North Side Lumber & Timber Co. v. Commissioner

NORTH SIDE LUMBER & TIMBER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. North Side Lumber & Timber Co. v. Commissioner Docket No. 34924. United States Board of Tax Appeals 27 B.T.A. 1187; 1933 BTA LEXIS 1235; April 14, 1933, Promulgated *1235 1. Liability for additional income and profits taxes was incurred by the petitioner corporation for the years 1920 and 1921, during which years all of its capital stock was owned by another corporation. Subsequently the affiliated group was dissolved by expiration of the parent corporation's charter, and the petitioner's stock was acquired by new stockholders. In December, 1927, respondent asserted deficiencies against the petitioner for 1920 and 1921 under the terms of valid waivers. Held, the collection of said deficiencies from the petitioner corporation would not constitute a taking of the property of its present stockholders without due process of law, in violation of the Fifth Amendment to the Constitution. 2. The parent corporation filed consolidated returns for itself and its subsidiary, petitioner herein, for the years 1920 and 1921. The corporations entered into no agreement respecting assessment of the taxes and the taxes were assessed against them in proportion to the net income of each. In computing the deficiencies, respondent did not take into consideration the amounts of tax assessed against the petitioner on said consolidated returns. Held, the*1236 petitioner is entitled to have its total tax liability reduced by such amounts in determining the deficiencies due from it for the taxable years involved. Wm. S. Bennett, Esq., for the petitioner. Chester A. Gwinn, Esq., for the respondent. TRAMMELL *1187 This is a proceeding for the redetermination of deficiencies in income and profits taxes for the years 1920 and 1921 in the amounts of $10,303.88 and $5,612.93, respectively. The issues are (1) whether or not collection of the deficiencies in controversy would be in violation of the due process clause of the Fifth Amendment to the Constitution; (2) whether or not assessment and collection of said deficiencies are barred by limitations; (3) the amount of profit, if any, realized by the John E. Burns Lumber Co. from the sale in 1920 of certain real estate acquired prior to March 1, 1913; and (4) whether or not respondent has properly allocated the tax deficiencies between the petitioner and its parent corporation in the taxable years. *1188 FINDINGS OF FACT. The following facts were stipulated by the parties: The petitioner herein is an Illinois corporation incorporated in 1904*1237 and having its office and principal place of business at the corner of Lincoln Avenue and Grace Street, Chicago, Illinois. * * * The John E. Burns Lumber Co., an Illinois corporation, was organized April 12, 1917 and its charter expired by limitation on April 12, 1922. During its entire existence and including the year 1920 it was conducting a lumberbusiness at 700 West Chicago Avenue, Chicago. The John E. Burns Lumber Co. filed a consolidated return for the year 1920 on April 11, 1921 and for the year 1921 on June 15, 1922 and included in the returns gross income and deductions for the respective years pertainingto the petitioner corporation, North Side Lumber & Timber Co. Between April 12 and September 15, 1922, the lumber business theretofore conducted by the said John E. Burns Lumber Co., an Illinois corporation, was carried on by an association which was thereafter taxed as a corporation and which used the name of John E. Burns Lumber Co. On September 15, 1922 the John E. Burns Lumber Co., an Illinois corporation, was organized and on February 12, 1923, by proceedings taken under the law of Illinois, its corporate name was changed to Burns Lumber Co. Its charter*1238 expired by its terms on September 15, 1927. The stockholders in the corporation which expired by its terms April 12, 1922; the members of the association which carried on business from April 12, 1922 to September 15, 1922; and the stockholders who organized the John E. Burns Lumber Co. on September 15, 1922 were, after May 24, 1920, identical in person and interest, except that in connection with the organization of the John E. Burns Lumber Co. on September 15, 1922 some nominal stockholders were used. In 1906, the John E. Burns Lumber Company, an Illinois corporation, purchased the property known as #672 to 718 West Chicago Avenue, Chicago. The property had a frontage of 300 feet on Chicago Ave. running back 350 feet on the east side and 326 feet on the west side of the Chicago (north branch) river. This tract of land embraced an area of about 130,000 square feet. During the same year, the property had been purchased by Edward Hines for $158,961.72, the same price at which it was conveyed to the corporation. On May 24, 1920, the property was sold to the Trustees of Lumber Investment Association for $438,635.75 which is the value at which the property had been carried on*1239 the books of the corporation since December 31, 1917. Simultaneous with the sale, a dividend of $438,635.75 was declared and paid by the corporation to its stockholders. In the consolidated return filed for the year 1920, no gain or loss from the sale was reported. The value of the property at March 1, 1913 was stated by the respondent at $275,000.00 or at the rate of $2.12 per square foot, for deficiency purposes and taxable profit in the amount of $163,635.75 asserted. This together with other adjustments resulted in an asserted deficiency of $82,810.89 for the year 1929 on a consolidated basis. On April 13, 1927 the Respondent sent to the Burns Lumber Co., in existence at that date, a sixty-day letter alleging a net additional tax due of $84,559.16, and on June 9, 1927 the said Burns Lumber Co. filed its petition *1189 with the Board of Tax Appeals, which filed the said petition as Docket No. 29,044. On or about January 23, 1931 the General Counsel of the Respondent drew and sent to the Attorney for the petitioner herein, who was also the Attorney for the petitioner in Docket No. 29,044, a stipulation embodying the statement. "It is hereby stipulated and agreed*1240 by and between the petitioner and the respondent, by their respective attorneys of record, that there is no deficiency in tax for each of the years 1920 and 1921, and that the Board may enter an order in accordance with the facts stipulated herein." which stipulation was executed by the Attorney herein as Attorney for the petitioner in Docket No. 29044; and thereafter, on February 7, 1931, the Board of Tax Appeals entered an order in said Docket No. 29,044 reading as follows: "DECISION Under written stipulation signed by counsel for the parties in the above-entitled proceeding and filed with the Board on Jan. 30, 1931, it is ORDERED and DECIDED: That there are no deficiencies for the years 1920 and 1921." The reasons given by the respondent for dismissing the proceeding under Docket No. 29,044 is [sic] that deficiencies against the John E. Burns Lumber Co. for the years 1920 and 1921 were not determined by the Commissioner until the mailing of the deficiency notice on April 13, 1927 at which time the taxpayer had gone out of existence by reason of the lapse of its charter, April 12, 1922. Under prior decisions of the Board, it had been held the Board had no jurisdiction*1241 in such cases because there was not pending before it an appeal filed by the taxpayer against which the deficiency had been asserted; but rather a petition filed by a successor corporation (in this case the John E. Burns Lumber Co. an Illinois corporation,) purporting to appeal from a deficiency not asserted against it, appeals of American Arch Co.13 B.T.A. 552 and Welfare Loan Society of Lancaster, Pennsylvania,20 B.T.A. 1113. No proceeding for the assessment of an additional tax for the years 1920 and 1921 was ever commenced against the John E. Burns Lumber Co., the Illinois corporation, the charter of which expired by its terms on April 12, 1922, and no deficiency was ever assessed against that company. As of December 31, 1917, the said lumber yard known as 700 West Chicago Avenue, owned by the John E. Burns Lumber Co. of that date, was valued by that company as of March 1, 1913 at $438,635.75, and that value was placed upon the books of the company. On May 24, 1920 the John E. Burns Lumber Co. conveyed the said property to Edward Hines, one of the Trustees of the common law trust described as the Trustees of Lumber Investment Association, *1242 such conveyance being for the benefit of the trust which at that time owned 1360 of the 2000 shares of the capital stock of the John E. Burns Lumber Co., the said Company being incorporated with a capital of $200,000.00, divided into 2000 shares of a par value of $100.00 each. Immediately upon the transfer of the real estate of the John E. Burns Lumber Co. to Edward Hines for the Trustees of Lumber Investment Association, the real estate was leased to the John E. Burns Lumber Co. by the Trustees of Lumber Investment Association for a rental of $15,000.00 a year, and the premises so leased have since been occupied successively by *1190 the first John E. Burns Lumber Co.; the association between April 12, 1922 and September 15, 1922, and the second John E. Burns Lumber Co. from September 15, 1922 to September 15, 1927. The association of April 12, 1922 to September 15, 1922 took over and operated with the assets of the John E. Burns Lumber Co. as the said assets existed on April 12, 1922. The John E. Burns Lumber Co., incorporated September 15, 1922, took over and operated with the assets of the association, including such if any as remained of the assets of April 12, 1922. *1243 In the years 1920 and 1921 the petitioner, North Side Lumber & Timber Co. had an authorized and issued capital stock of $50,000.00 divided into 500 shares of a par value of $100.00 each, all of which in the said years was issued, outstanding, and owned by the said John E. Burns Lumber Co. and all of which was on August 8, 1927 acquired from the Burns Lumber Co. by the Trustees of Lumber Investment Association and is still owned, held and possessed by the Edward Hines Yellow Pine Trustees into which the Trustees of Lumber Investment Association was merged November 1, 1929. The deficiencies at issue were asserted against petitioner in sixty-day letter mailed December 22, 1927 * * *. The asserted deficiency of $10,303.88 for 1920 arises as follows: The total asserted tax liability on a consolidated Basis was $101,821.96 for 1920. The net income of the John E. Burns Lumber Co. was determined to be $243,248.80 and the net income of the North Side Lumber & Timber Co. was determined to be $27,387.02, a total of $270,635.82. The taxliability asserted against petitioner was computed by applying the ratio of $27,387.02 (petitioner's income) to $270,635.82 (consolidated income) against*1244 the total tax of $101,821.96. This gave allocated tax of $10,303.88 which was determined by the respondent to be the deficiency due from the petitioner for 1920. The total asserted tax liability on a consolidated basis was $7,645.96 for 1921. The net income of the John E. Burns Lumber Co. was determined by the respondent to be $12,805.64 and the net income of the North Side Lumber & Timber Co. was determined to be $35,354.55, a total of $48,160.19. The tax liability asserted against petitioner was computed by applying the ratio of $35,354.55 (petitioner's income) to $48,160.19 (consolidated income) against the total tax of $7,645.96. This gave an allocated tax of $5,612.93 which was determined by the respondent to be the deficiency due from the petitioner for 1921. That the petitioner and the Commissioner of Internal Revenue have entered into agreements applicable to the assessment and/or collection of income taxes due from the petitioner * * * one dated December 23, 1925 covering the years 1920-1921 purporting to remain in effect until December 31, 1926, and the other dated October 18, 1926 covering the years 1920, 1921 and 1922 purporting to remain in effect until December 31, 1927. *1245 The total taxable net income reported on the consolidated return for 1920 was $98,205.06, of which amount $70,422.23 was attributable to the John E. Burns Lumber Co. and $27,782.83 was attributable to the petitioner. The total taxable net income reported on the consolidated return for 1921 was $42,758, of which amount $10,185.64 was attributable to the John E. Burns Lumber Co. and $32,572.36 was attributable to the petitioner. The total tax assessed and paid on the consolidated return for 1920 was $19,011.07, of which amount *1191 $5,378.23 was assessed against and paid by the petitioner. The total tax assessed and paid on the consolidated return for 1921 was $5,787.77, of which amount $4,409.12 was assessed against and paid by the petitioner. The parties also stipulated orally at the hearing that no agreement was made or entered into by the petitioner and its parent corporation respecting the proportions in which the total tax, computed upon the basis of the consolidated returns filed for the taxable years, should be assessed upon said affiliated corporations. In addition to the stipulated facts, the following fact was established by evidence. The property known*1246 as "#672 to 718 West Chicago Avenue," referred to in the stipulation hereinabove set out, had a fair market value at March 1, 1913, of $438,625.75. OPINION. TRAMMELL: The petitioner alleges that to permit the collection of the deficiencies in controversy under the circumstances disclosed in this proceeding would constitute the taking of property of its stockholders without due process of law, in violation of the Fifth Amendment to the Constitution of the United States. In support of this contention the petitioner points to the fact that most of the additional taxes asserted by the respondent result from transactions of the John E. Burns Lumber Co., the parent corporation, which owned all of the capital stock of the petitioner during the taxable years; that said parent corporation has long since been dissolved and collection of the deficiences from it is now barred by limitation; that the petitioner had no connection with said transactions of the parent corporation, derived no profit therefrom, and because of a lack of definite information is not in position to defend against respondent's claims; and, lastly, that the stockholders of the petitioner have completely changed since*1247 the taxable years. On the basis of these facts the petitioner argues that, there being no question of fraud involved, it would be a violation of the Fifth Amendment to the Constitution to permit the taking of the property of the present stockholders, to wit, their respective shares of the capital stock of the petitioner, in satisfaction of the tax liability incurred because of acts or omissions of the officers of the John E. Burns Lumber Co., a separate corporate entity, in 1920 and 1921, during which years the present stockholders owned no interest in the petitioner corporation. The petitioner cites Lipke v. Lederer,259 U.S. 557; Regal Drug Corp. v. Wardell,260 U.S. 386; and Dukich v. Blair, 3 Fed.(2d) 302. The cited cases involved certain provisions of the National *1192 Prohibition Act, under which collectors of internal revenue sought to assess, on account of alleged unlawful sale of liquor, penalties designated therein as taxes, without notice or hearing to the alleged offender, and thereafter to enforce said penalties by distraint. Such procedure was held to deny due process of law and trial by jury, *1248 but those decisions in our opinion have no application here, even by analogy. Aside from the lack of authority to support the petitioner's contention, we are not impressed by the argument on this point. A corporation is an artificial person, a wholly separate and distinct entity from its stockholders, and a change in stock ownership does not effect the liability of the corporation to meet its obligations, whether such change of stock ownership is partial or complete. The assets of a corporation generally are subject to the payment of its debts prior to the right of the stockholders to any portion thereof, and this principal is not affected by changes in the personnel of the stockholders. Indeed, a contrary rule would work positive fraud upon the creditors of a corporation, in that by a mere change of stockholders the corporation could avoid the payment of its just debts, and the value of corporate stock would in such event rest not upon the net worth of the corporation, but upon the basis of the total value of the assets without regard to outstanding liabilities. To state such a proposition is sufficient to refute it because of the obvious inequitable result to creditors whose*1249 claims upon the corporate assets are superior to those of common stockholders. Certainly the liability of the petitioner for income and profits taxes lawfully incurred in prior years, if any, was neither discharged nor lessened by reason of the subsequent change of stockholders. On this issue, the petitioner's contention can not be sustained. The petitioner has pleaded the statute of limitations in bar of assessment and collection of the proposed deficiencies, but failed to submit proof at the hearing or argument on brief in support of its bare allegation. The record discloses, however, that the consolidated returns of the petitioner and its parent corporation for the years 1920 and 1921 were filed on April 11, 1921, and June 15, 1922, respectively. Hence, the statutory periods of limitation for assessment and collection of income and profit taxes for said years expired April 11, 1926, and June 15, 1926. (Sec. 277(a)(2) and (3), Revenue Act of 1926.) But on December 23, 1925, prior to the expiration of said periods, the petitioner and the respondent consented in writing to the later assessment and collection of any tax due under any return made by or in behalf of the petitioner*1250 for said *1193 years 1920 and 1921, and by said agreement extended the period for assessment and/or collection to December 31, 1926. On October 18, 1926, prior to the expiration of the period so agreed upon, a second waiver was executed extending such period to December 31, 1927. On December 22, 1927, the notice of deficiency was mailed to the petitioner. The validity of said waivers is not attacked. Petitioner's plea of limitations is denied. (Sec. 278(c), Revenue Act of 1926.) The principal issue in controversy here, and which gives rise to most of the additional tax asserted for 1920, is the amount of profit, if any, realized by the John E. Burns Lumber Co. from the sale in said year of certain real estate acquired prior to March 1, 1913. In 1906 said company purchased real estate in the City of Chicago, on West Chicago Avenue, containing about 130,000 square feet, at a cost of $158,961.72. It sold the property in 1920 for $438,635.75, and in the consolidated return filed by said company for itself and the petitioner herein for said year, no gain or loss from said sale was reported. The respondent determined that the value of said property at March 1, 1913, was*1251 $275,000, or $2.12 per square foot, and asserted a taxable profit in the amount of $163,635.75. At the hearing the respondent offered no evidence concerning the March 1, 1913, value of the property in question, apparently being content to rely upon the prima facie correctness of his determination. On the other hand, the petitioner offered the testimony of an expert witness who was familiar with the development of real estate and the values thereof in the locality where said property was situated, for many years prior and subsequent to 1913. This witness, who had been an industrial real estate broker for about 25 years, fixed the fair market value of the property referred to, as of March 1, 1913, at $4.31 per square foot, which would give a total valuation at said date in excess of the sale price in 1920. In explanation of his opinion, the witness testified as to sales of similar property, and concerning developments in the neighborhood of the property in question, and other factors which he took into consideration. About 1906 Montgomery Ward & Company began acquiring property in the vicinity of the Burns property, and between 1908 and 1910 constructed their main building, *1252 with several sections completed afterwards. Also, Sprague-Warner constructed a building nearby, which was finished in 1910. Afterwards, the Nonast Company erected a building there, and about the same time Greason-Flacker built a new tunnel on North Branch Street about 200 feet northwest of the Burns property. These various improvements ranged from *1194 about $350,000 to $2,000,000 each. The developments mentioned brought on a "boom" and resulted in material increases in the value of property in that district. This appreciation continued until about 1915, when values began to drop. Montgomery Ward & Company purchased one parcel of land in 1910 at $2.50 per square foot and another in the same year at $2.63 per square foot. The Montgomery Ward purchases and subsequent developments added about 33 per cent to the prior values of property in the district, and the Burns property was worth approximately 25 per cent more because of its location and facilities consisting of a permanent railroad switch and a ramp leading into the property from the adjacent street. Considering all the evidence in the record before us, we have reached the conclusion that the Burns property had*1253 a fair market value at March 1, 1913, of not less than the price at which it was sold in 1920, and have so found. It follows that no taxable profit was realized by the John E. Burns Lumber Co., the parent corporation of petitioner, from the sale of said property in 1920. The remaining issue relates to the failure of the respondent to allow as a credit or offset against the petitioner's total tax liability for each taxable year the amount of tax assessed against and paid by the petitioner on each of the original consolidated returns. The respondent has determined that the petitioner's total tax liability for 1920 and 1921 was $10,303.88 and $5,612.93, respectively, which amounts respondent further determined to be the deficiencies due from the petitioner for said years, notwithstanding taxes were assessed against and paid by the petitioner on the consolidated returns for 1920 and 1921 in the amounts of $5,378.23 and $4,409.12, respectively. The respondent has asserted the deficiencies against the petitioner without taking into consideration "the amount shown as the tax by the taxpayer upon his return" for amount shown as the tax by the statute. The petitioner, in the determination*1254 of the amount of the deficiency, is entitled to have its total tax liability reduced by the amounts shown herein to have been assessed against and paid by it on the consolidated returns in determining the deficiencies due from it for the taxable years involved. Washburn Wire Co.,26 B.T.A. 1146; Folger & Co.,27 B.T.A. 1; Trahern Pump Co.,27 B.T.A. 363. The deficiencies will be redetermined in accordance with the foregoing opinion. Reviewed by the Board. Judgment will be entered under Rule 50.