Vestal v. Commissioner of Internal Revenue

• Decision Date: 03 December 1945
• Docket Number: No. 9025.,9025.
• Citation: 80 US App. DC 264,152 F.2d 132
• Parties: VESTAL v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — District of Columbia Circuit

80 US App. DC 264, 152 F.2d 132 (1945)

VESTAL v. COMMISSIONER OF INTERNAL REVENUE.

No. 9025.

United States Court of Appeals District of Columbia.

Argued October 25, 1945.

Decided December 3, 1945.

Mr. Homer Hendricks, of Washington, D. C., for petitioner.

Mr. Fred E. Youngman, Special Assistant to the Attorney General, with whom Mr. Samuel O. Clark, Jr., Assistant Attorney General, and Mr. Sewall Key and Miss Helen R. Carloss, Special Assistants to the Attorney General, were on the brief, for respondent. Messrs. J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and John M. Morawski, Special Attorney, Bureau of Internal Revenue, both of Washington, D. C., also entered appearances for respondent.

Before GRONER, Chief Justice, ALBERT LEE STEPHENS, Circuit Judge, sitting by designation, and PRETTYMAN, Associate Justice.

PRETTYMAN, Associate Justice.

This is an income tax case brought from the Tax Court of the United States to this court by stipulation of the parties under Section 1141(b) (2) of the Internal Revenue Code.¹ The tax is proposed against appellant as the transferee of assets of a dissolved corporation. By order of this court, entered pursuant to another stipulation of the parties, six other cases now pending on the court's docket,² involving other transferees of assets of the same corporation, are to be governed by the judgment in this case.

Chilhowee Mills, Inc., was a Tennessee corporation. On June 10, 1937, it granted to an outside party an option to purchase its good will and substantially all its assets. Among its assets was certain real estate. As of June 30, 1937, by action of its stockholders, it dissolved and surrendered its corporate charter. The corporate books were closed as of that date. As of July 1, 1937, the former holders of the common stock formed a partnership, in which their proportionate holdings as partners were the same as their prior holdings as stockholders. Partnership books were opened, and capital accounts in all the assets, including the real estate, were stated for the several partners. Thereafter, the business was conducted as a partnership. No formal articles of partnership were drawn. No deed to the real estate was executed by the corporation to the partnership.

In their individual income tax returns for 1937, the individuals who had been stockholders treated the liquidation of June 30, 1937, as a complete liquidation and as a distribution of all the assets, including the real estate. They paid taxes upon the gains thus computed. The corporation filed no income tax return for any period after June 30, 1937. Partnership returns were filed for Chilhowee Mills, beginning July 1, 1937.

In October, 1938, pursuant to the option of June 10, 1937, the real estate was sold to an assignee of the original option holder. The deed was executed by the former officers and directors of Chilhowee Mills, Inc., as trustees in liquidation.³ Chilhowee Mills, the partnership, included in the partnership return the gain from this sale and reported all required pertinent data in respect thereto. The respective partners paid the tax upon their respective shares of the income thus reported.

The Commissioner of Internal Revenue, upon examining the partnership returns for the fiscal years ending June 30, 1938, and June 30, 1939, determined that Chilhowee Mills was not a partnership but was an association taxable as a corporation. He thereupon sent a notice of deficiency upon that basis, including among other items in the income for the fiscal year 1939 the gain on the sale of the real estate.

Chilhowee Mills appealed to the then United States Board of Tax Appeals. The sole question before the Board was whether the petitioner was taxable as a partnership or, being an association, was taxable as a corporation. The Board held for the petitioner⁴ and pointed out in its opinion that it was foreclosed by the pleadings from the question latent in the case of whether the proceeds from the sale of the real estate was to be considered income of the partnership or income taxable as corporate income to the corporation in dissolution. No appeal being taken, the decision of the Board became final.

Thereafter, on January 9, 1943, the Internal Revenue Agent in Charge at Nashville, Tennessee, pursuant to the general authority delegated to him by the Commissioner,⁵ sent to Chilhowee Mills a statement showing his computation of the distributive net income of the partnership for the fiscal years 1937, 1938 and 1939, and thereafter sent to each of the partners a statement showing his computation of the respective partner's individual income tax liability upon that basis. In the latter statements, he said:

"On June 30, 1937, Chilhowee Mills, Inc., Athens, Tennessee, dissolved and distributed all of its assets in complete liquidation by opening accounts with each of its holders of common stock and crediting to those accounts the entire amount of its capital as represented by the common stock outstanding, and surplus. * * * After dissolution of the corporation, the business was continued as a partnership."

Included in the income thus taxed to the partners was the gain upon the sale of the real estate in 1938. The additional taxes shown by these statements were paid.⁶

Meantime, when the Commissioner had first determined that Chilhowee Mills was taxable as a corporation, some of the individuals, in order to protect their rights in the event the Commissioner was sustained in that determination, had filed claims for refund for the taxes which had been paid by them individually for 1937 upon the complete distribution theory. These claims for refund were denied.

On June 17, 1943, the Commissioner addressed notices of deficiency to Chilhowee Mills, Inc., as a dissolved corporation, and to the several former stockholders, in which he determined that the sale of the real estate in 1938 was by the corporation in dissolution, and that the several individuals were liable as transferees of the assets of the corporation for the taxes thus computed. The corporation, by its former officers, and the individuals appealed to the Tax Court of the United States. That court sustained the determination of the Commissioner.⁷ From that judgment the cases are brought to this court upon petitions for review.

The sale here involved is the sale of the real estate in 1938. It is the same sale upon which the gain was taxed to the individuals as partners pursuant to the action of the Internal Revenue Agent in Charge in January, 1943. The individuals who were then taxed as partners are the same individuals whom it is now proposed to tax as transferees of the assets of the corporation.

Petitioner, on behalf of himself and the other transferees, contends (1) that there was no liability on him in law or in equity for the tax as transferee of the assets of the corporation, because there was no tax due by the corporation, any such tax having been barred by the statute of limitations; (2) that the decision of the Board of Tax Appeals in the prior proceeding is res judicata of the issues in the case at bar; (3) that the Commissioner, having determined and collected taxes from these individuals upon the theory that the sale in 1938 was by the partnership, is now estopped from asserting that the sale was by the corporation in dissolution; and (4) that, in determining that the sale in 1938 was by the partnership and in collecting taxes from the individuals upon that basis, the Commissioner made a binding election and therefore cannot now assert that the tax upon the same sale is now due from the same individuals as transferees of the assets of the corporation.

Petitioner says that since assessment against the transferor corporation is barred by the statute of limitations, no liability, at law or in equity, of the transferees of the property, exists in respect of the tax. Section 311(a) (1), Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 311 (a) (1). The point is pertinent, of course, only upon the assumption that the corporation made the sale. If the corporation made the sale, the proceeds must have been distributed thereafter. Just what the date of such distribution was, under the Commissioner's theory of the case, is not clear, but it could not have been later than February 20, 1939, when, the Tax Court found, the corporation was finally dissolved. The transferee's liability is one which attaches, at law or in equity, to the assets when distributed, and such liability exists in equity when a tax is then potentially due.⁸ The corporate return for the period ended June 30, 1939, if any was due, was not due by February 20, 1939, and so any tax due upon such a return was a potential liability when the transferees took the assets, even if the distribution be deemed to have occurred at this latest possible date. Such being the case, the statute of limitations provided for assessments against transferees applies. That period is one year after the expiration of the period of limitation for assessment against the taxpayer.⁹ The corporate return for the fiscal year ended June 30, 1939, if any was due, was due September 15, 1939. The three-year period upon assessments against the taxpayer, plus the additional year, expired September 15, 1943. The notices of deficiency mailed June 17, 1943, were, therefore, in time, if, as we have said, it be assumed that the corporation made the sale.

Petitioner's contention that the return filed by Chilhowee Mills, a partnership, for the fiscal year 1939 was a return which started the running of the statute of limitations,¹⁰ is not, in our view, a sound premise for the conclusion that the liability of the transferees is barred. The only valid premise for petitioner's conclusion is that the one-year additional period provided for assessment against transferees does not apply in this case. We find no reason why it does not apply.

Petitioner next contends that the decision of the then Board of Tax...