Frost v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 25184.
| Decision Date | 27 May 1931 |
| Docket Number | Docket No. 25184. |
| Citation | 23 BTA 411 |
| Parties | HERMAN FROST, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
R. C. Ogden, Esq., for the petitioner.
J. E. Mather, Esq., for the respondent.
This proceeding involves the liability of the petitioner as transferee under the provisions of section 280 of the Revenue Act of 1926 on account of deficiencies in income and profits taxes which were asserted against the Gnu Investment Company for the years 1917, 1918, and 1919 and the three-month period ended January 31, 1921. The total liability proposed for assessment against the petitioner by the Commissioner in his notice is $21,619.96. While the foregoing amount is not clearly reconcilable with the statement attached showing deficiencies determined against the Gnu Investment Company for each of the years involved, it was shown at the hearing that the amounts now outstanding are as follows:
1917 ___________________________________________ $4,952.11
1918 ___________________________________________ 9,032.42
1919 ___________________________________________ 6,150.55
Three-month period ended January 31, 1921 ______ 119.87
__________
20,254.95
FINDINGS OF FACT.
On and prior to March 31, 1921, the Gnu Investment Company, a California corporation (hereinafter referred to as the "corporation"), was engaged in the saloon and cafe business. From the time it began business in 1916 until it discontinued business on March 31, 1921, the corporation occupied certain premises under a lease dated July 28, 1916, which ran for three years with the option of renewal for an additional two years. The option was exercised, and subsequent to the discontinuance of business by the corporation a new lease was negotiated by or for the party who took over such business.
The corporation's entire outstanding capital stock of 1,000 shares, par value $10 per share, was owned by petitioner on March 31, 1921, on which date the corporation discontinued business and transferred all of its assets to William Glover, who was acting as trustee or agent for the petitioner. Thereafter petitioner carried on the business which was formerly conducted by the corporation. The bill of sale under which the transfer took place recited:
That the undersigned, Gnu Investment Company, a corporation, by its President and Secretary thereunto duly authorized, for and in consideration of the sum of Five Thousand ($5000.00) Dollars, this day paid by William Glover to said corporation, does hereby sell, assign, transfer, convey and set over all of its good will, stock in trade, appliances, equipment, utensils, books of account, accounts and bills receivable, choses in action, all assignable leasehold interests. and all other property of said corporation, wheresoever situate or being.
To HAVE AND TO HOLD said assets and property to the said William Glover, his heirs and assigns forever; it being understood and agreed that in further consideration of the execution of this bill of sale, that the said William Glover will pay all existing indebtedness and obligations of said corporation accrued or owing on this date.
At the time the above transfer took place there was certain litigation pending against the petitioner, but such litigation was not on account of Federal taxes.
The actual transfer was not made in accordance with the terms of the bill of sale, but was effected in the following manner: The sum of $2,000 was turned over by the petitioner to the said Glover, who deposited the same in his own (Glover's) account. Glover then drew his personal check for $2,000 to the order of "James Wilson" who cashed the check. "James Wilson" was, in fact, the petitioner in this proceeding. In making the transfer to Glover, he (Glover) was acting as trustee or agent for the petitioner and on June 9, 1925, assets received by him were retransferred to petitioner by bill of sale which provided that:
This bill of sale is made for the purpose of reconveying to the said Herman Frost all of the property conveyed to the said William Glover by that certain bill of sale dated the 31st day of March, 1921, executed by the Gnu Investment Company, a corporation, to the said William Glover, wherein the said property herein transferred and conveyed was transferred and conveyed to the said William Glover; it being understood that the said property so transferred to the said William Glover by said Bill of Sale dated March 31, 1921, was assigned and transferred to him in trust only for the use and benefit of said Herman Frost, the said Herman Frost being the sole beneficiary of said trust; and the said Herman Frost does hereby acquit, discharge and release the said William Glover from any and all claims of every kind and nature whatsoever, existing in his favor against the said William Glover from the beginning of the world to date, and the said Herman Frost does hereby admit and acknowledge that the said William Glover has made a full, complete, fair, accurate and correct accounting of his trust, and that he, the said Herman Frost, has accepted the same, and that there are no differences existing between them, and that all adjustments have been made between the said parties in a manner satisfactory to both of them.
On or about March 31, 1921, all of the outstanding capital stock of the corporation was surrendered to the corporation by petitioner and canceled. On March 4, 1922, the charter of the corporation was suspended for failure to pay the State license tax.
The petitioner received assets from the corporation of a fair market value of $3,700 through the tranfer of March 31, 1921.
The returns of the corporation were filed on the following dates: 1917, on March 26, 1918; 1918, on April 15, 1919; 1919, on March 20, 1920; and 1921, on November 24, 1923. An additional assessment for 1917 was made in March, 1923, in the amount of $12,253, of which amount $7,719.88 was subsequently abated. A further assessment of $418.44 was made in January, 1924, which is still outstanding. The deficiencies now outstanding for the other years here involved were assessed in January, 1924. A waiver for 1917, unlimited as to time for assessment, was executed by the corporation on February 18, 1921, and filed with the Commissioner. A second waiver for 1917, unlimited as to time for "determination, assessment and collection" and dated January 12, 1923, and a third waiver identical in form for the same year and dated February 15, 1923, were filed with the Commissioner. Likewise a waiver similar in form to the two last named and dated January 17, 1924, was filed for 1918. Each of the waivers for 1917 was signed "Gnu Investment Co., by Herman Frost, President" and that for 1918 was signed "Gnu Investment Co. by Herman Frost." Herman Frost (petitioner in this proceeding) was president of the corporation at and prior to the time it discontinued business on March 31, 1921. All waivers, with the exception of the first and second waivers filed for 1917, are signed "D. H. Blair, Commissioner." The Commissioner's notice to the petitioner advising him of his liability as transferee for the several years in question was mailed January 14, 1927.
No question is raised in this proceeding as to the correctness of the deficiencies asserted against the Gnu Investment Company, but errors were assigned by the petitioner to the effect that no liability exists on his part as transferee under the provisions of section 280 of the Revenue Act of 1926, and that even if such liability arose by reason of the transfer of assets from the corporation to him, any deficiencies which may be due from the corporation are now barred from collection from him. With respect to the first error, we think it clear from the record that, while the form of conveyance by which the assets of the corporation were transferred to the petitioner was through a bill of sale, in effect and in substance what occurred was nothing more than a liquidation by the corporation to its sole stockholder. A consideration of $5,000 was named in such bill of sale, but the petitioner purported to pay only $2,000 and this amount merely passed from the petitioner to a so-called trustee or agent and back through a fictitious name to the petitioner himself. The amount of the consideration named or paid was thus immaterial. The reason for the use of Glover in connection with the transfer was because of certain litigation then pending against the petitioner, but this litigation was in no sense connected with Federal taxes and the Commissioner stipulated that the purpose of the transfer in the manner carried out was not to avoid Federal taxes. On the whole, in so far as our present question is concerned, we think the transfer may be viewed as if made to the petitioner instead of Glover, and both parties seem to accept this view of the situation. The Commissioner, however, urges that in view of the terms of the bill of sale to the effect that Glover, who was acting for the petitioner, obligated himself to pay all existing indebtedness and obligations accrued or owing on...
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