Uhl Estate Co. v. Commissioner

UHL ESTATE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Uhl Estate Co. v. Commissioner Docket No. 89239. United States Board of Tax Appeals 40 B.T.A. 1223; 1939 BTA LEXIS 741; December 21, 1939, Promulgated *741 1. Limitation period against assessment of deficiencies in income and profits tax for 1933 did not begin to run on date of the filing of a return unsupported by oath of officer signing the return. The return filed did not meet the statutory requirements of section 52(a) of the Revenue Act of 1932. 2. No proper return having been filed, the respondent properly asserted claim for the delinquency penalty of 25 percent of the tax under section 291 of the Revenue Act of 1932. 3. Petitioner had a claim against two joint debtors, one being solvent and the other insolvent. Petitioner is not entitled to deduction for a bad debt or for a loss for the amount for which it voluntarily relinquished its claim against the insolvent debtor where the other joint debtor was solvent. Paul A. McCarthy, Esq., and Benjamin Hicklin, C.P.A., for the petitioner. T. M. Mather, Esq., for the respondent. HARRON *1223 The Commissioner determined deficiencies for the year 1933 in income tax in the amount of $8,974.75, and in excess profits tax in the amount of $2,951.05, and asserted a claim for the delinquency penalty of 25 percent of the tax, as prescribed*742 in section 291 of the Revenue Act of 1932. The questions are whether the deficiency is barred by the statute of limitations; whether the delinquency penalty shall be added to the tax; and whether petitioner is entitled to a deduction for a bad debt or for a loss. *1224 FINDINGS OF FACT. 1. The petitioner is a California corporation, with its principal office in San Francisco. It was organized in the year 1905 to hold title to real estate. 2. In 1919 the entire stock of petitioner was owned by Adolph Uhl and George Uhl, with the exception of one or two qualifying shares. In 1919 Adolph Uhl transferred all his stock to George Uhl. George Uhl thereafter was and still is the owner of all the stock of petitioner with the exception of qualifying shares. 3. George Uhl, hereinafter referred to as George, resides in Los Angeles, and is engaged in the business of the manufacture of paint. Adolph Uhl, hereinafter referred to as Adolph, resides in San Francisco. He is engaged in the business of the manufacture and sale of paints and wall papers which is carried on by Uhl Bros., Inc. 4. In the taxable year, George Uhl was the president of petitioner and Ward Dawson*743 was the secretary for part of the year. Dawson resigned his office on November 6, 1933. The petitioner corporation had no other officers. The election of officers and the formal aspects of corporate activity were somewhat neglected. The management of the Werner building in San Francisco constituted the sold business activity of petitioner. George Uhl, residing in Los Angeles, took care of most matters, as president of petitioner, by correspondence with Ward Dawson and Benjamin Hicklin. Dawson was employed by petitioner to look after renting, collection of rents, and such matters relating to the Werner building. Hicklin is a public accountant. He has been employed by petitioner for several years, since 1918, to prepare all tax returns for petitioner. He kept petitioner's books in his possession and made up the income tax returns for petitioner therefrom. The returns for each year were sent to George Uhl to sign and to return to either Hicklin or Adolph Uhl. Hicklin submitted data, relative to petitioner's affairs, to the revenue agents. Hicklin was given general authorization by George Uhl to prepare and file Federal income tax returns for petitioner and to do, generally, *744 the things relating to income tax of petitioner. Hicklin was an agent of petitioner. 5. Although Adolph Uhl was not an officer of petitioner, Hicklin was in the habit of sending the Federal income tax returns of petitioner to Adolph who would look over them and send them to George to sign. Adolph also signed the Federal income tax returns of petitioner, as treasurer. He signed the Federal income tax returns of petitioner as treasurer for several years. 6. The return of petitioner for the taxable year 1933 was filed on March 15, 1934. The notice of deficiency was mailed to petitioner *1225 on March 2, 1937. The affidavit on the return was signed by George Uhl and Adolph Uhl. Adolph signed in the space over the printed legend on the return which says "Treasurer or Assistant Treasurer." Adolph was not an officer of petitioner. He was not treasurer of petitioner. The return was not sworn to by George or Adolph Uhl. It was not signed in the presence of a notary public by either George or Adolph Uhl. 7. In 1935 Adolph Uhl signed a waiver consenting to extension of the time within which the Commissioner could assess income and excess profits tax to June 30, 1937. *745 Adolph Uhl wrote on the waiver the name of the Uhl Estate Co. as the taxpayer, and subscribed his own signature below and wrote the word "Treasurer" after his name. The waiver was signed for the Commissioner on December 30, 1935. Adolph Uhl affixed to the waiver the seal of the Uhl Estate Co., the seal being kept in the office of Uhl Bros., Inc., where Adolph Uhl's office was. When Adolph Uhl signed the waiver he knew that the document was related to income tax matters of the petitioner. 8. The petitioner's capital stock tax return for 1933 was signed by George Uhl as president and Adolph Uhl as treasurer. The return was not sworn to by George or Adolph Uhl. It was not signed in the presence of a notary by either George or Adolph Uhl. A document under date of January 6, 1936, and another document, purporting to be a protest, under date of September 15, 1936, both pertaining to the tax liability of the company for 1933 and addressed to the Commissioner or agent in charge at San Francisco, were signed in behalf of the company by George Uhl as president and Adolph Uhl as secretary. 9. In 1919 petitioner owned two buildings in San Francisco, the Werner building and the St. *746 Paul building. In December 1919 George and Adolph agreed to separate their respective interests in petitioner. Adolph transferred to George all his stock in petitioner. Petitioner conveyed the St. Paul building to Adolph. Thereafter, the principal real estate owned by petitioner was the Werner building, and George was, in effect, the sole stockholder of petitioner. Adolph resigned as secretary and as a director of petitioner. Since 1919 Adolph has not been an officer, director, or stockholder of petitioner, and he has had no interest in the business of petitioner. *1226 10. From 1923 to 1933, inclusive, George Uhl and Adolph Uhl borrowed moneys from the petitioner as follows: Year Debits Credits — 1923 — Cash Loan $60,000.00 a/c Geary-Powell Bldg. Cash Loan 8,000.00 — 1924 — Cash Loan 150,000.00 Cash Loan 20,000.00 Cash Loan 51,000.00 — 1925 — Payment $150,000.00 Cash Loan 50,000.00 a/c Garfield Bldg. 17,326.96 — 1926 — Cash Loan 160,000.00 Payment 161,500.00 — 1927 — Cash Loan 30,000.00 — 1929 — Garfield account 8,812.00 — 1933 — 324.07 Total 546,651.03 Total 320,312.00 320,312.00 Balance due 226,339.03 *747 11. At a special meeting of the board of directors of the petitioner held on November 6, 1933, at which meeting George Uhl was recorded as being present, the following resolution was adopted: WHEREAS, Adolph Uhl and George Uhl are indebted to this corporation in the principal sum of $226,339.03, one-half of which is owed by Adolph Uhl; and WHEREAS, the financial condition of Adolph Uhl is greatly involved and it is desired to avoid the filing of a voluntary petition in bankruptcy; NOW, THEREFORE, be it resolved, that this corporation does hereby accept the offer of Adolph Uhl to execute his promissory note in favor of this corporation in the principal sum of $10,000, maturing on or before five years from date, without interest, in full satisfaction and discharge of said obligation of Adolph Uhl to this corporation. 12. The account set forth above, in paragraph 10, was carried on petitioner's books as the account of Adolph Uhl and George Uhl, or as the "A" and "G" Uhl account. The account was a joint account. It represented the joint debt and obligation of Adolph Uhl and George Uhl. 13. In November 1933 petitioner owed Adolph Uhl $22,655.09. 14. On or about November 6, 1933, Adolph*748 Uhl gave to petitioner his note for $10,000, payable without interest five years from the date thereof. The debt of $113,169.52 was adjusted on petitioner's books in the following way: The account of notes receivable was debited with $10,000, and the profit and loss account was debited with $103,169.52, and the "A" and "G" Uhl account was credited with $113,169.52. 15. Petitioner accepted the new $10,000 note of Adolph Uhl in full satisfaction and discharge of his debt in the amount of $103,169.52. Petitioner forgave and canceled the debt in the latter amount by accepting the offer of Adolph Uhl to give it a new note in consideration for cancellation of part of his indebtedness. *1227 16. In 1933, before and after the date of November 6, 1933, George Uhl was solvent. 17. In 1933 Adolph Uhl owned the title to 100,002 shares of stock of a holding company named Aetna Investment Co., which he organized in prior years to hold title to certain real property. This stock was held in escrow under an agreement executed January 26, 1925, whereby the Aetna Investment Co. agreed to pay to Helen Uhl, the divorced wife of Adolph Uhl, $500 per month for life. Adolph Uhl, individually, *749 guaranteed the payments, under the agreement. In the event of default in the payments to Helen Uhl, the Aetna stock was subject to sale to secure funds to cure the default. On December 31, 1933, the payments to Helen Uhl were in default in the amount of $4,950. The Aetna Investment Co. conveyed its main asset, real estate, in 1932, to another company, and that company sold the property in 1933 for $40,000 over encumbrances on the property. The Aetna stock in 1933 was encumbered by the claims of Helen Uhl, for which it was held as security. 18. As of November 1, 1933, the net worth of Adolph Uhl, exclusive of his equity in stock of the Aetna Investment Co., was as follows: Assets, $39,409.05; liabilities, $130,340, including the net amount of one-half of the balance due petitioner on the joint account of Adolph Uhl and George Uhl. 19. Petitioner sold the Werner building and the land on which it was situated in 1933 at a profit. It reported the profit on its Federal income tax return for 1933 at $65,657.19. 20. In 1933 petitioner did not sustain a loss by reason of discharging Adolph Uhl from his obligation, above $10,000, to the petitioner. In 1933 petitioner did not*750 ascertain to be worthless a debt in the net amount of $80,514.43 by reason of the discharge of Adolph Uhl from part of his obligation. OPINION. HARRON: The first question is whether assessment of a deficiency in income and excess profits tax is barred by the statute of limitations. Determination of this question turns on either (a) whether the return filed by petitioner was such return as meets the requirements of section 52(a) of the Revenue Act of 1932; or (b) whether a valid waiver was filed, pursuant to section 276(b) of the Revenue Act of 1932, by petitioner, so as to extend the period for assessment to June 30, 1937. (a) Petitioner stands upon the income and excess profits tax returns as filed, and contends that the filing of the income tax return started the running of the statute of limitations. Respondent, by amended answer, alleges that the return filed was not a proper return, *1228 as required by law, because it does not meet the requirements of section 52(a), since it was not sworn to by the president of petitioner, and it was not subcribed and sworn to by the treasurer of petitioner. Respondent contends that, no proper return having been filed, the*751 statute of limitations has not yet started to run. Respondent relies on , and . The evidence shows that the returns of petitioner for 1933 were not sworn to by its president. He has testified that he signed the returns in Los Angeles, the returns having been mailed there to him to sign, and that he did not sign the returns before a notary. The evidence shows that Adolph Uhl signed the returns in San Francisco. On each return there appears the signature and seal of Ruth H. Cosgrove, notary public in and for the City and County of San Francisco. The president of petitioner, George Uhl, did not swear to the returns of petitioner before Ruth H. Cosgrove. Her seal and signature on the affidavits mean nothing whatever with respect to the signatures of petitioner's president. The record shows that petitioner had only one officer in March 1934, when the returns were filed, namely, a president. George Uhl testified (page 12 of the transcript) that there was no treasurer. It is not necessary to determine whether a return signed and*752 sworn to by one officer of a corporation, who is the only officer, is a return which meets the requirements of section 52(a) Under the provisions of section 52(a) it is mandatory that a return of a corporation "shall be sworn to by the president." This requirement is not a matter of mere form, but is to fix responsibility. . The returns of petitioner do not meet the express requirement of the statute that the information thereon be furnished under oath. It is held that no proper returns for the year 1933 were filed for petitioner. A taxpayer must meet all the named conditions of the statute with meticulous compliance, in order to secure the benefit of the statute of limitations. Since the petitioner did not file returns which meet the statutory requirements, there is no bar to the assessments of tax which respondent has made. It is the filing of returns that starts the running of the statutory period. See section 275(a) of the Revenue Act of 1932; *753 . (b) In view of the above holding, it is not necessary for us to consider whether or not the waiver executed by Adolph Uhl was a valid waiver. The second question relates to the respondent's claim for addition to the tax of the 25 percent penalty under section 291 of the Revenue *1229 Act of 1932. The reasons which require that it be held that no proper return was filed for 1933, for failure to meet the statutory requirements, require also that the addition to tax be sustained. The imposition of the penalty is mandatory. ; affd., 105 Fed.(2) 488. The third question is whether petitioner is entitled to a deduction in the amount of $80,514.43 as a bad debt ascertained to be worthless and charged off, or as a loss. Petitioner deducted on its return, as a loss, $103,169.52, the amount of the joint debt of Adolph Uhl and George Uhl for which petitioner gave a discharge of liability to Adolph Uhl in November 1933. Since petitioner owed $22,655.09 to Adolph Uhl, it now claims to be entitled to a deduction for only the net amount of $80,514.43. *754 The respondent disallowed the deduction claimed upon the ground that no information had been submitted "to show any attempts to collect on this joint account or show how the joint account became a separable one on which the company could sustain a loss on joint debtors without an attempt to collect from both." In its petition, petitioner states the following: In November 1933 petitioner had a valid claim against Adolph Uhl based upon his joint indebtedness with George Uhl. At that time Adolph Uhl was in financial difficulties and was unable to pay his proportionate one-half of said joint obligation of $226,339.03. The petition has not been amended with respect to the above pleading. On brief, petitioner advances an argument that the indebtedness of Adolph Uhl and George Uhl was separate and several, because of what was done in 1919 when the Uhl brothers agreed to separate their interests in the petitioner. The facts show that the 1919 transaction represents nothing material, and no more than that in that year Adolph Uhl conveyed all his stock in petitioner to George Uhl in exchange for the St. Paul building. It is impossible to read into the 1919 transaction any oral*755 agreement that could have any bearing whatever on the nature of the obligation of the Uhl brothers under the loan account set up on petitioner's books in 1923. There is no evidence that in 1919 the Uhl brothers agreed that, if in the future any sums of money should be advanced to them by petitioner, they would be severally liable for repayment of one-half thereof. The theory is without merit and no consideration can be given to it. Apart from the above theory, petitioner contends that the debt of George and Adolph Uhl, totaling $226,339.03, was a several obligation from its inception in 1923 by agreement between the parties. There is no evidence to support the contention, other than testimony of Adolph Uhl as to his attitude with respect to his own obligation, *1230 and that which is stated in the preamble to the resolution adopted on November 6, 1933. Adolph Uhl's testimony, at page 147 of the transcript, is that he never looked upon the entire amount of the account as his obligation; that it was always understood that "each one" was responsible for his part of the obligation. Little weight attaches to this testimony standing alone, as it does. The statement in the*756 preamble to the resolution adopted in 1933 is ambiguous. It states, first, that "Adolph Uhl and George Uhl are indebted to this corporation in the principal sum of $226,339.03." Thereafter, it states that one-half of the amount is owed by Adolph Uhl. Both Adolph Uhl's testimony and the foregoing statements from the resolution are not incompatible with the existence of a joint obligation because even where a joint obligation exists, each obligor is usually deemed to be liable for contribution to the other obligor if he is called upon to pay more than his share of the joint debt. If the wording of the resolution be taken to mean that the share of each obligor was one-half of the total debt, that alone is not a statement sufficient to show that originally it was understood that the obligation was several. The first words of the resolution would indicate that the debt was joint. Nowhere is there to be found in the record any evidence of a distinct understanding, ab initio, that the debt was several. There are no distinct words or terms of severance used to produce a several responsibility or right. Adolph Uhl has not shown by his testimony or other evidence whether any*757 of the sum charged against the "A" and "G" Uhl account, from 1923 through 1933, were paid to him for his use. Although George Uhl testified in this case, he gave no testimony about the account, or about the understanding of the parties as to the liability of each or both debtors. The cash advances were charged to one account, that of George and Adolph Uhl, and it appears from some of the notations on the account that the advances were applied to the purchase of real estate, title to which was held by corporations in which both brothers owned all the stock. There is no evidence to show who made repayments to petitioner of the various amounts credited to the account in 1925, 1926, and 1929. It is likely that the sums were advanced to the Uhl brothers to use in joint ventures. As for Adolph Uhl's testimony about his attitude toward his obligation, it is not incompatible with the attitude of a joint obligor, for a joint obligor may feel himself bound, in the first instance, to pay only his share of a joint debt, and may expect his coobligor to pay his respective share. Such attitude, on the part of one obligor, has nothing to do, however, with the legal liability of the coobligor*758 to pay the full amount of the joint debt. Whether or not a debt is joint or several is governed by the intent of the parties. American Jurisprudence, vol. 12, par. 268. In the *1231 absence of clear evidence as to the intent of the parties, an obligation of two or more persons is presumed to be a joint obligation rather than several. See section 1431 of the Civil Code of California. Since there is no clear evidence of a several obligation to pay several sums of money, and no evidence that under a contract several distinct sums of money were advanced to several and separate persons, it is concluded and held that Adolph and George Uhl were joint obligors, jointly liable to repay to petitioner the total sum of $226,339.03. Cf. ; . It is not disputed that petitioner could release and discharge, or compromise and adjust, any debt owing to it. It discharged Adolph Uhl from any obligation to pay it $103,169.52 of the total sum owed. The ultimate question is whether, having done this, petitioner is, under the Federal revenue act applicable, entitled to deduction for all or part of*759 the sum for which Adolph Uhl was discharged. Having concluded that the obligation was a joint obligation, and the facts showing that the coobligor, George Uhl, was solvent, it follows that the voluntary discharge of Adolph Uhl does not entitle petitioner to any deduction. In , it was held that a valid debt is not ascertained to be worthless where the creditor, for consideration satisfactory to itself, voluntarily releases a solvent debtor from liability. Assuming that Adolph Uhl was insolvent in 1933, a valid debt was not ascertained to be worthless where a creditor, for consideration satisfactory to itself, voluntarily releases an insolvent joint obligor, without going against the solvent coobligor. We are satisfied that the discharge of Adolph Uhl from his obligation as a joint debtor did not operate to release George Uhl from his obligation as a joint debtor to pay the full amount of the joint debt, less the amount of the note given to petitioner by Adolph Uhl. See Restatement of the Law of Contracts, vol. 1, sec. 117; *760 ; ; ; ; . Section 1543 of the Civil Code of California provides, in part, as follows: A release of one of two or more joint debtors does not extinguish the obligations of any of the others, * * * nor does it affect their right to contribution from him. The courts of California have held that the release of one joint debtor from his obligation does not extinguish the obligation of any of the other joint debtors to pay the entire balance due on the joint indebtedness. ;; and see In *1232 the leading case of Northern Insurance Co.v. Potter, the court stated as follows (p. 158): Section 1543 of the Civil Code seems to give the same effect to a release in general terms as was given by the English courts to the qualified release, expressly providing that the joint debtors not*761 mentioned in the release should not be discharged. The section provides in effect that the joint debtor who accepts a release shall be held to have consented that the liability of his joint debtor should be continued together with his own liability to contribution. There is no merit in petitioner's contention that after the release of Adolph Uhl from his obligation to petitioner, George Uhl was liable to petitioner for only one-half of the total amount of the joint indebtedness. After the release of Adolph Uhl, George Uhl continued to be liable for the entire balance due on the joint indebtedness. ; It is held that petitioner is not entitled to a deduction in the year 1933 for a loss on account of the discharge of Adolph Uhl in 1933 from his obligation as a joint debtor. It is not necessary to determine how a loss, had there been one in the taxable year, would properly be deducted, i.e., whether, under the facts, the claim for a deduction should be as a loss from a bad debt, or as an ordinary loss. But see *762 . As a result of the above holding, petitioner had a net taxable income for the year 1933 of about $65,270. There are deficiencies in income and excess profits tax. Decision will be entered for the respondent.