Lowy v. Comm'r of Internal Revenue

• Citation: 35 T.C. 393
• Decision Date: 06 December 1960
• Docket Number: Docket No. 59265.
• Parties: LEO L. LOWY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

35 T.C. 393

LEO L. LOWY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 59265.

Tax Court of the United States.

Filed December 6, 1960.

Liability of stockholder-transferee of all of the assets of a wholly owned corporation for interest on deficiencies in tax due from the transferor for the years 1942 and 1943, begins on March 15, 1943, and March 15, 1944 (the due dates for the filing of returns and payment of taxes), where the value of the distributed assets substantially exceeded the amounts of the deficiencies, additions to tax, and potential interest owing by the transferor; such liability for interest is governed by section 292 of the Internal Revenue Code of 1939 and not by State law. Maurice V. Seligson, Esq., for the petitioner.

John J. Madden, Esq., and John A. Dunkel, Esq., for the respondent.

OPINION.

RAUM, Judge:

The only remaining issue in this case relates to petitioner's liability, as transferee of assets of American Rolbal Corporation, for interest on deficiencies in tax of that corporation for the years 1942 and 1943. Deficiencies against the corporation (including additions to tax pursuant to sections 293(b) and 291(a) of the 1939 Code for fraud and failure to file returns) were adjudicated by this Court, and its decision was affirmed by the Court of Appeals for the Second Circuit on March 29, 1955. American Rolbal Corporation v. Commissioner, 220 F.2d 749. Shortly thereafter, on June 2, 1955, the Commissioner sent the petitioner a notice that the determinations of the tax liabilities of the corporation disclosed specified deficiencies and penalties and that they, ‘plus interest provided by law,‘ constituting his liability as transferee of the corporate assets, would be assessed against him. Petitioner then filed a timely petition (which has since been amended) with this Court contesting the determination.

At the hearing of the present case no facts were presented other than those contained in a stipulation, which was thereafter amended by the parties. The entire stipulation, as amended, is as follows:

1. Petitioner is a transferee of the assets of American Rolbal Corporation and is liable, as such transferee, for the following taxes and penalties due and owing by said corporation for the taxable years as follows:

+---------------------------------------------------------------------+
                ¦Taxable Year ended December 31, 1942:¦          ¦50% Pen.  ¦5% Pen.  ¦
                +-------------------------------------+----------+----------+---------¦
                ¦Income tax                           ¦$61,119.83¦$30,559.92¦         ¦
                +-------------------------------------+----------+----------+---------¦
                ¦Declared Value Excess Profits tax    ¦22,951.66 ¦11,475.83 ¦         ¦
                +---------------------------------------------------------------------+
                

Taxable Year ended December 31, 1943
                Income tax                            28,552.97 14,276.49 $1,427.65
                Declared Value Excess Profits tax     10,570.25 5,285.13  528.51
                

The sole issue remaining between the parties concerns the date from which interest should be computed on the aforementioned liabilities of the petitioner as transferee.

2. The assets of American Rolbal Corporation were transferred to petitioner, who was the sole stockholder of said corporation, on December 31, 1943 and said assets at that time had a fair market value in excess of $1,000,000.00.

3. The notice of deficiency which advised petitioner of his liability as transferee in the instant proceeding was mailed to petitioner on June 2, 1955.

As simple arithmetic will disclose from the foregoing stipulation, the corporation owes taxes and additions to tax (‘penalties') in the aggregate amounts of $126,107.24 for 1942 and $60,641 for 1943. Petitioner, who, as sole stockholder, received over $1 million of corporate assets on December 31, 1943, concedes that as transferee he is liable for these taxes and ‘penalties.’ The sole issue left open by the stipulation is ‘the date from which interest should be computed on the aforementioned liabilities of the petitioner as transferee.’

Petitioner contends that he is not liable for any interest prior to June 2, 1955, when the Commissioner sent him the notice of transferee liability; he concedes that, under applicable New York law, he is liable for interest from June 2, 1955, to the date of payment. The Government, on the other hand, argues that the starting points for interest are March 15, 1943 and 1944, in respect of the tax liabilities for the years 1942 and 1943, respectively. Those were the dates when the returns and taxes for the respective years were due.

Much of the confusion surrounding this issue is attributable to the loose manner in which the word ‘interest’ has been used. There are at least two different concepts relating to interest collectible from a transferee— one founded upon Federal statute and the other upon State law— and it is important that they be kept clearly in mind.

The Federal statute itself spells out a liability for interest on a deficiency and fixes it at 6 per cent per annum from the due date. Thus, section 292(a) of the 1939 Code provides that, ‘Interest upon the amount determined as a deficiency * * * shall be collected as part of the tax, at the rate of 6 per centum per annum from the date prescribed for the payment of the tax * * * .’ When a tax is not paid the United States becomes entitled, by Federal Federal statute, not only to the tax and additions (‘penalties,‘ e.g., for negligence or fraud, section 293), but also for interest at the rate of 6 per cent from the due date, and these additions and interest are collectible together with the basic deficiency by the United States. Such is the right which the Federal statute itself creates in respect of the deficiency in tax, and such is the measure of the taxpayer's liability to the Government. Had there been no transfer of assets by the corporation, such would be the extent of its liability to the United States. However, it did transfer its assets to petitioner in an amount far greater than its total potential liability for taxes, ‘penalties,‘ and interest. The parties have stipulated that petitioner ‘is a transferee’ of the corporate assets ‘and is liable, as such transferee’ for specified taxes and ‘penalties' owing by the corporation for the years 1942 and 1943. The net effect of this stipulation is that the debtor (the corporation) transferred its assets in such manner as to enable the creditor (the Government) to follow those assets in the hands of the transferee in order to satisfy its claim against the debtor. To be sure, the liability of the transferee as such must arise under applicable State Law, cf. Commissioner v. Stern, 357 U.S. 39, but the quantum of the creditor's right— i.e., the amount of tax due, the additions to tax for negligence or fraud, and the amount of interest applicable thereto— must, of necessity, be determined in accordance with the Federal statute. Certainly, it is the Internal Revenue Code and not New York law which fixes the amount of deficiency in tax. And it is similarly the Internal Revenue Code, rather than State law, which spells out the right of the Government to the so-called penalties and interest. These amounts in the aggregate constitute the claim of the United States against the taxpayer-transferor and they similarly measure the claim against the transferred assets.

The confusion engendered by petitioner's position grows out of a situation where the amount of the transferred assets is less than the amount of the creditor's claim, and where, in order to make the creditor whole, it may be necessary to find some liability against the transferee for interest in respect of the transferred assets. Such interest, by its very nature, can arise only under State law, and must comply in every respect with applicable State law not only as to rate, but also as to the starting point. Thus, if the transferred assets herein had been equal to only $100,000, substantially less than the amount of the basic deficiencies, they would plainly have been insufficient to satisfy the Government's claim. However, in such circumstances, the transferee would have had the use of the transferred assets over a period of time, and it is quite possible that he...