested the City National Bank to execute and deliver to petitioner a conveyance of legal title to the trust property, and acknowledged the trustee's faithful administration of the trusts and released the trustee from liability arising out of the management of the trust property and administration of the trusts. On*2022 July 17, 1923, the City National Bank executed a conveyance to the petitioner of all its right, title, and interest and estate in and to the trust properties. In the execution of the first two instruments here mentioned petitioner's married daughters were joined by their husbands. Petitioner's son, Joseph Anderson Kemp, one of the beneficiaries, was a minor but his disability of minority had been removed by an appropriate proceeding before the execution of the instruments of July 14 and July 16, 1923. The value of the property transferred to the petitioner pursuant to the instruments executed in July, 1923, greatly exceeded the amount which the respondent asserts against the petitioner in this proceeding. On November 22, 1926, the City National Bank executed and delivered to the respondent a waiver extending until December 31, 1927, the time for making assessment of taxes for the years 1921 and 1922. On November 22, 1927, the City National Bank executed and delivered to the respondent a waiver extending until December 31, 1928, the time for making assessment of taxes for the years 1921, 1922, and 1923. Each of these waivers was signed "City National Bank, Trustee for J. A. *2023 Kemp's Children," by W. L. Robertson, vice president. Both waivers were accepted by the respondent. The respondent has never made any assessment of any tax liability against the City National Bank of Wichita Falls with respect to the income of the trusts above described for the years 1922 and 1923, or against any or all of the beneficiaries of the trusts. The City National Bank of Wichita Falls has been at all times heretofore referred to, and is now, a solvent going concern, with its place of business in Wichita Falls, Tex., and amply able to pay off and discharge any liability which might be asserted against it by the respondent on account of income received by it under the above described trust agreements for the years 1922 and 1923. By letter dated March 7, 1929, respondent notified petitioner of the assertion of a deficiency in income tax for the years 1922 and 1923 against him as "transferee of the City National Bank, Trustee for J. A. Kemp's Children." *878 OPINION. ARUNDELL: The petitioner, at the present stage of this proceeding does not question the amount of the deficiency determined by the respondent, but does question his liability for the amount*2024 determined, and to settle this the parties have submitted for decision the questions of alw set out in our preliminary statement. Petitioner's principal contention is that the respondent has not exhausted his remedies against the trustee bank and for that reason the respondent can not proceed against him at this time. His argument, in brief, is that the City National Bank is personally and primarily liable for the tax on the trust income, that its liability continues despite the termination of the trusts, and that the respondent is bound to look to the bank for the tax before he can proceed against the petitioner under section 280. Petitioner's theory is that under section 219 of the Revenue Act of 1921 the trustee became a taxpayer and as such was personally liable for the tax. In other words, as the liability of an individual taxpayer is not limited to the property which was the source of the income taxes, so the liability of a trustee for tax arising out of trust income is not limited to the property held in trust, but extends to the trustee's individual property. We think it is unnecessary to decide whether a trustee is technically a "taxpayer" during the period that he*2025 acts in a fiduciary capacity. It certainly is not contemplated by the taxing acts that a fiduciary's liability is to extend beyond the amount of trust property while he continues to hold it and to act as a fiduciary. In fact the more recent acts specifically provide that the tax is to be collected from the estate of the taxpayer for which the fiduciary is acting. Sections 281(a) of the Revenue Act of 1926 and 312(a) of the Revenue Act of 1928. It is only when the fiduciary divests himself of the trust property without satisfying the obligations of the United States that a personal liability arises. Section 3467 R. S. But that liability at best is but a secondary one, and there is clearly open to respondent the right to proceed against the transferee of the trust property, and this he has done here. Whether he might have elected to proceed against the City National Bank under section 3467 of the Revised Statutes is not necessary for us to now decide. We come to the question of whether the statute of limitations has run in favor of the petitioner. The fiduciary returns for 1922 and 1923 were filed on March 15, 1923, and March 15, 1924, respectively. The four-year period under*2026 the statute then in effect (section 250(d) of the 1921 Act), unless waived, ran against additional assessments on March 15, 1927, and March 15, 1928, respectively. No assessment *879 of additional tax was made within that period, nor was any notice of deficiency mailed. Two waivers were executed by the trustee bank and the respondent, one in 1926 extending until December 31, 1927, the period for assessment of 1921 and 1922 taxes, and the other in 1927 extending until December 31, 1928, the period for assessment of 1921, 1922, and 1923 taxes. The respondent, however, has failed to establish the authority of the bank to execute these waivers on behalf of the trusts. The trusts had been terminated more than three years prior to the execution of the first waiver and the respondent was notified of the termination when the 1923 return was filed in March, 1924. Respondent relies on section 281(a) of the Revenue Act of 1926, which provides, in substance, that upon notice to the Commissioner that any person is acting in a fiduciary capacity, such person shall assume all the rights, powers, duties and privileges of the taxpayer "until notice is given that the fiduciary capacity has*2027 terminated." Article 1292 of Regulations 69 specifies the manner in which notice of termination shall be given, and the respondent claims that the trustee has not complied with the regulations. The fact is that the trusts were terminated long prior to the enactment of the Revenue Act of 1926 and the promulgation of Regulations 69, and certainly it would be unreasonable, to say the least, to construe the Act and regulations retroactively so as to require every fiduciary, no matter how long since he has been discharged, to comply with the formalities prescribed in article 1292. As pointed out above, the respondent was given actual notice of the termination of the trusts when the 1923 return was filed. The situation then, in brief, is that more than three years after the trusts were terminated and the trustee discharged, waivers were executed by the former trustee and upon these waivers the respondent relies to collect taxes from the transferee of the trusts. In our opinion the waivers have not been shown to be valid to extend the statutory period for assessment against the transferee. Cf. *2028 . We need express no opinion as to what the situation may be in a case where the waivers were given prior to the distribution of the trust property. As set out above, the statutory period for assessment of taxes for 1922 against the transferor expired March 15, 1927. The respondent's notice to petitioner was mailed March 7, 1929, which is more than a year after the period for assessment against the transferor expired and assessment against the petitioner is barred. With respect to 1923 a different situation exists. The return having been filed March 15, 1924, the statutory period for assessment did not run in favor of the trustee until March 15, 1928, and as this date is subsequent to the date of enactment of the Revenue Act of *880 1926, the additional year provided by that act allowed the respondent until March 15, 1929, to notify the transferee of his liability. The notice was mailed March 7, 1929, and was therefore timely. . Accordingly, decision will be entered for the petitioner as to the year 1922, and the case will be restored to the general calendar for hearing*2029 on the merits as to the year 1923. Reviewed by the Board. Decision of no deficiency for the year 1922 will be entered. The proceeding, in so far as it relates to 1923, will be restored to the calendar for hearing on the merits in due course. PHILLIPS PHILLIPS, dissenting: I dissent on the ground that as the 1923 tax had been extinguished under section 1106(a) of the Revenue Act of 1926, there was no tax due to be collected from the transferee. SMITH agrees with this dissent.