*2540 Held that the respondent has failed to sustain the burden of proving that the petitioner is a transferee within the meaning of section 280.
*658 This is a proceeding for the redetermination of the liability of the petitioner as a transferee of the assets of the Union Finance Co., for unpaid income and profits taxes of the corporation. The proposed assessment against the petitioner is in the amount of $5,000.
The errors alleged are as follows:
(a) The assessments against the Union-Finance Co. of $6,295.21 and $6,951.11 for the years 1921 and 1922 are erroneous and are amounts in excess of any legal liability which could properly be asserted against said Union-Finance Co.;
(b) The Commissioner erred in asserting said assessments as the basis of the liability proposed against petitioner under the provisions of section 280 of the Revenue Act of 1926, because petitioner is not a transferee of the assets of the Union-Finance Co., now dissolved, and is not liable under said section 280 of the Revenue Act of 1926; and
(c) The liability asserted by*2541 the Commissioner under section 280 of the Revenue Act of 1926 would deprive petitioner of his property without due process of law and is, therefore, unconstitutional.
FINDINGS OF FACT.
Petitioner is a resident of Pittsburgh, Pa.
In 1920 he bought 100 shares of stock of the Union-Finance Co. of par value $10,000, and gave in exchange therefor 100 shares of stock of Superior Steel Co., which he had purchased a few weeks earlier for $10,000.
On November 24, 1922, the petitioner received two letters from the Union-Finance Co., one of which was a form letter sent to all the stockholders which provided in part as follows:
CLEVELAND, OHIO,
NOV. 14, 1922.
To the Stockholders of The Union Finance Company:
Though the proposal to sell the entire assets of The Union-Finance Company will doubtless strike you with surprise, it is not a new or sudden idea. It comes after mature and careful investigation by the Officers and Directors *659 of the Company over a period of nearly six months and has the unanimous approval of everyone responsible for the interests of the stockholders of this Company. While the legal effect of the plan takes the form of a sale of all the property*2542 of the Company, the proposition in reality is a merger with a strong, well-established and flourishing institution, The Metropolitan Securities Company of this city.
The Metropolitan Securities Company is an Ohio Corporation which has been in the business of discounting commercial securities for the past six years. During that time it has built up a highly efficient organization, and as a result of careful and skillful management possesses a large surplus and an excellent reputation. It has an authorized capital of One Million ($1,000,000) Dollars preferred stock, a small portion of which is issued, and 7,000 shares of no par common stock valued at $400,000, all of which is issued. It could employ additional capital to good advantage and has therefore made a very favorable and attractive offer to the stockholders of The Union Finance Company.
The substance of this offer is as follows: The Metropolitan Securities Company proposes to take over all of the assets and assume all of the liabilities of our Company and to give to the stockholders of our Company one share of Preferred stock of The Metropolitan Securities Company for each share of stock owned in The Union Finance Company. *2543 The dividend on this Preferred Stock is seven (7%) per cent and is cumulative, and must be paid before any dividend can be paid on the Common Stock, and this stock is tax free in Ohio. Moreover, the Company must at all times maintain net quick assets of the value of One Hundred and Twenty-five thousand ($125,000) Dollars for each share of Preferred Stock issued, and from and after January 1, 1930, must retire each year five (5%) per cent of the largest amount of this stock outstanding at One Hundred and Five ($105,00) Dollars per share. For the further protection of our stockholders, it is provided that in case of default in the performance of any of the conditions mentioned the holders of Preferred Stock become entitled to vote, and this privilege, by virtue of their having a majority of all of the stock, would, under these circumstances, give them control of the Company.
It is also provided in the proposed agreement that subscribers to stock of The Union Finance Company who have not paid all the installments on their subscriptions will receive the new Preferred Stock as soon as they complete the payments called for in their subcriptions.
There are several important and convincing*2544 reasons which have prompted your Officers and Directors to recommend this plan of merging the two Companies:
FIRST: When the two Companies are consolidated each outstanding share of Preferred Stock will have quick assets of One Hundred and Seventy ($170.00) Dollars behind it. This will give you an investment far more secure than your present stock. The Union Finance Company is still young; in the course of organization and the sale of its stock, it naturally incurred heavy expenses, which could not be gained back for many years. All this will be wiped out by the merger, and each share of Preferred Stock will represent One Hundred and Seventy ($170.00) Dollars worth of solid assets.
SECOND: The Metropolitan Securities Company has developed a very strong organization, and it is entirely clear that the success of a business of this kind depends pre-eminently upon the people who conduct it. While our Company during its short life and during unfavorable times has done very well, nevertheless it cannot be denied that we are still far short of having the kind of *660 organization we should have, and it would take some years of experimenting, with the risks this course would*2545 involve, before we could hope to perfect the kind of organization which The Metropolitan Securities Company already has.
THIRD: As the agreement provides that four stockholders of The Union Finance Company are to be elected members of the Board of Directors of the Metropolitan Securities Company, our stockholders while gaining the advantages offered by a Preferred Stock will, at the same time, have a voice in the conduct of the business.
FOURTH: The stability and safety of this Preferred Stock cannot be impaired because under the terms of the issue no mortgage or other preferred stock can be issued which will have priority over or equality with the stock now offered to you.
FIFTH: You will trade a certainty for an uncertainty; you will give up the small speculative possibility of larger profits for an assured income; you will exchange safety for risk.
For these reasons all of your Directors have joined in recommending this offer for your approval. They believe that the advantages to be gained are so many and so important that under all the circumstances involved, the proposal should be accepted. This conclusion has been reached only after long, careful and deliberate*2546 consideration of all questions involved, having in view solely the best interests of the stockholders.
Enclosed herewith you will find, in addition to the formal notice of the stockholders meeting, a form of proxy. We urge you to sign this proxy at once and send it to the office of the Company, so that your votes may be cast in favor of the proposed merger. Should you decide to come to the meeting, you can then cast your votes in person. Accordingly, whether you intend to come or not, send in your proxy.
Sincerely yours,
THE UNION FINANCE COMPANY,
By L. H. Sternheimer, Secretary.
The accompanying letter which was addressed to petitioner personally provided as follows:
We are enclosing you late statement of the two Companies which will give you a better idea of this merger.
While the return is slightly smaller, the book value of this stock will be about double, and there appears to be no doubt regarding the steady dividend you will receive, and no a common stock there is a possibility that the dividend would fiuctuate.
This matter was given careful consideration by the board of directors of your company over a period of six months, and is a very wise move, and*2547 will be most beneficial to all stockholders concerned.
We ask that you send in your signed proxy, and if you are at the meeting the same will be returned to you. If there is any further information you wish, kindly let us know.
Petitioner received no further form letters from the Union-Finance Co., except proxy blanks, which he refused to sign. The petitioner did nothing whatever with regard to furthering the proposed transaction. However, in the latter part of 1922 petitioner sent his shares of stock in the Union-Finance Co. to the Guardian *661 Trust Co. and received in exchange a like number of shares of preferred stock of the Metropolitan Securities Co. of a par value of $10,000.
Paragraph No. 3 of the petition, which is admitted by the respondent, states:
The taxes in controversy represent an alleged liability of petitioner as a transferee of the assets of the Union Finance Company, now dissolved, for unpaid income and profits taxes in the amounts of $6,295.21 and $6,951.11 heretofore assessed against that corporation for the years 1921 and 1922, the proposed assessment against petitioner being in the amount of $5,000, all of which tax is in dispute.
OPINION.
*2548 SIEFKIN: One of the errors assigned by the petitioner raises the question of the constitutionality of section 280 of the Revenue Act of 1926. However, the petitioner, having appealed to this Board under that section, is precluded from questioning its constitutionality. .
The petitioner raises questions as to the amount of tax liability of the Union-Finance Co. and also the liability of the petitioner as a transferee of the assets of such company. The hearing of the case, however, was limited to the question whether petitioner is a transferee of the property of the Union-Finance Co., the case to be restored to the calendar for further hearing if this question is decided adversely to the petitioner.
Section 280 of the Revenue Act of 1926 provides:
(a) 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 table (including the provisions in case of delinquency in payment after notice and demand, the provisions authorizing*2549 distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds):
(1) The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this title or by any prior income, excess-profits, or war-profits tax Acts.
Section 912 of the Revenue Act of 1928 provides:
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 evidence contained in the record does not clearly show the character of the transaction in question. If the transaction consisted of a transfer of stock between the Metropolitan Securities Co. and the stockholders of the Union-Finance Co., the stockholders of the Union-Finance Co. would not be liable as transferees of the assets of the Union-Finance Co. Since there is this possibility that *662 the petitioner was not a transferee of assets of the Union-Finance Co., and since the respondent has failed*2550 to negative this possibility, we must hold that he has failed to sustain his burden of proof.
Reviewed by the Board.
Judgment will be entered for the petitioner.
MILLIKEN, concurring in the result: The findings of fact to my mind clearly show that this petitioner was not liable as a transferee. I do not find it necessary to indulge in the speculation upon which the opinion is based.
SMITH and VAN FOSSAN agree with the above.