*2218 1.
2. Each of the petitioners held liable as transferees for unpaid income and excess-profits taxes of the transferor for 1918 and 1919.
3. Special assessment denied.
*1 The respondent has asserted a liability of $30,569.91 against each of the petitioners as transferees for unpaid income and excess-profits taxes of the Philadelphia Axminster Carpet Co. for the years 1918 and 1919. The issues raised are: (1) the constitutionality of section 280 of the Revenue Act of 1926; (2) the statute of limitations; (3) the assertion of liability against petitioners, as transferees, for unpaid taxes of the taxpayer without first proceeding against the latter for the collection of the amount alleged to be due; (4) the respondent's failure to assert a liability against all of the taxpayer's stockholders for the taxes claimed to be due, requiring each of them to make an equal contribution for the payment of the taxes; and (5) respondent's failure to*2219 compute the taxpayer's taxes under section 328 of the Revenue Act of 1918. No evidence was submitted on the second issue and it is not discussed in the brief filed for petitioners. We assume, therefore, that the allegation of error has been abandoned. The proceedings were consolidated for hearing and decision.
*2 FINDINGS OF FACT.
Petitioner Thomson is an individual residing at Philadelphia, Pa., and petitioner Foulkrod is one of the executors of the estate of Thomas C. Poole, who died November 2, 1923.
The Philadelphia Axminster Carpet Co., a corporation, hereinafter called the "corporation," was organized in 1903 to engage in the business of manufacturing Axminster carpets and rugs. The authorized capital stock of the corporation was owned, and its directors and officers on January 27, 1919, were as follows:
| Shares | |
| John Thomson, Jr., director, president | 400 |
| Thomas C. Poole, director, vice-president | 400 |
| Robert E. Vickerman, director, secretary-treasurer | 200 |
| George C. Flint, director | 400 |
The resignations of Poole and Vickerman as vice president, and director and secretary and treasurer, respectively, were accepted by the corporation's*2220 directors on February 3, 1919, on which date Poole was elected treasurer, and Flint, secretary.
In January, 1919, the corporation sold its assets, excepting certain cash on hand, accounts receivable, stocks and bonds, and a loan account, to the Pennsylvania Axminster Carpet Co., a New York corporation, for $350,000. The bill of sale transferring the property sold to the purchaser was signed on January 27, 1919. The proceeds of the sale, together with other assets of the corporation, were subsequently distributed among the corporation's stockholders pro rata. Thomson and Poole each received approximately $220,000 by virtue of the distribution. The corporation has not engaged in business or maintained an office since the distribution was made. It was finally liquidated in 1923, 1924, or 1925.
The income and excess-profits taxes due from the corporation for the years 1918 and 1919, amounting to $91,709.75, plus interest of $1,309.05, were assessed against the corporation in May, 1926. Distraint warrants were issued by the collector of internal revenue for the first Pennsylvania district on November 30, 1926, and November 3, 1927, for the taxes assessed against the corporation. *2221 The deputy collector to whom the warrants were assigned for execution was unable to locate any property of the corporation to levy upon to satisfy the amount due. At some undisclosed time, but prior to November 14, 1927, Poole and Thomson each paid one-third of the taxes and interest assessed against the corporation, leaving an unpaid balance of $30,569.91, which amount was proposed for assessment against the petitioners in deficiency letters dated December 29, 1927.
The corporation's officers in 1918 received salaries aggregating $15,600. Of this sum Vickerman received $6,000, and Thomson and *3 Poole each $4,800. Flint was not an active officer in 1918 and did not receive any salary from the corporation in that year. Poole and Thomson had been in the rug or carpet business from their youth.
The corporation owned between 300 and 400 patterns for the design of rugs acquired from information received from outside sources and buying fabrics and by making designs from imported fabrics, Oriental and European. From 1903 to 1914 the corporation expended about $85,000 on designs, all of which amount was charged to expense and none of it has ever been capitalized on the*2222 corporation's books. The patterns so acquired and owned by the corporation had a value on January 1, 1918, of $75,000. Designs for carpets and rugs change from time to time. Patterns for rugs and carpets depreciate in value, but do not become entirely obsolete. As new patterns were made, the old ones were retained for future use. New patterns were at times made from parts of others.
The gross sales of the corporation in 1918 were about $1,700,000. The statements attached to the deficiency letters show that the corporation's tax liability for 1918 and 1919 was computed on taxable income and invested capital as follows:
| 1918 | 1919 | |
| Net income | $ 233,265.14 | $ 33,572.95 |
| Invested capital | 564,622.01 | 698,681.60 |
OPINION.
ARUNDELL: The decision of the first issue is controlled by , holding that where petitioners seek a redetermination of their liability as transferees under section 280 of the Revenue Act of 1926, they may not question its validity.
It does not appear from the record whether or not the corporation has ever been legally dissolved. It was liquidated in 1923, 1924, or 1925, and has neither*2223 engaged in business nor maintained an office since its assets were distributed to its stockholders. The taxes were duly assessed against the corporation in May, 1926. Investigations made by the deputy collector in his endeavor to execute the distraint warrants issued thereafter disclosed no corporate assets against which satisfaction of the taxes due could be obtained. Suit against the transferor would have been useless procedure. Under such circumstances the respondent is not required to institute suit against the transferor before proceeding against the transferees of its assets. On this issue the respondent is sustained. ; ; .
*4 The contention being made that the respondent must proceed against all of the transferees of corporate assets, and in such proceedings call upon each for an equal contribution, is without merit, each transferee being liable for unpaid taxes of a transferor to the extent of the amount received in liquidation. *2224 ;.
Under the remaining issue the right of the transferor to special assessment is claimed on the ground that an abnormality of income exists by reason of low salaries paid to be corporation's officers and the exclusion from invested capital of amounts expended for rug and carpet patterns.
In 1918 petitioner's officers received as compensation for their services salaries amounting to $15,600. The amount of compensation paid to them in 1919, if any, does not appear of record. George Flint, who was president of the corporation prior to 1914, testified that he thought the salaries paid in 1918 were not reasonable for services rendered. Nothing was offered in proof of what would have been reasonable compensation for their services. If we were to accept this testimony as establishing that the salaries paid were less than reasonable amounts, that fact alone would not prove the existence of an abnormality in capital or income justifying special assessment. *2225 ; ; .
Prior to 1914 the corporation developed patterns for the manufacture of rugs and carpets at a cost of about $85,000, all of which amount was charged to expense and never capitalized on the corporate books. Patterns were discarded from time to time in favor of new ones, to meet the requirements of the corporation's trade. It does not appear from the evidence whether or not the respondent included the cost of the patterns developed before 1914 in his determination of the corporation's invested capital for 1918 and 1919, or whether any of such assets were employed in the corporation's business in 1918 and 1919, and, if so, the part they played in the production of its income in those years. The value of the patterns on January 1, 1918, was less than their cost. Section 327 of the 1918 Act is not applicable where the tax "is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital." The corporation's failure to capitalize on its books amounts expended prior to*2226 1914 for patterns did not, in our opinion, create such an abnormal condition as to justify special assessment.
The evidence does not show that the corporation comes within any of the other provisions of section 327 of the statute.
Decision will be entered for the respondent.