Weil v. Commissioner of Internal Revenue

• Decision Date: 26 July 1937
• Docket Number: No. 394,395.,394
• Citation: 91 F.2d 944
• Parties: WEIL v. COMMISSIONER OF INTERNAL REVENUE (two cases).
• Court: U.S. Court of Appeals — Second Circuit

91 F.2d 944 (1937)

WEIL v. COMMISSIONER OF INTERNAL REVENUE (two cases).

Nos. 394, 395.

Circuit Court of Appeals, Second Circuit.

July 26, 1937.

Thomas M. Wilkins, of Washington, D. C., for petitioners.

James W. Morris, Asst. Atty. Gen., and J. Louis Monarch and Joseph M. Jones, Sp. Assts. to Atty. Gen., for respondent.

Before MANTON, SWAN, and CHASE, Circuit Judges.

SWAN, Circuit Judge.

In 1932 additional income taxes for the years 1924, 1925, 1927 and 1928 were assessed against B. J. & L. V. Weil, Inc., a New York corporation. The corporation was dissolved in April, 1932, and no part of these additional taxes, amounting to $31,254.31 plus interest, has been paid. Under section 280 (44 Stat. 61) and section 311 (44 Stat. 77, 26 U.S.C.A. § 474 (b), of the Revenue Act of 1926 and section 311 of Revenue Act of 1928 (45 Stat. 860 26 U.S.C.A. § 311 and note), the petitioners have been held liable as transferees in the sum of $17,679.76 because the corporation, while insolvent, transferred to them in satisfaction of debts owing to them certain assets having a net book value of this figure, which the Board found to be their value.

The petitioners were the only stockholders and officers of the taxpayer corporation from its organization in 1923 to its dissolution in 1932. Its business was dealing in real estate. On or about December 31, 1931, the petitioners caused it to sell to them part of its assets for a price which was paid by canceling indebtedness of $122,513.49 owing to them by the corporation for advances and undrawn salaries, $40,000 against salaries, and the remainder against advances. The properties transferred consisted of office fixtures, three pieces of encumbered real estate, and the balances due on five second mortgages, three third mortgages, and one fourth mortgage. The book value of the office fixtures was $1,113.62. The total cost to the corporation of the three pieces of real estate was $711,875.30. At the date of sale the depreciation reserve on them on the corporation's books amounted to $131,017.50, and they were encumbered by mortgages for $671,000. They had been operated at substantial losses during 1931. The unpaid balances on the mortgages transferred totaled $106,708.34, but some of them were in default on December 31, 1931. The book values of all of the properties sold to the petitioners was $17,679.76. In 1932 the petitioners collected $3,022.90 of principal due on two of the mortgages, but they never collected any further principal on any of them. Five of them have been lost through the foreclosure of the prior mortgages, two in 1932, one in 1933, and two in 1934. Both before and after the transfer to the petitioners the corporation was insolvent. The Board found that after this transfer it retained loans receivable of $1,460.84 and two pieces of encumbered real estate having a book value of $190,185.41, which were conveyed to the mortgagees early in 1932 for what it would have cost the latter to foreclose. The Board made no finding as to the corporation's cash position at the close of 1931. According to Petitioners' Exhibit No. 1 (and there is no evidence to contradict it), the corporation ended the year with cash of $12,048.22. The value of the assets transferred to the petitioners was found by the Board to be $17,679.76 — the same figure as the book value. Transferee liability of the petitioners was apparently based on the theory that, since the corporation was insolvent, the transfer "amounted to a fraud on the other creditors, including the government."

The transferee provisions of the revenue acts impose no new obligation upon a transferee of the property of a taxpayer; they merely provide a summary procedure for enforcing a liability imposed by the municipal law. Hatch v. Morosco Holding Co., 50 F.(2d) 138, 139 (C.C.A.2). At common law it was not illegal for a failing debtor to prefer one creditor over another. Merillat v. Hensey, 221 U.S. 333, 342, 31 S.Ct. 575, 55 L.Ed. 758, 36 L.R.A. (N.S.) 370, Ann.Cas.1912D, 497. The appellee relies upon section 15 of the New York Stock Corporation Law (Consol. Laws, c. 59). It seems clear that the Board did not make sufficient findings of fact to bring this statute into play. The first part of the section forbids a corporation to pay a debt to any of its officers, directors, or stockholders, if it "shall have refused to pay any of its...