Opinion
Docket Nos. 18859, 18864-18868, 18880.
Promulgated December 12, 1950.
1. Under section 311 (b) (1), I. R. C., the Commissioner has one year after the expiration of the period of limitation for assessment of taxes against the taxpayer within which to proceed against a transferee of the taxpayer's assets, and the provisions of section 311 (b) (1) are applicable notwithstanding that the period of limitation against the taxpayer is computed under section 275 (b), I. R. C.
2. Stockholders, who were distributees of assets of a dissolved corporation which had complied with requirements of section 275 (b), held liable as transferees for deficiencies in excess profits taxes which Commissioner determined to be due from corporation and asserted against them within one year after the expiration of period of limitation provided for in section 275 (b).
Arthur L. Murray, Esq., for the petitioners.
R. H. Kinderman, Esq., for the respondent.
These proceedings, which have been consolidated for hearing, involve the transferee liability of the petitioners for deficiencies in excess profits taxes of the Sunset Golf Corporation in the amount of $7,543.71 for the year 1943 and $4,077.78 for the year 1944. The respondent has determined that the liability of each of the petitioners, limited by the value of the assets of the Sunset Golf Corporation (hereinafter referred to as the corporation) received by each, is as follows:
Petitioner Liability
Estate of Arthur T. Marix, deceased .......... $4,605.76 Dorothy K. Whitley ........................... 2,706.36 C. A. Brodie ................................. 1,585.92 Mary K. Dougherty ............................ 2,588.30 Anna K. Rives ................................ 1,176.50 Wm. P. Bell .................................. 1,353.44 Estate of James A. Dougherty, deceased ....... 11,621.49
FINDINGS OF FACT.
All of the facts have been stipulated and we adopt the stipulation as our findings of fact.
Mary K. Dougherty is the executrix of the estate of James A. Dougherty, deceased, who died on March 13, 1948, and Ralph D. Sweeney is the executor of the estate of Arthur T. Marix, deceased, who died January 11, 1949. The decedents and the other petitioners were during the taxable years residents of the State of California and stockholders of the corporation.
The corporation was organized under the laws of the State of California and filed its income and declared value excess profits tax returns and its excess profits tax returns for the calendar years 1943 and 1944 with the collector of internal revenue for the sixth district of California on February 23, 1944, and March 13, 1945, respectively.
The income and excess profits tax returns of the corporation for the calendar years 1941, 1942, and 1943 were examined by agents of the Bureau of Internal Revenue during the year 1944, the report of the examining officer showing a deficiency in excess profits tax for 1943 in the amount of $12,223.25. On December 16, 1944, the corporation agreed to said report and executed a "Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment," Treasury Form 874. The 1943 deficiency in excess profits tax was assessed against the corporation by the Commissioner on his February 23, 1945, assessment list.
This form contains the following note at the bottom thereof:
It is not, however, a final closing agreement under Section 3760 of the Internal Revenue Code, and does not, therefore, preclude the assertion of a further deficiency in the manner provided by law should it subsequently be determined that additional tax is due * * *.
During the year 1945, the corporation sold all of its assets and, by certain resolutions passed at a special directors' meeting of the corporation on June 26, 1945, it was decided that the corporation would liquidate and dissolve. The liquidation of the corporation was completed on or before December 17, 1945, except for the distribution to the 72 stockholders of record, on August 16, 1947, of refunds of taxes received by the corporation during 1947.
On December 18, 1945, the corporation filed with the collector of internal revenue at Los Angeles, California, its final Federal income and excess profits tax returns for the period January 1, 1945, to December 17, 1945. On December 19, 1945, the corporation wrote, and mailed, a letter to the collector informing him of the filing of its final return, with check attached in the amount of $2,656.58, and that the dissolution of the corporation had been commenced and was expected to be completed not later than December 26, 1945. The letter also stated that the corporation desired to take advantage of the privileges of section 275 (b) of the Internal Revenue Code and requested an early assessment under that section.
In a letter dated July 31, 1946, the Commissioner of Internal Revenue acknowledged receipt of the corporation's letter of December 19, 1945, and stated that its request for prompt action by the Bureau had been referred to the internal revenue agent in charge at Los Angeles for consideration in the disposition of income tax returns for the taxable years ended December 31, 1943, 1944, and 1945, and that the internal revenue agent in charge would advise it with respect to the determination of income tax for such years.
During the fall of 1946 an examination of the income and excess profits tax liabilities of the corporation for the years 1943 and 1944, and the period from January 1 to December 17, 1945, was made by an examining officer attached to the office of the internal revenue agent in charge at Los Angeles, California, and a copy of his report on such examination, dated November 4, 1946, was furnished to the corporation, to the findings of which the corporation agreed by executing, on November 1, 1946, Treasury Department Form 874.
The report of the examination and the agreement by the corporation on Form 874 were thereafter forwarded by the internal revenue agent in charge at Los Angeles to the Bureau of Internal Revenue at Washington, D.C., and, pursuant thereto, a deficiency in income tax for the year 1943 in the amount of $2,450.75, a deficiency in declared value excess profits tax for the year 1944 in the amount of $1.39, and a deficiency in excess profits tax for the year 1944 in the amount of $1,917.59 were assessed against the corporation on the March 13, 1947, assessment list. An overassessment in excess profits tax for the year 1943 in the amount of $7,965.53, and overassessments in income taxes for the year 1944, and for the period January 1, 1945, to December 17, 1945, in the respective amounts of $628.79 and $106.31 were scheduled in January 1947. Net refunds were made to the corporation during 1947, prior to August 16, 1947. The adjustments to taxes for the year 1943 were due to carry-back of unused excess profits credit from the period January 1, 1945, to December 17, 1945.
Thereafter, on review by the Bureau of Internal Revenue in Washington, D.C., of the revenue agent's November 4, 1946, report, the respondent determined that the excess profits tax liabilities, as shown in the report were understated in the amount of $7,543.71, for the year 1943, and in the amount of $4,077.78 for the year 1944, and that income tax liabilities for said years were correspondingly overstated in the amounts of $2,521 and $1,287.72, respectively. The reason for these adjustments was respondent's conclusion that the corporation had made distributions from capital in excess of the amounts used in the revenue agent's report in computing invested capital for the purpose of arriving at the excess profits credit. The petitioners admit their inability to show that the adjustments made in the corporation's invested capital on review of the agent's report are not correct.
On August 16, 1947, the corporation made its final distribution to its shareholders and the corporation became completely dissolved and without assets. The total distributions in liquidation made to each of the petitioners, on June 26, 1945, December 17, 1945, and August 16, 1947, were as follows:
Total distribution Shareholder received
Arthur T. Marix ........................... $4,605.76 Dorothy K. Whitley ........................ 2,706.42 C. A. Brodie .............................. 1,585.92 Mary K. Dougherty ......................... 2,588.30 Anna K. Rives ............................. 1,176.50 Wm. P. Bell ............................... 1,353.44 James A. Dougherty ........................ 18,753.41
No statutory deficiency notice has ever been issued to the corporation in connection with any portion of the deficiency now alleged to be due from it, and no assessment has ever been made against the corporation in connection therewith.
No statutory assessment has ever been made against any of the petitioners for, or in lieu of, any portion of the additional excess profits taxes now alleged to be due from the corporation, and none of the petitioners ever received any notification of alleged transferee liability to be due from him, her or it, until the receipt of the March 15, 1948, notices of transferee liability mailed to them by the Commissioner.
OPINION.
The sole question presented for decision is whether the Commissioner is barred by limitations from asserting liability against stockholders of a dissolved corporation with respect to excess profits taxes of the corporation. The pertinent provisions of the Internal Revenue Code are set forth in the margin, and the controversy turns upon the applicability of section 311 (b) (1), which allows the Commissioner to proceed against a transferee of a taxpayer's assets within a year after the expiration of the basic period of limitation for assessment against the taxpayer. If section 311 (b) (1) is applicable, then there is no dispute between the parties that the Commissioner's March 15, 1948, notices of liability were timely.
SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.
Except as provided in section 276 —
(a) GENERAL RULE. — The amount of income taxes imposed by this chapter shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.
(b) REQUEST FOR PROMPT ASSESSMENT. — In the case of income received during the lifetime of a decedent, or by his estate during the period of administration, or by a corporation, the tax shall be assessed, and any proceeding in court without assessment for the collection of such tax shall be begun, within eighteen months after written request therefore (filed after the return is made) by the executor, administrator, or other fiduciary representing the estate of such decedent, or by the corporation, but not after the expiration of three years after the return was filed. This subsection shall not apply in the case of a corporation unless —
(1) Such written request notifies the Commissioner that the corporation contemplates dissolution at or before the expiration of such 18 months' period; and
(2) The dissolution is in good faith begun before the expiration of such 18 months' period; and
(3) The dissolution is completed.
(c) OMISSION FROM GROSS INCOME. — If the taxpayer omits from gross income an amount property includible therein which is in excess of 25 per centum of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 5 years after the return was filed.
* * * * * * *
(f) For the purposes of subsections (a), (b), (c), (d), and (e), a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day.
SEC. 311. TRANSFERRED ASSETS.
(a) METHOD OF COLLECTION. — The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this chapter (including the provisions in case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds):
(1) TRANSFEREES. — The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this chapter.
(2) FIDUCIARIES. — The liability of a fiduciary under section 3467 of the Revised Statutes, as amended (U.S.C. Title 31, § 192), in respect of the payment of any such tax from the estate of the taxpayer.
Any such liability may be either as to the amount of tax shown on the return or as to any deficiency in tax.
(b) PERIOD OF LIMITATION. — The period of limitation for assessment of any such liability of a transferee or fiduciary shall be as follows:
(1) In the case of the liability of an initial transferee of the property of the taxpayer — within one year after the expiration of the period of limitation for assessment against the taxpayer;
* * * * * *
(f) DEFINITION OF "TRANSFEREE." — As used in this section, the term "transferee" includes heir, legatee, devisee, and distributee.
The parties are not entirely in agreement as to the computation of the basic period under section 275 (b), but there is no dispute between them that, whichever computation is adopted, the March 15, 1948, notices were untimely if section 311 (b) (1) is inapplicable, and that they were timely if section 311 (b) (1) is applicable. In the circumstances, no useful purpose would be served by determining which computation is correct since the rights of the parties cannot be affected thereby.
The basic limitation provisions are set forth in section 275, which is entitled "Period of Limitation Upon Assessment and Collection." Subsection (a) of section 275 is captioned "General Rule"; it requires that assessment be made within 3 years after the return was filed, and adds that "no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such periods." It is uncontroverted that where a taxpayer's assets have been disposed of, an additional year is added by section 311 (b) (1) to the foregoing 3-year period of limitation within which the Commissioner may proceed against a transferee. And this is so whether or not the Commissioner has initiated proceedings against the taxpayer-transferor within the basic period. City Nat. Bank v. Commissioner, 55 F.2d 1073 (CA-5), certiorari denied, 286 U.S. 561; Flynn v. Commissioner, 77 F.2d 180 (CA-5); Rowan Drilling Co., 44 B. T. A. 189, 196; Park Tilford, 43 B. T. A. 348, 383; J. H. Johnson, 19 B. T. A. 840, affd., 56 F.2d 58 (CA-5), certiorari denied, 286 U.S. 551. Compare Mississippi Valley Trust Co. v. Commissioner, 147 Fed. 2d 186 (CA-8); Moore v. Commissioner, 146 F.2d 824 (CA-2); Baur v. Commissioner, 145 F.2d 338 (CA-3); Fletcher Trust Co. v. Commissioner, 141 F.2d 36 (CA-7), certiorari denied, 323 U.S. 711.
Although it is true that section 275 relates to "income taxes imposed by this chapter" [i. e., Chapter 1], and although the taxes here involved are excess profits taxes imposed by another chapter [i. e., Chapter 2], nevertheless the provisions of section 275, along with other provisions of law relating to Chapter 1 taxes, are made applicable to excess profits taxes by section 729 (a) of the Code.
In the instant case, however, petitioners rely upon subsection (b) of section 275 rather than upon subsection (a). Subsection (b) is an exception to the "General Rule" of subsection (a). It is captioned "Request for Prompt Assessment," and provides in effect that in the case of income received by a decedent, or his estate, or by a corporation about to dissolve, subject to certain conditions, "the tax shall be assessed, and any proceeding in court without assessment for the collection of such tax shall be begun, within eighteen months after written request therefore * * * but not after the expiration of three years after the return was filed."
However, section 275 (f) provides that where the return was filed before the last day prescribed by law for the filing thereof, it "shall be considered as filed on such last day."
The written request contemplated by section 275 (b) was made herein on December 19, 1945. Thus, if section 311 (b) (1) allows an additional year within which to proceed against the transferees, the March 15, 1948, notices of deficiency were timely. The narrow question here presented, therefore, is whether section 311 (b) (1), which is applicable where the basic limitation period is computed under section 275 (a), is for some reason rendered inapplicable where the period is computed under section 275 (b). Our recent decision in J. B. Cage, 15 T.C. 529, 531, assumed that section 311 is operative in these circumstances.
There is nothing in the language or structure of section 275 (a) and (b), or of section 311 (b) (1), which suggests that 311 (b) (1) is to be inapplicable where the basic limitation period is determined under section 275 (b). Petitioners contend, however, that the very subject matter of section 275 (b) contemplates distributions of assets by the taxpayer; that its purpose was to fix the outside limit within which the Commissioner may proceed, whether against the taxpayer or against a distributee, and that it therefore renders section 311 (b) (1) inapplicable. Further, petitioners contend that section 275 (b) is not a "limitations" provision at all; that once the specified period has elapsed the Commissioner is deprived of all power to claim a deficiency, and that there can be no potential liability after that period to which section 311 (b) (1) could relate.
The difficulty with the latter contention is that section 275 (b) is a limitations provision. It is so identified by the all-embracing title of section 275, and the operative language of subsection (b) is essentially the same as the corresponding language of subsection (a), unquestionably a limitations provision. Again, other parts of section 275 confirm the character of subsection (b) as a limitations provision. For example, subsection (c) spells out a 5-year period where the taxpayer's return omits more than 25 per cent of the gross income properly includible therein. It seems clear that, if that condition were met, the 5-year period would supersede the 3-year period of subsection (a) or the shorter period of subsection (b). Foster's Estate v. Commissioner, 131 F.2d 405, 406 (CA-5), affirming 45 B. T. A. 126. Cf. National City Bank of New York v. Helvering, 98 F.2d 93 (CA-2), affirming 35 B. T. A. 975, 1000. We conclude that subsection (b) is merely part of a comprehensive scheme of limitations provisions, and was in general not intended to erase tax liability at the termination of the period specified therein in any manner different from that in which subsection (a) operates.
Petitioners rely upon certain language in Beverly Wall Paper Co. v. Commissioner, 98 F.2d 211, 212 (CA-3), in support of a contrary conclusion. However, that case did not involve the provisions of section 311 (b) (1), and was concerned merely with the question whether an appropriate notice had been given by the taxpayer so as to bring section 275 (b) into play. Nothing in that case turned upon whether the expiration of the period completely wiped out the tax liability.
There remains nevertheless the question whether subsection (b), dealing as it does with situations which contemplate distributions of assets, was intended to render section 311 (b) (1) inapplicable. Of course, Congress could have framed the statute so as to preclude the operation of section 311 (b) (1), but we are met at the outset with the blunt fact that there is nothing in the statute which so provides. Nor have we been referred to any convincing materials which disclose a legislative purpose to reach such result.
The prompt assessment provisions relating to corporations about to dissolve first appeared in section 275 (b) of the Revenue Act of 1928, 45 Stat. 791, and were essentially the same as the provisions here involved, except that the 1928 Act fixed the period at one year after the request for prompt assessment or 2 years after the return was filed. The Revenue Act of 1934 expanded the period to 18 months and 3 years, respectively, and, as thus modified, the provisions have been reenacted and incorporated into the Internal Revenue Code. The provisions of section 311 (b) (1) of the Internal Revenue Code that the period of limitation for assessment of the liability of a transferee of property of the taxpayer shall be "within one year after the expiration of the period of limitation for assessment against the taxpayer," first appeared in section 280 (b) (1) of the Revenue Act of 1926, and, after successive reenactments with some changes not material here, were finally brought into the Code.
The earliest statutory authority for prompt assessment was contained in section 250 (d) of the Revenue Act of 1921, 42 Stat. 227, where it was provided that in the case of income received during the lifetime of a decedent, all taxes due thereon shall be determined and assessed by the Commissioner within one year after written request therefore by the representative of the estate. That provision was superseded in somewhat changed form by section 277 (a) (3) of the Revenue Act of 1924, 43 Stat. 253, which, in turn, was reenacted in substantially identical terms in Section 277 (a) (4) of the Revenue Act of 1926, 44 Stat. 9. Section 275 (b) of the 1928 Act extended the privilege to include income received by the estate of the decedent during the period of administration, as well as to income received by corporations contemplating dissolution.
Thus, the additional year for transferee proceedings was added by the 1926 Act, and there is nothing in the reports of the congressional committees considering either that legislation or the measure which became the 1928 Act (adding the provisions for prompt assessment as to corporations) which indicates in the slightest that Congress had any intention of rendering the transferee provisions inapplicable to the prompt assessment provisions. Indeed, the reports dealing with the prompt assessment provisions make no reference to limitations with respect to transferee liability. They do, however, reflect the intention of Congress to shorten the general period of limitation provided for in section 275 (a) and related sections of prior Acts and thus permit decedents' estates and corporations contemplating liquidation to obtain an earlier determination, assessment, and settlement of their tax liabilities. See H. Rept. No. 350, 67th Cong., 1st Sess., p. 14; S. Rept. No. 398, 68th Cong., 1st Sess., p. 32; H. Rept. No. 844, 68th Cong., 1st Sess., p. 24; H. Rept. No. 2, 70th Cong., 1st Sess., p. 23; S. Rept. No. 960, 70th Cong., 1st Sess., p. 31; H. Rept. No. 704, 73d Cong., 2d Sess., p. 34; S. Rept. No. 558, 73d Cong., 2d Sess., p. 43. For example, we find the statement that "In the case of a corporation about to dissolve, the prompt determination of tax liability becomes particularly desirable" (H. Rept. No. 2, 70th Cong., 1st Sess., p. 23). But such statements as these do not help us here. They merely show why Congress provided for a shorter period of limitation in subsection (b) than in subsection (a). They in no way deal with the entirely separate question of the Commissioner's rights against a transferee.
Whenever the assets of a taxpayer have been disposed of, new and sometimes difficult problems face the Commissioner in his attempt to effect collection. Not only must he investigate the liability of the taxpayer, but he must also trace the assets and establish the liability of the transferee. It is for that reason, presumably, that the Congress has given the Commissioner an additional year under section 311 (b) (1). And we have been referred to nothing in the legislative history of the provisions here under review which states an intention to render section 311 (b) (1) inoperative where the basic limitation period is computed under section 275 (b).
Indeed, it is not difficult to imagine situations in which the Commissioner's powers might be seriously impaired if he did not have that additional year. For example, suppose that the Commissioner had completed an extended investigation of a corporation's tax liability just prior to the expiration of the 18-month period and that the corporation was finally liquidated and dissolved at about the same time. The Commissioner would then be faced with the entirely new problem of attempting to trace assets — a task that might well require far more than the few remaining days of the 18-month period.
Of course, it might be said that the Commissioner could protect himself by sending the deficiency notice promptly upon concluding his investigation within the 18-month period directly to the taxpayer, and that he would then have 1 year under section 311 (b) (1) within which to proceed against the transferees. But the difficulty with that position is that the cases cited above (p. 824) show that the Commissioner is entitled to proceed directly against transferees without sending any prior notice to the taxpayer. Indeed, such prior notice might well be a futile gesture if the corporation had already been finally and completely dissolved.
Section 311 (b) (1) was intended to give the Commissioner an additional period of 1 year within which to cope with the special problems growing out of a disposition of a taxpayer's assets. We are unwilling to say, in the absence of a clearly apparent legislative purpose, that Congress by implication deprived him of that additional year.
There is no dispute that respondent acted within that year in this case. All of the assets of the corporation were distributed to the petitioners, and the value of the distributions received by each was not less than the amount of the deficiencies asserted. As a result of the distributions the corporation was left insolvent and unable to satisfy the liability for additional excess profits taxes for 1943 and 1944 which the respondent determined it owed. Petitioners have not proven, or attempted to prove, that the adjustments made by the respondent in the corporation's invested capital, in arriving at the amount of the additional excess profits taxes due from the corporation, were erroneous. In the circumstances, we hold that the respondent correctly determined that the petitioners were liable as transferees, for the deficiencies asserted against them.
Decision will be entered for the respondent.