American Equitable Assurance Co. v. Commissioner

AMERICAN EQUITABLE ASSURANCE COMPANY OF NEW YORK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. American Equitable Assurance Co. v. Commissioner Docket No. 44332. United States Board of Tax Appeals 27 B.T.A. 247; 1932 BTA LEXIS 1094; December 8, 1932, Promulgated *1094 1. TRANSFEREE LIABILITY. - Where in 1926 petitioner, a corporation, purchased certain assets from another corporation and as a part of the consideration therefor agreed to pay all taxes, Federal, state, or otherwise, if and when determined, for all years prior to the year 1926, and where respondent has determined a deficiency against the transferor corporation for the year 1922, and where the value of the property so transferred is far greater than the amount of the tax determined against the transferor, petitioner is liable as a transferee of property under the provisions of section 280, Revenue Act of 1926. 2. STATUTE OF LIMITATIONS - TRANSFEREES. - Where the transferor corporation filed its income tax return for 1922 on July 3, 1923, and notice of deficiency to it was mailed July 2, 1927, and within sixty days thereafter a petition was filed with this Board seeking a redetermination of said deficiency, which proceeding remained before the Board until June 11, 1929, when it was dismissed for lack of jurisdiction, and where prior thereto, to wit, on March 15, 1929, the Commissioner mailed to petitioner a deficiency notice, proposing to assess against it as transferee the deficiency*1095 theretofore determined against the transferor corporation, such deficiency notice to petitioner as transferee was within the time prescribed by section 280(b)(1) and was not barred by the statute of limitations. 3. LOSSES OR BAD DEBT DEDUCTIONS. - Where the transferor corporation, an insurance company, keeping its books on an accrual basis, accrued on its books in 1922 items aggregating $74,115.41 as reinsurance claims against three other insurance companies and such companies were adjudged insolvent in 1922 and placed into liquidation during said year, which continued for several years thereafter, and where it is not shown that such claims were worthless in 1922, but that on the contrary they were regarded as having considerable value, the transferor corporation was not entitled to take as a deduction in determining its net income, either as a bad debt ascertained to be worthless and charged off during the taxable year or as a loss incurred in a transaction entered into for profit, such amount of $74,115.41. LeRoy B. Iserman, Esq., and Wendell P. Barker, Esq., for the petitioner. E. A. Tonjes, Esq., for the respondent. BLACK *248 A*1096 deficiency of $10,413.14, plus interest thereon, was determined against the Norwegian Atlas Insurance Company for the year 1922, and respondent now proposes to assess the same against the petitioner, American Equitable Assurance Company, as transferee, under section 280 of the Revenue Act of 1926. Petitioner resists such claim of the respondent (1) on the ground that it is not a transferee of property within the meaning of section 280 of the Revenue Act of 1926, but on the contrary it was a bona fide purchaser of assets for value, without notice of the tax claim now asserted by the Commissioner, and purchased the assets of the transferor corporation for a full and adequate consideration, free of any claim by the Government; (2) that if wrong in the above contention, nevertheless assessment and collection of the alleged liability *249 were barred by the statute of limitations at the time respondent mailed his deficiency notice to petitioner; (3) that, if it is wrong in either or both of the foregoing contentions, nevertheless most of the deficiency determined by the respondent against the transferor corporation was determined in error, because it was based upon respondent's*1097 action in adding back to the transferor's income for 1922 items amounting to $74,115.41 which the taxpayer had claimed as deductions on its income tax return for said year and which it was error on the part of respondent to disallow. FINDINGS OF FACT. The petitioner, American Equitable Assurance Company of New York, is an insurance company organized under the laws of New York, with its principal office in New York City. The Norwegian Atlas Insurance Company is an insurance company organized under the laws of Norway and doing business in the United States through a branch office and a United States manager located in New York City. The two companies will be hereinafter referred to as American Equitable and Norwegian Atlas. Under the laws of New York an insurance company must make certain deposits with the Insurance Department of that State as security against losses, or else deposit it with trustees for that purpose. The Norwegian Atlas complied with that requirement of the law. In 1926 the Norwegian Atlas determined to quit business in this country and desired to take down its deposits with the Insurance Department of New York and with trustees which it had made to secure*1098 losses. Under the laws of New York, as administered by its insurance department, it would have been many years before the deposits could have been withdrawn, as they would have been held until all possibility of losses had ceased. In order to obtain the deposited securities, or their value, negotiations were entered into with the petitioner, American Equitable, by which the Norwegian Atlas sold to the petitioner its deposited securities and cash on hand and in bank for the sum of $440,000 cash and the assumption of certain indebtedness by petitioner, more fully described in the clause of the contract relating thereto. The effective date of this contract was May 25, 1926, and, after providing for the payment of $440,000 cash to the Norwegian Atlas, the material parts of said contract are as follows: THIRD: As of such effective date, the American Equitable agrees to assume and pay every obligation, insurance or otherwise, of the Norwegian Atlas now outstanding and known or unknown which has arisen against it in connection with the business transacted by it through its United States Branch, to the *250 same effect as if such business had been transacted and such obligations*1099 created by the American Equitable. FOURTH: As of such effective date, the Norwegian Atlas sells, assigns, transfers and sets over unto the American Equitable all its right, title and interest in and to all deposit or trusteed securities now forming part of the assets of such United States Branch, such securities (as well as the cash in banks later referred to) being enumerated in the schedule hereto attached, as well as all cash in banks and other assets, including books of account, now forming a part of the said assets of its United States Branch; excepting, however, its rights to dividends or otherwise on its allowed claims against the Jefferson Insurance Company, the Liberty Marine Insurance Company and the North Atlantic Insurance Company, all in liquidation, which dividends or otherwise are specifically reserved from the effect of this agreement and, if paid by the respective Liquidators to the American Equitable, are to be immediately transmitted to the Norwegian Atlas; and excepting also any rights which may exist in or accrue to the Norwegian Atlas by reason of the claim of its Head Office against the Second Russian Insurance Company some time since assigned to John F. Murphy. *1100 * * * EIGHTH: The Norwegian Atlas agrees to hold the American Equitable harmless from all unknown claims which may be asserted in connection with the transaction of business through its United States Branch; it being understood that this paragraph of this agreement shall not be effective or create any obligation on the part of the Norwegian Atlas longer than one year from the effective date hereof, and that this paragraph does not in any way affect any unknown losses under policies or any claims for return premiums thereon. * * * TENTH: Nothing herein contained shall be deemed to make the Norwegian Atlas liable to the American Equitable for any unpaid taxes, either federal, state or otherwise, except any taxes accruing against it for the first five months of the year 1926, which last-mentioned taxes - if any - it agrees to pay upon the same being determined; the American Equitable agreeing, as a part hereof, to pay all taxes, federal, state or otherwise, if and when determined, for all years prior to the year 1926 and for the last seven months of such year 1925, as well as after such last mentioned year, including any unpaid part of the federal income tax of the Norwegian*1101 Atlas for the taxable year 1925. The contract was approved by the Superintendent of Insurance of New York and was performed by the payment of the agreed consideration and the petitioner thereupon became the owner of and received the securities and cash. The value of the securities and cash transferred to petitioner for $440,000 was approximately $525,000, the difference between the two amounts being considered a reasonable amount to protect petitioner for possible future losses or liabilities of Norwegian Atlas, which petitioner assumed to pay. The determination of the deficieny herein involved was not made until after the transfer and was unknown to the parties at the time of the transaction. In the course of its business, the Norwegian Atlas had reinsured some of its risks with the Jefferson Insurance Company, the Liberty *251 Marine Insurance Company, and the North Atlantic Insurance Company. All of these companies became insolvent or went into liquidation in 1921. Claims arising against these three companies because of their failure to discharge their reinsurance liabilities to Norwegian Atlas on account of losses were expressly excepted from the sale of assets*1102 and were reserved by Norwegian Atlas. For the year 1922 the amount of these claims was $74,115.41. Provision was made in the contract for the settlement of other claims not material to this controversy. The Norwegian Atlas kept its books on an accrual system and in making its income tax return for 1922 included these reinsurance claims of $74,115.41 in gross income, and took deductions therefor in an equal amount as losses or bad debts. The language used by petitioner in its claim for this deduction on its 1922 income tax return was as follows: "Various amounts credited in 1922 as recovered, covered, which were at the same time charged to three companies in liquidation. These amounts being as yet uncollected income is accordingly reduced $74,115.41." The books of the Norwegian Atlas showed these claims as reinsurance recoverable at the close of the calendar year 1922. These companies were in liquidation for several years and substantial sums have been collected thereon by Norwegian Atlas, but the amounts and dates of collection have not been shown. The respondent disallowed the alleged losses claimed by the Norwegian Atlas on its return for 1922 and made several other adjustments*1103 not material, and determined a deficiency of $10,413.14 for 1922 against the Norwegian Atlas. These reinsurance claims carried on the books of Norwegian Atlas in 1922 were not worthless in 1922, and what loss, if any, the Norwegian Atlas ever suffered on said claims is not shown by the evidence. The return of the Norwegian Atlas was filed July 3, 1923, and the notice of deficiency to it was mailed July 2, 1927. Within 60 days thereafter a petition was filed with this Board seeking a redetermination, which was dismissed by order of the Board June 11, 1929, for lack of jurisdiction, it appearing that while the petition was filed in the name of Norwegian Atlas, it was signed by American Equitable by its assistant secretary as successor to United States Branch of Norwegian Atlas. On March 15, 1929, the respondent mailed to the petitioner, American Equitable, a deficiency notice proposing to assess against petitioner the amount of $10,413.14, and interest, as representing its liability as transferee of the Norwegian Atlas for income tax due from that company for 1922. On March 11, 1928, the Commissioner of Internal Revenue assessed against the Norwegian Atlas Insurance Company*1104 a deficiency in 1922 Federal income taxes in the amount of $10,413.14, plus interest *252 thereon as provided by law. This amount is still outstanding and unpaid. OPINION. BLACK: At the hearing and by brief counsel for the respondent based his entire contention as to the transferee liability of petitioner upon the contract liability, if any, of the petitioner to pay the tax in question, resulting from its assumption of certain debts and liabilities of Norwegian Atlas in the contract of May 25, 1926. Respondent contends that petitioner's agreement to pay the tax involved in this proceeding was a part of the very consideration for the assets which it received from the Norwegian Atlas. In Wolf Mfg. Industries, Bankrupt, etc. v. United States, 56 Fed.(2d) 64, the court said: We have observed that the only consideration for the transfer of the corporate assets to the trustees was the agreement by the latter to pay the debts and discharge the liabilities of the corporation, and that the property received in trust was to be devoted first of all to the discharge of such debts and liabilities. Upon such written contract, under the statutes of Illinois*1105 and Indiana, actions are barred in 10 years. Within that time the Government filed its claim in the court of bankruptcy, showing that there had been legally established a tax liability against the corporation in the sum claimed. Both Illinois and Indiana recognized the rule that third persons for whose benefit a contract is made may bring action thereon. (See Commercial v. Kirkwood, 172 Ill., 563; Dean v. Walker,107 Ill. 540; Chicago Title & Trust Co. v. Central Trust,312 Ill. 396; Hess v. Lackey,191 Ind. 107; Tinkler v. Swaynie,71 Ind. 562; Ransdel v. Moore,153 Ind. 393.) And despite what may be the rule in various other Commonwealths, the same rule has long abided in the Federal courts. (See Hendrick v. Lindsay,93 U.S. 143; Princes Amusement Co. v. Wells,271 Fed. 226 (C.C.A. 6, certiorari denied, 254 U.S. 701); Gibson v. Victor Talking Machine Co.,232 Fed. 225; *1106 Barker v. Pullman,124 Fed. 555 at 567; Blackmore v. Parkes et al,81 Fed. 899 (C.C.A. 6); In re Dresser,135 Fed. 495 (C.C.A. 2); Millett v. Omaha Bank, 30 Fed.(2d) 655 (C.C.A. 8). It follows that the Government, having established the legal liability of the corporation, was entitled to file and have allowed its claim in the bankrupt estate of the parties who assumed and agreed to pay such liabilities. Furthermore, it was the court's duty, sitting as a court in equity, to treat the property of the bankrupt as a trust fund for the benefit of the creditors of the corporation according to their respective priorities. Thus it seems clear that in such a case the Government has a cause of action against the purchaser of assets who assumes the liability for taxes of the transferor, which it may assert in a proper proceeding in court. Section 280 of the Revenue Act of 1926, as has been often said by the Board and the courts, creates no new liability, but simply gives to the Government the right to enforce, by the methods provided therein, an existing liability which it may have at law or in equity against*1107 the transferee. Petitioner in its brief, in arguing against *253 its own liability in the instant case, cites certain Board and court cases where it was held that the respondent had not sustained the burden of proof put upon him by the statute to show the liability of the transferee. An examination of these cases will show that they were cases where the respondent failed to show the insolvency of the transferor or the value of the assets transferred and matters of that sort which were necessary elements of his case. These were all cases where the respondent relied entirely upon an equitable liability against the transferor, based on the trust fund doctrine. None of these cases were such as we have in the instant case, where there was a contractual agreement on the part of the transferee to pay the tax. Therefore, we do not believe the cases cited by petitioner are in point to sustain the contention which it makes. In the third paragraph of the contract of May 25, 1926, quoted in our findings of fact, the petitioner agreed to assume and pay every obligation, insurance or otherwise, of the Norwegian Atlas, now outstanding and known or unknown, which had arisen against*1108 it in connection with its business transacted through its United States branch, and in the tenth paragraph of the contract it agreed "to pay all taxes, Federal, state or otherwise, if and when determined, for all years prior to the year 1926," except for the first five months of the year 1926, which Norwegian Atlas agreed to pay. This we think creates a liability on the part of the petitioner to the United States which it may enforce by a proper court action, and, being such a liability, it may be enforced against petitioner under section 280 of the Revenue Act of 1926. Petitioner is a transferee of the property of the taxpayer, the Norwegian Atlas, and the value of the property is far in excess of the tax involved in this proceeding, and a part of the very consideration for the property which petitioner received from the transferor was an agreement to pay the taxes involved in this proceeding. At least that is the construction which we place upon the meaning of the contract between petitioner and the Norwegian Atlas. The question of the enforcement of a purely contractual liability was before us in *1109 Reid Ice Cream Corp.,24 B.T.A. 823, in which the petitioner entered into a contract with the taxpayer by which the petitioner transferee bought out another corporation under a contract which provided that the purchaser should assume the liabilities of the seller as of a certain date and subsequent liabilities incurred in the ordinary routine of business. Following the sale, the seller distributed the entire purchase money to its stockholders. The tax return of the seller showed a tax liability resulting from the profits of the sale, which the respondent proposed to assess and collect from the purchaser, Reid Ice Cream Corporation, under section 280, basing his action on the promise to assume and pay the liabilities of the *254 seller. We sustained the contention of the respondent and held that the taxes in question were included in the contract and that a purely contractual liability of the transferee could be enforced under section 280. We adhered to the same general rule in Richards & Hirschfield,24 B.T.A. 1295. Reid Ice Cream Corp., supra, was reversed in *1110 Reid Ice Cream Corp. v. Commissioner, 59 Fed.(2d) 89, but not upon the ground that a contractual liability could not be enforced under section 280. The court held that the Board was in error in holding that the contract involved in that proceeding was broad enough to cover the taxes which resulted from the sale itself. The court said in part: Where as in the instant case, a corporation sells its business, the properties sold are the only transferred assets and there is no claim against those transferred assets so far as the income tax on any profit on the sale is concerned. That claim arises only on the payment of the price and relates only to the price received and not in any sense to the transferred assets. and, again: Here there was no taxable fund until after the sale, and the petitioner never partook of a taxable fund because no tax liability arose except upon receipt by the seller of the purchase price. That, and not the assets sold, constitutes the taxable fund. There could not be any claim against the transferred assets. Therefore section 280 creates no liability; it is remedial and presupposes a liability bility for the enforcement of which*1111 it is designed to furnish a remedy. The opinion of the court, as we construe it, does not conflict with the rule announced by us in Reid Ice Cream Corp., supra, and Richards & Hirschfield, supra, to the effect that where the purchaser assumes sumes by contract the payment of taxes already existing, as part of the consideration for the transferred assets, and fails to pay that part of the agreed consideration, collection of such taxes may be enforced under section 280. Therefore, we hold that petitioner is liable as a transferee under the provisions of section 280 of the Revenue Act of 1926. Limitations. - Petitioner pleads and relies on the 4-year statute of limitations. The return of the Norwegian Atlas was filed July 3, 1923, and the notice of deficiency was mailed July 2, 1927, which was within four years. Within 60 days thereafter a petition was filed with this Board seeking a redetermination, which proceeding was dismissed by order of the Board on June 11, 1929, for lack of jurisdiction. The petition had been filed in the name of Norwegian Atlas, but was signed by an official of American Equitable as the successor of the United States Branch*1112 of Norwegian Atlas. The 60-day notice to petitioner was mailed March 15, 1929. Section 280(b)(1) expressly provides that, "The period of limitation for assessment of any such liability of a transferee or fiduciary shall be as follows: (1) Within one year after the expiration of the period of limitation for assessment against the taxpayer." *255 Section 277(b) of the Revenue Act of 1926, as amended by section 504 of the Revenue Act of 1928, expressly provides that the period during which the Commissioner is prohibited from making an assessment or instituting distraint or proceedings in court, or while a proceeding in respect of the deficiency is pending before this Board, and 60 days thereafter, shall not be counted in considering the running of the statute of limitations. In view of these statutes, it is clear that the statute had not run in the instant proceeding, because the deficiency notice to petitioner was sent before the dismissal of the Norwegian Atlas proceeding. Wayne Body Corp.,22 B.T.A. 401. Cf. *1113 Wells-Elkhorn Coal Co.,27 B.T.A. 198. Norwegian Atlas Deductions. - Petitioner claims the right to go into the merits of the deductions which were claimed by Norwegian Atlas and disallowed by the respondent. Petitioner has this right. Wayne Body Corp., supra.Relative to this matter, the burden of proof is on the petitioner. Petitioner contends that respondent should allow as a deduction from gross income of Norwegian Atlas in 1922 the amount of these reinsurance claims, aggregating $74,115.41, either as losses or bad debts. While it is true that all three reinsurers were placed in liquidation in 1921, the books of Norwegian Atlas at the close of 1922 showed the aggregate of $74,115.41 as reinsurance receivable, and it does not appear that these claims were ascertained to be worthless and charged off during the taxable year. On the contrary, it is vigorously argued by petitioner in this proceeding that these claims were valuable assets retained by Norwegian Atlas, out of which the United States could and should have collected the tax in controversy instead of enforcing it against the petitioner under section 280. In addition it may be observed*1114 that it is alleged in the petition that "Subsequent to the filing of its 1922 tax return, the Norwegian Company collected a substantial proportion of these dividends, no part of which has been received by petitioner." In the evidence of Wendell P. Barker, general counsel and vice president of the petitioner, it is stated, "I know that the company today possesses certain assets in the United States in the shape of certain claims or choses in action which they are today endeavoring to enforce and I know that since this contract was signed they have taken down and collected a substantial sum of money in connection with these claims which was reserved from this contract." This allegation of the petition and evidence quoted is incompatible with a theory of either a loss or worthless debt in 1922, and we sustain respondent in disallowing these claimed deductions. Decision will be entered for the respondent.