*2589 On the record, held that the petitioners are transferees of the Mable Coal Co. and their liability under the provisions of section 280 of the Revenue Act of 1926 as such transferees determined.
*800 The above proceedings were consolidated for hearing and decision and involve the redetermination of liabilities determined by respondent against petitioners under section 280 of the Revenue Act of 1926 as transferees of the property of the Mabel Coal Co. in the following amouhts:
| Bilton McDonald | $20,499.86 |
| Bruce McDonald | 20,499.86 |
| J. K. Parsons | 20,499.86 |
| F. M. Burgess | 20,499.86 |
| J. W. Thornbury | 20,499.86 |
The deficiency claimed to be due from the Mabel Coal Co. is $20,499.86.
The errors alleged are:
(1) That section 280 is unconstitutional;
(2) That the liabilities of petitioners are barred by the statute of limitations;
(3) That it was error to determine any taxes due from the petitioners; and in no event could the amount determined against each exceed his equitable liability;
(4) That the Commissioner erroneously determined*2590 that on a sale of its entire capital assets in November, 1919, the Mabel Coal Co. realized a taxable profit of $49,768.35;
(5) That the Commissioner erroneously determined that in the year 1919 the Mabel Coal Co. had a taxable income from operations of $18,192.77 for the taxable period January 1 to November 30, 1919, *801 when in fact no taxable income from operations was realized by the corporation for that year;
(6) That all profits from operations of the Mabel Coal Co. in the year 1919, if any there were, were expended by it in that year, together with at least $11,500 of other money, in additions and betterments to its mining plant and equipment, and, on the sale of its entire capital assets in November, 1919, such profits, if any, as well as said additional sum of $11,500 so expended were lost to it; that it was therefore error to determine taxes on an income from operations in 1919, if there were such profits and that said corporation should have been allowed a loss of $11,500 plus all profits on the sale of its capital assets.
FINDINGS OF FACT.
On September 9, 1918, the Huff Mining Co., a West Virginia corporation organized in 1917, had issued and outstanding*2591 500 shares of its capital stock of a par value of $100 a share. The stock was owned as follows:
| Shares | |
| H. H. Oakley | 100 |
| Lillie Oakley | 62 1/2 |
| R. M. Wilson | 50 |
| John McGuire | 50 |
| S. E. McDonald | 162 1/2 |
| W. C. Turley | 50 |
| Bilton McDonald | 25 |
The corporation then owned a coal mining lease in Logan CountyWest Virginia, which it had acquired without the payment of any bonus. It had installed machinery and equipment for a mining plant and was then mining and shipping coal therefrom. It also owned certain accounts receivable and had certain unsatisfied accounts payable.
On September 9, 1918, H. H. Oakley, Lillie Oakley, R. M. Wilson, John McGuire, and S. E. McDonald, owning together 425 shares of the company's stock, entered into a contract with F. M. Burgess, J. K. Parsons, J. W. Thornbury, G. R. Claypool, W. F. Campbell, and Bilton McDonald, which contract is in the words and figures following:
THIS MEMORANDUM OF AGREEMENT made this the 9th day of September, 1918, by and between H. H. Oakley, Lillie Oakley, R. M. Wilson, John McGuire and S. E. McDonald, parties of the first part, and F. M. Burgess, J. K. Parsons, J. W. Thornbury, G. R. Claypool, W. F. Campbell, *2592 and Bilton McDonald, parties of the second part,
WHEREAS, The parties of the first part are the owners of 425 shares of the capital stock of the Huff Mining Company, a corporation, which said stock is owned and held by said first parties individually as follows; H. H. Oakley, 100 shares, Lillie Oakley 62 1/2 shares, R. M. Wilson 50 shares, John McGuire 50 shares and S. E. McDonald 162 1/2 shares, and,
WHEREAS, The parties of the second part are desirous of purchasing said 425 shares of stock to be owned and held by said parties of the second part as *802 follows; F. M. Burgess, 100 shares, J. K. Parsons, 100 shares, J. W. Thornbury, 100 shares, G. R. Claypool, 50 shares, W. F. Campbell, 50 shares, and Bilton McDonald, 25 shares.
Now, therefore, this contract witnesseth that the said parties of the first part, for the consideration hereinafter, set out, have this day bargained and sold the 425 shares of the capital stock of said The Huff Mining Company, a corporation, owned and held by them as aforesaid, unto the parties of the second part to be owned and held by them in the proportion aforesaid.
The parties hereto agree that on the 14th day of September, 1918, they, *2593 or some one or ones of them, will together ascertain from the books of said company, or otherwise, all accounts receivable due to said company from whatever source and all accounts payable by the said company to whomsoever owing. The parties of the second part agree to pay, in proportion to the number of shares of said stock purchased by them as aforesaid, unto the said parties of the first part, in proportion to the number of shares of said stock sold by them as aforesaid, for said stock, the sum of $110,500.00 plus the total amount of all accounts receivable of the said The Huff Mining Company to be ascertained as aforesaid and less all accounts payable of the said company so ascertained, which sum when so ascertained shall be paid as follows; $42,500.00 in cash on the said 14th day of September, 1918, and the balance in six equal installments in six, twelve, eighteen, twenty-four, thirty and thirty-six months, respectively from that date. It is further agreed that the said parties of the second part shall each of them make execute and deliver unto J. Cary Alderson, Trustee, his six notes for his proportionate part of said deferred payments, dated Sept. 14th, 1918, and payable*2594 as aforesaid, and shall deposit with said Trustee the shares of stock so purchased by him as collateral security for the payment of said notes when due. Said parties of the second part shall have the right to anticipate the payment of said notes and to pay off or discharge any one or more of them before they are due.
The parties of the second part agree to assume the payment of all the indebtedness of the said The Huff Mining Company, but in the event the said indebtedness shall exceed the sum of $27,500.00 it is agreed that the excess over and above said sum of $27,500.00 whatever it may be, shall be charged back to the said parties of the first part in proportion to the stock so sold by them, and the parties of the second part shall be credited on their said notes with said amount in the proportion that the number of shares bought by them individually is to the whole number of 425 shares bought by all said parties of the second part.
The parties of the first part agree upon the payment of said cash consideration and the execution of said notes to assign unto the said parties of the second part as aforesaid the 425 shares of stock so sold by them.
Executed in duplicate.
*2595 In witness whereof the parties have hereunto subscribed their names this the 9th day of September, 1918.
(Signed) S. E. MCDONALD.
H. H. OAKLEY.LILLIE OAKLEY.
R. M. WILSON.BILTON MCDONALD.
J. K. PARSONS. G. R. CLAYPOOL. F. M. BURGESS. W. F. CAMPBELL. J. W. THORNBURY.*803 No value was placed upon the individual shares of stock in making the contract. Some of the purchasers, including F. M. Burgess and J. K. Parsons, the latter of whom had had four years experience in the installation, operation, and management of coal mining properties, together with an experienced mine foreman engaged for that work, went on the plant and leasehold and in the mine of the Huff Mining Co. and inspected the property and after such inspection recommended that the purchaser pay $130,000 for it. The figure of $130,000 for the leasehold, mining plan and equipment was agreed on and the figure of $110,500 in the contract was ascertained by taking 425/500 of that sum.
The deal was closed on or about September 14, 1918. There were some changes in the stock ownership of the Huff Mining Co. subsequent to September 14, 1918. Shortly thereafter the stock was owned*2596 as follows:
| Shares | |
| J. K. Parsons | 250 |
| Bruce McDonald | 100 |
| F. M. Burgess | 50 |
| J. W. Thornbury | 50 |
| Bilton McDonald | 50 |
Neither of the five new stockholders was a bookkeeper and neither of them, except J. K. Parsons, had had any experience in operating a coal mine. They therefore made J. K. Parsons manager of the mines with F. M. Burgess working under him and arranged with one J. R. Slack, then located at the town of Logan, 17 miles from the mine and doing business under the name and style of Standard Audit Co., to keep the books. A pay-roll clerk, one Senter, was employed at the mine, whose duty it was to keep the pay-rolls and manage and handle the petty cash kept at the mine, and he together with the manager was expected to forward all pay-rolls, bills and other necessary information to Slack for entry on the books of the company, which were kept at his office in Logan. The Armistice was signed November 11, 1918, and shortly thereafter all orders of the company for coal were canceled and from that time to August 1 or 15, 1919, there was very little demand for coal. The company's overhead expenses went on during this period.
In July, 1919, the Mabel Coal*2597 Co. was organized by the then stockholders of the Huff Mining Co. for the purpose of taking over the fixed assets and the lease of the Huff Mining Co. By a deed dated July 14, 1919, the Huff Mining Co. transferred and conveyed to the Mabel Coal Co. all its property and assets, except certain accounts receivable due it. The consideration stated in the deed is $100 "and other good and valuable considerations." The authorized capital stock of the Mabel Coal Co. was $150,000 divided *804 into 1,500 shares of $100 each. Certificates for shares of stock were never issued by the Mabel Coal Co. The stockholders of the Huff Mining Co. took the ownership of the shares in the Mabel Coal Co. "in proportion to what they had owned in the other [Huff Mining] company." In this manner J. K. Parsons became the owner of 750 shares of the capital stock of the Mabel Coal Co., Bruce McDonald 300 shares, F. M. Burgess, J. W. Thornbury, and Bilton McDonald 150 shares each.
During the summer and fall of 1919 certain capital investments were made as follows: A third track between 300 and 400 feet long was built to the railroad side track under the tipple at a cost of something like $900; a second*2598 track was built from the headhouse on the mountain to the drift mouth about 400 feet; inside the mine a storage double track between 300 and 350 feet long was built; an office was built costing about $700; an addition was built to the bar; a cutting machine was purchased at a cost of about $4,500; two mules and two poines were purchased.
On December 1, 1919, the Mabel Coal Co. sold, transferred, and conveyed all its property and assets, except money, choses in action, and accounts receivable to the Faulkner Coal Co. for $130,000, of which amount $25,000 was paid in cash and the balance of $105,000 in notes payable in from 60 days to 36 months. Of the cash consideration paid $12,000, was distributed to the stockholders on December 10, 1919. About the same time the $105,000 in notes was also distributed to the stockholders. On May 28, 1920, final distributions were made, the Mabel Coal Co. distributing $1,500 and the Huff Mining Co. $1,852. J. K. Parsons received from the Mabel Coal Co. in money and notes $59,250, and from the Huff Mining Co. $912.50, making a total of $60,162.50 received by him. Bruce McDonald received from the Mabel Coal Co. $23,700 in money and notes and from*2599 the Huff Mining Co. $365, making a total of $24,065. F. M. Burgess, J. W. Thornbury, and Bilton McDonald each received from the Mabel Coal Co. $11,850, and from the Huff Mining Co. $182.50, making a total for each of $12,032.50. No other distributions of any character were made to stockholders by either the Huff Mining Co. or Mabel Coal Co.
All other monies of both corporations on hand and collected from time to time on accounts due them were used to pay off and discharge their indebtedness except one item of $104 in petty cash at the mine which disappeared and can not be accounted fro. One debt of $601.03 due from the Mabel Coal Co. to J. K. Parsons is yet unpaid, there being no money with which to pay it after the payment of other debts and the distributions to stockholders. One account, in *805 addition to those reported on the income-tax return, of $902.10 against the Amherst Coal Co. was never collected, that company claiming that coal to that amount had been lost in transit and was not received by it.
The Mabel Coal Co. filed a corporation income and profits-tax return on Form 1120 for the fiscal period January 1 to November 30, 1919, on April 14, 1920. This*2600 return erroneously disclosed operating profits for the period of $18,192.77. From such operating profits was deducted $37,513.68 alleged to represent a loss upon the sale of the company's assets to the Faulkner Coal Co., such deduction resulting in a loss for the year of $19,320.91. The cost of the assets sold by the Mabel Coal Co. was not more than $80,231.37 and the Commissioner determined that the company made a taxable profit from the sale of its capital assets of $49,768.63, which amount he added to its reported operating profit of $18,192.77, producing an adjusted net income of $67,961.40. Attached to the return was a balance sheet of the Huff Mining Co. as of December 31, 1918, showing as follows:
| Assets | Liabilities | ||
| Total property assets | $75,258.57 | Total accounts payable | $9,732.81 |
| Total cash & accounts receivable | 9,318.34 | Bills payable (sundries) | 24,153.04 |
| Capital stock | 50,000.00 | ||
| Total | 84,576.91 | Profit and loss (1918) | 691.06 |
| Total | 84,576.91 |
There was also appended an exhibit showing as follows:
| Property sold for | $130,000.00 | |
| List of assets sold: | ||
| Railroad bridge | $6,608.48 | |
| Barn and equipment | 693.93 | |
| Fan and sandhouse | 922.23 | |
| Livestock | 1,775.00 | |
| Leasehold | 87,282.31 | |
| Mine development | 12,971.84 | |
| Mining machine | 3,325.00 | |
| Mine tracks | 9,778.86 | |
| Mine cars | 3,750.00 | |
| Office fixtures and furniture | 521.64 | |
| Railroad sidetrack | 14,561.76 | |
| Substation | 3,085.76 | |
| Steel rail | 1,269.32 | |
| Tenements | 8,692.26 | |
| Tipple and incline | 12,275.29 | |
| Total | 167,513.68 | |
| Loss | 37,513.68 |
*2601 *806 On November 19, 1924, a tax of $26,922.24 claimed to be due from the Mabel Coal Co. was assessed against it. In 1926 the Commissioner redetermined the tax of the Mabel Coal Co. for the fiscal period January 1 to November 30, 1919, to be $20,499.86 and sent a notice of deficiency to each of the petitioners holding each liable to the deficiency under section 280 of the Revenue Act of 1926.
The leasehold valued at $87,282.31, listed among the assets sold in the above exhibit, was originally acquired by the Huff Mining Co. in 1917 without any capital expenditure being made therefor, the lessee simply being required to pay royalties upon the coal mined.
OPINION.
SMITH: Petitioners' first contention is that section 280 of the Revenue Act of 1926 is unconstitional. This question is foreclosed by our decision in .
The second contention is that the petitioners are not liable for any tax due from the Mabel Coal Co. since the assessment against and collection of any such liability from them is barred by the statute of limitations. This contention is made in the petitions filed, but the basis thereof is not apparent. *2602 The petitioners' brief is silent upon this point.
Section 278(d) of the Revenue Act of 1924 provides, so far as material:
Where the assessment of the tax is made within the period prescribed in section 277 or in this section, such tax may be collected by distraint or by a proceeding in court, begun within six years after the assessment of the tax.
The return of the Mabel Coal Co. for the fiscal period January 1 to November 30, 1919, was filed April 14, 1920. This return showed no tax due the Government. After an audit of the return the respondent determined that tax was due from the company for the fiscal period covered by the return in the amount of $26,022.24, which was assessed against the company on November 19, 1924, or within five years from the date the return was filed. See section 250(d) of the Revenue Act of 1918. Under such circumstances the respondent had six years from November 19, 1924, within which to collect the assessment made against the Mabel Coal Co., the facts here being essentially different from those considered by the Supreme Court in *2603 .
On October 18, 1926, the respondent sent a notice of deficiency, under the provisions of section 280 of the Revenue Act of 1926, to each of the petitioners, holding him liable for the entire tax, which was redetermined to be in the amount of $20,499.86. The petitions are based upon such notices of deficiencies.
*807 Section 280 of the Revenue Act of 1926 provides in part as follows:
(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 the making of such assessment against the taxpayer, but in no case later than one year after the enactment of this Act.
(3) If a court proceeding against the taxpayer for the collection of the tax has been begun within either of the above periods, then within one year after return of execution in such proceeding.
*2604 The notices of deficiencies were sent to the petitioners within one year after the enactment of the Revenue Act of 1926; also within six years after the date of the assessment against the taxpayer, which assessment was made prior to the enactment of the Revenue Act of 1926. We are of the opinion that the assessment was timely made and that the notices of deficiencies were sent to the petitioners before the statute of limitations had tolled with respect to them.
The third contention of the petitioners is that the respondent was in error in determining any taxes due from the petitioners and that in no event could the amount determined against each exceed his proportionate liability. This point was exhaustively considered by the Board in , in which we held that a transferee of the assets of a corporation, which has gone out of business, is liable for unpaid taxes of the corporation to the extent of the amount the transferee received in liquidation. The petitioners also contend that when they purchased the stock of the Huff Mining Co. they were intending to purchase the assets of that company and not its stock; that the*2605 petitioners perceived no difference between a purchase of the shares of stock of the mining company and of an interest in its assets; that in point of fact the distributions received by them in liquidation of the transferor corporation were less in amount than the price which they paid for their shares of stock; that they derived no income from the transaction and that a court of equity must take this fact into consideration in determining whether they are liable to any tax as transferees of the dissolved corporation.
The evidence is clear that the petitioners purchased shares of stock of the Huff Mining Co. and not the assets of that company. The Huff Mining Co. conducted operations as a corporation after the petitioners had acquired their stock in much the same manner as before; that is to say, the existence of the corporation was not affected by a change in the ownership of its shares. The corporation had the same assets after the petitioners acquired their stock as it *808 had before. This Board and the courts have consistently held that the stockholders of a corporation are separate and distinct entities from the corporation itself and that contracts entered into*2606 by the stockholders as such stand alone and on their own merits. See ; .
There is no question but that each petitioner received in liquidation of the Mabel Coal Co. the amounts set forth in our findings of fact. If the Mabel Coal Co. is liable for any tax for the fiscal period January 1 to November 30, 1919, that liability is collectible from the petitioners under the provisions of section 280 of the Revenue Act of 1926.
The final question for our consideration is whether the transferor corporation is liable to any tax for the fiscal period January 1 to November 30, 1919. Section 912 of the Revenue Act of 1924, added by section 602 of the Revenue Act of 1928, provides that:
In proceedings before the Board the burden of proof shall be upon the Commissioner to show that a petitioner is liable as a transferee of property of a taxpayer, but not to show that the taxpayer was liable for the tax.
The petitioners allege error on the part of the respondent in finding that the Mabel Coal Co. had operating profits of $18,192.77 for*2607 the period January 1 to November 30, 1919, and also in finding that it sold its assets at the close of this period at a profit of $49,768.35. They contend that if any operating profits were made during the period they were all lost upon the sale of the property; further, that no profit was made upon the sale of the property; that the petitioners paid $130,000 for their shares of stock in the Huff Mining Co. and that the total amount received by them in distribution upon the liquidation of the Huff Mining Co. and of the Mabel Coal Co. was only $120,325, and that this is the total amount they received from their investment.
The evidence of record satisfies us that the return filed for the period in question did not correctly reflect the financial operations of the Mabel Coal Co. If any profits were made either by the Huff Mining Co. or its successor, the Mabel Coal Co., from the operation of the mines in 1919, the evidence indicates that such profits were lost upon the sale of the property. A large part of the profits, assuming that any were made, was invested in additional plant and equipment. No operating profits were ever distributed to the stockholders as a dividend and they*2608 were not in the treasury at the date of sale. The evidence further indicates that on November 30, 1919, the Mabel Coal Co. owed certain debts and that a part of the money received from the Faulkner Coal Co. upon the sale of its assets was utilized in the liquidation of such liabilities. The amount of such liabilities is, however, not in evidence.
*809 The evidence is clear that the Mabel Coal Co. sold its assets at the close of the taxable period for $130,000 and that such amount was received either in cash or notes worth their face value from the Faulkner Coal Co. in payment for the assets purchased by it; that a portion of such amount was used in liquidating certain liabilities of the Mabel Coal Co., either accrued before or after November 30, 1919; and that the balance of the amount received was distributed to the petitioners. The return filed by the Mabel Coal Co. lists the assets sold at $167,513.68. Included in this total is "leasehold $87,282.31," which represented no capital outlay, either by the Huff Mining Co. or the Mabel Coal Co. The respondent has, therefore, excluded such amount from the value of the assets sold and has used the remainder of $80,231.37*2609 as the cost of the assets sold by the Mabel Coal Co. for $130,000. The burden of showing error on the part of the respondent in making such determination is upon the taxpayer. . Neither the taxpayer nor the petitioners have met such burden.
The return which was filed by the Mabel Coal Co., for the fiscal period ended November 30, 1919, covered the operations of both the Huff Mining Co. from January 1, 1919, to the date when it transferred the bulk of its assets to the Mabel Coal Co. in July, 1919, and the operations of the Mabel Coal Co. from the date of its organization to November 30, 1919. The evidence of record shows nothing with respect to the fair market value of the assets of the Huff Mining Co. as of the date of transfer to the Mabel Coal Co. We can not determine that the cost or fair market value of the assets acquired by the Mabel Coal Co. in July, 1919, was any amount in excess of the cost of such assets to the Huff Mining Co. Indeed, no contention has been made to the contrary. Neither can we determine that the cost of those assets sold by the Mabel Coal Co. was more than $80,231.37, or that the Mabel Coal*2610 Co. operated at a loss to November 30, 1919.
We are of the opinion that the evidence of record does not warrant any reversal of the respondent's determination that the Mabel Coal Co. made a profit of $49,768.63 upon the sale of its assets in November, 1919. We think, however, that this amount constitutes the entire net income of the corporation for the taxable period involved and that the deficiency of the Mabel Coal Co. should be recomputed accordingly; likewise that the petitioner's liabilities should be recomputed to conform to the deficiency determined for the Mabel Coal Co.
Reviewed by the Board.
Judgment will be entered under Rule 50.