Skaneateles Paper Co. v. Commissioner

SKANEATELES PAPER COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Skaneateles Paper Co. v. Commissioner Docket No. 21561. United States Board of Tax Appeals 29 B.T.A. 150; 1933 BTA LEXIS 988; October 24, 1933, Promulgated *988 1. Where the deficiency notice was addressed to the original taxpayer, a corporation dissolved as the result of its consolidation with other corporations under the laws of the State of New York, and an appeal was filed by the successor consolidated corporation, held, that the Board has jurisdiction. Bowman Hotel Corp.,24 B.T.A. 1193. 2. Where the respondent mailed a deficiency notice to the taxpayer on December 5, 1925, and thereafter withdrew the notice in order to give consideration to the taxpayer's request for special assessment of its profits tax, and, upon denial of the request, mailed a second and final deficiency notice covering the same year on September 29, 1926, from which appeal was timely taken, held, that the Board has jurisdiction thereof. 3. Where the statutory period for assessment and/or collection, as extended by waiver, expired prior to June 2, 1924, waivers subsequently executed held to have revived the barred deficiencies, on authority of McDonnell v. United States,288 U.S. 420. 4. Petitioner's claim for increased invested capital and depreciation disallowed for lack of evidence to show error in*989 respondent's determination. James P. Quigley, Esq., for the petitioner. J. H. Yeatman, Esq., and J. A. Lyons, Esq., for the respondent. TRAMMELL *151 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the year 1917, consisting of a jeopardy assessment in the amount of $25,302.18 and an additional tax in the amount of $545.20. The issues raised by the pleadings are (1) whether or not the total deficiency asserted for the year 1917 is barred by the statute of limitations; (2) whether the respondent erred in failing to include in the petitioner's invested capital at January 1, 1917, any part of the alleged increase in its surplus account effected through cancellation of its indebtedness of $35,000 to the Oswego Falls Pulp & Paper Co.; and (3) whether or not the respondent erroneously disallowed the entire deduction for depreciation claimed by the petitioner from its gross income for 1917 on that part of the cost of the paper mill and equipment represented by its indebtedness of $35,000. The question of the Board's jurisdiction in this proceeding in also raised by the petitioner in its brief. *990 FINDINGS OF FACT. By notices dated April 24, 1926 (Form NP - 1), addressed to "Skaneateles Paper Company, Skaneateles, New York," the respondent tentatively determined a deficiency in that company's income and excess profits taxes for the year 1917 in the amount of $545.20, in addition to rejecting a claim for abatement of a prior jeopardy assessment in the amount of $25,302.18, and by notice dated September 29, 1926 (Form NP-2), addressed to the same company, final determination of the deficiency was made. The Skaneateles Paper Co. was a New York corporation, organized in 1875 and engaged in the operation of a paper mill at Skaneateles, New York. This corporation was dissolved by operation of *152 law on or about January 31, 1922, as the result of its consolidation with other corporations to form the Oswego Falls Corporation, under and pursuant to the Business Corporation Law of the State of New York. The original petition in this proceeding was filed November 27, 1927, and on November 12, 1928, an amended petition was duly filed. Each of the petitions was styled "Skaneateles Paper Company, Skaneateles, New York, Petitioner," and was signed "Skaneateles Paper Company, *991 By its sole beneficiary Oswego Falls Corporation, of Fulton, New York, by S. C. Stivers, Secretary." Each of the petitions contained the following statement in paragraph 1 thereof: The petitioner is Skaneateles Paper Company, a New York StateCorporation which, by agreement dated January 30, 1922 and filed in the office of the Secretary of State for New York on January 31, 1922, was consolidated with other corporations to form Oswego Falls Corporation, a New York State Corporation, having its principal office in Fulton, New York, and this petition is filed by the latter as the sole beneficiary of all of the assets and liabilities of Skaneateles Paper Company. Paragraph 1 of the petitions was admitted by the respondent in his respective answeres thereto. The Skaneateles Paper Co. filed its income and profits tax teturns for the year 1917 on March 29, 1918. An unlimited waiver (corporation), signed Skaneateles Paper Co. and approved by the respondent, was executed under date of February 14, 1921. By this document the company waived "any and all statutory limitations as to the time within which assessments" might be entered, based upon its liability for all Federal taxes imposed*992 for the year ended December 31, 1917, "on its net income received from all sources in said year." Under date of December 9, 1924, an income and profits tax waiver was executed, whereby the parties thereto consented to extend the period prescribed by law for a determination, assessment and collection of the amount of income, excess profits, or war profits taxes due under any return made by or on behalf of the Skaneateles Paper Co. for the year 1917. This document was signed "Skaneateles Paper Company by Oswego Falls Corporation, Its Successor by Consolidation, H. L. Paddock, Prest." and by the respondent, and contained the following statement: This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation within which assessments of taxes may be made for the year or years mentioned, or the statutory period of limitation as extended by section 277 (b) of the Revenue Act of 1924, or by any waivers already on file with the Bureau. An income and profits tax waiver, dated January 26, 1925, was executed with substantially the same signatures as the waiver last *153 *993 above mentioned, and provided that the time within which assessment of income and profits taxes of the Skaneateles Paper Co. might be made for the year 1917 should be extended to December 31, 1925. An income and profits tax waiver dated November 25, 1925, bearing substantially the same signatures as the last two preceding instruments, provided for the further extension to December 31, 1926, of the time within which assessment might be made of the income and profits tax liability of the Skaneateles Paper Co. for the year 1917. By notice dated February 15, 1924, the Skaneateles Paper Co. was advised that the respondent had determined an additional tax liability against it for the year 1917 in the amount of $25,302.18, and, in order that collection thereof might not be jeopardized by the delays incident to giving the usual 30-day notice, an immediate assessment would be made, but that a claim in abatement would be entertained. This amount was assessed by the respondent on March 14, 1924, and a claim in abatement was filed on March 26, 1924. On October 30, 1924, and again on November 28, 1925, conferences were held between attorneys for the taxpayer and the respondent respecting*994 the correctness of the additional tax so assessed. Under date of December 5, 1925, the respondent addressed a notice to the Skaneateles Paper Co. stating that a deficiency in its tax liability for the year 1917 had been determined in the amount of $545.20, and further stating that an appeal contesting the correctness of the determination might be filed with this Board within 60 days from the date of mailing of the notice. It was further stated in the notice that the claim for abatement of $25,305.18, covering the year 1917, would be rejected in full. Before the expiration of the 60-day period for appeal and before an appeal was filed, respondent addressed a letter to the company under date of January 12, 1926, in reply to a request that its profits tax for 1917 be computed under section 210 of the Revenue Act of 1917, stating that the provisions of the notice of December 5, 1925, might be disregarded. Thereafter, the 30-day notice of April 24, 1926, and the 60-day notice of September 29, 1926, hereinabove referred to, were mailed by the respondent to the paper company. They were duly received by the Oswego Falls Corporation, and within 60 days from the date of the last mentioned*995 notice the appeal in this proceeding was filed. The Oswego Falls Pulp & Paper Co. operated a paper mill at Fulton, New York. A majority of the capital stock of that corporation, as well as that of the Skaneateles Paper Co., was owned by one Forest G. Weeks and members of his family. About the year 1911 the Oswego Falls Pulp & Paper Co. purchased from Weeks a paper mill, known as the Draycott Mill, for $35,000, and it was turned over *154 to the Skaneateles Paper Co. to operate. Amounts spent by the latter company in the operation of the Draycott Mill and for improvements thereto were treated by it as advances to the Oswego Falls Pulp & Paper Co., and were carried on the books of the Skaneateles Paper Co. in an account receivable. In February 1914 the Oswego Falls Pulp & Paper Co. sold the Draycott Mill to the Skaneateles Paper Co. for $35,000, plus the cost of operations and improvements, amounting to $52,237.29, or a total of $87,237.29. The Skaneateles Paper Co. gave its promissory notes of the face value of $35,000 to the Oswego Falls Pulp & Paper Co. in part payment for the property. No payment was ever made on the notes, and on April 30, 1915, they were canceled*996 by the Oswego Falls Pulp & Paper Co. OPINION. TRAMMELL: The petitioner suggests in its brief that we are without jurisdiction in this case because of certain facts appearing in the record, to which reference will be made seriatim hereinbelow. No such question was raised in the pleadings, but since the jurisdiction of this Board is prescribed and limited by the statute, we deem it our duty, in all cases where the essential jurisdictional facts do not clearly appear from the record, to consider and determine first of all whether we do or do not have jurisdiction of the proceeding. The first question of jurisdiction suggested by the petitioner arises from the following facts: (1) The deficiency notice of September 29, 1926, from which this appeal was taken, was addressed to "Skaneateles Paper Company, Skaneateles, New York," (2) which corporation had been consolidated with two other corporations on or about January 31, 1922, to form the Oswego Falls Corporation, and on that date the component corporations had been dissolved by operation of law, and (3) the petition filed with the Board was signed "Skaneateles Paper Company, By Its Sole Beneficiary Oswego Falls Corporation, *997 of Fulton, New York, By S. C. Stiver, Secretary." In , precisely the same jurisdictional question, arising from a parallel state of facts, was considered by us and decided in the affirmative. On authority of that decision we hold that, in so far as the point here considered is concerned, we have jurisdiction to redetermine the deficiency involved in the instant case. See also , and cf. , followed by us in . The next question suggested by the petitioner touching ourjurisdiction of this proceeding is predicated upon the fact that two deficiency notices were mailed to the taxpayer covering the same taxable *155 year. Under date of December 5, 1925, the respondent mailed a deficiency notice to the taxpayer substantially in the same form as the second deficiency notice dated September 29, 1926, from which the present appeal was filed, and each deficiency notice purported to advise the taxpayer of the respondent's final determination*998 of its tax liability. No appeal was taken from the first deficiency notice, and by letter dated January 12, 1926, the respondent advised the taxpayer as follows: Reference is made to your letter dated 11-28-25 requesting that your profits tax for the year 1917 be computed under Sec. 210 of the Revenue Act of 1917. The provisions of the 60-day letter * * * dated December 5, 1925, may be disregarded. Under the Revenue Act of 1924, after having sent the taxpayer a deficiency notice, the Commissioner nevertheless had the right, without revoking the first notice, to send a second deficiency notice covering the same taxable year. . Cf. ; ; . This right was taken away by section 274(f) of the Revenue Act of 1926 if the taxpayer appealed to the Board from the first deficiency notice, and after the enactment of the latter act the Commissioner in such case was prohibited from determining any additional deficiency, except that he was authorized to assert a claim for increased*999 deficiency at or prior to the hearing or rehearing before the Board. In the instant case, the taxpayer did not appeal to the Board from the first deficiency notice, and the respondent, therefore, was not prohibited from sending the second notice under the 1926 act. . See also , and . As stated in , the second deficiency notice constituted respondent's final determination of the petitioner's tax liability, and, having been mailed subsequent to the enactment and in pursuance of the provisions of the Revenue Act of 1926, and an appeal having been filed with the Board within 60 days thereafter, we have jurisdiction to redetermine the deficiency. The petitioner also questions our jurisdiction in respect to the jeopardy assessment of $25,302.18. The amount was assessed by the respondent on March 14, 1924, and 12 days later the taxpayer filed its claim in abatement. By notice of December 5, 1925, the respondent notified the taxpayer of his determination of a deficiency in the amount of $545.20, which*1000 was in addition to the jeopardy assessment of $25,302.18, and in the notice respondent further advised the taxpayer that its claim for abatement of the jeopardy assessment would be rejected in full. Thereafter, in order to give consideration to the taxpayer's request for special assessment of its *156 profits tax, the respondent on January 12, 1926, advised the taxpayer that the provisions of the notice of December 5, 1925, might be disregarded. The withdrawal of the deficiency notice applied to the rejection of the claim for abatement of the jeopardy assessment as well as to the determination of the additional deficiency of $545.20. On April 24, 1926, respondent mailed to the taxpayer a 30-day letter advising of the tentative determination of an additional deficiency of $545.20, and in that letter it was further stated that "In accordance with the foregoing conclusions, your claim for the abatement of $25,302.18 will be rejected in full." The final deficiency notice of September 29, 1926, which is the basis for this appeal, makes specific reference to the letter of April 24, 1926, for further explanation of the deficiency. Thus, the deficiency letter of September 29, 1926, constituted*1001 respondent's notice to the taxpayer of the final rejection of its claim in abatement, and in this situation section 283(e) of the Revenue Act of 1926 confers upon us jurisdiction to redetermine the entire deficiency, including the jeopardy assessment. However, even if the deficiency notice of September 29, 1926, had made no reference to the final rejection of the claim for abatement of the jeopardy assessment, since our jurisdiction has been invoked to redetermine the additional deficiency of $545.20, we may consider all facts determinative of the petitioner's tax liability for the year 1917, including the redetermination of the jeopardy assessment and any question of limitation properly before us. ; ; ; ; . The petitioner pleads the statute of limitations in bar of the collection of the jeopardy assessment of $25,302.18, and in bar of both assessment and collection of the additional deficiency of $545.20. *1002 This issue is to be determined in the light of the following facts: The taxpayer filed its income and profits tax returns for the year 1917 on March 29, 1918, and the five-year period for assessment and collection, provided in section 250(d) of the Revenue Act of 1921, expired not later than March 29, 1923. On February 14, 1921, the taxpayer executed a so-called "unlimited waiver" which, under the Commissioner's Mimeograph 3085 of April 11, 1923, expired April 1, 1924. On March 14, 1924, respondent made the jeopardy assessment of $25,302.28, which was within the statutory period for assessment as extended by the waiver. On March 26, 1924, a claim in abatement was filed. On December 9, 1924, the next waiver was filed, which purported to extend the time for both assessment and collection to April 1, 1925, and again on January 26 and November 25, *157 1925, waivers were executed purporting to extend the period for assessment to December 31, 1926. The deficiency notice appealed from was mailed September 29, 1926. From the foregoing it is clear that while the amount of $25,302.18 was assessed timely, collection thereof became barred on and after April 1, 1924, and that both*1003 assessment and collection of any additional amount became barred on the same date. This situation without change existed on June 2, 1924, the effective date of the Revenue Act of 1924, and continued to exist at least until the execution of the waiver of December 9, 1924. Did the execution of the waiver of December 9, 1924, and the subsequent waivers referred to, serve to revive the right of the respondent to collect the jeopardy assessment and to assess and collect the additional deficiency? This question must be answered in the affirmative only (1) if the waivers were validly executed, and (2) if they were competent to lift the bar of limitation which had theretofore fallen. The petitioner argues that the waivers are invalid and without legal effect for the reason that they were executed for and in behalf of the Skaneateles Paper Co. by the consolidated corporation, petitioner herein, as successor of the original taxpayer, and since the latter corporation was dissolved in 1922, the peritioner was without authority as such successor to execute a waiver for or in its behalf. This contention of the petitioner must be denied on authority of our decision in *1004 , where we held that similar waivers were validly executed by this same petitioner; that the consolidated corporation, having been made by statute directly liable for all obligations of its components, was acting for itself as principal and not for another as agent, when it executed the waivers. See . The petitioner also urges that collection of the jeopardy assessment of March 14, 1924, in the amount of $25,302.18 was in any event barred on and after April 1, 1924, when the so-called unlimited waivers were held to expire, and that even if the waivers subsequently executed were valid to extend the time within which additional taxes might thereafter be assessed and collected, such waivers were not competent to extend the period for collection of a tax theretofore assessed, citing . The Russell case did not involve a waiver executed after the applicable period of limitation had run and which purported to revive and extend such period; hence, that decision is not pertinent here, and petitioner's contention on this point, we think, must be*1005 rejected. The waiver of December 9, 1924, recited that the taxpayer and the Commissioner "hereby consent to extend the period prescribed by law for a determination, assessment, and collection of the amount of income, excess-profits or war-profits taxes due under any return made by or on behalf of said taxpayer for the year 1917." It follows that, *158 since the jeopardy assessment of $25,302.18 concededly represented income and profits taxes due for the year 1917, if said waiver was valid to extend the period for determination and assessment, it was equally valid to extend the period for collection of any such tax due for 1917, whether theretofore or thereafter assessed. While the subsequent waivers of January 26 and November 25, 1925, refer only to "assessment," the term so used must be construed as comprehending the entire procedure necessary to a determination and collection of the tax. . Petitioner's final argument on the issue of limitations is that since either assessment or collection of the 1917 taxes in question was barred during the period from April 1 to December 9, 1924, the waiver executed on*1006 the latter date did not operate to lift the bar, for the reason that on June 2 of that year the Revenue Act of 1924 was enacted, and while section 278(c) thereof provided for extension of the assessment period by consents in writing between the Commissioner and the taxpayer, this provision was subject to the limitation contained in paragraph (e) of section 278 to the effect that "This section shall not (1) authorize the assessment of a tax or the collection thereof by distraint or by a proceeding in court if at the time of the enactment of this Act such assessment, distraint or proceeding was barred by the period of limitation then in existence, or (2) affect any assessment made, or distraint or proceeding in court begun, before the enactment of this Act." This point was decided adversely to the petitioner's contention in , where it was held that paragraph (e) of section 278 did not constitute a limitation on paragraph (c) thereof, and that a waiver executed subsequent to June 2, 1924, was not invalid because the five-year period for assessment had elapsed before June 2, 1924. On authority of that decision, petitioner's*1007 plea of limitations is overruled. This brings us to a consideration of issues (2) and (3) on the merits. Issue (2) is based upon the petitioner's allegation that in computing the deficiency the respondent erred in failing to include in invested capital at January 1, 1917, any part of the alleged increase of surplus effected on April 30, 1915, through the cancellation of seven promissory notes for $5,000 each, which were executed and delivered to the Oswego Falls Pulp & Paper Co. on February 15, 1914, in connection with the purchase of the Draycott Mill and on April 30, 1915, were canceled, marked "Paid" and returned to petitioner without cost. Petitioner purchased the Draycott Mill in February 1914 for a total consideration of $87,237.29, consisting of the cancellation of its account receivable against the Oswego Falls Pulp & Paper Co. in the amount of $52,237.29 and said seven promissory notes each for *159 the sum of $5,000. No payment was ever made on the notes and on April 30, 1915, they were canceled and returned to petitioner under circumstances which clearly amounted to a donation. The Revenue Act of 1917 defined and limited invested capital, so far as material*1008 here, as follows: SEC. 207. * * * (a) In the case of a corporation * * *: (1) Actual cash paid in, (2) the actual cash value of tangible property paid in other than cash, for stock or shares in such corporation * * *, at the time of such payment * * * and (3) paid in or earned surplus and undivided profits used or employed in the business, exclusive of undivided profits earned during the taxable year: * * * Admittedly the Draycott Mill was not paid in to the petitioner for shares of its capital stock, and only the amount of $52,237.29 which was actually paid for the property may be included in invested capital, unless the promissory notes in the aggregate amount of $35,000 are shown to have constituted paid-in surplus. By the cancellation of the notes without payment, $35,000 was donated to the petitioner, but such donation did not increase the petitioner's paid-in surplus unless the donor was a stockholder, or unless the cancellation of the notes resulted in the receipt of taxable income by the donee. The record does not disclose facts necessary to enable us to determine either of those questions. We have heretofore held that property donated to a corporation by a nonstockholder*1009 does not give rise to paid-in surplus. ; ; . In the deficiency notice the respondent held that the transaction referred to "represented, in effect, nothing more than the transfer of an operating loss from a parent company to a subsidiary, which would indicate that the subsequent cancellation of the notes was merely an adjustment of the selling price of the plant to its true value. It is further held that, under the circumstances, the original entries on your books by which notes payable were debited with $35,000.00 and the plant account credited with a like amount, was correct and that there is no warrant for allowing this item as invested capital within the meaning of the statute and Income Tax Regulations." The burden is upon the petitioner to show that the respondent's determination is erroneous. This, we think, the petitioner has failed to do. Accordingly, the respondent's action on this issue is approved. Issue (3) involves the question whether respondent erred in disallowing the entire deduction for depreciation*1010 claimed by the petitioner from its gross income for 1917 on that part of the alleged cost of the Draycott Mill represented by the canceled indebtedness of $35,000. On brief the petitioner states that "its claim for depreciation *160 should be passed over because of the absence of evidence indicative that any depreciation was sustained during the taxable year 1917." Respondent's action on this issue is, therefore, approved. Reviewed by the Board. Judgment will be entered for the respondent. MURDOCK dissents.