Rolnick v. Commissioner

NATHAN ROLNICK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. LILLIE ROLNICK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Rolnick v. Commissioner Docket Nos. 35325, 35386. United States Board of Tax Appeals 20 B.T.A. 989; 1930 BTA LEXIS 1990; September 25, 1930, Promulgated *1990 Nathan Rolnick, for the petitioners. J. R. Johnson, Esq., for the respondent. PHILLIPS *990 The Commissioner determined deficiencies in income tax against the Wellbuilt Realty Co., which he assessed on April 30, 1927, with penalty and interest as follows: Year Income tax assessed 25 per cent penalty assessed Interest assessed Total assessed [1921] $940.00 $235.00 $289.01 $1,464.01 [1922] 103.13 25.78 25.52 154.43 [1923] 5,171.88 1,292.97 969.55 7,434.40 6,215.01 1,553.75 1,284.08 9,052.84 By letters dated December 22, 1927, he notified each of the petitioners that said taxes plus the accrued penalty and interest were proposed for assessment against them as provided in section 280, Revenue Act of 1926. The petitioners instituted these proceedings alleging in effect that neither was a transferee or distributee of the assets of the corporation, that there were no deficiencies in tax, and that assessment and collection were barred by the statutory period of limitations. FINDINGS OF FACT. The Wellbuilt Realty Co. was incorporated in 1920, with capital stock of the par value of $12,000. One-half thereof*1991 was acquired by petitioner Nathan Rolnick and one-half by one Glass. In 1920 or 1921 it purchased for $32,000 a corner plot of real estate in Brooklyn, N.Y., upon which was an old small house. This was moved to the rear of the property and the house and lot on which it stood were sold for $14,000. The remainder of the property was improved by erecting buildings at a cost of $53,000. The corporation issued a first bond and mortgage for $35,000, and a second bond and mortgage for $20,000. The latter required payment in installments. Glass loaned the corporation from $28,000 to $29,000. The corporation borrowed $35,000 from a bank. The proceeds were used to repay said loans made by Glass and to pay him $6,000 for his stock in the corporation which had been purchased by Rolnick. In 1923 the bank demanded payment of said note and payment was made. At the suggestion of the bank the real estate owned by the corporation was transferred on November 30, 1923, to Lillie Rolnick, who thereupon executed a bond and mortgage for $60,000, payable to one of the officers of said bank. At that time the indebtedness of the corporation to the bank for principal, interest and charges amounted*1992 to between $38,000 and $40,000. At that time Nathan Rolnick was indebted to said bank on personal obligations to the extent of some $40,000 and other corporations in which Rolnick *991 was interested were also indebted to the bank in substantial amounts. Said bond and mortgage were held by the bank as collateral for the indebtedness of the Wellbuilt Realty Co., and all or a part of said indebtedness of Rolnick and the corporations in which he was interested at the time said property was conveyed to Lillie Rolnick and the bond and mortgage executed and delivered by her to the bank. There was outstanding and unpaid a first mortgage of $35,000 and a second mortgage of $20,000, upon which between $8,000 and $10,000 remained unpaid. At that time said property had a fair market value of $90,000. In 1923 or 1924 said first and second mortgages became due. A first mortgage of $60,000 was placed upon said property. The mortgage of $60,000 issued to the bank officer was subordinated to said new mortgage and the prior first and second mortgages were paid off and discharged. The bonus of $2,000 and fees of $500 to each of two attorneys were paid in these refinancing transactions. *1993 In 1926 the bank foreclosed its mortgage upon the property which sold at the foreclosure sale at between $110,000 and $112,000. Fees and expenses of foreclosure amounted to about $12,000. The Wellbuilt Realty Co. has no assets and has had none since 1926. In or about October, 1926, the Wellbuilt Realty Co. filed income and profits-tax returns for the calendar years 1921 and 1922. On May 15, 1923, the Wellbuilt Realty Co. filed an income-tax return for a fiscal year ended February 28, 1923. The Commissioner rejected such return filed upon the fiscal year basis and computed income for the calendar year 1923. On April 30, 1927, he made assessments of taxes, penalties and interest against said Wellbuilt Realty Co., as follows: Year Income tax assessed 25 per cent penalty assessed Interest assessed Total assessed [1921] $940.00 $235.00 $289.01 $1,464.01 [1922] 103.13 25.78 25.52 154.43 [1923] 5,171.88 1,292.97 969.55 7,434.40 6,215.01 1,553.75 1,284.08 9,052.84 A warrant to distrain for the collection of said taxes was issued against the corporation and returned unsatisfied. On or about December 22, 1927, the Commissioner mailed*1994 to Nathan Rolnick and to Lillie Rolnick letters in which he notified them that he proposed for assessment against each of them, as transferees of the assets of the Wellbuilt Realty Co., pursuant to section 280 of the Revenue Act of *992 1926, unpaid income taxes due from said company of $6,215.01, plus any accrued penalty and interest. On February 20, 1928, Nathan Rolnick and Lillie Rolnick petitioner the Board for a redetermination of the liability asserted against them. OPINION. PHILLIPS: In each of these cases the Commissioner has the burden of establishing that the petitioner is a transferee of the assets of the Wellbuilt Realty Co., and liable under section 280 of the Revenue Act of 1926 for the payment of the taxes of that company. The evidence reminds us of nothing so much as of an incomplete jig-saw puzzle. The principal witness for respondent was the petitioner, Nathan Rolnick. On some points his testimony is clear; on others it is contradictory; in some instances it is incomprehensible, and in many respects the details are incomplete. The record, however, is sufficient to establish that Rolnick was a transferee of the assets of the corporation to the extent*1995 of $6,000. It appears that one Glass, who owned $6,000 of the capital stock, had loaned some $28,000 or $29,000 to the corporation, repayment of which he required. Rolnick caused the corporation to borrow $35,000 from a bank upon its note and used the proceeds to pay this indebtedness and, in addition, to purchase for himself the stock which Glass held. At this point it is clear that Rolnick had used $6,000 of the corporation's funds in acquiring this stock for his own account. It is our opinion that the record is insufficient to establish any greater liability on his part as a transferee. The Commissioner also sought to establish the liability of Mrs. Rolnick as a transferee of assets of the corporation. The evidence does not show that she ever received any part of the assets of the corporation for her own benefit. In taking title she acted merely as a trustee. The respondent cites cases which establish that in such cases the liability follows the trust property, but these cases are not in point to establish an individual liability against the trustee. The petitioners alleged that the assessment and collection of the taxes in question were barred by the statute of limitations, *1996 but there is no merit in this. It is also alleged that the amounts of tax were incorrectly computed; that there were no taxes due from the corporation. No proof of the income or deductions for any of the years has been offered. Since the burden was on petitioner to establish the incorrectness of the deficiency in taxes and this has not been done or attempted, we must accept the amount as correct. In Docket No. 35325, decision will be entered for respondent for $6,000. In Docket No. 35386, decision will be entered for petitioner.