Ochs v. United States

• Decision Date: 03 October 1962
• Docket Number: No. 362-56 to 365-56.,362-56 to 365-56.
• Citation: 158 Ct. Cl. 115,305 F.2d 844
• Parties: Alfred L. OCHS v. The UNITED STATES. Alfred L. OCHS, and Wife, Verna L. Ochs v. The UNITED STATES. Roberta OCHS, Executrix of Estate of Donald F. Ochs, Deceased v. The UNITED STATES. Roberta OCHS, Individually, as the Surviving Wife of Donald F. Ochs, Deceased; as well as the Executrix of the Estate of Donald F. Ochs, Deceased v. The UNITED STATES.
• Court: U.S. Claims Court

158 Ct. Cl. 115, 305 F.2d 844 (1962)

Alfred L. OCHS v. The UNITED STATES.

Alfred L. OCHS, and Wife, Verna L. Ochs v. The UNITED STATES.

Roberta OCHS, Executrix of Estate of Donald F. Ochs, Deceased v. The UNITED STATES.

Roberta OCHS, Individually, as the Surviving Wife of Donald F. Ochs, Deceased; as well as the Executrix of the Estate of Donald F. Ochs, Deceased v. The UNITED STATES.

Nos. 362-56 to 365-56.

United States Court of Claims.

July 18, 1962.

Rehearing Denied October 3, 1962.

Raymond F. Garrity, Washington, D. C., for the plaintiffs. Robert A. Littleton, Washington, D. C., was on the briefs.

Cynthia Holcomb, Washington, D. C., with whom was Asst. Atty. Gen., Louis F. Oberdorfer, for the defendant. Edward S. Smith, Lyle M. Turner and Philip R. Miller, Washington, D. C., were on the briefs.

JONES, Chief Judge.

Two of these four actions consolidated for trial (Nos. 362-56 and 364-56) seek recovery of corporate income and excess profits taxes assessed against a corporation, Ochs Brothers, Incorporated, for the fiscal years ending January 31, of each of the years 1943 through 1947. Such assessments were paid in 1950 by the individual plaintiffs, Alfred L. Ochs and Donald F. Ochs.¹

The other two suits involve the assessment for calendar year 1947 of personal income taxes against Alfred and Donald Ochs and their wives. This assessment was based on the theory that Ochs Brothers, Incorporated, was liquidated and its assets distributed during that year, causing the realization of a long-term capital gain by the distributees, the Ochs brothers. The legal aspects of the two problems as briefly outlined above will be discussed separately, although some of the facts presented below are common to both.

Cases Nos. 362-56 and 364-56

Ochs Brothers, Incorporated, was created as a mercantile corporation under the laws of Minnesota on March 24, 1914, for a period of 30 years. As is pertinent to these cases, Alfred and Donald Ochs owned all the shares, except for one directorship qualifying share. Without plaintiffs' knowledge, the corporate charter expired on March 25, 1944. It is not disputed that under state law such expiration terminated the corporation's existence save for the purpose of closing up its affairs.² Not until December 1947 were plaintiffs aware of these circumstances.

Plaintiffs' discovery was subsequent to an audit by the Internal Revenue Service earlier in 1947 which culminated in a report concerning proposed deficiencies for the fiscal years ending on January 31, of 1943, 1944, and 1945. In April 1949, forms entitled "Consent Fixing Period of Limitation Upon Assessment of Income and Profits Tax," were executed for these years in the corporate name, bearing the corporate seal, and signed by "Alfred L. Ochs, former President." After several conferences with the Service, a "Waiver of Restriction on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessments" was signed in November of 1949 by Alfred L. Ochs on behalf of Ochs Brothers, Incorporated, for deficiencies proposed for each of the fiscal years ending January 31, of 1943, 1944, and 1945.

In January 1950, after audit of corporate returns for the fiscal years ending January 31, of 1946 and 1947, a "Waiver of Restriction on Assessment and Collection of Tax Deficiency" was signed by Afred L. Ochs as "former Pres." with respect to proposed deficiencies for those years.

Deficiencies were assessed against Ochs Brothers, Incorporated, on March 3 and March 10, 1950. Later in March, plaintiffs' position as regards the deficiencies was outlined in a letter to the Service. (A similar position had been taken by plaintiffs, beginning in January of 1949, in formal protests to and at intermittent conferences with the Service.) Primarily they contended that the taxes were uncollectible because the statute of limitations for assessment of deficiencies had run, since (1) the corporation no longer existed after March 25, 1944, and thus could not execute extensions to the period of limitations, and (2) Donald and Alfred Ochs had never consented to such extensions as individual transferees of the corporate property after March 25, 1944. In response, the Service relied on the waivers of restriction on assessments and collections of deficiencies which required that the deficiency be paid and which only then allowed disputation of the assessment through the filing of a claim for refund.

Consistent with its position, the Service twice demanded payment in May 1950. On July 27, 1950, 30-day notices of transferee liability were sent to the brothers, individually. Early in August of that year, the Service caused to be served personally on one of the Ochs brothers a warrant for distraint directed to the corporation. Tax liens were also filed in the county and directed to Ochs Brothers, Incorporated.

Believing that the warrant and liens were effective, the president of the bank with which the Ochs brothers did business informed the brothers that the bank would not honor checks on the account or make any loans until the matter was settled. Consequently, the brothers conferred on August 16, 1950, with the Service in order to negotiate a basis for the payment of the assessments against Ochs Brothers, Incorporated, and also in reference to the personal tax liability of Alfred and Donald Ochs, individually, for the calendar years 1945 and 1946. The resultant settlement allowed certain over-assessments which had been granted the brothers and their wives on 1945 and 1946 personal returns to be deducted from the corporation's total deficiency. As the settlement contemplated, $17,465.95 was collected from each of the brothers for aggregated deficiencies assessed against Ochs Brothers, Incorporated, for the fiscal years ending on January 31, of 1943 through 1947. Plaintiffs are here asking for refund.

Initially, we must decide whether Ochs Brothers, Incorporated, even though its charter had expired under state law and its existence terminated, was taxable as a corporation within the meaning of section 3797(a) (3) of the Internal Revenue Code of 1939³ for the period covered by the deficiency assessments.

Whether an organization is to be taxed as a corporation under the Code is determined by Federal, not state, law. Burk-Waggoner Oil Ass'n v. Hopkins, 269 U.S. 110, 46 S.Ct. 48, 70 L.Ed. 183 (1925). Section 3797(a) (3) provides: "The term `corporation' includes associations * * *." A regulation⁴ which covers the years in issue states:

"If the conduct of the affairs of a corporation continues after the expiration of its charter, or the termination of its existence, it becomes an association."

We consider this a reasonable interpretation of the Code by the Internal Revenue Service.⁵ The question remains whether, as shown by the facts in these cases, there is present the continued conduct "of the affairs of a corporation" after March 25, 1944 — the date the charter of Ochs Brothers, Incorporated, expired.

On February 11, 1948, all the outstanding stock of Ochs Brothers, Incorporated, was surrendered and canceled, and Alfred and Donald Ochs entered into a written partnership agreement. The latter was a written memorandum of a purported oral agreement to operate the business as equal partners after April 30, 1944. Also in February 1948, the capital and surplus accounts of the corporation were closed out retroactively and transferred to a new partnership capital account opened as of February 1, 1947. Partnership tax returns were first filed for the fiscal year ending January 31, 1948. A notice furnished the Service in June 1948 ("Employer's Notice of Termination of Employment") signed by Alfred L. Ochs, as "Partner," indicated the corporation had been dissolved on January 31, 1947.

The events above, apart from asserted retroactivity, including the December 1947 discovery of the charter expiration itself, took place subsequent to January 31, 1947. This date marks the end of the period for which deficiencies were assessed. Clearly, at least until that date, "the conduct of the affairs of" Ochs Brothers, Incorporated, was carried on in the same manner as prior to the date the charter expired, that is as a corporation. A more detailed presentation of facts relevant to this conclusion is found in findings 11 through 16. We only note further in summary that during the years in question corporate tax returns and social security returns were filed under the name of Ochs Brothers, Incorporated, annual stockholders' and directors' meetings were held, corporate stock was issued, and bank records remained in the name of Ochs Brothers, Incorporated.

Ochs Brothers, Incorporated, therefore, was an association at least through the fiscal years ending January 31, 1947, and properly taxed as a corporation. See Coast Carton Co. v. Commissioner, 149 F. 2d 739 (9th Cir.1945), which reached the same result when dealing with comparable facts.

Plaintiffs next argue that since this organization was neither a de facto nor de jure corporation under state law, no one could have been authorized to sign waivers and consents to extension of the statute of limitations as described, supra. Applicable to this contention is this court's discussion in Aldridge v. United States, 64 Ct.Cl. 424, 432 (1928), of the power of a Mississippi executrix of a deceased taxpayer to waive the running of the statute of limitations against an assessment:

"It can not be contended that the power of Congress to confer the right to waive the statute can be taken away by a State statute * * *. To say that the right can be granted but the privilege of exercising it can be limited or taken away by a State statute or a decision of a State court would be in effect to destroy the right and thus nullify the act of Congress."

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