Shepard v. Commissioner of Internal Revenue

• Decision Date: 18 February 1939
• Docket Number: No. 6708.,6708.
• Citation: 101 F.2d 595
• Parties: SHEPARD v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Seventh Circuit

101 F.2d 595 (1939)

SHEPARD v. COMMISSIONER OF INTERNAL REVENUE.

No. 6708.

Circuit Court of Appeals, Seventh Circuit.

January 11, 1939.

Rehearing Denied February 18, 1939.

Leland K. Neeves and Homer H. Cooper, both of Chicago, Ill., for petitioner.

James W. Morris, Asst. Atty. Gen., and Berryman Green, Sewall Key, and F. E. Youngman, Sp. Assts. to Atty. Gen., for respondent.

Before EVANS and TREANOR, Circuit Judges, and LINDLEY, District Judge.

Petitioner seeks to reverse the ruling of the Board of Tax Appeals which affirmed a tax assessment against him as one of two transferees of the assets of the City Ice and Supply Company, a dissolved corporation. The tax of $37,766.04 was levied upon the dissolved corporation's income for 1926.

EVANS, Circuit Judge.

We are here confronted with the validity of a tax assessed against the alleged transferee of a corporation which dissolved without paying its income tax and without assets from which the tax could be collected.

The facts: The City Ice and Supply Company, an Illinois corporation, herein called the Old Company, had a stock issue of 3,325 shares of common stock and 1,000 shares of preferred stock, each of the par value of $100. Petitioner and an associate, Hunt, entered into negotiations with two officers and stockholders of the Old Company, which resulted in the execution of a thirty day option to purchase the common stock at $200 per share. The option was never exercised, and its importance lies in its possible bearing on the subsequently executed escrow agreement out of which the tax in question grew. The second agreement named a bank as escrow agent to hold in escrow all certificates of capital stock of the Old Company; it provided that the stockholders execute proxies to petitioner who also acquired the exclusive option to purchase the stock deposited with the escrow agent on the payment of $200 per share for common stock, two-thirds of which was to be in cash and one-third in 7% preferred stock of an Illinois corporation to be known as the City Ice and Coal Company, herein called the New Company; and also provided for the redemption of the preferred stock at $105 per share. The agreement contained other provisions which, however, do not bear on our question.

The New Company was promptly organized. Directors of the Old Company accepted the proposal of petitioner and his associate which is evidenced by letters from petitioner to the Old Company from which the following excerpts are taken:

Offer submitted May 6, 1926, and accepted May 7, 1926. "All existing liabilities of City Ice and Supply Company to be assumed and paid by the parties making this proposition and payment thereof guaranteed by the corporation to whom will be made the conveyance herein contemplated."

May 6, 1926. "Steps have been taken by the undersigned to acquire the physical properties and certain other assets of the City Ice & Supply Co., an Illinois corporation chiefly engaged in the manufacture and sale of ice in the City of Chicago. Such acquisition being on the basis of assumptions and payment by us of all liabilities and obligations of said City Ice and Supply Company. We propose to cause to be conveyed to you certain of such assets as set forth in the statement hereto attached marked `Schedule A', in consideration of the payment and delivery to us or our nominees of —"

May 10, 1926. "It is the object of this memorandum effectively to designate and constitute said City Ice and Coal Company and ourselves, respectively, as our nominees to whom shall be conveyed, assigned and delivered the property purchased by us in pursuance to our written offer above mentioned."

Change in plans by petitioner was necessitated because of inability to raise the cash requirements. Under second agreement the purchaser used cash of Old Company and proceeds of a $375,000 first mortgage bond issue of New Company. When payments had been fully made, petitioner signed a receipt to the bank for "forty options and 4,365 shares of Capital Stock representing all of the common and Preferred Stock of the Old Company. After cancellation these certificates can be returned to L. R. to complete records of Old Company."

Petitioner did not take possession of the stock which he received. His attorney refused to accept the certificates, saying, "We don't want it; it is not ours." The stock was thereupon left with the escrow agent and later by it returned to the Old Company.

The New Company issued 200 shares of common stock, of which petitioner and his associate each took 96 shares and 8 were scattered. Additional shares were subsequently issued to petitioner and his associate who were at all times the officers and directors of the New Company.

The Old Company kept its books and filed its income tax return for the year 1926 on the accrual basis. It did not report as income any profit from the sale of its assets. No question was ever raised by it as to the correctness of the Commissioner's determination that the Old Company's net profit of $277,748.42 from this transaction should have been included in its 1926 income. The Commissioner subsequently added this profit to the income reported by the Old Company and determined the deficiency tax at $37,766.04. The Old Company had no assets and the tax was never paid by it. Subsequently the Commissioner determined a deficiency tax against the petitioner for the amount of this unpaid tax, acting under section 280 of the Revenue Act of 1926, 44 Stat. 61, which deals with the liability of transferees.

The Commissioner first assessed the tax against the stockholders of the Old Company as transferees, but this position was not sustained by the Board of Tax Appeals. The Commissioner then proceeded against petitioner and his associate. Two grounds were advanced for the Commissioner's action against petitioner: (a) Petitioner's agreement to assume all existing liabilities of the Old Company, and (b) the propositions of law applicable to one who is a transferee of another taxpayer's assets. This liability is also asserted on the theory that one is a trustee who has taken all of the taxpayer's assets without paying its income taxes.

The petitioner's defenses are several — as many as the theories of the Commissioner.

As to liability growing out of his agreement to assume the Old Company's debts, he asserts that income taxes accruing and assessed subsequent to the execution of his agreement were not part of "existing liabilities" thereby assumed. He denies that he is a transferee within the meaning of section 280 of the Revenue Act of 1926 and also denies liability on the theory of a trustee: first, because the facts do not make of him a trustee; second, there is no showing that the Old Company was insolvent when he closed his dealings with it; and third, even as a trustee he would not be liable for income taxes subsequently assessed when the purchase price was paid to the stockholders of the Old Company.

To a large degree he rests his contention on a fact basis; namely, that the profit occurred after the property was transferred and therefore he was not liable on any theory for a debt or tax obligation arising after his transactions with the debtor were closed.

Respondent also stresses a fact, viz., pet...