Leuthesser v. Comm'r of Internal Revenue, Docket Nos. 28817
| Decision Date | 25 September 1952 |
| Docket Number | Docket Nos. 28817,28818. |
| Citation | 18 T.C. 1112 |
| Parties | EDWARD G. LEUTHESSER, ALLEGED TRANSFEREE OF NATIONAL METAL PRODUCTS CORP., PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.FRED W. LEUTHESSER, JR., ALLEGED TRANSFEREE OF NATIONAL METAL PRODUCTS CORP., PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Respondent's determination as to reasonableness of officers' salaries approved. Section 23(a), I.R.C.
2. Where to taxpayer receives a refund by reason of a carry-back pursuant to section 3780, I.R.C., the period of limitations for assessment of deficiencies with respect to the earlier year is not enlarged by section 3780(c) or section 276(d), I.R.C., except to the extent that the deficiency is based upon an error ‘attributable to the carry-back.‘ Only a small part of the deficiencies determined was attributable to the carry-back, but as to that part respondent has failed to meet his burden of proving that petitioners are liable as transferees. The remainder of the deficiencies against petitioners is barred by limitations.
3. Petitioners held not liable as fiduciaries under section 3467, Revised Statues, where they did not use assets of the taxpayer to pay its debts. Fred R. Tansill, Esq., and Eugene Meacham, Esq., for the petitioners.
Thomas A. Steele, Jr., Esq., for the respondent.
The respondent determined that each of the petitioners was liable as transferee for the following deficiencies in income and excess profits taxes of the National Metal Products Corporation:
+-----------------------------------+
¦Calendar ¦ ¦ ¦
+----------+--------------+---------¦
¦year ¦Type of tax ¦Amount ¦
+----------+--------------+---------¦
¦1944 ¦Income ¦$2,610.39¦
+----------+--------------+---------¦
¦1944 ¦Excess profits¦15,966.95¦
+----------+--------------+---------¦
¦1945 ¦Income ¦1,465.24 ¦
+-----------------------------------+
In an amendment to his answer, respondent asserts alternatively the liability of petitioners for these amounts as fiduciaries in accordance with section 3467 of the Revised Statutes.
Petitioners have conceded their liability for the year 1945.
In addition to the question whether National Metal Products Corporation was liable for any deficiency for 1944, the issues are whether petitioners are liable either as transferees or as fiduciaries with respect to any such deficiency.
Petitioner Fred W. Leuthesser, Jr., is a resident of Cincinnati, Ohio, and petitioner Edward G. Leuthesser is a resident of Glen Ellyn, Illinois. The petitioners are brothers.
National Metal Products Corporation (hereinafter referred to as ‘National ‘) was an Illinois Corporation with its principal place of business in Franklin Park, Illinois. It was incorporated in 1933. It kept its books and filed its income and excess profits tax returns on an accrual and calendar year basis. It filed its original income and declared value excess-profits tax return and its excess profits tax return for the year ended December 31, 1944, on March 15, 1945, with the collector of internal revenue for the first district of Illinois. No waivers extending the statute of limitations with respect to its 1944 returns have ever been executed.
The petitioners each owned 49.8 per cent of the stock of National and were directors and officers of that corporation.
Fred W. Leuthesser, Jr. (hereinafter referred to as ‘Fred‘) is 44 years old. He completed grammar school, high school, and five semesters of study at the College of Engineering, University of Illinois, and also studied metallurgy at the Lewis Institute of Technology. He is a registered professional engineer in the State of Illinois. He is a member of the American Society of Mechanical Engineers, the American Society of Tool Engineers, and the American Ordnance Association, a group of manufacturers engaged in the production of ordnance parts for the United States Army.
In 1928 Fred went to work for the Kelly Brass Works, a manufacturing concern in Chicago owned by his father. Here he gained experience in all departments of the plant: foundry, machine shop, tool room, pattern shop. He designed tools and patterns, did sales work and sales engineering, estimating, and production scheduling. He worked in these various departments of this company for approximately three years.
Fred remained with Kelly Brass Works until 1931. By that time he had become ‘Assistant General Manager,‘ with duties relating to production. While in the employ of this company he engaged in technical, scientific research which resulted in the development of methods and invention of articles patented in his name.
In 1931, Fred started a new business venture. He brought his father in as partner and on August 15, 1933, the business was incorporated as National Metal Products Corporation with a capital of $1,500. National then engaged in the manufacture of thermostatic devices and controls for use in the domestic and industrial heating field. Fred's father resigned as an officer of National in 1939 at the age of 76.
Fred was secretary and treasurer and a director of National from its inception until its termination; he was also chief engineer.
Edward G. Leuthesser (hereinafter referred to as ‘Edward‘) is 43 years old. His education included grammar school, high school, and three years of engineering at the Lewis Institute of Technology in Chicago. He took courses in mechanical engineering, metallurgy, physics, and mathematics. His educational background relative to engineering and metallurgy is comparable to that of his brother.
Edward was employed by the Kelly Brass Works in various supervisory jobs beginning in 1930 or 1931. After several years he left, and, as a sole proprietor for three years, conducted a trucking business that operated between Forest Park, Illinois, and Minneapolis and Milwaukee.
About 1938, Edward became interested in manufacturing iron lungs. After observing the original models of iron lungs manufactured in the United States, he designed, developed and had manufactured a new pumping air instead of a blower, and a simpler and lighter type of construction with certain mechanical innovations which made the operation silent in contrast to the noise of the earlier original models. He applied for and received several patents on some of these improvements.
In 1939, the company through which Edward conducted his iron lung business changed its name to Scientific Equipment Company. It was primarily a sales organization and the manufacturing was subcontracted. Edward owned a substantial amount of its stock. It sustained losses in 1940 and 1941, when its operations were curtailed due to material shortages. Subsequent to 1941 it was liquidated and its charter surrendered.
Edward first became associated with National in 1936 or 1937, at which time he devoted some time to the selling operations of that company. Subsequently, he acquired stock in the company, became vice president, and devoted most of his time to its business. On or about January 1, 1940, he became president and held this office at all times material to these proceedings.
In late 1939 or early 1940, National sold its civilian business, thereby acquiring some working capital with which to equip a plant to engage in defense work. During the latter part of 1940 and early part of 1941, it was negotiating for Government contracts and converting its plant, and was not producing for civilian use.
The usual prewar civilian business of National did not involve serious engineering problems. In the latter part of 1941, the company became engaged in war production and its engineering problems became more complex and difficult. The Government contracts normally required production to close tolerances, and new and different manufacturing techniques were involved requiring greater engineering skill. Likewise the administrative work increased and became more involved. A portion of National's work was performed by subcontractors.
During the war years, National did not maintain an elaborate staff of engineers. Its engineering work was done by the petitioners, and its detail work was done by draftsmen, production clerks, and tool engineers.
In the latter part of 1941, National began the manufacture of tools, dies, and punches designed for producing 30 and 50 caliber ammunition under an Army Ordnance contract. At the time, a large number of contractors were engaged in producing similar tools. When National first commenced production, it contracted to produce 50 units per day, but later the company was informed that Army Ordnance needed all of these tools that could possibly be produced. By early 1942, National was producing more than 2,500 units per day.
During 1942, while National was producing these tools, dies, and punches, various officials from Army Ordnance visited the plant of National. They examined its production methods and techniques and recommended them to other manufacturers.
In 1943 National was in the process of tooling up for and manufacturing a hydraulic pump for the Air Force. This was in connection with a prime contract in excess of $1,500,000 for the production of an inclined bank, engine-driven hydraulic pump used on aircraft. This pump was used to operate the hydraulic equipment, surface controls, landing gear, etc., in the various types of Army aircraft. Vickers, Inc., the holder of the patents on the pump, agreed to allow National to manufacture it license-free. It was an intricate mechanism, and in its manufacture there were more than 60 tolerances that were held to two ten-thousandths of an inch or less, and two dimensions that were held to two-millionths of an inch.
In the course of tooling up for the Air Force contract a considerable starting burden was incurred and $150,843.93 was spent in 1943 for this purpose by National. This amount was incurred primarily for special...
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