Roche v. Commissioner

FRANK L. ROCHE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Roche v. Commissioner Docket No. 21556. United States Board of Tax Appeals 21 B.T.A. 1139; 1931 BTA LEXIS 2239; January 14, 1931, Promulgated *2239 1. Held that the Board has jurisdiction to hear and determine the issues presented under section 280. 2. The amount of the liability of the petitioner as a transferee determined from the evidence. 3. Held, further, under the facts presented that the period of limitation for proceeding against the transferee as to the years 1919 and 1920 had expired. 4. Held, further, that the petitioner has failed to introduce sufficient evidence to overcome the presumption of correctness of the Commissioner's determination of the amount of tax liability of the taxpayer. George E. H. Goodner, Esq., for the petitioner. J. A. Lyons, Esq., and John D. Foley, Esq., for the respondent. TRAMMELL *1139 This is a proceeding for the redetermination of the liability of the petitioner as a transferee, determined by the respondent in the amount of $26,772.85, plus any accrued penalties and interest, for income and profits taxes of the Roche & Burke Undertaking Co., a dissolved corporation, as follows: for 1918, $15,753.51; for 1919, $11,903.63; for 1920, $7,826.75, and for 1921, $5,966.70. Upon motions duly made and granted the petition*2240 was amended and the answer of the respondent was also amended, leaving issues arising from allegations of the petitioner as follows: (1) The petitioner contends that section 280 of the Revenue Act of 1926 is unconstitutional; (2) The petitioner denies liability at law or in equity for the taxes, penalties and interest of the Roche & Burke Undertaking Co.; (3) The petitioner alleges that collection of the unpaid taxes of the Roche & Burke Undertaking Co. for 1918 and 1919 is barred by the statute of limitations; the respondent alleges that the returns were fraudulent and there is no limitation; (4) The petitioner alleges that the net income of the Roche & Burke Undertaking Co. for 1920 and 1921 is overstated; (5) The petitioner alleges error in failing to compute the profitstax liabilities of the Roche & Burke Undertaking Co. under the relief provisions of sections 327 and 328 of the Revenue Acts of 1918 and 1921. *1140 At the hearing the petitioner abandoned the fifth issue with reference to special assessment. FINDINGS OF FACT. The petitioner is a resident of Mobile, Ala. The Roche & Burke Undertaking Co., hereinafter referred to as the corporation, was*2241 an Alabama corporation, organized in 1914, with its principal office at Mobile. It was engaged in carrying on an undertaking business during 1918, 1919, 1920, and until September 30, 1921, upon which date it discontinued business and was dissolved. At the date of dissolution, Frank L. Roche, hereinafter referred to as Roche, and Peter Burke, hereinafter referred to as Burke, were the sole stockholders, each holding one-half of the outstanding stock of the corporation. During the entire existence of the corporation Roche had been its president and Burke had been its secretary-treasurer. The books were in charge of Burke. On the date of dissolution of the corporation, Roche and Burke formed a partnership, took over all of the assets of the corporation and turned them over to the partnership, which thereafter carried on the undertaking business formerly conducted by the corporation. The ledger that had been used by the corporation was continued in use by the partnership, until October, 1922, and the book values of the assets remained unchanged. After charging off bad debts and determining the profits of the corporation to the date of dissolution, the book values of the assets*2242 taken over by the petitioner and Burke from the corporation were as follows: Assets Liabilities Cash $8,613.53 Total shown by books $4,727.72 Merchandise inventory 8,000.00 Real estate 20,000.00 Furniture and fixtures 700.00 Automobiles and vehicles 6,000.00 Accounts receivable (including accounts of stockholders) 26,287.75 Total book value 69,601.28 Net book value of assets 64,873.56 The assets of the corporation, at the time taken over by Roche and Burke, had a fair net value of $31,634, after deducting the liabilities of the corporation, as shown by the books, and the amount of additional taxes paid in its behalf in 1923. The capital stock of the corporation was $10,000, and the amount of surplus and undivided profits, $54,873.56. The capital accounts of the partnership were opened to reflect for Roche an investment of $5,000; for Burke an investment of $5,000, and the surplus and undivided profits were transferred to a partnership profit and loss account in the credit amount of $54,873.56. *1141 With reference to the accounts receivable, according to the ledger an amount of at least $10,514.11 was subsequently collected*2243 in cash and an amount of at least $8,434.49 was charged off to profit and loss account on December 31, 1921. The real estate was located at the corner of St. Joseph and State Streets in Mobile, and comprised a lot extending about 150 feet in one direction and somewhat less than 100 feet in the other; and the lot was improved by a two-story brick residence of dimensions approximately 40 feet by 100 feet, which had been acquired by the corporation about 1907 or 1908. Real estate values in Mobile declined during 1921 and there was a very poor market for the sale of such property. The value of the real estate was not in excess of $15,000 when taken over from the corporation. The partnership continued to operate the undertaking business until the death of Burke on July 5, 1922. Thereafter Roche operated the business for a few months, when he caused a corporation to be organized to go into the undertaking business. The corporation filed a so-called tentative return for 1918 on March 12, 1919, reporting an estimated tax liability of $120. The return of the corporation for 1918 was filed on April 22, 1919, reporting net income of $2,976.92 and a tax liability of $117.23. The*2244 return of the corporation for 1919 was filed on March 8, 1920, reporting a net income of $4,423.72 and a tax liability of $242.37. The profit and loss account in the ledger reflected a net profit to the corporation amounting to $1,316.15 for the period ended September 30, 1921. Roche employed a firm of public accountants in 1923 to audit the accounts and records of the corporation. These accountants left the ledger unadjusted, but upon their advice, amended returns were made up for 1918, 1919, and 1920 and they were executed and filed by Roche, as president of the dissolved corporation. At the same time and in the same manner an original return was made up, executed and filed by Roche for the corporation, for the period in 1921 ended with the dissolution of the corporation on September 30. These returns were all filed on April 24, 1923, and they reported as follows: for 1918, net income, $21,519.23; tax liability, $7,899.84; for 1919, net income, $18,394.27; tax liability, $4,033.02; for 1920, net income, $11,450.69; tax liability, $1,270.11; for 1921, net income, $6,368.86; tax liability, $486.89. The amount of additional taxes paid in 1923 on behalf of the dissolved corporation*2245 was as follows: for 1918, $7,553.23; for 1919, $3,790.65; for 1920, $635.22; for 1921, $486.89, or an aggregate of $12,465.99. The unpaid additional taxes of the corporation were assessed on or about March 10, 1924, in the following amounts: for 1918, $15,753.51; *1142 for 1919, $11,903.63; for 1920, $7,826.75; for 1921, $8,193.42, of which tax for 1921, $2,226.72 was abated on January 28, 1926. The deficiency letter was mailed to the petitioner on September 28, 1926. OPINION. TRAMMELL: In the first issue the petitioner contends that section 280 of the Revenue Act of 1926, under which the respondent asserts the liability in controversy, is unconstitutional. We have previously decided that a petitioner who appeals to this Board under said section is precluded from questioning its validity. . See also ; ; certiorari denied, . In any event, in our opinion we have jurisdiction to determine the issues here presented. This disposes of the first issue, and the fifth issue*2246 was abandoned by the petitioner at the hearing. There remain the second, third, and fourth issues, which will be considered in their inverse order. In the fourth issue the petitioner alleges that the tax liability of the corporation transferor is overstated for 1920 and 1921. The basis of this claim is that the ledger shows in the profit and loss account amounts of net profits smaller than the net income determined by the respondent. Since the tax is computed upon the statutory net income, which is frequently an entirely different amount from the net profits according to the books, we must hold that the petitioner has failed to sustain the burden on this issue. There is no proof that the amount of the net profits shown by the books was correct, or how it was arrived at. We know only that the ledger showed a certain amount of "net profits" for each of the said taxable years, and that such amount is less than the net income determined by the respondent. This is not sufficient to overcome the presumption in favor of the correctness of the respondent's determinations. The petitioner must establish the correct amount of the statutory or taxable net income, which is not accomplished*2247 by an unesplained ledger account showing purported "net profits." The respondent's determinations of taxable net income for 1920 and 1921 are, therefore, approved. In the third issue the petitioner contends that the statute of limitations has run against the collection of the unpaid taxes for 1918 and 1919. Section 250(d) of the Acts of 1918 and 1921 provided, with exceptions not material here, that the amount of tax due under any return for said years should be determined and assessed by the Commissioner within five years after the return was due or was made, and that no suit or proceeding for the collection of any tax *1143 should be begun after the expiration of five years after the date when the return was due or was made. The returns of the corporation herein for 1918 and 1919 were made on April 22, 1919, and March 8, 1920, respectively, and the five-year periods provided in the above statutes for assessment and collection thereafter expired in April, 1924, and March, 1925, respectively. However, the taxes for both years were assessed by the Commissioner on March 10, 1924, within the five-year period of limitations then in effect, and prior to the passage of the*2248 Revenue Act of 1924, on June 2 of that year. The tax having been assessed prior to the enactment of the 1924 Act, the collection thereof was barred prior to the passage of the Revenue Act of 1926 and the statute of limitations barred the assessment or collection from the transferee. Section 280(b)(1) and (b)(2) does not have the effect of reviving a remedy once dead. . The contention of the petitioner in the third issue is sustained. In the second issue the petitioner denies liability at law or in equity for the taxes of the corporation transferor. In that connection, the petitioner contends that, in orally withdrawing at the hearing any claim for a fraud penalty, the respondent has left the Board without any definite basis upon which to proceed. This argument we think is unsound, for the reason that the amount of the unpaid taxes is clearly stated in the deficiency letter, and the respondent has not withdrawn his determination in that respect. The evidence shows that all of the assets of the corporation were distributed in 1921 to its two stockholders, the petitioner and Peter Burke, each of whom held one-half*2249 of the outstanding stock and each of whom received one-half of the assets. The corporation was thus left without assets and was dissolved. The petitioner is liable, therefore, for the taxes of the corporation to the extent of the value of the assets received by him. The Revenue Act of 1928 provides in section 602 that in proceedings before the Board the burden of proof shall be upon the Commissioner to show that a petitioner is liable as a transferee of property of a taxpayer. The petitioner contends that the respondent has not met the burden of proof in this respect, in that the actual or fair value of the assets at the time of distribution has not been shown. We can not agree with this contention. We have found from the evidence that the fair net value of the corporate assets at the time of distribution, less the additional taxes paid in behalf of the corporation in 1923, was $31,634, and since the *1144 petitioner received one-half thereof, he is liable for taxes of the corporation in an amount not in excess of $15,817. The net book value of the assets is shown to have been $64,873.56, including cash in the amount of $8,613.53. With respect to some of the items*2250 shown on the books, no testimony was introduced as to their actual value, but at the time of the dissolution of the corporation the petitioner used these book values a being the actual values and placed such values on the partnership books. When the Commissioner introduced evidence of such book values and the method of treatment thereof by the individuals and the partnership, the petitioner should have introduced some evidence as to values if he considered the book values not correct and as not representing actual valuations. Book values are clearly some evidence, especially when the petitioner and his copartner adopted them after the dissolution of the corporation and placed them on the partnership books. With respect to the real estate, evidence was introduced to show that its value was less than that at which it was carried on the books, but this evidence is of such an indefinite and uncertain character that it does not convince us that the real estate was worth less than $15,000. Also included in the book value of assets of $64,873.56 were accounts receivable carried on the books in the amount of $26,287.75, which embraced stockholders' accounts in an undisclosed amount. *2251 It is shown that $10,514.11 of the accounts receivable was subsequently collected and it does not appear that these accounts were considered even doubtful of collection, and in finding the net value of the assets we have accepted the accounts receivable as having a value equal only to the amount so collected. The remainder we have considered too doubtful to be of any value, although only $8,434.49 was actually charged off. Upon consideration of all the evidence, in connection with the facts above referred to, we have found the net value of the assets to be as before stated. We think the evidence fairly establishes that the petitioner received assets of the corporation having an actual value equal at least to $15,817. We hold, therefore, that the petitioner is liable as a transferee for taxes of the taxpayer corporation as determined by the respondent for 1920 and 1921 in an amount not to exceed $15,817. Henry Cappellini et al., supra;. Reviewed by the Board. Judgment will be entered under Rule 50.