American SS Co. v. Wickwire Spencer Steel Co.

• Decision Date: 17 August 1934
• Parties: AMERICAN S. S. CO. v. WICKWIRE SPENCER STEEL CO.
• Court: U.S. District Court — Southern District of New York

8 F. Supp. 562

AMERICAN S. S. CO. v. WICKWIRE SPENCER STEEL CO.

District Court, S. D. New York.

August 17, 1934.

Martin Conboy, U. S. Atty., of New York City (Walter H. Schulman, of New York City, of counsel), for claimant.

Henry E. Kelley, of New York City, for receivers.

PATTERSON, District Judge.

The defendant is in equity receivership on creditor's bill. The United States filed a claim for $303,752.19 as additional income tax for the year 1918, claimed as due from Morgan Spring Company originally and from the defendant as transferee. The receivers rejected the claim. The matter was referred to a special master to take testimony and report. The special master had made findings of fact and has reported in favor of the United States.

The Morgan Spring Company, a Massachusetts corporation and the original taxpayer, transferred all its assets in June, 1919, to Wickwire Spencer Steel Corporation (then known as Clinton Wright Wire Company), which agreed to assume and pay all obligations of the Morgan Company then outstanding. The Wickwire Spencer Steel Corporation had already acquired the entire capital stock of the Morgan Company, and after the transfer of assets the latter was an empty shell, without assets or business. It was not formally dissolved, however, until March 31, 1924. In February, 1925, the defendant, pursuant to a plan of reorganization, took over all the assets and assumed all the liabilities of Wickwire Spencer Steel Corporation, such assets including part of the original Morgan Company assets. The Morgan assets thus acquired in succession by the Wickwire Spencer Steel Corporation and by the defendant had a value in excess of the alleged tax deficiency of the Morgan Company.

The Morgan Company had filed its 1918 tax return on May 20, 1919. The limit of time for additional assessment of tax for 1918, five years, would normally expire on May 20, 1924. On March 18, 1924, the Commissioner made an additional assessment of $44,695.99 against the Morgan Company. The Wickwire Spencer Steel Corporation then filed a claim for abatement in behalf of the Morgan Company and requested that collection be deferred until the merits of the alleged deficiency should be decided. Collection was deferred. Thereafter three statutory waivers were signed, purporting to extend the government's time for assessing and collecting the 1918 tax. All of these waivers named the Morgan Company as the taxpayer. The first was on May 8, 1924, and was for one year; it was signed "Morgan Spring Company, Wickwire Spencer Corporation, successor, G. V. Pach, Assistant Treasurer." This waiver was not signed by the Commissioner; it was referred to, however, in a letter signed by the Commissioner on December 3, 1924, and sent to the Morgan Company. The second waiver was on January 31, 1925, and was an extension to December 31, 1925; it was signed "Morgan Spring Company, Taxpayer, G. V. Pach, Treasurer of Suc. Co." The third was on November 17, 1925, and was an extension to December 31, 1926; it was signed "Wickwire Spencer Steel Company, Successor, G. V. Pach, Treasurer." The second and third waivers were signed by the Commissioner in due course. During this entire period of 1924-1926, the Wickwire Spencer Steel Corporation and later the defendant were negotiating with the Commissioner and protesting against the additional assessment of $44,695.99 and a proposed further deficiency of $228,752.15 for the same year also said to have been due from the Morgan Company. A formal deficiency letter on the $228,752.15 was sent by the Commissioner to the Morgan Company on February 12, 1926.

It appears that on December 31, 1927, the Commissioner turned his attention to the defendant and made an assessment against it as transferee of the Morgan Company. It is this assessment against the defendant that is sought to be enforced in the present claim. The assessment was for $303,752.99, made up of the earlier assessment of $44,695.99 against the Morgan Company, the alleged additional deficiency of $228,752.15, and interest on both amounts to December 31, 1927.

Meanwhile there had been instituted a proceeding in the name of the Morgan Company before the Board of Tax Appeals, the determination of which is relied on by the receivers as a binding adjudication against the present claim of the United States. The proceeding, though nominally brought by the Morgan Company, was directed and controlled by the defendant and later on by its receiver. A petition was filed by the Morgan Company on April 26, 1926, to review the alleged deficiency of $228,752.15. The petition set forth, among other grounds of alleged illegality, that the period for assessment and collection of tax for 1918 had expired prior to the deficiency notice, and that no waivers had been signed by the taxpayer. A hearing was held on June 19, 1928, before a member of the Board sitting as a division. The petitioner withdrew all matters assigned as errors except those based on the statute of limitations. At the conclusion the division held orally that the taxpayer had sustained the defense of limitations; that the Commissioner had not established that the three waivers had been executed by authority of the Morgan Company; that the waivers were therefore not binding on it; that accordingly there was no deficiency due from the Morgan Company. These findings and conclusions were recorded in the stenographic minutes. The next day the member who heard the case entered in the records a decision whereby it was adjudged "that there is no deficiency for 1918." The United States took no proceedings to have the decision reviewed on appeal.

Prior to the hearing on this petition the 1928 Revenue Act had become effective. By that act certain changes in procedure relative to cases before the Board were adopted. It was provided that the report of a division on a case "shall become the report of the Board within 30 days after such report by the division, unless within such period the chairman has directed that such report shall be reviewed by the Board," Revenue Act 1924, § 906 (b), as added by Revenue Act 1926, § 1000, as amended by Revenue Act 1928, § 601, 26 USCA § 1217 (b); and that the decision of a case "shall be made by a member in accordance with the report of the Board, and such decision so made shall, when entered, be the decision of the Board," section 907 (a), as added in 1926 and amended in 1928, 26 USCA § 1219 (a).

Other facts are set forth in the findings of the special master. Neither the United States nor the receivers offered any proof as to the correct amount of the 1918 tax of the Morgan Company.

1. The assessment of the tax is prima facie correct, casting on the party resisting the claim the burden of showing that the Commissioner's computation was erroneous. United States v. Rindskopf, 105 U. S. 418, 26 L. Ed. 1131; Wickwire v. Reinecke, 275 U. S. 101, 48 S. Ct. 43, 72 L. Ed. 184; Brunton v. Commissioner, 42 F.(2d) 81 (C. C. A. 9), certiorari denied 282 U. S. 889, 51 S. Ct. 101, 75 L. Ed. 783; Burnet v. Petroleum Exploration, 61 F.(2d) 273 (C. C. A. 4), affirmed 288 U. S. 467, 53 S. Ct. 439, 77 L. Ed. 898. There being no evidence either way as to the actual tax liability of the Morgan Company, it must be concluded that the Morgan Company failed to pay its proper tax for the year 1918 by the amount here in dispute. The question is whether the deficiency may be collected from the defendant as transferee.

2. The defendant as transferee of the taxpayer's property incurred liability for payment of the deficiency in tax. For one thing, the defendant's predecessor made an express agreement to assume and pay the liabilities of the Morgan Company, and the defendant in turn assumed the liabilities of its predecessor. Warner Collieries Co. v. United States, 63 F.(2d) 34 (C. C. A. 6). Independently of express assumption, the defendant succeeded to the entire assets of the Morgan Company, and those assets had a value substantially in excess of the tax liability. Phillips v. Commissioner, 283 U. S. 589, 51 S. Ct. 608, 75 L. Ed. 1289; Hatch v. Morosco Holding Co., 50 F.(2d) 138 (C. C. A. 2), certiorari denied (Irving Trust Co. v. U. S., 284 U. S. 668, 52 S. Ct. 42, 76 L. Ed. 565; United States v. Garfunkel, 52 F.(2d) 727 (D. C. N. Y.). The United States therefore had a cause of action against the defendant enforceable by suit in equity or action at law, or it might proceed by summary administrative measures under section 280 of the 1926 Revenue Act (26 USCA § 1069 and note). Phillips v. Commissioner, supra. The Commissioner adopted the latter course when he made the assessment of December 31, 1927, against the defendant as transferee.

3. The assessment of December 31, 1927, must be deemed a timely one. Under the act of 1926 (section 280) as well as under subsequent acts, the period of assessment against a transferee does not expire until one year after expiration of the period of limitation for assessment against the original taxpayer. The return having been filed on May 20, 1919, the time for assessment against the Morgan Company would ordinarily have expired May 20, 1924. But a series of waivers of time for assessment of tax was signed by Wickwire Spencer Steel Corporation and by the defendant, both of them acting ostensibly for the Morgan Company, and these successive waivers purported to bring the time for assessment against the Morgan Company down to December 31, 1926. It is unnecessary here to determine whether these waivers were authorized by the Morgan Company or were in any way binding on it. The defendant represented that it had authority to sign them in behalf of that company and is equitably estopped now to maintain the contrary. On this feature Lucas v. Hunt, 45 F.(2d) 781 (C. C. A. 5), is directly in point. There the Commissioner made an assessment against Hunt as transferee of the assets of a dissolved corporation which owed the tax. Hunt was one of the liquidators and signed...