1931 BTA LEXIS 1634">*1634 Petitioners held not liable as transferees.
24 B.T.A. 506">*507 These are proceedings for the redetermination of deficiencies in income tax for the year 1924, asserted against the petitioners as transferees of the assets of Mrs. Ella Cathey. The asserted deficiency in each case is $4,959.24. Each of the petitioners presents eight assignments of error, described as follows:
1. In finding that the petitioner was liable in law or in equity as a transferee of property of Mrs. Ella Cathey, in the amount of $4,959.24, or in any amount whatsoever.
2. In failing to find that section 280 of the Revenue Act of 1926 is unconstitutional in that it deprives the petitioner of property without due process of law within the purview of the Fifth Amendment.
3. In failing to find that section 280 of the Revenue Act of 1926 is unconstitutional as depriving petitioner of the right to a trial by jury as is contemplated by the Seventh Amendment.
4. In failing to find that section 280 of the Revenue Act of 1926 is unconstitutional as undertaking1931 BTA LEXIS 1634">*1635 to vest judicial power in the Commissioner of Internal Revenue contrary to section 1 of Article III of the Constitution.
5. In finding a deficiency against Mrs. Ella Cathey for the year 1924 in the amount of $4,959.24, or in any amount whatever.
6. In failing to exhaust available legal remedies against Mrs. Ella Cathey before proceeding against petitioner for collection of the tax involved.
7. In failing to find that assessment against and collection from the petitioner of the deficiency involved is barred by the statute of limitations.
8. In failing to find that section 280 of the Revenue Act of 1926 is unconstitutional in so far as it allows additional time for the assessment and collection of deficiencies against transferees, because it deprives the petitioner of property without due process of law and denies equal protection of the law, contrary to the Fourteenth Amendment.
On brief petitioners specifically waive the assignments of error numbered 5 and 7, above.
FINDINGS OF FACT.
In 1924 Mrs. Ella Cathey, a widow residing in Putnam, Callahan County, Tex., was the owner of 520 acres of farm land in Callahan County, which she had acquired under the will of1931 BTA LEXIS 1634">*1636 her husband, who died in 1913. On June 20, 1924, Mrs. Cathey sold the mineral rights attaching to the 520 acres for $40,000 in cash. Immediately thereafter she gave each of her seven children, all of whom are petitioners herein, $5,000 apiece. C. C. Russell, the other petitioner, is a son-in-law of Mrs. Cathey.
24 B.T.A. 506">*508 After disposing of $35,000 of the proceeds of the sale as above detailed, Mrs. Cathey possessed assets consisting at least of the remaining $5,000 cash, surface rights to the 520 acres of farm land, and a small house and lot located in Putnam. By a warranty deed dated April 5, 1927, and recorded November 9, 1921, Mrs. Cathey conveyed her rights in the above mentioned 520 acres of farm land to the petitioners, Mr. and Mrs. C. C. Russell, her son-in-law and daughter, in consideration of their promise to pay her known existing debts and to support her as long as she lived.
At the time of conveyance mentioned Mrs. Cathey was indebted to one R. L. Clinton in the amount of $2,500, which debt was secured by a deed of trust of Mrs. Cathey's house and lot in Putnam. In pursuance of the agreement above mentioned, petitioner C. C. Russell paid the said obligation1931 BTA LEXIS 1634">*1637 of Mrs. Cathey to R. L. Clinton in the amount of $2,500 and the deed of trust was canceled and released on February 23, 1929.
Since the date of the conveyance to them of the said 520 acres farm on April 5, 1927, Mr. and Mrs. C. C. Russell have contributed approximately $600 or $700 per year to Mrs. Cathey, who maintains a separate household in Putnam. These contributions are mostly made in the form of deposits to Mrs. Cathey's account in the Farmers State Bank, Putnam, Texas, of which C. C. Russell is assistant cashier.
At the time petitioners Mr. and Mrs. C. C. Russell made the agreement of April 5, 1927, with Mrs. Cathey and received a conveyance of the 520 acres of farm land, they had no knowledge that the respondent would make any claim for additional taxes against Mrs. Cathey for the year 1924 or for any year.
An assessment for the year 1924 was made against Mrs. Cathey on the January, 1928, assessment list for the second district of Texas, dated March 3, 1928. This assessment was in the amount of $4,959.24, plus interest in the amount of $863.73, a total of $5,822.97.
On April 12, 1928, a warrant for distraint in the amount of $5,822.97, representing additional1931 BTA LEXIS 1634">*1638 taxes for the year 1924, was issued against Mrs. Cathey by the collector of internal revenue for the second district of Texas. G. W. Haywood, deputy collector, to whom the warrant was addressed, thereafter discussed the matter with Mrs. Cathey and with the petitioner, C. C. Russell. Mrs. Cathey executed the following quoted document:
STATEMENT OF ASSETS AND LIABILITIES, CASE OF MRS. ELLA CATHEY, PUTNAM, TEXAS.
REAL ESTATE:
1. HOMESTEAD:
1. Value: 6 room frame house - approx. $3,000.
2. Encumbrance: $2500 Payable to R. L. Clinton, Putnam.
3. County in which located: Callahan County, Texas.
REAL ESTATE - Continued.
24 B.T.A. 506">*509 2. OTHER REAL ESTATE UNENCUMBERED:
1. Value: None.
2. County in which located:
3. OTHER REAL ESTATE ENCUMBERED:
1. Value:
2. Encumbrance:
3. County in which located:
PERSONAL PROPERTY:
1. HOUSEHOLD GOODS:
1. Value: $300.
2. Encumbrance: None.
2. AUTOMOBILE:
1. Value: None.
2. Encumbrance:
3. DIAMONDS: None.
1. Value.
2. Encumbrance.
4. STOCKS AND BONDS:
1. Value: None.
2. Encumbrance.
5. LIVE STOCK:
1. Value: None.
2. Encumbrance.
6. No cash on hand. No notes1931 BTA LEXIS 1634">*1639 or other assets owned.
7. .
STATE OF TEXAS
COUNTY OF CALLAHAN SS
Correct MRS. ELLA CATHEY.
(Signed)
Subscribed and sworn to before me, this 11th day of Mr. 1928.
R. L. CLINTON,Notary Public.
The warrant of April 12, 1928, was returned under date of May 31, 1928, with the report that no property had been found on which to levy.
On June 25, 1929, the collector of internal revenue for the second district of Texas issued a second warrant of distraint against Mrs. Cathey in the amount of $5,822.97, representing taxes for the year 1924 and interest thereon. This warrant was directed to Leo A. Gilbreath, deputy collector. This warrant was returned under date of October 11, 1929, with the endorsement: "No property found on which to levy. Amount of $750. submitted as offer in compromise and rejected, paid on October 11, 1929." In each instance the deputy collector had conferred with the taxpayer before making his return of the warrant.
Deficiency letters addressed to each of the petitioners indicate that the deficiencies involved were determined as follows:
| Net income on return | $10,923.13 |
| Additional income disclosed | 35,000.00 |
| Corrected net income | 45,923.13 |
| Exemption | 2,900.00 |
| Balance taxable | 43,023.13 |
| Tax at 2% on $4,000.00 | $80.00 |
| Tax at 4% on $4,000.00 | 160.00 |
| Tax at 4% on $26,023.13 | |
| 2,101.39 | |
| Surtax | 2,868.47 |
| Total tax | $5,209.86 |
| Earned income credit | 10.50 |
| Correct tax due | $5,199.86 |
| Assessed on return | 240.12 |
| Deficiency | $4,959.24 |
1931 BTA LEXIS 1634">*1640 24 B.T.A. 506">*510 OPINION.
LOVE: The petitioners have abandoned the assignments of error numbered 5 and 7. Such of the remaining assignments as attack the constitutionality of section 280 of the Revenue Act of 1926, i.e., assignments numbered 2, 3, 4 and 8, are decided adversely to the petitioners on authority of Phillips v. Commissioner,283 U.S. 589">283 U.S. 589, affirming 42 Fed.(2d) 177, and 15 B.T.A. 1218">15 B.T.A. 1218; Baumgartner v. Commissioner, 51 Fed.(2d) 472; affirming 21 B.T.A. 623">21 B.T.A. 623; Alexander v. Mid-Continent Petroleum Corp., 51 Fed.(2d) 735; and Coca-Cola Bottling Co. et al.,22 B.T.A. 686">22 B.T.A. 686.
The sixth assignment alleges error in the respondent's failure to exhaust available legal remedies against the taxpayer before proceeding against the transferees. It has been shown that after assessment two warrants of distraint were issued against the taxpayer and after conferences with the taxpayer were returned with notations that "no property was found on which to levy." It is apparent that under such circumstances further proceedings against Mrs. Cathey would have been futile and we have1931 BTA LEXIS 1634">*1641 held in analagous cases that the respondent was not required to pursue them. B. F. Fairless,19 B.T.A. 304">19 B.T.A. 304; John Thomson, Jr., et al.,20 B.T.A. 1">20 B.T.A. 1.
The first assignment of error is the only one remaining for consideration. It alleges that the respondent erred in finding that the petitioner was liable in law or in equity as a transferee of property of Mrs. Cathey. Under the provisions of section 602 of the Revenue Act of 1928 the burden of proof is upon the respondent to show that the petitioners are liable as transferees. Since it is conceded that each of the petitioners is in fact a transferee of Mrs. Cathey, the 24 B.T.A. 506">*511 only question presented is whether or not they are liable in law or in equity under the provisions of section 280. Each of the petitioners, except C. C. Russell, received $5,000 in cash from Mrs. Cathey in 1924, and Mr. and Mrs. C. C. Russell acquired certain property from her in 1927. These are the transfers upon which respondent depends to support his determination of the petitioners' liabilities. Since they involve two types of transfers, we will discuss them separately.
In 1924 Mrs. Cathey sold certain oil rights1931 BTA LEXIS 1634">*1642 or royalties for $40,000 in cash. She immediately gave each of the seven petitioners herein, who are her children, i.e., each of the petitioners except C. C. Russell, $5,000 in cash, as a gift. After making these gifts, totaling $35,000, Mrs. Cathey's assets consisted of at least $5,000 in cash, surface rights to 520 acres of farm lands and a small homestead situated in Putnam, Tex. The homestead had an estimated value of $3,000 in 1927 and was then encumbered to the amount of $2,500. Evidence respecting the value of the surface rights of the farm land has not been sufficient to warrant a finding of its value. It does not appear whether or not this property was encumbered in 1924. Mrs. Cathey, according to respondent's determination of her tax liability as indicated in the deficiency letters, had a total net income for the year 1924 in the amount of $45,923.13.
Respondent contends that after making the gifts above mentioned Mrs. Cathey was insolvent, or so nearly insolvent as to render her donees liable to her creditors, or, more specifically, to charge the petitioners with her income-tax liability. Respondent takes the position that because the value of the 520 acres of1931 BTA LEXIS 1634">*1643 farm land has not been established we must regard it as valueless. This we are not willing to do. Such evidence as there is in the record, while not conclusive enough to warrant a finding of value, clearly indicates that the farm lands had a considerable value in 1924. The burden of establishing a transferee's liability as such is on the respondent. Kinnett-Odom Co.,19 B.T.A. 1124">19 B.T.A. 1124. We do not believe it has been sustained in this instance.
The transfer of the farm lands to Mr. and Mrs. C. C. Russell in 1927 remains to be discussed. Again we think the respondent has failed to sustain his burden. The testimony is that Mrs. Cathey transferred the farm lands to the Russells in consideration of their agreement to assume her known debts and to support her for the remainder of her life. C. C. Russell thereafter paid off a $2,500 note of Mrs. Cathey's and he has contributed $600 to $750 a year to her support since 1927. The payment of the note and the contributions to Mrs. Cathey's support certainly constitute valuable considerations for the transfer of the farm lands. When it is remembered that 24 B.T.A. 506">*512 the value of the farm lands has not been established, 1931 BTA LEXIS 1634">*1644 the failure to sustain respondent's burden becomes patent. We can not approve respondent's assertion of a liability as a transferee upon such evidence as was offered in these proceedings.
Judgment will be entered for the petitioner.