*93 Decisions will be entered under Rule 50.
1. Respondent's determination as to reasonableness of officers' salaries approved. Section 23(a), I. R. C.
2. Where taxpayer receives a refund by reason of a carry-back pursuant to section 3780, I. R. C., the period of limitations for assessment of deficiencies with respect to the earlier year is not enlarged by section 3780(c) or section 276(d), I. R. C., except to the extent that the deficiency is based upon an error "attributable to the carry-back." Only a small part of the deficiencies determined was attributable to the carry-back, but as to that part respondent has failed to meet his burden of proving that petitioners are liable as transferees. The remainder of the deficiencies against petitioners is barred by limitations.
3. Petitioners held not liable as fiduciaries under section 3467, Revised Statutes, where they did not use assets of the taxpayer to pay its debts.
*1112 The respondent determined that each of the petitioners was liable as transferee for the following deficiencies in income and excess profits taxes of the National Metal Products Corporation: *1113
| Calendar | ||
| year | Type of tax | Amount |
| 1944 | Income | $ 2,610.39 |
| 1944 | Excess profits | 15,966.95 |
| 1945 | Income | 1,465.24 |
In an amendment to his answer, respondent asserts alternatively the liability of petitioners for these amounts as fiduciaries*96 in accordance with section 3467 of the Revised Statutes.
Petitioners have conceded their liability for the year 1945.
In addition to the question whether National Metal Products Corporation was liable for any deficiency for 1944, the issues are whether petitioners are liable either as transferees or as fiduciaries with respect to any such deficiency.
FINDINGS OF FACT.
Petitioner Fred W. Leuthesser, Jr., is a resident of Cincinnati, Ohio, and petitioner Edward G. Leuthesser is a resident of Glen Ellyn, Illinois. The petitioners are brothers.
National Metal Products Corporation (hereinafter referred to as "National") was an Illinois corporation with its principal place of business in Franklin Park, Illinois. It was incorporated in 1933. It kept its books and filed its income and excess profits tax returns on an accrual and calendar year basis. It filed its original income and declared value excess-profits tax return and its excess profits tax return for the year ended December 31, 1944, on March 15, 1945, with the collector of internal revenue for the first district of Illinois. No waivers extending the statute of limitations with respect to its 1944 returns have ever been executed.
*97 The petitioners each owned 49.8 per cent of the stock of National and were directors and officers of that corporation.
Fred W. Leuthesser, Jr. (hereinafter referred to as "Fred") is 44 years old. He completed grammar school, high school, and five semesters of study at the College of Engineering, University of Illinois, and also studied metallurgy at the Lewis Institute of Technology. He is a registered professional engineer in the State of Illinois. He is a member of the American Society of Mechanical Engineers, the American Society of Tool Engineers, and the American Ordnance Association, a group of manufacturers engaged in the production of ordnance parts for the United States Army.
In 1928 Fred went to work for the Kelly Brass Works, a manufacturing concern in Chicago owned by his father. Here he gained experience in all departments of the plant: foundry, machine shop, tool room, pattern shop. He designed tools and patterns, did sales work and sales engineering, estimating, and production scheduling. *1114 He worked in these various departments of this company for approximately three years.
Fred remained with Kelly Brass Works until 1931. By that time he had become *98 "Assistant General Manager," with duties relating to production. While in the employ of this company he engaged in technical, scientific research which resulted in the development of methods and invention of articles patented in his name.
In 1931, Fred started a new business venture. He brought his father in as a partner and on August 15, 1933, the business was incorporated as National Metal Products Corporation with a capital of $ 1,500. National then engaged in the manufacture of thermostatic devices and controls for use in the domestic and industrial heating field. Fred's father resigned as an officer of National in 1939 at the age of 76.
Fred was secretary and treasurer and a director of National from its inception until its termination; he was also chief engineer.
Edward G. Leuthesser (hereinafter referred to as "Edward") is 43 years old. His education included grammar school, high school, and three years of engineering at the Lewis Institute of Technology in Chicago. He took courses in mechanical engineering, metallurgy, physics, and mathematics. His educational background relative to engineering and metallurgy is comparable to that of his brother.
Edward was employed *99 by the Kelly Brass Works in various supervisory jobs beginning in 1930 or 1931. After several years he left, and, as a sole proprietor for three years, conducted a trucking business that operated between Forest Park, Illinois, and Minneapolis and Milwaukee.
About 1938, Edward became interested in manufacturing iron lungs. After observing the original models of iron lungs manufactured in the United States, he designed, developed and had manufactured a new model of which a number were sold. He introduced a bellows for pumping air instead of a blower, and a simpler and lighter type of construction with certain mechanical innovations which made the operation silent in contrast to the noise of the earlier original models. He applied for and received several patents on some of these improvements.
In 1939, the company through which Edward conducted his iron lung business changed its name to Scientific Equipment Company. It was primarily a sales organization and the manufacturing was subcontracted. Edward owned a substantial amount of its stock. It sustained losses in 1940 and 1941, when its operations were curtailed due to material shortages. Subsequent to 1941 it was liquidated and*100 its charter surrendered.
Edward first became associated with National in 1936 or 1937, at which time he devoted some time to the selling operations of that company. *1115 Subsequently, he acquired stock in the company, became vice president, and devoted most of his time to its business. On or about January 1, 1940, he became president and held this office at all times material to these proceedings.
In late 1939 or early 1940, National sold its civilian business, thereby acquiring some working capital with which to equip a plant to engage in defense work. During the latter part of 1940 and early part of 1941, it was negotiating for Government contracts and converting its plant, and was not producing for civilian use.
The usual prewar civilian business of National did not involve serious engineering problems. In the latter part of 1941, the company became engaged in war production and its engineering problems became more complex and difficult. The Government contracts normally required production to close tolerances, and new and different manufacturing techniques were involved requiring greater engineering skill. Likewise the administrative work increased and became more *101 involved. A portion of National's work was performed by subcontractors.
During the war years, National did not maintain an elaborate staff of engineers. Its engineering work was done by the petitioners, and its detail work was done by draftsmen, production clerks, and tool engineers.
In the latter part of 1941, National began the manufacture of tools, dies, and punches designed for producing 30 and 50 caliber ammunition under an Army Ordnance contract. At the time, a large number of contractors were engaged in producing similar tools. When National first commenced production, it contracted to produce 50 units per day, but later the company was informed that Army Ordnance needed all of these tools that could possibly be produced. By early 1942, National was producing more than 2,500 units per day.
During 1942, while National was producing these tools, dies, and punches, various officials from Army Ordnance visited the plant of National. They examined its production methods and techniques and recommended them to other manufacturers.
In 1943 National was in the process of tooling up for and manufacturing a hydraulic pump for the Air Force. This was in connection with a prime contract*102 in excess of $ 1,500,000 for the production of an inclined bank, engine-driven hydraulic pump used on aircraft. This pump was used to operate the hydraulic equipment, surface controls, landing gear, etc., in the various types of Army aircraft. Vickers, Inc., the holder of the patents on the pump, agreed to allow National to manufacture it license-free. It was an intricate mechanism, and in its manufacture there were more than 60 tolerances that were held to two ten-thousandths of an inch or less, and two dimensions that were held to two-millionths of an inch.
*1116 In the course of tooling up for the Air Force contract a considerable starting burden was incurred and $ 150,843.93 was spent in 1943 for this purpose by National. This amount was incurred primarily for special tools such as special chucks and other fixtures that are attached to a standard type of machine for producing a special and specific product. Some of these special tools were made by National, and some were purchased by it. The accounting firm, which audited National's books and prepared its returns, included the amount of $ 150,843.93 as part of the "cost of goods sold" in the corporation income and declared*103 value excess-profits tax return filed for the year 1943. This firm also prepared an amended corporation income and declared value excess-profits tax return for National for the year 1944, which was signed by the petitioners and by the representative of the firm, and filed on June 8, 1945. In this amended return the tooling costs of $ 150,843.93 were included as part of the "cost of goods sold" for 1944, and were reported to be "Costs on Uncompleted Portion of Pump Contract Deferred at December 31, 1943, allocable to 1944."
The respondent disallowed the amount of $ 150,843.93 as a part of the cost of sales for 1943, and, in accordance with National's amended return, allowed that amount as a part of the cost of sales for 1944. The reason given by the respondent for this action is contained in his explanation with respect to adjustment (d), hereinafter quoted, in the statement attached to the notice of deficiency for 1944.
In 1943, National had other contracts. One was with Curtiss-Wright Corporation for the production of hydraulic swivels, hydraulic actuators, wing flap controls for the C-46 aircraft, and down-lock cylinders for the landing gear.
In the year 1944, National was engaged*104 on the same contracts as it had been in the previous year. In 1944 the hydraulic pump was in production and the activities of the company as a whole were increased during this year. During the year the company received two research and development contracts from the Air Force; one of these involved the development of a wind-driven pump to be used in connection with the expendable fuel tanks; the other was an electrical device used for pumping gasoline from the expendable tank into the wing tank.
National did other work in 1944 at the request of the Air Force which was not under contract, such as the development of a 3,000-pound hydraulic pump for use on aircraft. It manufactured a number of such pumps, which were submitted to the Air Force at Wright Field where they were tested. They were also submitted to Curtiss-Wright Corporation where they were tested and approved. These pumps were further flight-tested for six or eight months. By this time the war had come to an end and there was no further need for them.
*1117 The plant facilities of National expanded considerably during the war years. In 1940 National used approximately 18,000-20,000 square feet. During the years*105 1942, 1943, and 1944 the company expanded to approximately 100,000 square feet. There ultimately were three plant locations, the second being acquired in either late 1942 or early 1943 and the third being acquired in the latter part of 1943 or early 1944.
The number of employees also increased considerably. In 1940 approximately 50 people were employed by National, whereas in 1944 there were in excess of 500 employees.
During 1943 and 1944, Edward negotiated all of National's contracts, maintained relations between it and the purchasers of its products, frequently contacted the latter to iron out details and complaints, and handled most of the administrative work of National. He also worked with his brother on the original organization of a job. Once it was engineered and set up, he did not pay much attention to it since Fred was in charge of production. Edward also handled the banking relations of National and maintained over-all supervision of personnel. During 1943 and 1944, he spent almost one-third of his time traveling.
Fred worked with his brother in setting up jobs but thereafter concentrated his efforts on the production phase of the business. Between 1942 and 1946, *106 Fred traveled more than 300,000 air miles on United Air Lines alone, and, in addition, he used other airlines, trains, and his personal car, traveling for National. Such traveling consumed approximately three or four per cent of the time he devoted to the business.
Both petitioners worked long hours for National during the years 1943 and 1944.
The net sales, net income, officers' salaries and percentage of war work of National for 1941-1947 per returns are as follows:
| Approximate | ||||
| Net income | Net sales | Officers' | percentage | |
| Year | per return | per return | salaries | of war work |
| 1941 | $ 404.47 | $ 69,665.28 | * $ 13,200 | None |
| 1942 | 17,081.27 | 383,885.96 | 70,000 | 80 |
| 1943 | (163,685.29) | 791,346.28 | 70,000 | 65 |
| 1944 | 86,108.14 | 1,487,540.42 | 70,000 | 100 |
| 1945 | (4,967.21) | 1,041,709.69 | 70,000 | 100 |
| 1946 | (60,620.95) | 3,975.14 | 8,000 | None |
| 1947 | (368.23) | None | 6,000 | None |
Petitioners, as officers of National, each received from National onehalf of the amounts reported as officers' salaries in its returns for the years 1942 to 1947, inclusive. The respondent disallowed as deductions $ 10,000, of the $ *107 35,000 paid to each petitioner during the years *1118 1943, 1944, and 1945 on the ground that $ 35,000 was an excessive and unreasonable compensation for the services rendered. Reasonable compensation for the services rendered by each petitioner to National during the years 1943, 1944, and 1945 was $ 25,000 per annum.
National did not declare or pay any dividends from 1941 to the time it was liquidated.
In its return for the calendar year 1946, National reported a net operating loss of $ 60,620.95 for that year and an unused excess profits credit of $ 4,528.55. National filed an application (Form 1139) for a tentative net operating loss carry-back and an unused excess profits carry-back from the calendar year 1946 to the calendar year 1944.
As a result of its application (Form 1139) for a tentative net operating loss carry-back from the calendar year 1946 to the calendar year 1944, National received refund checks from the Government in June 1947, to the extent of $ 14,629.52 in corporation income tax, $ 19,528.70 in excess profits tax, and $ 1,098.13 in declared value excess profits tax -- totaling $ 35,256.35.
According to the balance sheet contained in National's corporate*108 income tax return filed for the calendar year 1946, it owned assets listed at $ 143,373.37 as of December 31, 1946.
In the early part of 1947, National discontinued its operations, and during that year transferred certain assets to the petitioners or to a partnership of which they were the sole members, known as Leuthesser Brothers. The distributed assets consisted principally of machine tools, and were approximately the same or equivalent assets as those appearing on National's balance sheet as of December 31, 1946, less the assets remaining on December 31, 1947.
According to the balance sheet contained in National's corporate income tax return filed for the calendar year 1947, the corporation owned assets listed at $ 48,952.12 as of December 31, 1947. These assets consisted of a debt owed to it by the petitioners in the amount of $ 38,952.12 and good will listed at $ 10,000. The asset, listed as good will had no value on December 31, 1947. The amount of $ 38,952.12 had been borrowed by petitioners from National some time during 1947, for the use and benefit of their partnership.
After National became inactive in early 1947, no books and records were maintained. With respect*109 to corporate books and records of National for years prior to 1947, many of them have been thrown away or destroyed. In addition, some of the documents and papers of National which had been preserved were stolen from the car of Edward Leuthesser during 1948. The theft of the papers was reported to the police and a reward was offered.
During the fall of 1947 a revenue agent examined the books and records of National and that corporation's tax returns for the years *1119 herein involved. After completing his examination of National's books and records and tax returns for the years 1943, 1944, and 1945, and after discussing the nature of his proposed adjustments of National's income with that corporation's tax consultant, the revenue agent, a short time prior to November 28, 1947, obtained a consent by National to his proposed adjustments in the form of a waiver of restrictions on assessment and collection (Form 874) of the instant deficiencies against National. This consent was signed by Fred W. Leuthesser, Jr., as treasurer of National and was stamped with the corporate seal.
Prior to his signing Form 874 (agreement to the adjustments giving rise to the instant deficiencies) *110 Fred W. Leuthesser read it, and discussed the subject with his brother and with their accountants.
The following deficiencies, together with certain interest thereon, were assessed against National on February 13, 1948:
| Calendar | ||
| year | Types of tax | Amount |
| 1944 | Income | $ 2,610.39 |
| 1944 | Excess profits | 15,966.95 |
| 1945 | Income | 1,465.24 |
Notice and demand for payment of these deficiencies was issued to National on February 24, 1948; a warrant for distraint for their collection was issued on August 15, 1948; and a notice of lien for their collection was filed on September 28, 1948.
Another warrant for distraint for the collection of the deficiencies was issued on October 2, 1950. Finally, on January 1, 1951, Form 53 was filed which denotes that the collector of internal revenue had exhausted his efforts to collect the deficiencies from National and had failed to collect them.
Petitioners paid their $ 38,952.12 debt to National in April 1948. They acquired the funds used for this purpose from refunds of their individual income taxes and from borrowings on life insurance.
Having read the waiver (Form 874) and having discussed it with his brother and accountant before he signed *111 it in the fall of 1947, Fred knew that National owed the instant deficiencies when he and his brother paid their debt to it. Both of the petitioners realized after the payment of $ 38,952.12 that this amount represented the only remaining asset of the corporation which had any value.
After petitioners paid the $ 38,952.12 to National, this amount was deposited in the bank to the account of National.
In May 1948, an involuntary petition in bankruptcy was filed against Leuthesser Brothers, the partnership composed of petitioners, in the United States District Court for the Northern District of Illinois. The creditors of the partnership claimed that the $ 38,952.12 payment made by petitioners to National was a preferential payment. The *1120 court asked the petitioners what disposition had been made by them of the income tax refunds, and when informed that they had been paid to National, instructed Fred to deposit them with the court in the interest of creditors of the partnership on the ground that they constituted preferential payments.
By check dated June 2, 1948, petitioners withdrew from the bank $ 35,000 of the above-mentioned $ 38,952.12 and paid it to the court to be used*112 in the bankruptcy proceedings involving the Leuthesser Brothers partnership. The check has the words "National Metal Products Corporation" printed by hand in ink above the petitioners' signatures. The printing was done by Fred.
On June 3, 1948, a petition was filed by the partnership for confirmation of debtor's arrangement under chapter XI of the Bankruptcy Act. On July 26, 1948, the proposed debtor's arrangement was approved by the Bankruptcy Court. The $ 35,000 paid to the court was used to discharge debts owed to creditors of the partnership.
The notices asserting liability against each of the petitioners, as transferee of assets of National, for deficiencies in taxes of that corporation for the years 1944 and 1945 were mailed by the respondent on March 9, 1950. In an amendment to answer filed with this Court on May 23, 1951, respondent alleges that each petitioner is also liable for the deficiencies as fiduciaries under the provisions of section 3467 of the Revised Statutes.
In determining the deficiencies in income tax and excess profits tax of National for the year 1944, respondent made the following adjustments to the net income reported in its return for that year:
| Net income as disclosed by return | $ 86,108.14 | |
| Unallowable deductions and additional income: | ||
| (a) Compensation of officers | $ 20,000.00 | |
| (b) Other deductions | 550.00 | |
| (c) Net operating loss carryover deduction | 153,418.66 | |
| 173,968.66 | ||
| Total | $ 260,076.80 | |
| Nontaxable income and additional deductions: | ||
| (d) Cost of sales | $ 150,843.93 | |
| (e) Taxes | 125.00 | |
| (f) Amortization of emergency facilities | 14,412.55 | |
| (g) Net operating loss carry-back deduction | 60,245.00 | |
| 225,626.48 | ||
| Net income adjusted | $ 34,450.32 |
*113 The explanation given by the respondent for adjustments (a), (c), (d), and (g) was as follows:
(a) The deduction for compensation of officers claimed in the return in the amount of $ 70,000.00 has been reduced to $ 50,000.00 for the reason that the amount claimed is excessive and unreasonable for the services rendered by the two officers and therefore is not allowable in full under the provisions of section *1121 23 (a) of the Internal Revenue Code. Accordingly, the amount of $ 20,000.00 has been restored to net income.
(c) The net operating loss carryover deduction claimed in the return in the amount of $ 153,418.66 for an operating loss sustained in 1943 has been disallowed. The operating loss sustained by the corporation in 1943 as adjusted is $ 3,594.41 which constituted a carryback loss to 1942 (there was no net income for 1941) under the provisions of section 122 of the Internal Revenue Code and was so allowed in that year. Therefore, there is no net operating loss carryover from the year 1943 allowable in 1944. Adjustments to the net loss for 1943 are shown on schedule 2 herein.
(d) The corporation has been allowed additional cost of sales in the amount of $ 150,843.93*114 representing costs deferred at December 31, 1943 on the uncompleted pump contract, which deferred costs have been determined allowable in the current year.
(g) A net operating loss carryback deduction in the amount of $ 60,245.00 has been allowed for the operating loss sustained in 1946 in that amount. Computation is as follows:
| Net loss for 1946 as disclosed by return | $ 60,620.95 |
| Less: Personal property tax deducted which is not allowable | $ 500.00 |
| Balance | $ 60,120.95 |
| Add: Interest expense allowable, but not claimed in return | $ 124.05 |
| Net loss for 1946 as adjusted | $ 60,245.00 |
* * * *
* * * The corporation has been allowed an unused excess profits credit carryback from 1946 to 1944 in the amount of $ 4,528.55 * * *.
Schedule 2, referred to in explanation (c) above, deals with adjustments made by respondent to the net loss reported by National in its 1943 return; it reads as follows:
| Net loss as disclosed by return | $ 168,685.29 | |
| Add: Cost of sales claimed in 1943, allowed in 1944 | $ 150,843.93 | |
| Compensation of officers (same explanation as | ||
| item (a) for 1944) | $ 20,000.00 | |
| 170,843.93 | ||
| Total | $ 2,158.64 | |
| Deduct: Additional taxes allowed | $ 838.47 | |
| Amortization of emergency facilities * * * | $ 4,914.58 | |
| $ 5,753.05 | ||
| Net loss adjusted, allowable as a carryback deduction | ||
| to 1942 | $ 3,594.41 |
*115 OPINION.
In view of petitioners' concession of their liability for the 1945 taxes of National Metal Products Corporation, there remains only the question of their liability with respect to 1944. The taxes involved were assessed against National, on February 13, 1948. Since the Government has failed to collect these taxes, respondent is now proceeding against petitioners, who were officers, directors, and *1122 owners of substantially all of the stock of National. He at first determined the deficiencies against them as transferees, but by amended answer, he now seeks to hold them accountable, in the alternative, as fiduciaries under section 3467 of the Revised Statues.
1. At the outset, petitioners challenge National's liability for the taxes involved. The deficiencies were based upon a number of adjustments, of which only two are contested. The first involves a deduction for officers' salaries. National's returns for 1944 claimed a deduction of $ 70,000 for officers' salaries, representing $ 35,000 to each of the petitioners. Respondent reduced the deduction to $ 50,000; he determined that the amount claimed was excessive and unreasonable under section 23 (a) of the Internal*116 Revenue Code, and that only $ 25,000 for each petitioner was reasonable compensation under the statute.
Petitioners introduced considerable evidence in an effort to sustain their burden of proving that salaries of $ 35,000 each constituted reasonable compensation. A careful consideration of all the evidence, including the evidence on cross-examination, does not convince us that reasonable compensation for petitioners' officers exceeded the aggregate of $ 50,000 for both petitioners which respondent has allowed. His determination in this respect is therefore approved.
The second adjustment in controversy is the denial of a deduction of $ 153,418.66 based upon a carry-over to 1944 of a net operating loss from 1943. Respondent's determination in this connection grows out of his action with respect to two items involved on National's 1943 returns. One of those items was a deduction for officers' salaries, and the Commissioner's conclusion that $ 50,000, rather than $ 70,000 was reasonable compensation for 1943 is hereby approved. The facts in this respect are substantially identical with the facts considered in connection with the year 1944, and our decision is the same as to both*117 years. The other item is the amount of $ 150,843.93 which National subtracted on its 1943 returns from gross sales as part of "cost of goods sold" in determining its gross profits from 1943 sales. The Commissioner determined that the $ 150,843.93 represented cost of goods sold in 1944 rather than in 1943, and eliminated that amount from the net operating loss for 1943. However, at the same time, he allowed a deduction in the identical amount, $ 150,843.93, for 1944, the year here involved, as part of "cost of goods sold" in 1944.
To be sure, the Commissioner's action with respect to this item had the effect, in conjunction with his action on the salary deduction, of eliminating the net operating loss carry-over deduction. But his corresponding action in allowing the full amount of the second item of $ 150,843.93 as a deduction for 1944, makes it a matter of no consequence here whether he correctly eliminated that item from the 1943 net operating loss. For, to the extent that the deduction might *1123 be restored to 1943, as contended for by petitioners, and thus taken into account in computing the net operating loss to be carried forward to 1944, the deduction for "cost *118 of goods sold" in 1944 would have to be revised downward. It is not apparent how a greater tax benefit would accrue to petitioners for 1944 by allocating the $ 150,843.93 item to 1943; certainly, the amount of the net operating loss carry-over deduction in 1944, to the extent that it would be attributable to that item could not be greater than $ 150,843.93, while, at the same time, petitioners would lose the advantage of the $ 150,843.93 deduction for "cost of goods sold" in 1944. In the circumstances, it becomes wholly immaterial here in reviewing the correctness of the deficiencies asserted as to which view is accepted.
We conclude that the deficiencies determined by the respondent are correct, and we pass to the questions whether petitioners are liable for such deficiencies in these proceedings, either as transferees or as fiduciaries.
2. On the question of petitioners' transferee liability we are met at the very beginning with the contention that the deficiencies determined against them in this capacity are barred by the statute of limitations, sections 275 (a) and 311 (b) (1) of the Internal Revenue Code. Section 275 (a) requires that the tax be assessed within 3 years after*119 the return was filed, and section 311 (b) (1) permits assessment of liability against a transferee within 1 year after the expiration of the period of limitation for assessment against the taxpayer. Accordingly, since National filed its original 1944 return on March 15, 1945, and since no waivers have been executed, the period within which the Commissioner had authority to proceed against petitioners as transferees under sections 275 (a) and 311 (b) (1) could not extend beyond March 15, 1949. But the deficiency notices herein were mailed on March 9, 1950, and are therefore untimely within the foregoing provisions.
Respondent does not challenge the effect of the foregoing provisions, as outlined above. Rather, he seeks to avoid their impact by relying upon certain facts relating to a refund received by National in 1947 with respect to the year 1944 as a result of a net operating loss carry-back adjustment from the year 1946, pursuant to section 3780 of the Code; and he contends that these facts bring into play a different period of limitations, founded upon section 276 (d).
In its return for 1946, National reported a net operating loss of $ 60,620.95 for that year. It filed an *120 application under section 3780 (a) of the Internal Revenue Code for a tentative net operating loss carry-back and an unused excess profits credit carry-back from the year 1946 to the year 1944. Pursuant to section 3780 (b), it received refunds from the Government in June 1947 of $ 14,629.52 in corporation *1124 income tax, $ 19,528.70 in excess profits tax, and $ 1,098.13 in declared value excess-profits tax -- totaling $ 35,256.35. These refunds exceeded the amounts of the deficiencies in income and excess profits taxes determined against National for the year 1944. Respondent contends that by reason of these refunds, the period of limitation for the assessment of the deficiencies against it, under the provisions of section 3780 (c) and section 276 (d) of the Internal Revenue Code, did not expire until March 1950, and under the provisions of section 311 (b) (1), the period for assessment of the deficiencies against petitioners as transferees did not expire until March 1951.
Subsection (a) of section 3780 provides that under specified circumstances a taxpayer may file an application for a tentative carry-back adjustment of the taxes for prior taxable years affected by a net*121 operating loss carry-back or an unused excess profits credit carry-back. Subsection (b) provides in part that within a period of 90 days the Commissioner shall make a limited examination of the application to discover omissions or errors of computation, determine the amount of the increase or decrease in each tax attributable to such carry-back upon the basis of the application and examination, apply any decrease against unpaid taxes or deficiencies, and refund the remainder to the taxpayer. Subsection (c) provides as follows:
Assessment of Erroneous Allowances. -- If the Commissioner determines that the amount applied, credited or refunded under subsection (b) is in excess of the over-assessment attributable to the carry-back with respect to which such amount was applied, credited or refunded, he may assess the amount of the excess as a deficiency as if it were due to a mathematical error appearing on the face of the return, as provided in section 272 (f). * * *.
Section 276 (d) provides, to the extent here material, that in the case of a deficiency "attributable to the application to the taxpayer of a net operating loss carry-back or unused excess profits carry-back, including*122 deficiencies which may be assessed pursuant to the provisions of section 3780 (b) and (c)," such deficiency may be assessed at any time before the expiration of the period within which a deficiency for the year of the net operating loss or unused excess profits credit may be assessed.
Respondent contends that, applying these provisions here, the period within which he could proceed against petitioners did not expire before March 1951, and that therefore his March 9, 1950, deficiency notices were timely. That contention is predicated upon the assumption that under these provisions the period within which he could assess a deficiency for 1944 is to be coextensive with the period applicable to 1946, 1*1125 provided only that the deficiency did not exceed the amount of the section 3780 refund.
*123 We are unable to agree with respondent's interpretation of these provisions. Of course, if the refund were erroneous by reason of an incorrect application of the carry-back adjustments authorized by section 3780, or by reason of an incorrect determination of the amount or existence of losses giving rise to the carry-back, then plainly respondent's position would be sound. For, such were the very types of situations which the legislation was intended to govern. But respondent is here attempting to invoke these provisions in order to correct an error in the tax reported for the earlier year to which the carry-back was applied -- an error having nothing whatever to do with the circumstances giving rise to the carry-back or the statutory machinery for making it applicable to the earlier year.
Neither the language of the statute nor the legislative history supports respondent's position. Section 3780 (c), in providing for assessment of erroneous allowances is specifically limited to the situation where "the Commissioner determines that the amount applied, credited or refunded under subsection (b) is in excess of the over-assessment attributable to the carry-back with respect to*124 which such amount was applied, credited or refunded * * *." (Emphasis added.) And throughout the report of the House Ways and Means Committee which accompanied the bill introducing these provisions, the inference is inescapable that they were intended merely to permit an enlargement of the period of limitations where the error giving rise to the deficiency was "attributable to the carry-back." 2 Nowhere is there any suggestion that liability for the earlier year is to be kept alive for all purposes (limited only by the amount of the refund or credit) for an additional period of years beyond the original period of limitations.
In determining the 1944 deficiencies, the only adjustment made by the respondent which was attributable to the application to National of a net operating*125 loss carry-back or an unused excess profits credit carry-back amounted to $ 375.95, which resulted from an allowance of a net operating loss carry-back from 1946 of $ 60,245 in lieu of $ 60,620.95. Six other adjustments made by the respondent were attributable to his determination that National had not correctly reported its income and deductions in its 1944 return. To the extent that the deficiencies determined for 1944 against petitioners as transferees are attributable to these six adjustments, they are barred by sections 275 (a) and 311 (b) (1). To the extent that the deficiencies are attributable to the small adjustment made in the amount of the 1946 operating loss carry-back, the period of limitation contained *1126 in section 276 (d) is applicable and the assertion against petitioners as transferees of the portion of the deficiencies attributable to this adjustment was timely. But the respondent has not sustained his burden of proving that they are liable as transferees of National for such deficiencies. National in June 1948 paid to the bankruptcy court only $ 35,000 of the $ 38,952.12 it had received from petitioners in April 1948. The difference of $ 3,952.12 *126 was more than sufficient to satisfy any deficiencies attributable to the small adjustment made in the 1946 operating loss carry-back, and respondent, upon whom the burden of proof lies in this connection, has not shown that National did not retain that difference.
3. In the alternative, respondent contends that even if sections 3780 and 276 (d) did not enlarge the period of limitations within which to proceed against petitioners as transferees, they are liable as fiduciaries under section 3467 of the Revised Statutes, 3 and that such liability is not barred by limitations.
*127 The liability of petitioners as fiduciaries was asserted by the respondent in an amendment to answer filed with this Court on May 23, 1951. The facts alleged in support of this affirmative allegation are that petitioners at all times material herein were officers and principal stockholders of National; that National on March 15, 1945, and March 15, 1946, became liable for the payment of income and excess profits taxes aggregating $ 20,042.58 which have never been paid; that in May or June 1948 National received cash in the approximate amount of $ 40,000 4 representing the repayment of a loan owed to it by petitioners; that at that time this $ 40,000 represented and constituted the sole asset of National; that petitioners then knew that unpaid taxes of $ 20,042.58 were outstanding and overdue; that the $ 40,000 constituted a trust fund in the hands of petitioners for the benefit of creditors of National, including the respondent herein; that petitioners, as officers of National and as trustees, did not use the $ 40,000 to pay debts due the United States. Respondent alleges further that petitioners, as officers and trustees, turned the sum of $ 40,000 5 over to themselves as individuals*128 and applied this sum for their own use and benefit, i. e., they employed this money to salvage their interests in Leuthesser Brothers, a partnership in which they had equal interests, and which was then the subject of a bankruptcy proceeding pending in the United States District Court for the *1127 Northern District of Illinois; and that by so doing they rendered National insolvent and wholly without assets, and rendered themselves personally, and jointly and severally, liable for the payment of the $ 20,042.58 in tax plus interest thereon under the provisions of section 3467 of the Revised Statutes.
The statutory machinery for the collection of deficiencies is made applicable by section 311 (a) (2) of the Internal Revenue Code to the enforcement of fiduciary liability created by section 3467*129 of the Revised Statutes in respect of payment of "tax from the estate of the taxpayer." 6*130 And, on the assumption that petitioners incurred liability under section 3467 of the Revised Statutes, respondent argues that his action was timely. 7
Petitioners contend that the facts alleged or proved do not bring this case within section 3467 of the Revised Statutes. We agree.
Passing the question whether petitioners were the kind of fiduciaries covered by the statute, it is plain that there has not been compliance with its terms. Section 3467*131 applies where the fiduciary "pays, in whole or in part, any debt due by the person or estate for whom or for which he acts before he satisfies and pays the debts due to the United States from such person or estate." Both the allegations and proof are clear that the payment made by petitioners which is alleged to render section 3467 applicable was not a payment of any debt of National. The payment was made for the benefit of creditors of petitioners' partnership. Such payment might have resulted in transferee liability against petitioners had respondent proceeded in time. *1128 But it plainly did not fall within the terms of section 3467. 8L. T. McCourt, 15 T. C. 734, relied upon by respondent is perhaps distinguishable on its facts; however, if it is taken to hold that a distribution by a fiduciary not in payment of the taxpayer's debts falls within section 3467, it is not justified by the language of the statute and to that extent will not be followed.
*132 Decisions will be entered under Rule 50.
Footnotes
*. Of this amount, $ 4,800 was paid to F. W. Leuthesser, Sr.↩
1. The period applicable to 1946 is three years after the filing of the returns plus an additional year for proceeding against transferees. Sections 275 (a) and 311 (b) (1)↩. This would give respondent until March 1951 within which to assess a deficiency against transferees with respect to the year 1946, assuming that the return for 1946 had been filed in March 1947.
2. Sections 3780 and 276 (d)↩ were added to the Internal Revenue Code by sections 4 (a) and 5 (e) of the Tax Adjustment Act of 1945. See particularly the report of the House Ways and Means Committee, No. 849, 79th Cong., 1st Sess., pp. 28-29 32-33.
3. SEC. 3467 (As Amended). LIABILITY OF FIDUCIARIES.
Every executor, administrator or assignee, or other person, who pays, in whole or in part, any debt due by the person or estate for whom or for which he acts before he satisfies and pays the debts due to the United States from such person or estate, shall become answerable in his own person and estate to the extent of such payments for the debts so due to the United States, or for so much thereof as may remain due and unpaid.↩
4. The amount, as shown by the proof, actually was $ 38,952.12↩
5. The proof showed, and we have so found, that only $ 35,000 was turned over to the bankruptcy court for the benefit of the creditors of Leuthesser-Brothers.↩
6. Section 311 (a) (2) provides:
(a) Method of Collection. -- 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 a tax imposed by this chapter * * *:
* * * *
(2) Fiduciaries. -- The liability of a fiduciary under section 3467 of the Revised Statutes, as amended, (U. S. C., Title 31, Section 192) 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.
The words "the estate of the taxpayer" suggest that these provisions may be inapplicable to situations such as this one, where the alleged fiduciaries were not acting in a representative capacity, as in the case of a decedent's estate, but merely had possession and control of assets of their corporation. However, it is not necessary to meet this question in view of the decision that we reach with respect to the applicability of section 3467↩ to the facts of this case.
7. Section 311 (b) (3) of the Internal Revenue Code provides:
(b) Period of Limitation. -- The period of limitation for assessment of any such liability of a transferee or fiduciary shall be as follows:
* * * *
(3) In the case of the liability of a fiduciary, -- not later than one year after the liability arises or not later than the expiration of the period for collection of the tax in respect of which such liability arises, whichever is the later;
Accordingly, since the taxes herein were in fact timely assessed against National on February 13, 1948, and since collection of the taxes thus assessed may be made within six years thereafter (Section 276 (c)), respondent's action here would be timely under Section 311 (b) (3) if petitioners are liable under Section 3467↩ of the Revised Statutes.
8. In holding that petitioners are not liable in these proceedings as transferees or fiduciaries, we do not mean to suggest that, if they are still indebted to National and such indebtedness may be treated as an asset of National, the Government may not have a means of reaching such asset in an appropriate proceeding brought to effect collection of the assessment that was made against National on February 13, 1948.↩