Hutton v. Commissioner of Internal Revenue

• Decision Date: 31 May 1932
• Docket Number: No. 6638.,6638.
• Parties: HUTTON v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

59 F.2d 66 (1932)

HUTTON v. COMMISSIONER OF INTERNAL REVENUE.^*

No. 6638.

Circuit Court of Appeals, Ninth Circuit.

May 31, 1932.

Lloyd W. Dinkelspiel and Heller, Ehrman, White & McAuliffe, all of San Francisco, Cal., for petitioner.

G. A. Youngquist, Asst. Atty. Gen., and Sewall Key, F. Edward Mitchell, and Wm. Cutler Thompson, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, and John W. Gaskins, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for respondent.

Before WILBUR and SAWTELLE, Circuit Judges.

WILBUR, Circuit Judge.

Petitioner seeks to reverse a decision of the United States Board of Tax Appeals on his petition for review of the action of the Commissioner of Internal Revenue assessing him as transferee of the C. A. Hutton Flour Company, Inc., for income and profit taxes for the calendar years 1919 and 1920, amounting to $6,428.76 for the year 1919 and $1,454.48 for the year 1920. The Board of Tax Appeals affirmed the Commissioner. The facts upon which the decision of the Board of Tax Appeals rests are either stipulated or admitted in the pleadings. From such stipulation and admission it appears that the taxpayer was the sole owner of the C. A. Hutton Flour Company from the time of its organization up to the time of its liquidation; that it was incorporated in 1908, and engaged in the business of buying and selling flour until 1920; that the corporation was dissolved and liquidated in 1921; that the liquidation of the company resulted from heavy losses sustained by it in postwar readjustments which were accompanied by declines in market and inventory values and the collapse of the business of many of the company's debtors, resulting in heavy losses in accounts and bills receivable; that the liquidation was accomplished by realizing on all sound assets and by some of the largest merchandise creditors accepting as credits some of the corporation's questionable bills receivable, bearing the personal endorsement and guaranty of the petitioner, some of which are still outstanding and unpaid; that upon the liquidation of the company the petitioner received the sum of $72,000 from said company; that subsequent to such receipt by him of said amount he paid certain outstanding obligations of the company, which payments exceeded the said sum of $72,000 so received by him.

At the conclusion of the presentation of the stipulation of facts to the Board of Tax Appeals a colloquy occurred between a member of the Board and counsel representing the respective parties which is of significance on this review solely for the reason that the petitioner contends that the Commissioner thereby, in effect, stipulated that the sole question involved in the case was whether or not there was a lien in favor of the government upon the $72,000 received by the taxpayer from the C. A. Hutton Flour Company. The matter arose as follows:

"The Member. Well, if I remember correctly, and understand it correctly, in the liquidation and distribution of the assets of this corporation, the petitioner here got about $72,000.

"Mr. Wilson. That is admitted, yes, sir.

"The Member. It is also stipulated and admitted that he paid out subsequent to that receipt amounts of outstanding liabilities of the corporation in excess of $72,000.

"Mr. Wilson. That is correct.

"The Member. Well, then, why shouldn't judgment be rendered for the petitioner on that statement of facts? He is not really a distributee rendering him liable, is he?

"Mr. Wilson. The only point on which the Commissioner contends, your Honor, is that the Government takes the position that the petitioner received the sum of $72,000 on the liquidation of the C. A. Hutton Flour Company; that the amount of income taxes heretofore duly assessed against the company became a lien prior to any of its general creditors against the company. If the Commissioner is mistaken in that contention, then I will say that the petitioner is entitled to judgment. That is the sole ground upon which the Commissioner stands in this case.

"The Member. Then it really becomes a question of law as to whether or not a lien did attach by reason of this assessment, and second whether or not that lien takes precedence of the preferred creditors.

"Mr. Dinkelspiel. That is the first question of law, and of course, there is the additional contention and the further question that is raised. We realize that it has been decided adversely several times by the Board, but nevertheless has been sustained by the District Court, namely, the constitutionality of the procedure under section 280 of the Revenue Act of 1926.

"The Member. Has the Board ever passed directly upon the question of whether or not this assessment fixes a lien that gives a preference to the Government?

"Mr. Dinkelspiel. I do not believe so. I have been unable to find a decision, and I would like to ask Mr. Wilson whether he has been able to find such a decision.

"Mr. Wilson. I am unaware of such a decision upon that point."

Petitioner contends that, inasmuch as there is no such thing as a lien under the circumstances, the Board of Tax Appeals should have confined its consideration to that issue, and that, not having done so, this court should reverse the action of the Board. It is sufficient to say that the contention of the Commissioner here, and no doubt before the Board of Tax Appeals as well, is that the government had priority over the general creditors of the company by reason of the provisions of sections 3466, 3467 of the Revised Statutes (31 USCA §§ 191, 192). Whether or not that priority resulted in a lien in the strict sense of the term is entirely immaterial. Nor do we think the impromptu statement of counsel for the Commissioner before the Board of Tax Appeals did or should limit the Board in considering the stipulated facts to determine therefrom whether or not the taxpayer was liable for the tax. For that reason, we proceed to consider the matter upon its merits.

The stipulation of facts leaves much to be desired and many questions unanswered. Each party contends he should prevail in view of these uncertainties and of the burden of proof thereon. Before considering that controversy, some of the deficiencies in the stipulation should be noted. The manner of the dissolution of the corporation is not stated. The date thereof is not fixed, except that it is stipulated that it occurred during the year 1921. Neither is the date of the payment of the sum of $72,000 by the corporation to its stole stockholder fixed. Whether it was paid before, upon, or after dissolution is not stated; nor is it shown in what manner or by whom said payment was authorized to be made to the stockholder. It is not shown when or to whom the taxpayer paid said sum upon "certain outstanding obligations of the C. A. Hutton Flour Company." Nor is it shown whether or not the petitioner as sole stockholder was a director or manager of the corporation, although it is clearly inferable that he was because a director must be a stockholder, and he was the sole stockholder. Petitioner states: "It is important to note that there is absolutely no evidence or stipulation as to the nature of the obligations paid, as to whether they were obligations of mortgage creditors, judgment creditors, preferred creditors or others, nor is there anything in the record which would support the holding that the petitioner had any notice at the time of the receipt by him of the sum of $72,000 or at the time of the distribution thereof by him of this sum in liquidation of the corporation's debts, of any claim for taxes by the Government. There is, moreover, nothing in the record as to the filing of any lien claim by the government."

And the respondent points out that: "There is not a word in the agreed statement of facts or the findings of the Board to show that the respondent was required to pay these obligations; that he ever assumed to pay said obligations, much less that he received the $72,000 impressed with a trust to pay them; that he received said sum in a representative capacity, or as the agent of the taxpayer corporation; nor is there anything to indicate the character or extent of the obligations which were paid. Whether they were secured or unsecured, or whether they consisted in whole or in part of obligations upon which petitioner was liable are all matters which are left to conjecture."

It is well to remember in dealing with the facts that the corporation was the alter ego of the "sole stockholder," and that he was a director thereof. The law of California at the time of the dissolution of the corporation prohibited the distribution of the capital of a corporation to the stockholders until its debts were all paid. Section 309 of the Civil Code of California, as amended in 1917 (St. Cal. 1917, p. 657), provided:

"Unless they shall have been first permitted or authorized so to do by the commissioner of corporations, directors of corporations 1 must not make dividends except from the surplus profits arising from the business thereof; * * * 3 nor must they divide, withdraw, or pay to the stockholders, or any of them, any part of the capital stock, except as hereinafter provided. * * *

"For a violation of the provisions of this section, the directors under whose administration the same may have happened * * * are, in their individual or private capacity, jointly and severally liable to the corporation, and to the creditors thereof, to the full amount of the capital stock so divided, withdrawn, paid out, or reduced or debt...