Rossi v. Commissioner

ANDREW E. ROSSI, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Rossi v. Commissioner Docket No. 96470. United States Board of Tax Appeals 41 B.T.A. 734; 1940 BTA LEXIS 1148; April 4, 1940, Promulgated *1148 Petitioner was a member of a partnership which in 1935 became insolvent and made an assignment to an agent and attorney in fact of its assets for the benefit of its creditors. In 1936, the assets having been sold and converted into cash, final settlement was made with the creditors and the partnership liquidated. In 1937 the Pillsbury Flour Co. mailed a draft payable to the partnership in refund of certain processing taxes paid in prior years. The person formerly designated as agent and attorney in fact in the assignment received the draft, cashed it, and spent the money for his own personal use, never turning any of it over to petitioner or to the partnership creditors. The Commissioner has charged petitioner with the receipt of the entire amount of the draft, and has determined a deficiency against petitioner in unjust enrichment tax thereon, under provisions of section 501(a)(2), Revenue Act of 1936, and a 25 percent delinquency penalty for failure to file a return. Held, the former agent and attorney in fact, in receiving the draft, cashing it, and spending the money for his own personal use, was not acting as agent for petitioner, and petitioner is not taxable on any*1149 part of the amount of the draft, since he received none of it and he is on the cash basis. Moultrie Hitt, Esq., for the petitioner. Frank B. Schlosser, Esq., for the respondent. BLACK *734 The Commissioner has determined a deficiency in petitioner's unjust enrichment tax liability for the year 1937 of $622.52 and a 25 percent delinquency penalty of $155.63. The deficiency results from an adjustment made by the Commissioner which is stated in the deficiency notice, as follows: Reimbursement of Federal excise taxes received from Pillsbury Flour Mills Company, Minneapolis, Minnesota, on January 28, 1937, taxable at 80 per centum under the provisions of section 501(a)(2) of the Revenue Act of 1936 $787.15 The petitioner by an appropriate assignment of error contests the correctness of this determination of the Commissioner. *735 FINDINGS OF FACT. Petitioner is an individual, residing at Houston, Texas. Prior to November 29, 1935, the Dixie Mills Distributing Co., a partnership composed of petitioner and Meyer Zuber, was engaged in the business of distributing flour in Houston, Texas. Prior to the aforementioned*1150 date, the partnership had purchased flour from the Pillsbury Flour Mills Co., Minneapolis, Minnesota, at prices which included processing taxes levied under the Agricultural Adjustment Act. These taxes were included in the prices at which the partnership sold the flour to its customers. On or about November 29, 1935, the partnership surrendered its assets to one W. C. Houston, to be liquidated for the benefit of its creditors, and discontinued business. The assignment which the partners made to Houston for the benefit of their creditors was as follows: WE, Meyer Zuber and Andrew E. Rossi, composing the Firm of Dixie Mills Distributing Company, of Houston, Texas, hereby appoint W. C. Houston as our agent and Attorney in Fact for us, to take possession of all the assets belonging to the Dixie Mills Distributing Company, of Houston, a list of which assets is annexed hereto and marked Exhibit "A", and to dispose of the same for cash or its equivalent as early as is possible, the proceeds thereof to be distributed as follows: 1st. To pay all necessary expenses incurred in turning the assets into cash. 2nd. To pay off such outstanding utility bills and one other bill in favor*1151 of Grocery Supply Company, all of which approximate $25.00 to $50.00. 3rd. To pro rate between G. B. R. Smith Milling Company or its Agent, and American Maid Flour Mills, the balance remaining on hand on a pro rata basis figured on the accounts of each of said two creditors to the total amount held by both creditors, it being understood that the sums to be paid out are to be paid out in the order as set forth above. The agent is to be furnished with a verified account of the claims of G. B. R. Smith Milling Company and American Maid Flour Mills, and the pro rata distribution to be made will be based on the statements so filed, the approximate amount of these claims being, to G. B. R. Smith Milling Company about $3,350.00, and to American Maid Flour Mills about $415.00. Said Houston is hereby authorized to dispose of the assets in such manner as to him seems best, without interference whatsoever on the part of the undersigned. It is understood that the acceptance by the above-named creditors under this agreement shall constitute a release of all our indebtedness to them. The assets transferred by the partners to Houston for the benefit of their creditors and the liquidation*1152 of the partnership are listed in Exhibit "A" to the written assignment as follows: Cash on hand, about $125.00 Merchandise, estimated 1,000.00 One truck, valued 500.00 Accounts receivable of the face value of 533.00 Furniture and fixtures of the estimated value of $25.00 to $50.00 *736 On the date of such transfer the debts of the partnership to its creditors aggregated approximately $3,765. Final settlement was made with these creditors by Houston as agent in 1936 and the partnership was completely liquidated in that year. On January 18, 1937, the Pillsbury Flour Mills Co. mailed to the Dixie Mills Distributing Co., Houston, Texas, its combination draft and release agreement No. 41020 for the sum of $778.15, which represented the Pillsbury Flour Mills Co.'s processing tax reimbursement offer to the Dixie Mills Distributing Co. because of the invalidation of the Agricultural Adjustment Act. Said combination draft and release agreement was executed on behalf of the Dixie Mills Distributing Co. by W. C. Houston, agent and attorney in fact, on January 21, 1937, and payment made thereon on January 25, 1937, by the South Texas Commercial National Bank*1153 of Houston, Texas, in the sum of $778.15. Houston immediately deposited the proceeds of the above draft with the said South Texas Commercial National Bank of Houston, Texas. It remained on deposit with the bank until Houston checked it our over a period of two or three months and spent it for his own personal use without accounting to the creditors of the partnership or to either of the former partners for the sum of money thus collected. Petitioner has never received any of the proceeds of the draft thus collected and spent by Houston. Respondent determined that petitioner was subject to the unjust enrichment tax on the entire sum of $778.15 for the year 1937, under the provisions of section 501 of the Revenue Act of 1936. No return having been filed by petitioner, the 25 percent delinquency penalty was added to the tax. OPINION. BLACK: Subsequent to the holding by the Supreme Court of the United States that the processing taxes imposed by the Agricultural Adjustment Act were unconstitutional, Congress in the Revenue Act of 1936 enacted "Title III, Tax on Unjust Enrichment." Provisions of that act applicable to the instant case are printed in the margin. 1 *1154 *737 Petitioner contests respondent's determination on the ground that he did not receive any of the proceeds of the draft from the Pillsbury Flour Co., either directly or indirectly. The uncontradicted evidence is that the check was received in 1937 by W. C. Houston, who in 1935 had been made the assignee of the partnership assets belonging to Dixie Mills Distributing Co. for the benefit of creditors. Houston cashed the check and spent the money for his own personal use. Houston, among other things, testified at the hearing: The check was deposited in the bank and held some little time, and the fact that we had already made a complete settlement with the creditors on the assets, I did not know what disposition to make of the check; meantime I was out of employment and naturally - the check had been there for sometime - and I used it for my own personal use. None of it was ever paid to Mr. Rossi or his creditors. The respondent does not contend that petitioner actually received any of the money but he does contend that Houston was petitioner's agent and, as such, received the money for and on behalf of petitioner. Respondent contends that, under the assignment for*1155 the benefit of creditors executed by the Dixie Mills Distributing Co., Houston was authorized to take possession of all assets belonging to the partnership and to dispose of them for the benefit of the creditors named therein; that a reimbursement for taxes previously paid by the partnership is an asset which under the assignment for the benefit of creditors, should have been paid either to petitioner or to the creditors for the account of petitioner's firm; that the mere fact that Houston appropriated the money to his own use is immaterial; that Houston is still liable to petitioner either for the return of the money or the payment of it to the creditors in accordance with the terms of the agreement; and that petitioner has not proved that Houston would not, or could not, make restitution if requested by petitioner or if ordered to do so by some court of law. In the first place, before discussing the respective contentions of the parties, it seems clear that petitioner would not be liable for a greater unjust enrichment tax than a tax based on one-half of the check for $778.15. The Commissioner seems to have entirely disregarded the fact that petitioner had an equal partner in*1156 the business, one Meyer Zuber. Zuber was entitled to receive one-half the partnership assets and we know of no authority which would sustain a tax against petitioner based on Zuber's one-half of partnership assets. To that extent at least, the Commissioner's determination can not be sustained. One person can not be taxed on income belonging *738 to another. . Should petitioner be taxed on the one-half of the draft which belonged to him, although it is clear he never received any of the proceeds nor were they used in any way for his benefit? As has already been stated, the Commissioner's contention, in short, is that Houston was the agent of petitioner and that the receipt by an agent of income for his principal is the same for tax purposes as if the principal had received the income direct. In support of this proposition, respondent cites . Cf. ; affd., . It may be stated as a general rule that receipt of income by an agent is equivalent to receipt by the principal. The*1157 theory is that the principal is in constructive receipt of income. This rule applies, even though the taxpayer is on a cash basis. See Paul and Mertens, vol. 1, sec. 9.10. So, if at the time of the receipt by Houston of the reimbursement draft in question he was the agent of the partnership to receive and collect the draft, then we think it is clear that petitioner is taxable on one-half of the amount of the draft, even though it is conceded that he never actually received any of the proceeds. We do not think, however, that Houston was the agent of the partnership at the time he received the check, cashed it, and spent the money for his own personal use. A reading of the assignment by the partnership to Houston will show that the partnership conveyed all of its then known assets to Houston to be sold and converted into cash, and, after the payment of certain small preferred claims, the balance was to be paid pro rata to two general creditors, with the requirement that "acceptance by the above named creditors under this agreement shall constitute a release of all our indebtedness to them." Houston testified at the hearing that sometime in 1936 final settlement with the creditors*1158 was completed under the terms of the agreement. Thus it seems clear that the agency which Houston had undertaken to administer was entirely at an end sometime in 1936. There were no longer any creditors of the partnership. Their claims had been satisfied by the payments which they had accepted under the terms of the assignment. So far as was then known, there were no more assets to administer. It is a recognized principle of law that an agency terminates after the purpose for which it was created has been fulfilled. See 2 C.J.S., Agency, sec. 72. In 1937, when Houston received the draft for $778.15 from Pillsbury Flour Co. payable to Dixie Mills Distributing Co., he had no right to cash it. There were no further creditors to pay. He should have immediately turned it over to the two former partners or, perhaps *739 more properly, he should have returned it to the Pillsbury Flour Co. The partnership of Dixie Mills Distributing Co. was defunct. It had been completely liquidated. Houston clearly had no right to cash the draft and use the money for his own personal needs, and, in doing so, he was not acting as agent for the partners and it would appear that the income*1159 was taxable to him rather than to petitioner. Cf. . Under such circumstances, in our judgment, petitioner is not to be taxed with any of the income, because he did not receive it. It may well be that petitioner has a claim against Houston for one-half of the amount of the draft and that if pressed hard enough this claim can be collected. He may also have an alternative claim against the bank for allowing Houston to cash the check under the circumstances herein narrated, but if these things be true, he can only be taxed on this income, when and if he actually receives it, since he is on the cash basis. Cf. , in which the Supreme Court, among other things, said: The net profits were not taxable to the company as income of 1916. For the company was not required in 1916 to report as income an amount which it might never receive. * * * [Italics ours.] Only on the assumption that Houston was acting as petitioner's agent when he received and cashed the draft could it be taxed to petitioner on the theory of constructive receipt. *1160 That theory, for reasons we have already stated, we reject. Decision will be entered for petitioner. Footnotes 1. SEC. 501. TAX ON NET INCOME FROM CERTAIN SOURCES. (a) The following taxes shall be levied, collected, and paid for each taxable year (in addition to any other tax on net income), upon the net income of every person which arises from the sources specified below: * * * (2) A tax equal to 80 percentum of the net income from reimbursement received by such person from his vendors of amounts representing Federal excise-tax burdens included in prices paid by such person to such vendors, to the extent that such net income does not exceed the amount of such Federal excise-tax burden which such person in turn shifted to his vendees. * * * (1) The taxes imposed by subsection (a) shall be imposed on the net income from the sources specified therein, regardless of any loss arising from the other transactions of the taxpayer, and regardless of whether the taxpayer had a taxable net income (under the income-tax provisions of the applicable Revenue Act) for the taxable year as a whole; except that if such application of the tax imposed by subsection (a) is held invalid, the tax under subsection (a) shall apply to that portion of the taxpayer's entire net income for the taxable year which is attributable to the net income from the sources specified in such subsection. ↩