1929 BTA LEXIS 2268">*2268 1. Depreciation upon tobacco warehouse and warehouse equipment determined.
2. Deduction for the loss of tobacco baskets allowed.
3. Personal service classification denied.
4. Petitioner is a transferee of assets of the Star Warehouse Co. within the meaning of section 280 of the Revenue Act of 1926.
5. Where the period of limitation for assessment of taxes against a taxpayer did not expire until after the enactment of the Revenue Act of 1926, and the liability for unpaid taxes of the taxpayer was asserted against the petitioner as a transferee, within one year after the expiration of such period, collection of the taxes is not barred. Louis Costanzo et al.,16 B.T.A. 1294">16 B.T.A. 1294.
17 B.T.A. 584">*585 The respondent, acting under section 280 of the Revenue Act of 1926, has determined a liability against the petitioner in the amount of $3,384.50, as constituting his liability as a transferee of the assets of the Star Warehouse Co., Shelbyville, Ky., for unpaid income and profits taxes of that amount assessed against the said company for the1929 BTA LEXIS 2268">*2269 period November 7, 1919, to August 31, 1920.
The petitioner makes allegations of error as follows:
1. That with respect to the net taxable income of the Star Warehouse Co. for the taxable period, the respondent erroneously (a) determined general expense to be $10,282.70 instead of $12,096.15; (b) disallowed a deduction of $1,666.70, representing an expense or a loss for tobacco baskets; (c) disallowed a deduction of $3,225, depreciation on buildings and equipment; and (d) disallowed a deduction for bad debts in the amount of $45.88.
2. That the respondent erred in refusing to classify the Star Warehouse Co. as a personal service corporation for the taxable period.
3. That the respondent erred in holding that there is now or ever has been any liability upon the petitioner in law or in equity as a transferee of the property or assets of the Star Warehouse Co. within the meaning of section 280 of the Revenue Act of 1926.
4. That the respondent erred in failing to hold that paragraph (1) of division (a) of section 280 of the Revenue Act of 1926 applies only to a person becoming a transferee after the passage of the said Act and only as to taxes assessed against the taxpayer1929 BTA LEXIS 2268">*2270 after the passage of the Act.
Petitioner also alleges that paragraph (1) of division (a) of section 280 of the Revenue Act of 1926 is unconstitutional, being opposed to Article 1, Section 2, of the Constitution and, further, that it is violative of the Fifth Amendment, in that it deprives a person of property without due process of law.
Petitioner, on brief, abandons the allegation of error with respect to the bad debt deduction. It appears that the allegations of error numbered 1(a) and (b) above relate to the same item which is an alleged expense for tobacco baskets. The respondent concedes that the deduction claimed should be allowed to the extent of $960.
FINDINGS OF FACT.
Petitioner is an individual whose post office address is Shelbyville, Ky.
The taxes in controversy are income and profits taxes of the Star Warehouse Co., hereinafter referred to as the company, a Kentucky corporation with its principal office at Shelbyville, and are for the period November 7, 1919, to October 31, 1920, inclusive.
17 B.T.A. 584">*586 The company was incorporated in November, 1919, with a capital stock of $60,000, divided into 600 shares of $100 par value. All of the stock was issued1929 BTA LEXIS 2268">*2271 for cash at par. Upon organization the petitioner herein held 60 shares of said stock. The entire capital of the company was used to purchase the warehouse and equipment of the Shelby Loose Leaf Tobacco Warehouse Co. at Shelbyville. The sole business of the company was the sale of tobacco for farmers at public auction on a commission basis, the commission being 80 cents per 100 pounds.
The stockholders of the company were prominent residents of the Counties of Shelby, Henry, Spencer, Anderson and Jefferson, respectively. They were all primarily farmers, but some of them also engaged in real estate or merchandising businesses. Each of the stockholders would solicit the business of tobacco growers among his neighbors and acquaintances for the company.
The selling period extended from the middle of December to about the first or fifteenth of March. During this period the company would conduct sales as often as the volume of tobacco on hand warranted, which averaged about twice a week. The tobacco farmers would haul their crops into the company's warehouse where they were unloaded and sorted into grades by representatives of the company. Each grade was placed in separate1929 BTA LEXIS 2268">*2272 baskets provided by the company. Each farmer's tobacco was kept separately. As many as 25 baskets might be required for the display of one farmer's crop. A crop would weigh between 5,000 and 10,000 pounds. After the tobacco was graded the baskets were arranged about the warehouse floor for the inspection of prospective buyers. When sales were made the purchasers were required to make settlement and remove their tobacco by the close of the day. Most of the buyers maintained accounts in the local banks and settled at the close of each day. The company issued its check to the farmer immediately upon completion of the sale. In this way the company often paid for farmer before it had collected from the buyer.
During the taxable period involved the company borrowed $30,000 from banks. Sales for that period were approximately $1,500,000, and commissions earned amounted to $30,378.54.
As a rule all of the stockholders were at the warehouse on sale days. Each stockholder would be present when the crop of a farmer whose business he had secured was being sold.
The grading of tobacco was done by experts, the company having the service of about 25 such men. It does not appear1929 BTA LEXIS 2268">*2273 that the stockholders were tobacco graders. The company's office force consisted of three calculators, a bookkeeper and the petitioner. From 10 to 17 B.T.A. 584">*587 50 warehouse laborers were employed, depending upon the volume of business each day.
The assets acquired by the company from its predecessor consisted of the warehouse, 3 scales, about 20 Bilduck hand trucks and 4,000 or 5,000 tobacco baskets. The warehouse was a one-story frame structure, 150 by 320 feet in size, with galvanized iron sheathing and a composite roof having many skylights. Except for a driveway at one side, it had a wooden floor about 3 feet above the ground. The building had a fair rental value of $8,000 per year, and 6 per cent was a reasonable annual rate of depreciation upon the structure. Of the $60,000 which the company paid upon the assets it acquired, as above described, $50,000 was allocated to this building. Fair depreciation upon the scales and hand trucks would amount to $225 for the taxable period.
The tobacco baskets were constructed of rived oak, with a latticed bottom and with side bars 2 inches high. They cost between $1.25 and $1.50 per basket. The company valued the baskets acquired1929 BTA LEXIS 2268">*2274 from its predecessor at about $4,000. Purchasers were permitted to remove their tobacco in these baskets and they often failed to return them. The inventory of June 30, 1920, disclosed that about 1,200 baskets had been lost. They were replaced at a cost of $1,666.70 and the company claimed this amount as an expense deduction upon its return. The respondent denied the said deduction, but upon hearing concedes that it should be allowed to the extent of $960, computing this sum as the cost of 1,200 baskets at 80 cents per basket.
Upon the advice of a former employee of the Bureau of Internal Revenue, the company filed a return as a personal service corporation for the taxable period involved. At a stockholders' meeting it was agreed that all of the stockholders would return their income from the company upon the theory that it was a personal service corporation. The petitioner made such a return.
On October 14, 1921, the company's warehouse, equipment, books of account and records, were totally destroyed by fire. The company then ceased business and dissolved. Immediately upon collection of its insurance it distributed the same to its stockholders. Subsequently the warehouse1929 BTA LEXIS 2268">*2275 lot was sold to the petitioner and another person for $5,000 and the net proceeds were likewise distributed to the stockholders.
The following table states the names of the stockholders, the number of shares of stock held by each upon organization, the number of shares of stock held by each upon distribution of the assets, the amount received by each stockholder upon each distribution, the 17 B.T.A. 584">*588 total amount distributed to each stockholder and the dates of the said distributions:
| Stockholder | Shares held upon organization | Shares held upon distribution |
| David T. Long | 60 | 80 |
| Clifford L. Walters | 60 | 60 |
| J. Arch Bell | 60 | 60 |
| John F. Davis | 60 | 60 |
| Mark A. Wakefield | 60 | 70 |
| James H. Wakefield | 60 | 60 |
| Charles McMakin | 60 | 60 |
| Adam C. McMakin | 60 | 60 |
| Harry F. Walters | 20 | 30 |
| J. Guthrie Goodman | 20 | 10 |
| Alex Veech | 10 | |
| Gilbert Veech | 10 | 10 |
| Eugene U. Wiggerton | 10 | 10 |
| Tom Temple | 10 | 10 |
| Pryor Sanford | 10 | |
| Will Jones | 10 | |
| Jake Coots | 10 | |
| Kenneth Fry | 10 | |
| Luther Rockwell | 5 | 5 |
| Dave Temple | 5 | 5 |
| Total | 600 | 600 |
| Distributions | |||
| Stockholder | 12/6/29 | 3/9/23 | Total distributed to each |
| David T. Long | $3,733.33 | $528.24 | $4,261.57 |
| Clifford L. Walters | 2,800.00 | 396.18 | 3,196.18 |
| J. Arch Bell | 2,800.00 | 396.18 | 3,196.18 |
| John F. Davis | 2,800.00 | 396.18 | 3,196.18 |
| Mark A. Wakefield | 3,266.66 | 462.10 | 3,728.76 |
| James H. Wakefield | 2,800.00 | 396.18 | 3,196.18 |
| Charles McMakin | 2,800.00 | 396.18 | 3,196.18 |
| Adam C. McMakin | 2,800.00 | 396.18 | 3,196.18 |
| Harry F. Walters | 1,400.00 | 198.09 | 1,598.09 |
| J. Guthrie Goodman | 466.66 | 66.03 | 532.69 |
| Alex Veech | 466.66 | 66.03 | 532.69 |
| Gilbert Veech | 466.66 | 66.03 | 532.69 |
| Eugene U. Wiggerton | 466.66 | 66.03 | 532.69 |
| Tom Temple | 466.66 | 66.03 | 532.69 |
| Pryor Sanford | |||
| Will Jones | |||
| Jake Coots | |||
| Kenneth Fry | |||
| Luther Rockwell | 233.33 | 33.02 | 266.35 |
| Dave Temple | 233.33 | 33.02 | 266.35 |
| Total | 27,999.95 | 3,961.69 | 31,961.64 |
1929 BTA LEXIS 2268">*2276 The David T. Long above mentioned is the petitioner in this proceeding. The company officers were: Clifford L. Walters, president; D. T. Long, secretary-treasurer; Charles McMakin, manager, and Eugene U. Wiggerton, floor manager. Kenneth Fry was a calculator. Three of these officers were salaried. None of them devoted their entire time to the company's business.
On or about November 23, 1925, petitioner received notice upon Form 7658 that on November 19, 1925, additional taxes in the amount of $3,384.54 had been assessed against the company for the year 1920, the assessment being on the respondent's list for November, 1925. On August 4, 1925, respondent mailed to petitioner a deficiency notice which stated:
As provided in section 280 of the Revenue Act of 1926, there is proposed for assessment against you, as a transferee of the assets of the Star Warehouse Company, Shelbyville, Ky., the sum of $3,384.54, representing unpaid income and profits tax assessed against that company for 1920, in accordance with the attached statement.
Petitioner comes to the Board in this proceeding by a petition filed September 22, 1926. Petitioner is a transferee of property of the Star1929 BTA LEXIS 2268">*2277 Warehouse Co. within the meaning of section 280 of the Revenue Act of 1926, to the extent of $4,261.57.
OPINION.
LOVE: Upon hearing, the respondent concedes that the income of the company should be reduced by $3,225, representing depreciation upon its warehouse and equipment, as claimed by the petitioner. 17 B.T.A. 584">*589 The respondent further concedes that a deduction should be allowed for the loss of 1,200 tobacco baskets and he computes the said deduction as $960, representing the value of 1,200 baskets at 80 cents per basket. The evidence is that the baskets cost from $1 or $1.25 to $1.50 each, and that the cost of replacing the 1,200 baskets lost was $1,666.70, which amount is the deduction claimed herein. The replacement cost indicates a cost of approximately $1.40 per basket. We believe that, as contended by petitioner, the net income of the company for the period involved should be reduced by $1,666.70, representing the loss mentioned. See American 3 Way Luxfer Prism Co., 9 B.T.A. 571.
The questions now remaining relate to the claim that the company was a personal service corporation and to the petitioner's various attacks upon the proposed assessment1929 BTA LEXIS 2268">*2278 of the tax against him as a transferee.
We have repeatedly held that to be entitled to personal service classification, it must be shown that the income of a corporation is primarily attributable to the activities of its principal stockholders, who are themselves regularly engaged in the active conduct of the business, and in which capital is not a material income-producing factor. The limitations and requirements set forth must all exist and the failure of any one defeats the claim for such classification. Cliver-Wright-Rainey Co.,2 B.T.A. 561">2 B.T.A. 561; Home Insurance Agency,5 B.T.A. 1020">5 B.T.A. 1020; Metropolitan Business College,5 B.T.A. 10">5 B.T.A. 10.
We think the evidence in this proceeding fails, in at least one particular, to satisfy the requirements above detailed. We do not believe that the income of a corporation is "primarily" ascribable to the stockholders simply because they obtain its business by solicitation, when it appears that the corporation renders to its customers expert service necessary to the marketing of the customers' product and which service is not shown to have been rendered by stockholders.
It appears that the company had1929 BTA LEXIS 2268">*2279 the service of about 25 tobacco graders who are experts in the classification of tobacco into grades for sale. It would be unreasonable to assume that the service of these graders was not a factor influencing the farmers in bringing their crops to the company for sale. Furthermore, the petitioner sold by auction and the identity of its auctioneers is not shown.
With the exception of the petitioner, Charles McMakin, Eugene U. Wiggerton, and Kenneth Fry, it does not appear that the stockholders rendered any service to the company beyond their solicitations and their presence on sale days.
In Patterson-Andress Co.,6 B.T.A. 392">6 B.T.A. 392, 6 B.T.A. 392">399, in speaking of the requirement that the income of a personal service corporation must 17 B.T.A. 584">*590 be primarily attributable to the activities of the principal stockholders, we said:
* * * In our opinion this clause means more than that the stockholders shall obtain the clients and supervise the work, or that clients shall look to their experience; it means, among other things, that the corporation may not rely upon nonstockholders to do a substantial amount of the work which produces the income whether such work be detailed or supervisory. 1929 BTA LEXIS 2268">*2280 * * *
We think also that capital was a material income-producing factor. The company had a valuable plant which was an important factor in the production of income and without which it could not have successfully carried on its operations.
Upon the record we hold that petitioner has failed to establish that the income of the company was primarily ascribable to the activities of its principal stockholders. We are therefore unable to declare that the company was a personal service corporation during the taxable period involved.
Petitioner's various denials of liability as a transferee may be considered in three groups. The first of these is the contention that all liability against either the company or himself as a transferee was barred by expiration of the period of limitation when the respective assessments were made or proposed. The second contention is that he is not a transferee. As will appear further, this position is predicated upon the theory that section 280 is not retroactive and therefore has no application to the transfer of assets of a taxpayer prior to its effective date, nor to cases in which assessment against the taxpayer was made before such date. The1929 BTA LEXIS 2268">*2281 third group may be considered as attacks upon the constitutionality of section 280. We will discuss these groups in order mentioned.
The petition alleges that the company's return for the period involved was filed "about January 14, 1921." The respondent's answer neither admits nor denies this allegation except by a general denial, and there is no proof. Assuming, however, that the date mentioned is correct, the statutory period for assessment against it of taxes for the period involved did not expire until January 14, 1926 (section 250(d) Revenue Act of 1918, and section 277(a), Revenue Act of 1924). The additional tax of $3,384.54 asserted against the company for the period mentioned was assessed November 19, 1925, a date within the five-year period allowed by the statute for assessment. The provisions of section 280(b)(1) of the Revenue Act of 1926, enacted February 26, 1926, extended the period of limitation for assessment of any liability of the petitioner, as a transferee, for unpaid taxes of the company, to one year after the expiration of the period of limitation for assessment against the taxpayer, or to January 14, 17 B.T.A. 584">*591 1927. The deficiency notice was mailed1929 BTA LEXIS 2268">*2282 to the petitioner on August 4, 1926, a date prior to the expiration of the statutory period for assessment against him. The petition instituting this proceeding was filed September 22, 1926. Section 280(d) of the Revenue Act of 1926 suspends the running of the period for assessment against a transferee until the decision of the Board becomes final, and for 60 days thereafter.
Section 278(d) of the Revenue Act of 1926 reads, in part, as follows:
Where the assessment of any income, excess-profits or war-profits tax imposed by this title or by prior Act of Congress has been made (whether before or after the enactment of this Act) within the statutory period of limitation properly applicable thereto, such tax may be collected by distraint or by a proceeding in court (begun before or after the enactment of this Act), but only if begun (1) within six years after the assessment of the tax * * *.
In Louis Costanzo et al.,16 B.T.A. 1294">16 B.T.A. 1294, 16 B.T.A. 1294">1297, the Board stated:
This section of the Act is retroactive to taxes payable under the Revenue Act of 1918, and applies to the transferees. 1929 BTA LEXIS 2268">*2283 United States v. Updike, 32 Fed.(2d) 1. It follows that the period within which collection may be made from the transferees has not expired.
The last question for consideration involves the petitioner's various attacks upon the constitutionality of section 280 of the Revenue Act of 1926. In Henry Cappellini et al.,14 B.T.A. 1296">14 B.T.A. 1296, we held that when a transferee has invoked the provisions of section 280 by appealing to the Board, he may not in such a proceeding question the validity of that section. On brief, the petitioner's counsel attacks that decision at great length and with considerable vigor. Regardless of whether or not the holding of the Board in the Cappellini case, on the question of estoppel, be sound, it is now a well-established doctrine that a transferee of the assets of a corporation, in liquidation, is liable for income taxes due by the corporation at date of dissolution to an amount not to exceed the amount he received in such distribution. It is true that several defenses might be urged in reduction of such amount, but no such defense appears in this record. Hence, we hold that petitioner is liable for the full amount1929 BTA LEXIS 2268">*2284 of the deficiency to be recomputed in accordance with this opinion.
Judgment will be entered under Rule 50.