Graham v. Commissioner , 26 B.T.A. 301 ( 1932 )

M. H. GRAHAM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ESTATE OF H. C. STONE, MRS. H. C. STONE, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

G. H. MOORE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

H. C. CHENOWITH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ESTATE OF W. L. HODGES, AGNES WILEY HODGES, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

W. L. HODGES, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Graham v. Commissioner

Docket Nos. 38335-38337, 38349-38351.

United States Board of Tax Appeals

26 B.T.A. 301; 1932 BTA LEXIS 1329;

June 8, 1932, Promulgated

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1. Receipt of assets belonging to a taxpayer by a trustee in liquidation does not establish individual transferee liability.

2. Stockholders of a corporation received a dividend of $700 per share at a date when the corporation was solvent and such distribution did not result in insolvency. Held, that the stockholders are not liable under section 280 of the Revenue Act of 1926 for income taxes due from the corporation.

3. The statutory liability of California corporation stockholders is not such a liability as may be asserted under section 280 of the Revenue Act of 1926.

A. Calder Mackay, Esq., George M. Thompson, C.P.A., and Dan J. Chapin, Esq., for the petitioners.

J. A. Lyon, Esq., and E. L. Updike, Esq., for the respondent.

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LANSDON

These are proceedings under section 280 of the Revenue Act of 1926. The respondent has asserted liability as transferee of the Pacific Rock and Gravel Company in respect of income taxes for 1922 as follows: M. H. Graham, $7,500; H. C. Stone, $7,500; G. H. Moore, $10,000; H. C. Chenowith, $15,000; W. L. Hodges, $53,509.11; and W. L. Hodges, Trustee, $53,509.11.

Liability of the taxpayer has been determined in Pacific Rock & Gravel Co.,26 B.T.A. 296">26 B.T.A. 296, promulgated this day, and it remains only for us to determine the liability, if any, of each of these petitioners.

FINDINGS OF FACT.

For several years prior to November 2, 1919, the Pacific Rock and Gravel Company was engaged in manufacturing and selling crushed rock, sand and gravel. On June 2, 1919, it exchanged its plant and equipment for one-half of the preferred and common stock of the Union Rock Company. In May, 1922, it sold such stock for $573,007.56 in cash. On June 28, the board of directors declared a dividend of $700 per share, payable in cash, which was paid on June 29, as follows:

	Shares	Amount
M. H. Graham	20	$14,000
H. C. Stone	20	14,000
G. H. Moore	28	19,600
H. C. Chenowith	40	28,000
W. L. Hodges	622	435,400

After payment of the above dividend the corporation had its capital of $73,000 intact and a surplus of $42,358.87, of which approximately $75,000 was in cash.

By decree of the Superior Court of Los Angeles County, California, dated October 25, 1923, the Pacific Rock and Gravel Company was ordered dissolved. Its assets in the amount of $115,358.87 were transferred to W. L. Hodges, as trustee in liquidation.

On March 21, 1927, and April 19, 1927, the collector of internal revenue at Los Angeles, through his deputy collector, served a warrant of distraint on W. L. Hodges, trustee for the Pacific Rock and Gravel Company, for 1922 income taxes and interest amounting to $66,321.24. The warrant was returned unsatisfied, with the report that no property or funds of any kind remained in the hands of the trustee and that the taxes and interest could not be collected from the Pacific Rock and Gravel Company.

OPINION.

LANSDON: The petitioner, W. L. Hodges, Trustee, is not a transferee within the meaning of section 280. He received assets amounting to $115,358.87, as trustee in liquidation, and if any of the assets remained in his hands the respondent may proceed against them to satisfy liability of the taxpayer. Receipt of such assets as trustee, however, does not establish an individual liability. Nathan Rolnick,20 B.T.A. 989">20 B.T.A. 989; Lillian Burke,21 B.T.A. 45">21 B.T.A. 45; and Ezra Gould,21 B.T.A. 824">21 B.T.A. 824.

The respondent contends that he has established transferee liability by showing that each stockholder received a dividend of $700 per share in partial liquidation of the taxpayer. The facts show that the taxpayer was solvent at the date the dividend was declared and that it was not made insolvent by payment thereof. In such circumstances we have repeatedly held that no transferee liability has been established. We said in Samuel Keller,21 B.T.A. 84">21 B.T.A. 84, relying on McDonald v. Williams,174 U.S. 397">174 U.S. 397:

* * * If a corporation transfers a part of its assets to stockholders while it is solvent and is not made insolvent by the transfer, there is no liability either at law or in equity on the part of the stockholders who receive such distribution, even though the corporation subsequently becomes insolvent and is no longer able to pay its debts. * * *

See also United States v. Updike, 1 Fed.(2d) 550; 8 Fed.(2d) 913; United States v. Armstrong, 26 Fed.(2d) 227; Kinnett-Odom Co.,19 B.T.A. 1124">19 B.T.A. 1124; Eliza J. Wray,24 B.T.A. 94">24 B.T.A. 94; and Charles Havard,25 B.T.A. 1061">25 B.T.A. 1061.

The record does not show what disposition was made of the corporate assets amounting to $115,358.87 which were transferred to Hodges as trustee in liquidation. The respondent shows that he issued a warrant of distraint against Hodges as trustee and that it was returned unsatisfied, with the report that he had no property or assets of the taxpayer. The petitioners, Moore, Graham and Chenowith, testified that they received no assets of the taxpayer after payment of the $700 dividend and that no dividend was later paid. We think that respondent has failed to establish liability of these petitioners as transferees.

The respondent contends that each of the stockholders of the taxpayer is liable under section 322 of the Civil Code of California, Deering, 1917, which provides in part as follows:

Liability of stockholders. Each stockholder of a corporation is individually and personally liable for such proportion of all its debts and liabilities contracted or incurred during the time he was a stockholder as the amount of stock or shares owned by him bears to the whole of the subscribed capital stock or shares of the corporation.

Section 280 of the Revenue Act of 1926 provides that the liability at law or in equity of a transferee of property of a taxpayer may be assessed, collected and paid in the same manner and subject to the same provisions as in the case of a deficiency in tax. The liability under section 322 of the California Civil Code is a statutory remedy and is not based on any transfer of assets. It is not such a liability as may be asserted under section 280 of the Revenue Act of 1926.

Decision will be entered for the petitioners.