Johnson v. Commissioner , 19 B.T.A. 840 ( 1930 )

J. H. JOHNSON AND F. W. WEAVER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

GRACE JENNINGS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

H. B. HOPPS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

CHARLES WILSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

O. E. LANCASTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

W. B. LANCASTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

J. A. VAN DORAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

S. E. WALKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

C. E. E. THOMPSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

E. W. BARR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

MRS. M. B. CHUNN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Johnson v. Commissioner

Docket Nos. 25690, 25695, 25713, 25720-25725, 25762, 25852.

United States Board of Tax Appeals

19 B.T.A. 840; 1930 BTA LEXIS 2317;

May 2, 1930, Promulgated

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1. The petitioners held to be transferees of the property of the Barr-Davis Oil Co., and, as such, liable for the amounts asserted against them on account of taxes due from the Barr-davis Oil Co. for 1921 and 1922.

2. The respondent's determination of the tax liability of the Barr-Davis Oil Co. for 1921 and 1922 sustained.

Harry C. Weeks, Esq., and H. B. Hopps, Esq., for the petitioners.

R. W. Wilson, Esq., for the respondent.

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MARQUETTE

These proceedings, which were duly consolidated for hearing and decision, are for the redetermination of liabilities for income and profits taxes asserted by the respondent against the petitioner, under section 280 of the Revenue Act of 1926, as transferees of the Barr-Davis Oil Co. The taxes claimed to be due from the Barr-Davis Oil Co. are $8,857.65 for the year 1921, and $10,371.12 for the year 1922, and the amounts asserted against the petitioners are as follows:

J. H. Johnson and F. W. Weaver	$3,483.00
Mrs. Grace Jennings	2,236.00
H. B. Hopps	1,204.00
Charles Wilson	516.00
O. E. Lancaster	43.00
W. B. Lancaster	$1,419.00
J. A. Van Doran	516.00
S. E. Walker	1,032.00
C. E. E. Thompson	6,432.60
E. W. Barr	11,162.80
Mrs. M. B. Chunn	1,720.00

FINDINGS OF FACT.

The petitioners J. H. Johnson and F. W. Weaver were, during the years involved herein, the sole members of a partnership known as the Weaver & Johnson Drilling Co., which owned certain shares of the capital stock of the Barr-Davis Oil Co. The other petitioners were holders, in their own right, of shares of the capital stock of the Barr-Davis Oil Co.

The Barr-Davis Oil Co. was an unincorporated joint stock association with its place of business at Electra, Tex. Its authorized capital stock was $75,000, divided into 7,500 shares of the par value of $10 each, all of which was outstanding during the period January 1 to February 9, 1921. The assets of the Barr-Davis Oil Co. consisted of an oil and gas lease and certain well machinery and equipment.

In February, 1921, dissension arose between J. F. Davis, a stockholder and officer of the Barr-Davis Oil Co., and the other stockholders and officers of the company. In order to obviate this dissension, the Barr-Davis Oil Co. on February 9, 1921, purchased all of Davis' stock, 2,590 shares, for $104,000.

On October 31, 1921, the Barr-Davis Oil Co. sold all of its assets to Griswold Oil Co. The transaction was consummated by a written instrument, denominated "Assignment," which was in the words and figures following, to wit:

ASSIGNMENT

KNOW ALL MEN BY THESE PRESENTS: Whereas, the Barr-Davis Oil Company, a joint stock association having for its trustees, E. W. Barr, Mrs. Grace Jennings, a feme sole, and C. E. E. Thompson, is the owner of a certain oil and gas lease originally executed by S. B. Burnett from self and others to S. W. Smith on the 17th day of May, 1919, duly recorded in the deed records of Wichita County, Texas, at page 310, Book 132, the original lease covering the southeast one-quarter of section 6, H & T B Ry Company Lands, Wichita County, Texas, and the portion thereof owned by the Barr-Davis Oil Company covers the North 60 acres of the said Southeast one quarter, and

Whereas, said lease has on it certain wells, equipment and other property, and whereas, the shareholders of the Barr-Davis Oil Company by a unanimous vote at a meeting duly held on the 7th day of September, 1921, authorized and instructed the above mentioned trustees to sell said lease, the wells, equipment and other property located thereon to the Griswold Oil Company upon the terms hereinafter set out.

Now, therefore, the Barr Davis Oil Company acting by and through its said three trustees, being all of said trustees, E. W. Barr, Mrs. Grace Jennings, a feme sole, and C. E. E. Thompson for and in consideration of the sum of Two Hundred Thousand ($200,000) Dollars, paid and to be paid by the Griswold Oil Company a joint stock association, as follows:

Fifty Thousand Dollars ($50,000.00) cash in hand paid, the receipt of which is hereby acknowledged; One Hundred and Fifty thousand ($150,000.00) Dollars to be paid in deferred installments as follows:

$10,000.00 within thirty days from this date.

$10,000.00 within sixty days from this date.

$10,000.00 within ninety days from this date, and an additional $5,000.00 each and every month thereafter until the full amount of the purchase price has been paid.

Each of said installments shall bear interest at the rate of 7% per annum, said interest to be payable at the maturity of each installment; any installment may be paid before its maturity. It is understood that the failure to meet any installment upon its maturity will, at the option of the Barr Davis Oil Company, mature all the balance of the indebtedness and suit for foreclosure in such event may be filed, and in event of suit, a reasonable attorney's fee shall be added to the amount of the then indebtedness to cover the expense of foreclosure.

Beginning with September 1, 1921, the seven eights (7/8ths) of the oil produced and saved from off said lease (being the amount run by the working interest after deducting the royalty) shall be paid to the Griswold Oil Company, until the last of the three $10,000.00 payments above set out, has matured or been previously paid. From and after the maturity of said Third $10,000.00 payment, or its payment prior to maturity, seven sixteenths (7/16ths) of the oil produced and saved from off said lease, shall be paid to the First National Bank of Electra, Texas, as Trustee for account of the Barr Davis Oil Company, to be applied monthly on the deferred payments above mentioned. It is understood and agreed that in the event, at the maturity of any $5,000.00 installment of the purchase price as above set out, there shall not have been paid at the First National Bank of Electra, the sum of $5,000 being the amount of the matured installment, together with interest thereon, then the Griswold Oil Company shall, nevertheless, pay to said bank for the account of Barr-Davis Oil Company, the difference between the amount received by said Bank from seven sixteenths (7/16ths) of the oil and the principal of $5,000.00 and accrued interest on the current maturing payment. It is understood that interest at the rate of 7% per annum shall commence to run on all deferred payments from date of delivery of assignment.

It is further understood and agreed that a release of the liens herein provided for upon the property hereby conveyed, to secure the indebtedness above referred to, has this day been executed by the said Barr-Davis Oil Company, acting by and through its Trustees above named, who have been thereunto duly authorized; and said release shall be deposited in escrow in the First National Bank of Electra, Texas, and surrendered to said Griswold Oil Company when the indebtedness herein referred to, together with all interest thereon, has been fully paid off and discharged.

It is further understood that the vendor's lien shall exist and is here retained against the above described lease, together with the wells, equipment, and other property located thereon, to secure the payment in full of the purchase price.

It is further understood that a lien shall exist and the same is here given, as against all personal property that is placed on said lease by the Griswold Oil Company or its assigns, in the nature of improvements, such as casing in wells, machinery and equipment to operate the wells, but it is understood that this lien shall not exist as to property temporarily placed on the lease, such as surplus casing, drilling machinery and other property not attached to or made a part of the wells, or the machinery for operating the wells.

It is further understood that the Griswold Oil Company shall have the right to credit on the deferred payments the sum of Twenty Thousand ($20,000.00) dollars, said Twenty Thousand ($20,000.00) dollars to be charged against the indebtedness which J. F. Davis holds against the property herein described, but said Twenty Thousand ($20,000.00) Dollars to be nevertheless, a payment by the Griswold Oil Company upon the purchase price.

For and in consideration of the above payment and above agreements, the said Barr Davis Oil Company has bargained, sold transferred and assigned and by these presents does bargain, sell, transfer and assign unto S. M. Griswold, E. F. Griswold, and Eugene Christian, as Trustees of the said Griswold Oil Company, an unincorporated joint stock association, the above described lease and leasehold estate, in so far as it covers the north 60 acres of the southeast quarter of section 6, H & T B. Ry Co Lands, Wichita County, Texas, together with the wells, equipment and all personal property of every kind and description located thereon.

To have and to hold the above described lease and property together with all the rights and appurtenances thereunto in anywise belonging, unto the said S. M. Griswold, E. F. Griswold and Eugene Christian, as trustees of the said Griswold Oil Company, their successors and assigns forever; but it is expressly agreed and stipulated that the vendor's lien is retained against the above described property, premises and improvements, until the above described deferred payments, together with all interest thereon are fully paid, according to the above agreement, when this conveyance shall become absolute.

And the Barr-Davis Oil Company, grantor, herein in consideration of the premises does hereby bind and obligate itself, its successors and assigns, to warrant and forever defend, all and singular, the above described property unto the said S. M. Griswold, E. F. Griswold and Eugene Christian, Trustees of the Griswold Oil Company aforesaid, their successors and assigns, against the lawful claims or claim of any and all persons claiming or to claim the same or any part thereof.

Witness the hands of the trustees of the Barr-Davis Oil Company, this 3rd day of October, 1921.

(Signed) C. E. E. THOMPSON

E. W. BARR

Mrs. GRACE JENNINGS

Trustees of Barr-Davis Oil Company.

The only evidence of the deferred payments was the assignment aforesaid. Ninety-five thousand dollars of said purchase price was actually paid to the Barr-Davis Oil Co. in 1921, and the balance of the purchase price was paid in due course. The Griswold Oil Co. was a solvent going concern and was able to meet its obligations.

On March 15, 1922, the Barr-Davis Oil Co. filed an income and profits-tax return for the year 1921. Attached to said return and made a part thereof was the following written statement:

This income-tax return is made up and filed strictly from operation in 1921.

This company operated their lease from January 1st to July 31st, 1921, at which time a contract for sale was agreed upon to sell the entire physical properties and oil lease for a consideration of $200,000 contingent upon the oil production holding up until the sale price has been received.

A shareholders meeting was held in August 1921 and it was voted to liquidate the Company. J. A. Wise, Vice President of the First National Bank, Electra, Texas, was made Trustee to handle all receipts and disbursements. No liquidating dividends had been paid shareholders at December 31, 1921.

Hence, Barr-Davis Oil Company is in process of liquidation and not operating.

In said return it is stated that the Barr-Davis Oil Co. was, during 1921, "acting as principal actively operating first seven months of year, but now preparing for complete liquidation."

On June 15, 1923, the Barr-Davis Oil Co. filed an income-tax return for the year 1922. On the first page of said return it was stated that the Barr-Davis Oil Co. was "in process of liquidation."

In August, 1921, the officers and stockholders of the Barr-Davis Oil Co; decided to dissolve that company and liquidate its assets. One J. A. Wise, at that time the active head of the First National Bank of Electra, Tex., was selected by the stockholders and officers of the Barr-Davis Oil Co. to act as liquidating agent for the company. Wise accepted the employment, took over the then assets of the Barr-Davis Oil Co., collected the deferred payments from the Griswold Oil Co. and other accounts due the Barr-Davis Oil Co., and made various distributions to the stockholders of the Barr-Davis Oil Co. The amounts distributed to the petitioners herein were:

Johnson and Weaver	$4,495.50
Mrs. Grace Jennings	2,886.00
H. B. Hopps	1,554.00
Charles Wilson	726.00
O. E. Lancaster	60.50
W. B. Lancaster	1,914.00
J. A. Van Doran	720.00
S. E. Walker	$1,092.00
C. E. E. Thompson	8,676.80
E. W. Barr	14,407.80
Mrs. M. B. Chunn	2,420.00
Total	38,952.60

Wise made no effort to ascertain whether the Barr-Davis Oil Co. was indebted to the United States for taxes, or to satisfy any such liability. Wise is solvent and is financially able to pay any taxes due the United States from the Barr-Davis Oil Co.

In October, 1925, the respondent assessed against the Barr-Davis Oil Co. taxes in the amount of $8,857.65 for the year 1921, and $9,810.67 for the year 1922. In November, 1926, the respondent assessed additional taxes against the Barr-Davis Oil Co. for the year 1922 in the amount of $560.45.

On December 23, 1925, a warrant of distraint was issued for said taxes for the year 1921, and for said assessment of $9,810.67 for the year 1922. In December, 1926, a warrant of distraint was issued for said taxes for 1922 in the amount of $560.45. Each of said warrants of distraint was returned with a statement to the effect that the warrant had not been executed for the reason that the Barr-Davis Oil Co. had been formally dissolved.

The president of the Barr-Davis Oil Co. was C. E. E. Thompson, who resided at Fort Worth, Tex. He was never active in the affairs of the company. The active head of the company was E. W. Barr, who resided at Electra, Tex., and was well known there. Grace Jennings was the secretary-treasurer of the company. She also resided at Electra, Tex., and her connection with the company was well known. Neither Barr, Mrs. Jennings, nor Wise, the liquidating agent of the company, ever received any notice and demand for the payment of said taxes, nor any letter from the Bureau of Internal Revenue regarding same.

The letters asserting liabilities against the petitioners as transferees of the Barr-Davis Oil Co. in the amounts above set forth were mailed to the petitioners on February 3, 1927.

OPINION.

MARQUETTE: The evidence herein establishes that the petitioners are transferees of the Barr-Davis Oil Co., and that each of them received upon the dissolution of that company cash in an amount greater than the liability asserted against him or her by the respondent. The petitioners, however, advance a number of reasons why they should not be held liable for the taxes due from the Barr-Davis Oil Co., notwithstanding that they are transferees.

The first contention of the petitioners is that section 280 of the Revenue Act of 1926, under authority of which the liabilities have been asserted, is unconstitutional. While not waiving this point, they decline to argue it in view of the decision of this Board that a transferee may not seek a redetermination by the Board under section 280 of the Revenue Act of 1926, and at the same time question the validity of that section. . That is what the petitioners have done in these proceedings and, on the authority of the Cappellini case we hold that, having appealed to the Board from the determination of the respondent, the petitioners have waived their right to attack the constitutionality of the law under which the appeal is taken.

The second contention of the petitioners is that the assessments made by the respondent against the Barr-Davis Oil Co. for the years 1921 and 1922 are invalid and will not support a claim against the transferees. We consider this contention beside the point, in that under the facts herein, a valid assessment against the Barr-Davis Oil Co. is not necessary before the respondent can proceed against the petitioners. Section 280 of the Revenue Act of 1926 provides:

SEC. 280. (a) The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in tax imposed by this title (including the provisions in case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds):

(1) The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this title or by any prior income, excess-profits, or war-profits tax Act.

(2) The liability of a fiduciary under section 3467 of the Revised Statutes in respect of the payment of any such tax from the estate of the taxpayer. Any such liability may be either as to the amount of tax shown on the return or as to any deficiency in tax.

(b) The period of limitation for assessment of any such liability of a transferee or fiduciary shall be as follows:

(1) Within one year after the expiration of the period of limitation for assessment against the taxpayer; or

(2) If the period of limitation for assessment against the taxpayer expired before the enactment of this Act but assessment against the taxpayer was made within such period, - then within six years after making of such assessment against the taxpayer, but in no case later than one year after the enactment of this Act.

* * *

The return of income made by the Barr-Davis Oil Co. for the year 1921 was filed on March 15, 1922, and the return for the year 1922 was filed on June 15, 1923. The four-year period for assessment of the taxes for those years provided by section 250(d) of the Revenue Act of 1921, and by subsequent revenue acts, expired on March 14, 1926, and June 14, 1927, respectively. Under section 280 of the Revenue Act of 1926, if assessment was made against the taxpayer within the four-year period and prior to the Revenue Act of 1926, the respondent had six years from the date of the assessment, but not later than one year after the enactment of the Revenue Act of 1926, to proceed against the transferees, or, if no assessment was made against the taxpayer, he could proceed against the transferees within one year after the expiration of the period for assessment against the taxpayer. At the time the assessments were made against the taxpayer, and when the notices to the petitioners were mailed, the Barr-Davis Oil Co. had been dissolved and its assets distributed among its stockholders, and that fact was known to the respondent. In that situation it was not essential that the respondent should proceed against the transferor before taking steps to collect the tax from the transferee. It is sufficient that he has proceded against the transferee within the time prescribed by the statute therefor. ; . It is clear that whether the assessments made against the Barr-Davis Oil Co. are valid or invalid, the respondent has proceeded against the petitioners as transferees of that company within the period prescribed by section 280 of the Revenue Act of 1926, and that assessment and collection of the liabilities in question are not barred.

The petitioners next urge that J. A. Wise, as liquidating agent of the Barr-Davis Oil Co., is primarily liable for the taxes of that company, for the reason that he distributed its assets without making any effort to ascertain or pay the taxes for 1921 and 1922 and that as he is solvent and able to pay the taxes, these transferee proceedings can not be maintained. This contention is, in the light of the statute, clearly without merit. Section 280 of the Revenue Act of 1926 gives this Board jurisdiction to determine the liability, at law or in equity, of a transferee of property of a taxpayer for income, excess-profits, or war-profits taxes imposed upon a taxpayer and the liability of a fiduciary under section 3467 of the Revised Statutes in respect of the payment of any such tax from the estate of a taxpayer. Wise is neither the transferee of a taxpayer nor the fiduciary of the estate of a taxpayer and therefore, assuming but not deciding, that in his capacity as liquidating agent of the Barr-Davis Oil Co. he was guilty of such misfeasance or malfeasance as to render himself liable to the United States for the taxes due from that company, this Board under the law has no jurisdiction to determine and adjudge that liability. Our jurisdiction is conferred by the statute and we may not go beyond its scope.

The petitioners also urge that the Barr-Davis Oil Co., in computing its net income for 1921, is entitled to deduct as a loss sustained in that year the amount of $104,000 paid to Davis for his stock in that company. In reporting its income for 1921 and 1922 the Barr-Davis Oil Co. claimed that the amount paid to Davis should be considered as a part of the cost of the oil and gas lease it sold to the Griswold Oil Co. These contentions are also without merit. The amount paid to Davis by the Barr-Davis Oil Co. for his stock was clearly no part of the cost of the oil and gas lease the company had theretofore acquired. Nor was it a loss to the company. It was a capital transaction that amounted to a distribution to Davis of part of the company's assets which did not result in gain or loss to the company. .

The fifth contention of the petitioners is that the sale by the Barr-Davis Oil Co. of its assets was made to a solvent purchaser; that $95,000 was received in 1921; that the deferred payments were the equivalent of cash, and that the transaction should be considered as completed in 1921 and the entire profit taxed as income in that year. The Barr-Davis Oil Co., in reporting its profit from the transaction, treated it as a sale on the deferred payment plan and the respondent has accepted it on that basis. In fact, the Barr-Davis Oil Co., as shown by its return for 1921, regarded the transaction as a sale "of its entire physical properties and oil lease for a consideration of $200,000 contingent upon the oil production holding up until the sale price has been received." And the return is signed by E. W. Barr and Mrs. Grace Jennings, two of the petitioners herein, as vice president and treasurer. The evidence shows that the Barr-Davis Oil Co. sold all of its property to the Griswold Oil Co. in 1921 for $200,000. The transaction was consummated by a written instrument denominated "Assignment," which conveyed the property and provided for the immediate payment of $50,000 and for deferred payments amounting to $150,000, secured by a vendor's lien on the property sold. As far as the record shows, there was no evidence of the deferred obligations other than the "Assignment." The cash payment of $50,000 was made, as shown by the "Assignment," and the deferred obligations to the amount of $45,000 were liquidated in 1921. It further appears that the obligations not paid in 1921 were direct liabilities of the Griswold Oil Co. not dependent on the production from the property purchased; that the Griswold Oil Co. was a solvent, going concern able to meet its obligations and that it did meet them as they became due. However, we are of opinion that the evidence fails to establish that they were the equivalent of cash within the meaning of the Revenue Act of 1921, and the regulations promulgated thereunder, and that the Barr-Davis Oil Co. and the respondent properly treated the transaction as a sale on the deferred payment plan. The "Assignment" was assignable but not negotiable and there was, apparently, no other evidence of the deferred payments. The petitioners have produced evidence to show that the Griswold Oil Co. was solvent and able to meet its obligations, but they have entirely failed to show that these deferred obligations were, or were considered at any time, as the equivalent of cash, or that they could have been sold for an amount approximating their face value. In the absence of evidence to that effect we must hold that the petitioners and the respondent correctly treated the sale as one on the deferred payment plan. It follows that the respondent's determination as to the tax liability of the Barr-Davis Oil Co. for 1921 and 1922 must be affirmed.

The record discloses that the petitioners are transferees of the Barr-Davis Oil Co.; that each of them received in the liquidation of that company property of a value in excess of the amount of the liability which the respondent proposes to assess against him or her as such transferee, and that these proceedings are timely. The petitioners are, therefore, liable for the respective amounts asserted against them. ; .

Judgment will be entered for the respondent.