Summary
In Columbia River Orchards, Inc. v. Commissioner, 15 T.C. 253 (1950), we held a statutory notice of deficiency inadequate to confer jurisdiction because it covered less than a full taxable period.
Summary of this case from Page v. Comm'r of Internal RevenueOpinion
Docket Nos. 20501 20502.
1950-09-22
COLUMBIA RIVER ORCHARDS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.E. D. GENSINGER, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
A. R. Kehoe, Esq., R. B. Hooper, Esq., and H. B. Jones, Esq., for the petitioners. John H. Pigg, Esq., for the respondent.
1. A petition filed in the name of a dissolved corporation by a former liquidating trustee and sole stockholder, without authority to act for the corporation under state law, is not the petition of the corporation and the proceeding instituted thereby is dismissed for lack of jurisdiction.
2. The Commissioner's determination and notice of income tax deficiency for a fractional part of taxpayer corporation's correct taxable period held ineffective, there being no deficiency for the period covered by the deficiency notice and the Tax Court having no jurisdiction over the part of the year not covered by the deficiency notice. A. R. Kehoe, Esq., R. B. Hooper, Esq., and H. B. Jones, Esq., for the petitioners. John H. Pigg, Esq., for the respondent.
These proceedings, consolidated for hearing, involve deficiencies in taxes and penalties for 1943 as follows:
+-----------------------------------------------------------------------------+ ¦ ¦ ¦ ¦5 per cent¦25 per cent¦ +----------------------------+--------------+----------+----------+-----------¦ ¦Petitioner ¦Kind of tax ¦Deficiency¦negligence¦delinquency¦ +----------------------------+--------------+----------+----------+-----------¦ ¦ ¦ ¦ ¦penalty ¦penalty ¦ +----------------------------+--------------+----------+----------+-----------¦ ¦Columbia River Orchards, Inc¦Income ¦$2,816.67 ¦$140.83 ¦ ¦ +----------------------------+--------------+----------+----------+-----------¦ ¦ ¦Declared value¦ ¦ ¦ ¦ +----------------------------+--------------+----------+----------+-----------¦ ¦ ¦excess profits¦12,545.01 ¦627.25 ¦ ¦ +----------------------------+--------------+----------+----------+-----------¦ ¦E. D. Gensinger, ¦ ¦ ¦ ¦ ¦ +----------------------------+--------------+----------+----------+-----------¦ ¦Transferee of Columbia ¦ ¦ ¦ ¦ ¦ +----------------------------+--------------+----------+----------+-----------¦ ¦River Orchards, Inc. ¦Excess profits¦73,177.67 ¦3,658.88 ¦$18,294.42 ¦ +----------------------------+--------------+----------+----------+-----------¦ ¦ ¦ ¦ ¦ ¦ ¦ +----------------------------+--------------+----------+----------+-----------¦ ¦Total ¦ ¦ ¦ ¦111,260.73 ¦ +-----------------------------------------------------------------------------+
The deficiencies in tax arise from respondent's determination that the amount of $129,544.55 should be included in the income of Columbia River Orchards, Inc., for the taxable year 1943 on the ground that that amount represents the proceeds from sales of fruit grown and sold by the corporation in that year. Respondent has also asserted a 25 per cent delinquency penalty on account of the failure of the corporation to file an excess profits tax return for that year and a 5 per cent negligence penalty. The proceeding against petitioner, E. D. Gensinger, arises from respondent's determination that he is liable as transferee of the assets of Columbia River Orchards, Inc., for the deficiencies in taxes and penalties involved in the corporation proceeding.
FINDINGS OF FACT.
E. D. Gensinger, hereinafter referred to as the petitioner, and his wife, Okel E. Gensinger, are individuals residing at all times here material in Wenatchee, Washington. On April 1, 1930, among other properties owned and operated in connection with his occupation as a fruit farmer, petitioner owned a tract of approximately 300 acres of undeveloped orchard land in Douglas County, Washington. For the purpose of developing and operating an orchard on this tract of land petitioner formed Columbia River Orchards, Inc., a Washington corporation, hereinafter called the corporation, with its principal office at Wenatchee. Petitioner transferred the 300-acre tract of land to the corporation in exchange for an undisclosed number of shares of its stock. Petitioner formed the corporation with the intention of attracting outside capital for the development of the orchard and to limit his own liability. However, only about $5,300 worth of stock was ever sold to outsiders and substantially all of the corporation's stock was owned by petitioner and his wife. The corporation also failed to afford petitioner the limited liability he wanted since he had to endorse all corporate obligations.
The corporation earned no profits from 1930 to 1942, during the period of the development of the orchard. A small profit was earned in 1942. Anticipating larger profits after 1942, petitioner bought up the outstanding stock in preparation for liquidation of the corporation. By the end of 1942 petitioner held all the corporation's stock in his name except for two qualifying shares held in his wife's name.
On January 1, 1943, a resolution providing for dissolution of the corporation was drafted. It provided a plan for the liquidation of the corporation out of court under Washington law
+----------------------------+ ¦Pool No.¦Date ¦Amount ¦ +--------+-------+-----------¦ ¦100 ¦Aug. 6 ¦$36,071.05 ¦ +--------+-------+-----------¦ ¦200 ¦Aug. 3 ¦20,000.00 ¦ +--------+-------+-----------¦ ¦200 ¦Aug. 11¦63,300.87 ¦ +--------+-------+-----------¦ ¦300 ¦Aug. 19¦1,018.10 ¦ +--------+-------+-----------¦ ¦Total ¦ ¦120,390.00 ¦ +----------------------------+
All checks for distributions from apricot sales were issued to Regional Agricultural Credit Corporation, which financed the operations of both the corporation and the petitioner individually, and to ‘Columbia River Orchards.‘ No checks were issued in either the name of the corporation or the name of the petitioner. Checks issued for distributions from proceeds from cherry sales were issued in like manner in the aggregate amount of $6,530.39 on various dates between July 22 and July 31, 1943.
Prior to 1943, the corporation's books and records were kept and its tax returns were filed on the cash basis for calendar years. In its income and declared value excess profits tax return for the period January 1 to July 7, 1943, filed on October 16, 1943, with the collector of internal revenue for the district of Washington, the corporation's gross income was stated to be $5,529.96, but a net operating loss of $5,349.04 was reported and no tax liability was shown. An information schedule with respect to dissolution of the corporation which was filed with the return contained the statement that all assets and liabilities of the corporation were received by its sole stockholder, the petitioner, on dissolution as of July 7, 1943. No part of either the amount of $120,390.02, representing proceeds of apricot sales, or the amount of $6,530.39, representing proceeds of cherry sales, was included in the gross income of the corporation as reported in its income and declared value excess profits tax return for its taxable year 1943. On the advice of C. W. Franklin, a certified public accountant who prepared tax returns for the corporation and the petitioner, no excess profits tax return was filed for the corporation for its taxable year 1943.
In his individual income tax return for the taxable year ended June 30, 1944, filed with the collector of internal revenue for the district of Washington, the petitioner reported a long term capital gain of $46,414.05 as a result of the corporation's dissolution, on the theory that petitioner received in complete liquidation of the corporation assets having a fair market value at the time of distribution of $155,221.85 in exchange for his stock in the corporation, acquired at a total cost of $62,393.75. Included in the fair market value of the assets received by petitioner in liquidation of the corporation was the value of the then unsold 1943 crops of apricots and cherries.
Respondent mailed a statutory notice of deficiency to the corporation in care of the petitioner on June 29, 1948, notifying it that:
* * * determination of your income tax liability for the taxable year January 1, 1943, to July 17, 1943, disclosed a deficiency of $2,816.67 and $140.83 in penalty, and that the determination of your declared value excess profits tax liability for the year mentioned discloses a deficiency of $12,545.01 and $627.25 in penalty, and that the determination of your excess profits tax liability for the year mentioned discloses a deficiency of $73,177.67 and $21,953.30 in penalties, as shown in the statement attached.
The deficiencies in taxes were accounted for in respondent's explanation of adjustments by the statement that:
(a) It is held that sales of fruit for a total of $129,544.55 which were made by the corporation prior to the date of dissolution should be included in sales of the corporation. Income reported is, therefore, increased by this amount.
The penalties asserted were a 25 per cent delinquency penalty for failure to file an excess profits tax return and a 5 per cent penalty for negligence.
As a result of the dissolution of the corporation and the distribution of all its assets to the petitioner in complete liquidation, the corporation was left without assets and without liabilities. Petitioner is the initial transferee of all the property of the corporation. Respondent mailed a notice of transferee liability to petitioner on June 29, 1948, asserting liability for the full amount of the deficiencies and penalties determined against the corporation. The petitioner filed a petition in the name of the corporation and a petition in his own name on September 27, 1948.
In respondent's original deficiency notices and in his answer to the taxpayer's petitions he determined that the corporation's taxable year 1943 was the period January 1 to July 17, 1943. By amendment to his answer respondent alleged that the taxable period was January 1 to October 11, 1943. Finally, after the hearing, respondent moved for and was granted leave by further amendment to his answer to allege that the proper taxable period was the full calendar year 1943, on account of his determination that the corporation was not finally dissolved until May 24, 1944.
OPINION.
LeMIRE, Judge:
The first matter to be disposed of is respondent's motion filed at the hearing to dismiss the proceeding in Columbia River Orchards, Inc., Docket No. 20501, for lack of jurisdiction on the ground that the corporation was finally and completely dissolved on May 24, 1944, with the result that neither the former corporation nor the former liquidating trustee is authorized or empowered to maintain and prosecute this proceeding. The petition was filed in the name of the corporation by the petitioner as former liquidating trustee and sole beneficial stockholder. The facts are that the corporation was completely and finally dissolved for all purposes on May 24, 1944; that respondent mailed a deficiency notice to the corporation in care of petitioner on June 29, 1943; and that the petitioner filed a petition in the name of the corporation on September 27, 1948. Under the laws of the State of Washington, the corporation's existence was terminated on May 24, 1944, when the trustee's certificate of final dissolution was filed with the Secretary of State. Remington's Revised Statutes of Washington, section 3803-59. There is no provision in Washington law for continuance of the corporation after that date for any purpose, and the petitioner has no lawful authority to act for the corporation. Cf. S. Hirsch Distilling Co., 14 B.T.A. 1073, and First Bond & Mortgage Co., 21 B.T.A. 1. It follows that the petition filed by him is not the petition of the taxpayer in Docket No. 20501, and the proceeding in that docket is therefore dismissed for lack of jurisdiction. Nibley-Mimnaugh Lumber Co., 37 B.T.A. 671; G. M. Standifer Construction Corporation v. Commissioner, 78 Fed.(2d) 285. There is a recently expressed disagreement with the authorities holding that the right of a dissolved corporation to invoke the jurisdiction of this Court depends upon the law of the state of incorporation rather than upon Federal law. However, in view of our disposition of the transferee proceeding, no reexamination of our long established rule, which we follow here, is warranted.
There is a further jurisdictional question as to whether we have jurisdiction over any period other than the period January 1 to July 17, 1943. Respondent's deficiency notice and notice of transferee liability stated that the determination of tax liability ‘for the taxable year January 1, 1943 to July 17, 1943‘ disclosed the deficiencies here involved. In the explanation of adjustments attached to the notice, respondent stated that: ‘It is held that sales of fruit * * * which were made by the corporation prior to the date of dissolution should be included in sales of the corporation.‘ By successive amendments to his answer to the petition respondent alleged, first, that the corporation's taxable year 1943 was January 1 to October 11, 1943, instead of the period January 1 to July 17, 1943, as originally stated in the deficiency notice, and, second, and that it was the entire calendar year 1943.
Respondent admits that he has no authority to alter the correct taxable period of a taxpayer and that this Court has no jurisdiction where the deficiency notice does not cover a proper taxable period. He argues, however, that his deficiency notice was intended to cover the entire taxable period and that he is entitled to correct his erroneous theory as to what constituted the corporation's correct taxable period by amending his answer to conform to the facts adduced at the hearing. Petitioner argues that this Court has no jurisdiction over any period other than the period January 1 to July 17, 1943, covered by the deficiency notice and that since the income involved was realized after July 17, there is no deficiency notice covering it and there is no deficiency for the period covered by the notice.
There is no question that respondent has authority to adopt the annual accounting period of the taxpayer or any fractional part of a year during which it was in existence as a taxpayer as the taxable year, but as we said in Mrs. Grant Smith, 26 B.T.A. 1178, even though the return filed for the corporation in the year it went into dissolution may have covered an incorrect period there is no warrant in law for the respondent's action in computing a deficiency for an incorrect fractional part of the year which does not cover the entire period the corporation was in existence as a taxpayer. Had liquidation of the corporation been completed by July 17, 1943, the respondent's determination and notice would have been proper, but the evidence shows that it had only begun. Cf. California Brewing Association, 43 B.T.A. 721, appeal dismissed, 129 Fed.(2d) 321; Harvey Coal Corporation, 12 T.C. 596. If there is any deficiency for 1943, it must be determined for the entire taxable year. Respondent gave notice of no such determination to the taxpayer here. Since the record clearly shows that the sale of the corporation's assets, the gain from which respondent is attempting to tax to the corporation, took place after the period covered by respondent's deficiency notice, we conclude that there is no deficiency notice for the period during which the income involved was realized and that there is no deficiency for the period over which we have jurisdiction. Mrs. Grant Smith, supra; Elgin Compress Co., 31 B.T.A. 273; Pittsburgh & West Virginia Railway Co., 32 B.T.A. 66; Oklahoma Contracting Corporation, 35 B.T.A. 232.
Respondent's attempt to correct his deficiency notice by amendment to his answer must fail. It is well settled that jurisdiction cannot be conferred upon this Court by the parties where it does not exist by statute. Since we do not have jurisdiction over any period beyond July 17, 1943, the last date included in the deficiency notice, it follows that respondent cannot create jurisdiction for the Court by his pleadings.
In view of the foregoing, we hold that respondent erred in asserting transferee liability against the petitioner for any deficiency in taxes of the corporation.
Reviewed by the Court.
An order dismissing the proceeding in Docket No. 20501 for lack of jurisdiction will be entered. Decision will be entered for the petitioner in Docket No. 20502.