*1342 The Commissioner has failed to show that the petitioners are liable as transferees of property of the taxpayer.
*212 These proceedings, consolidated for hearing, are for the determination of the petitioners' liability for income and profits tax of the Whitney Coal Mining Company for 1918 and 1919 in the amounts of $4,114.15 and $1,314.07, respectively, upon the ground that they are transferees of the property of the company under section 280 of the Revenue Act of 1926.
*213 FINDINGS OF FACT.
The petitioners are stockholders of the Whitney Coal Mining Company, a Pennsylvania corporation which was incorporated on February 26, 1918, and began business on July 1, 1918. It succeeded to the assets and business of the partnership which began business on January 1, 1918. There were three members of the partnership, the petitioners in these proceedings. The capital stock of the corporation was $15,000 and each of the petitioners paid $5,000 for one-third of the capital stock. The petitioners constituted all of the stockholders*1343 and all of the officers of the corporation from the time of its organization to the present time - Willard M. Whitney, president, Mae A. Kelley, now Mae A. Kelley Murphy, secretary and treasurer, and John P. Kelley, vice president.
The business of the corporation was the buying and selling of coal, partly on a commission basis and partly for itself as principal. It kept its books of account upon the accrual basis. At the time it began business, salaries were fixed in the amount of $13,600 for the president, $10,000 for the vice president, and $11,800 for the secretary and treasurer. A minute of the meeting of the board of directors of March 3, 1919, shows an establishment of the above mentioned salaries "for the ensuing year." The salaries were continued at the same rates for bookkeeping purposes for subsequent years, although the meetings of the board of directors make no reference to salaries payable for such years.
The corporation assumed that it was a personal service corporation within the meaning of the Revenue Act of 1918 and made its returns for 1918 to 1921, accordingly. The return for 1918 shows the deduction of salaries for officers from July 1 to December 31, 1918, of*1344 $17,700; the return for 1919, $5,400; the return for 1920, $35,520; and the return for 1921, $4,520. The returns for 1922 and subsequent years were made on the regular corporation form and salaries to the three officers were deducted in the amounts of $35,520 for 1922 and 1923, and of $2,499.99 for 1924, the corporation having ceased active business operations on or about December 31, 1924. The returns filed show net income or losses as follows:
| Year | Net income | Loss |
| 1918 | $13,401.42 | |
| 1919 | 7,525.78 | |
| 1920 | 57,065.88 | |
| 1921 | $26,983.17 | |
| 1922 | 25,931.93 | |
| 1923 | 28,331.42 | |
| 1924 | 6,792.88 |
*214 The corporation maintained drawing accounts for each of the petitioners. There were credited to the drawing accounts the pro rata shares of the profits for the years 1918, 1919, and 1920, and also salaries to January 31, 1924, at the rate of $13,600 per year for Willard M. Whitney, $10,000 per year for John P. Kelley, and to Mae A. Kelley at the rate of $11,800 per year for 1918, $12,800 per year for 1919, and at the rate of $11,920 per year for succeeding years to January 31, 1924. Salaries were paid monthly in cash to the president at the rate of $300 per*1345 month or $3,600 per year to January 31, 1924, and to the secretary and treasurer at the rate of $150 per month or $1,800 per year for the years 1918 and 1919, and at the rate of $1,920 per year for subsequent years to January 31, 1924. No monthly cash salaries were paid to the vice president. In 1919, it became apparent that the earnings of the corporation would not be sufficient to pay the salaries agreed upon, and by agreement of the petitioners their drawing accounts were each debited with $10,000 in respect of the salaries credited. Similarly, in 1921, the drawing account of each was debited with $10,000, representing an offset to the salaries credited.
In addition to the monthly salaries paid to Willard M. Whitney and to Mae A. Kelley, the corporation made the following distributions to the petitioners:
| Year | Willard M. Whitney | Mae A. Kelley | John P. Kelley |
| 1918 | $5,000 | $5,000 | $5,000 |
| 1919 | 6,000 | 6,000 | 7,500 |
| 1920 | 10,723.53 | 11,523.56 | 1 12,736.22 |
| 1924 | 600 |
There was also distributed to each in 1919, stock of the Champion Gas Coal Company of the value of $5,000 and Liberty bonds of the value of $500, *1346 and to each in 1924, furniture and fixtures of the value of $300. The corporation had acquired Liberty bonds in 1919 at a cost of $10,000. With the consent of the other stockholders these Liberty bonds were used as collateral by Willard M. Whitney in a personal stock trading account in which they were lost prior to 1924. The corporation continued, however, to carry them in its balance sheet as an asset up to January 1, 1924. In 1924, Whitney's drawing account was debited with $10,000 for the Liberty bonds. His account was also debited on December 31, 1923, with $630 and the account of the Champion Gas Coal Company credited with a like amount with an explanation in the journal "amt. paid to Champion due by W. M. Whitney for Revenue Tax."
*215 The balance sheet of the corporation as of December 31, 1920, shows as follows:
| Assets | Liabilities | ||
| Fixtures | $2,685.92 | Capital | $15,000.00 |
| Stationery | 250.00 | Accounts payable | 158,414.31 |
| Insurance | 1,921.18 | Surplus | 57,065.88 |
| Liberty bonds | 10,000.00 | ||
| Cash | 13,750.06 | ||
| Accounts receivable | 201,873.03 | ||
| Total | 230,480.19 | Total | 230,480.19 |
In 1924 the corporation had no assets except furniture and*1347 fixtures of a value of approximately $900; accounts receivable of approximately $40,000, which had been determined to be worthless, although in July of that year $4,300 was collected upon one account, which was used in the payment of current expenses; and a claim against Whitney for the $10,000 Liberty bonds taken by him as above indicated. The taxpayer corporation has never been dissolved and has never been adjudged a bankrupt. The balance sheet of the corporation attached to its income-tax return for 1924 shows a deficit, at a time when all business operations had ceased, of $118,039.40. The liabilities consisted principally of credits to the drawing accounts of the petitioners.
OPINION.
SMITH: The respondent being unable to collect the taxes ue from the Whitney Coal Mining Company for 1918 and 1919 in the amounts of $4,114.15 and $1,314.07, respectively, seeks in these proceedings to establish the petitioners' liability for them as transferees of the assets of the corporation. The respondent has the burden of proving the liability of the petitioners. Sec. 912, .revenue Act of 1928; *1348 ; ; ; ; ; ; .
The first point made by the respondent is that the petitioners, directors of the corporation, are liable for the taxes of the corporation under sections 5786 and 6054 of the Statutes of the Commonwealth of Pennsylvania in force in 1920, which provide as follows:
SEC. 5786. Declaration of dividends. - All corporations heretofore or hereafter incorporate under any special or general law of this commonwealth may, at any time or times, declare dividends of so much of their net profits as shall appear advisable to the directors; such dividends to be paid to the stockholders or their legal representatives at such time after their declaration as the directors may fix; but such dividends shall in no case exceed the amount of the net profits actually acquired by the company, so that the capital stock shall never be impaired thereby. (1913, *1349 May 23; P.L. 336, § 1.)
*216 SEC. 6054. Individual liability of directors. - If the directors of any company declare any dividend when the company is insolvent, or the payment of which would render it insolvent, they shall be jointly and severally liable for all the debts of the company then existing, and for all thereafter contracted, so long as they respectively continue in office; Provided, That the amount for which they shall be liable shall not exceed the amount of such dividend; and if any of the directors are absent at the time of making the dividend, or object thereto at said time, and file their objections in writing with the clerk of the company, they shall all be exempted from such liability. (1863, July 18; P.L. [1864] 1102, § 24.)
The respondent points out that the surplus of the corporation at December 31, 1920, was $57,065.88 and that on January 31, 1921, this surplus was credited on the books of the company in equal shares to the drawing accounts of the petitioners, to be paid to them when the corporation was in funds to make the payments. The contention is that this credit on the books of the corporation was tantamount to the declaration of*1350 a dividend by the corporation and that inasmuch as the balance sheet at December 31, 1920, does not show the corporation's liability for taxes for 1918 and 1919 in the aggregate of $5,428.22, the credit upon the books of the corporation rendered the corporation insolvent and therefore make the petitioners, as directors, liable for the taxes.
In our opinion the respondent is in error in his contention that the credits upon the books of the corporation under the circumstances here stated were tantamount to the declaration of a dividend. The corporation filed a personal service corporation return for 1919 under section 218(e) of the Revenue Act of 1918. The credits were made upon the assumption by the officers of the corporation that it was a personal service corporation and that they as the stockholders were liable to income tax on their individual returns for their pro rata shares of the profits. The credit was made subsequent to that supposition and not for the purpose of creating a liability of the corporation to the petitioners. In any event, the corporation was not in funds with which to pay the petitioners the credits made and was never able to make such payments. The amounts*1351 were not distributed to the petitioners.
Section 280(a)(1) of the Revenue Act of 1926 provides for the collection of the tax of the transferor from "a transferee of property of a taxpayer" in certain circumstances. The section is not, however, authority for proceeding against persons, either individual or corporate, who may be liable for the tax where in point of fact they are not transferees of property. Thus, a corporation or an individual may at law be liable for the tax due from a taxpayer by reason of having guaranteed the payment of a tax. In , the Board defined a transferee as "one who takes the property of another without full, fair and adequate *217 consideration therefor, to the prejudice of the rights of creditors." Before the respondent may proceed under section 280 a person must be a transferee of property from the taxpayer in circumstances which make him liable at law or in equity for the tax. It follows that if a person claimed to be a transferee has not received property from the transferor no liability for the tax attaches to him. *1352 ; ; . In the last mentioned case an attempt was made to hold certain stockholders liable for the tax of the transferor under section 280. The stockholders, in subscribing for the stock of the taxpayer corporation, had given their notes, which were thereupon used by the corporation as collateral in borrowing money to be used in operating the company. The loans were paid by the corporation in due course, but the notes were never paid. The Commissioner contended that these notes represented assets of the corporation, which were, in effect, distributed to the stockholders by cancellation without collection. We held, however, that the notes were liabilities of the stockholders to the corporstion, enforceable against the stockholders by the corporation or by its creditors, but that such liabilities were not such as to make the petitioners transferees of the assets of the taxpayer.
In the proceedings at bar there is no evidence that assets of the corporation were distributed to the petitioners by virtue*1353 of the credits made to their accounts upon the transferor's books of account on January 31, 1921. We are therefore of the opinion that no liability attached to the petitioners by virtue of such credits.
We have further to consider the question of the liability of the petitioners for the taxes due from the corporation for 1918 and 1919, upon the ground that after 1920 the petitioners were distributees of the assets of the corporation under conditions which made them liable for the taxes as transferees under section 280 of the Revenue Act of 1926.
For some years subsequent to 1920, the corporation did a large volume of business. In proved unable, however, to collect many of its accounts receivable. Legal proceedings were resorted to in some cases, but without success. The corporation continued to pay cash salaries to its president at the rate of $3,600 per year, and to its secretary and treasurer at the rate of $1,920 per year, but had no funds with which to pay the full salaries credited to the drawing accounts upon its books or the earnings which had been credited to such accounts for the years 1918, 1919, and 1920. The payment of the ordinary salaries was in no wise such*1354 a distribution of the assets of the corporation as would render the petitioners liable *218 for the taxes of the corporation. The amounts were paid for services actually rendered. The petitioners claim that any amounts which were distributed to them subsequent to 1920 were on account of salaries. The burden of proof to show the contrary is placed by the statute upon the respondent. Section 602 of the Revenue Act of 1928. In , we said:
It is evident that the statute places a real burden on the Commissioner. He must establish the liability of the transferee against whom he proposes to proceed. He must establish all facts necessary to show that there is a liability at law or in equity on the part of that transfree for the payment of the whole or a part of the liability. This burden is not met by such an indifferent showing of the facts as we have here.
See .
It is true that subsequent to 1920 there were certain small distributions made to the petitioners by the Whitney Coal Mining Company. But there is no evidence as to whether the salaries accrued to the petitioners upon*1355 the company's books of account were unreasonable in amount or that the amounts distributed, were not, as claimed by the petitioners, payments for salary, or for that matter in payment of other liabilities of the company to the petitioners. There is no evidence that any amounts were distributed by the company to the petitioners in liquidation of the corporation. We therefore hold, as in , that the Commissioner has not discharged the burden of proof placed upon him by section 602 of the Revenue Act of 1928.
Reviewed by the Board.
Judgments of no liability will be entered for the petitioners.
Footnotes
1. Cash and other items. ↩