*1076 1. Section 280 of the Revenue Act of 1926 is not unconstitutional, following
2. Evidence held insufficient to disturb respondent's determination of the net income of the taxpayer corporation for the years 1918 and 1919.
3. Where assessments were made prior to the passage of the 1924 Act and the applicable period of limitation had expired prior to the mailing of the deficiency notice, held, such period is not extended by section 280 of the 1926 Act and therefore petitioners are not liable as transferees for any part of the deficiency asserted against taxpayer corporation, or for any part of the unpaid portion of the original 1919 assessment.
4. Certain stock was transferred to Hettman by Kibele Merely for the purpose of having Hettman represent Kibele at stockholders' and directors' meetings. Upon liquidation of the corporation Hettman redeived and immediately paid over to Kibele his pro rata share of corporate assets. Held, that Hettman was not a transferee within the meaning of section 280, and that the liability of Kibele is increased by the*1077 amount of assets received by Hettman in his behalf.
*378 These proceedings are for the redetermination of alleged liabilities asserted against the petitioners as transferees of the assets of the National Engineering Corporation under the provisions of section 280 of the Revenue Act of 1926. For the taxable years 1918 and 1919 the respondent determined deficiencies against the corporation of $5,631.69 and $5,785.46, respectively, and he asserts that there is an unpaid balance due on the original 1919 income and profits tax assessment of $3,073.89.
Except as pointed out later, the petitioners each allege error on the part of the respondent in the following particulars:
(a) The Commissioner has assumed that petitioners are liable under the provisions of Section 280 of the Revenue Act of 1926, for a tax in the amount above stated, as a transferee of the assets of the National Engineering Corporation, a dissolved corporation formerly with principal place of business at Wilmington, California, whereas*1078 the petitioner is not liable under said section of the law for the reason that:
(1) It is alleged that Section 280 of the Act referred to, insofar as it imposes a tax on the former stockholders of a corporation, is unconstitutional in that the liability of the several stockholders is not definitely set forth, and, furthermore, it purports to create a stockholders' liability other than that provided by the state law which should govern inasmuch as,
(2) A corporation is a creature of the state statutes and the liability of a stockholders thereof is limited by the statutes as enacted by the several states.
(3) The National Engineering Corporation was incorporated under the laws of the State of California and under the laws of said state fixing the liability of stockholders of a corporation, this petitioner's liability as a stockholder for the debts of the National Engineering Corporation has long since expired.
(4) As to the taxable period 1918, it is alleged that the National Engineering Corporation filed an income tax return for said year prior to June 2, 1919, and the statutory period within which collection of any tax claimed due for that year could be made, by suit or otherwise, *1079 expired prior to June 2, 1924. By reason of this fact, the Government was without authority to bring any action against the stockholders for the collection of said tax prior to February 26, 1926, on which date the provisions of Section 280 of the Revenue Act of 1926 became effective; and insofar as Section 280 referred to tends to revive a statute of limitation which had expired prior to the enactment of said section it should be regarded as of no force and effect.
(b) If it should be held that the Commissioner did not err with respect to the points set out in the preceding paragraphs, then it is alleged that he erred in determining the net income and tax liability of the National Engineering Corporation for the taxable periods 1918 and 1919, in that -
*379 (1) He understated the net income for 1918 and overstated the net income for 1919 in the amount of $3,639.04 by reason of the fact that he did not properly allocate overhead expenses reimbursed by the Government to the two taxable years, and
(2) In determining the net income for the calendar year 1919, the same was overstated to the extent of $13,861.45, by reason of the fact that the profit on the sale of certain*1080 capital assets was overstated by said amount.
(3) In determining the invested capital of the corporation for both the years 1918 and 1919, the same was understated to the extent of $13,861.45, by reason of not including therein a paid-in surplus created at the time of the incorporation of the company on account of leasehold value acquired by the corporation in excess of the value at which same was set up on the books of the corporation.
The above allegations of error appear in each of the petitions except that of Joseph Costello, Docket No. 22640, wherein the petitioner has set out the same errors, but has worded his allegations differently.
In his amended answers filed in each of the above proceedings, respondent alleged certain facts purporting to establish that the individual petitioners are transferees of the National Engineering Corporation and that the proceeds received by each exceeded in value the amount of taxes and interest claimed from each of them in these proceedings.
Thereafter, the petitioners amended their petitions in each of the proceedings, except Walter E. Hettman, alleging in addition to the foregoing errors, that the respondent erred:
* * * in proposing*1081 to assess against these petitioners as transferees of the National Engineering Corporation, the amount of the tax originally assessed against the National Engineering Corporation on its 1919 return, but which remains outstanding and unpaid in the sum of $3,073.89, in that not only was the collection of such tax against the said corporation barred by the Statute of Limitations prior to the institution of these proceedings, but also said corporation's liability for the payment of such unpaid tax was extinguished by operation of Section 1106 of the Revenue Act of 1926, and, since there is no liability of the transferor corporation for such tax, these petitioners as transferees of said corporation cannot be held liable for a debt which has been extinguished.
The above entitled proceedings were consolidated for hearing and opinion.
FINDINGS OF FACT.
The parties filed the following stipuation, which we find as facts with respect to the issues presented:
It is hereby stipulated and agreed by and between the parties hereto, through their respective counsel, that the stipulation formerly entered into with respect to the petitioners; Mrs. Kizzie Gordon, Max L. Gordon, Andy Martins, *1082 Ivor B. Bell, George W. Ley, Mrs. Mary C. Ley, Albert O. Pegg, Kathleen M. Turner, Joseph Costello and O. B. Kibele; Dockets Nos. 22332, 22333, 22334, 22335, 22336, 22337, 22338, 22340, 22640 and 24882, respectively, may be amended and is *380 hereby amended to include the petitioner Walter E. Hettman, Docket No. 22341; and that all of said appeals may be consolidated for the purpose of this stipulation and for the purpose of the issuance by the Board of an order of redetermination of deficiency in accordance with the following agreement:
It is further stipulated and agreed that the stipulation hereinbefore entered into is amended to read as follows:
It is stipulated and agreed by and between the parties hereto, through their respective counsel, that the petitioners herein, with the exception of Walter E. Hettman, Docket No. 22341, are liable in these proceedings as transferees of the National Engineering Corporation, a dissolved corporation, within the meaning of Section 280 of the Revenue Act of 1926, and that, with the exception of the petitioners Walter E. Hettman, and O. B. Kibele, they received property in the liquidation of the corporation in the amounts shown in*1083 the exhibit hereto attached and marked "Amended Exhibit A" and hereby made a part hereof, and that, with the exception of said petitioners Walter E. Hettman and O. B. Kibele, they were owners and holders of the capital stock of said corporation at the time of dissolution in the amount of shares set opposite their names as appearing on said "Amended Exhibit A" hereto attached.
The facts with respect to the stock ownership in the National Engineering Corporation of Walter E. Hettman and O. B. Kibele are hereinafter set forth. There are also hereinafter set forth the facts in respect to the amount of property received in the liquidation of said corporation by said Walter E. Hettman and O. B. Kibele.
It is further stipulated that said National Engineering Corporation duly filed its 1918 income, excess profits and war profits tax return on June 16, 1919 and that the deficiency in tax for the year 1918 as shown in the 60-day letters addressed to the petitioners herein, in the amount of $5,631.69 was assessed against said National Engineering Corporation on February 25, 1924, and that said deficiency has not been paid nor has there been instituted any suit or proceeding other than*1084 this appeal for the collection of said tax.
It is further stipulated that the said National Engineering Corporation duly filed its income and profits tax return for the year 1919 on May 15, 1920; that on May 27, 1920 there was duly assessed against said corporation the original tax based upon said return in the sum of $7,885.00 for the year 1919. Of said original tax of $7,885.00, but $4,811.11 was paid, the balance of $3,073.89 still remaining unpaid as indicated in the 60-day deficiency letter to the petitioners herein; that no suit or proceeding has been instituted for the collection of said balance of $3,073.89 of the original tax for the year 1919 remaining unpaid other than this appeal; that the deficiency in tax against said corporation for the year 1919 in the amount as shown in the 60-day deficiency letters to the petitioners herein of $5,785.46 was duly assessed against said corporation on March 3, 1925; that attached hereto and made a part hereof is a true copy of an income and profits tax waiver filed with the respondent with respect to the year 1919.
Walter E. Hettman was the owner of record of eight and three-fourths (8-3/4) shares of stock in the National Engineering*1085 Corporation at the dissolution thereof. O. R. Kibele transferred said eight and three-fourths (8-3/4) shares to said Walter E. Hettman merely for the purpose of having said Walter E. Hettman represent him, said O. B. Kibele, at the meetings of the stockholders and directors of said National Engineering Corporation. Walter E. Hettman did represent O. B. Kibele at the meetings of the stockholders and directors of said National Engineering Corporation and upon dissolution of said National Engineering Corporation received $1,400.60, representing a proportion of the *381 liquidating dividend from said Corporation to which he, Hettman, was entitled as the owner of record of eight and three-fourths (8-3/4) shares of said corporation's capital stock. Walter E. Hettman immediately thereafter paid said amount of $1,400.60 to O. B. Kibele.
O. B. Kibele was the owner of record of fifty-one and one-fourth (51.-1/4 shares of the capital stock of the said National Engineering Corporation at the time of dissolution thereof and received thereon the sum of $8,203.60 as a liquidating dividend.
For a period of approximately thirteen months, to wit, from April 1, 1918, to May 5, 1919, the*1086 National Engineering Corporation was in the business of outfitting ships under Government contract. During 1919 the corporation filed a claim for reimbursement of certain expenditures under its contracts with the United States Shipping Board, and during the same year it received from the Shipping Board the sum of $39,422.91. The corporation was dissolved in 1920.
On or about January 28, 1925, the following instrument was executed for the National Engineering Corporation by George W. Ley, its former president:
INCOME AND PROFITS TAX WAIVER
(For taxable years ended prior to March 1, 1921.)
In pursuance of the provisions of existing Internal Revenue Laws National Engineering Company, a taxpayer of Los Angeles, California, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year 1919 under existing revenue acts, or under prior revenue acts. This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1925, and shall then expire except that if a notice*1087 of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.
[Signed] NATIONAL ENGINEERING COMPANY, A DISSOLVED CORPORATION
Taxpayer.
By GEORGE W. LEY.
former President.
D. H. BLAIRCommissioner.
NO SEAL
AVAILABLE
If this waiver is executed on behalf of a corporation it must be signed by such officer or officers of the corporation as are empowered under the laws of the State in which the corporation is located to sign for the corporation, in addition to which, the seal, if any, of the corporation must be affixed.
Deficiency notices were mailed to the petitioners herein on November 6, 1926, in all cases except that of Joseph Costello and O. B. *382 Kibele. In the Costello case the deficiency notice was mailed on November 27, 1926; in the Kibele case the deficiency notice was mailed on January 7, 1927. *1088 Petitions were filed with the Board on January 3, 1927, in all cases except the Costello and Kibele cases, the petitions in these two cases being filed on January 17, 1927, and March 3, 1927, respectively.
OPINION.
MCMAHON: In view of the stipulation that the petitioners herein are liable as transferees of the National Engineering Corporation, a dissolved corporation, within the meaning of section 280, except for the petitioner, Walter E. Hettman, these proceedings, in the last analysis, present the following issues for our determination: (1) The constitutionality of section 280 of the Revenue Act of 1926; (2) whether respondent correctly computed the net income of the National Engineering Corporation for the years 1918 and 1919; (3) the applicability of the statute of limitations; and (4) whether Walter E. Hettman is liable for any part of the taxes due, if any, from the National Engineering Corporation.
The first issue must be decided adversely to petitioners, in view of our decisions in ; *1089 ; and , and in view of the decision of the Supreme Court in . In their brief, petitioners, except Hettman, admit that they are liable as transferees for the 1919 deficiency if section 280 is constitutional. Therefore, in view of our decision on this issue, we approve respondent's determination that petitioners, with the exception of Hettman, are liable as transferees for the 1919 deficiency, amounting to $5,785.46.
Likewise, the second issue must be determined adversely to the petitioners, because the evidence is insufficient to show error in respondent's method of computing the taxpayer's net income for the years in question. At the hearing petitioners attempted to lay the foundation for secondary evidence relative to the claim asserted against the Government under certain contracts, upon the ground that they could not produce the original records of their transactions with the Shipping Board, but they were unable to lay a proper foundation for such secondary evidence. Accordingly, the record is silent as to how the sums*1090 received from the Shipping Board should be allocated. In this situation the Board must affirm the allocation made by the respondent, since the burden of showing error rested upon the petitioners.
The third issue relates to the bar of the statute of limitations, and involves the collection of the 1918 tax and the unpaid portion of the *383 tax assessed on the National Engineering Corporation's original 1919 return. The stipulated facts show that the taxpayer corporation filed its 1918 income and profits tax return on June 16, 1919; that the deficiency letters addressed to these petitioners show that a deficiency of $5,631.69 was assessed against the corporate taxpayer on February 25, 1924; and that said deficiency has not been paid nor has any suit or proceeding been instituted for the collection of said tax, other than these appeals.
The stipulated facts and documentary evidence further show that the taxpayer corporation filed its 1919 income and profits tax return on May 15, 1920; that on May 27, 1920, a tax of $7,885 was assessed against it on the basis of said return; that of the original tax so assessed only $4,811.11 was paid, leaving a balance due of $3,073.89, *1091 which is still unpaid; that no suit or proceeding has been instituted to collect such unpaid balance; that a "waiver," dated January 28, 1925, was filed for the taxpayer corporation by its former president for the purpose of extending the time for making any assessment of income and profits taxes for the year 1919 until December 31, 1925; and that on March 3, 1925, a deficiency of $5,785.46 was assessed against said corporation with respect to its 1919 tax liability.
Under these facts the petitioners contend that the 1918 deficiency and the unpaid portion of the original 1919 tax are barred by the statute of limitations, citing inter alia, , and .
Considering, first, the bar of the statute of limitations as it applies to the deficiency for 1918, we find that the facts herein bring these proceedings within our decisions in the Shaw and Wheeler cases, supra, and our decision in . The deficiency assessment was made on February 25, 1924, which was within the 5-year period of limitation for assessment and collection*1092 provided by section 250 of the Revenue Act of 1918, and was prior to the enactment of the Revenue Act of 1924, which occurred on June 2, 1924. Since the assessment was made before June 2, 1924, section 278 of the 1924 Act did not serve to extend the period of limitation for collecting the assessment. .
The statute of limitations having run against the transferor taxpayer, no suit against the transferee could be had (;) unless the time in which suit may be brought against a transferee is extended by section 280 of the Revenue Act of 1926.
It has been repeatedly held by the Board that where the statutory period for assessment did not expire until after the enactment of the 1926 Act, section 280(b)(1) of such act is applicable and thereunder *384 the statutory period of limitation for assessment of liability of a transferee is extended one year. ; *1093 ; . Section 280(b)(1), however, is not applicable in cases where the period of limitation has expired prior to the passage of the 1926 Act. .
Although the facts herein apparently bring this proceeding within section 280(b)(2) of the 1926 Act, such section is not applicable. In , in construing section 280(b)(2), it was stated that it applied:
* * * to assessments made before the passage of the 1926 Act, which did in fact at the time they were made serve to extend the period for collection, which would include all valid assessments made after the passage of the 1924 Act, but would not include assessments made before June 2, 1924, which it has now been definitely held in the Russell case were not included in the provisions extending the period for collection. [Italics supplied.]
Therefore, the assessment and collection of the asserted deficiency for the year 1918 against the petitioners, as transferees, is barred.
We have next to consider whether the respondent is barred*1094 from collecting the unpaid portion of the original 1919 assessment, and in this connection we must examine the waiver that was filed to determine its effect upon the period of limitations for collecting this original assessment. The 1919 return of the taxpayer was filed on May 15, 1920, and the period of limitation for collection expired five years thereafter, unless extended by consent of the parties.
In 1920 the National Engineering Corporation was dissolved. On or about January 28, 1925, the former president of such corporation signed a waiver on behalf of such corporation providing in part that "the time prescribed by law for making any assessment of * * * taxes due under any return made by or on behalf of the taxpayer for the year 1919" be extended until December 31, 1925. Assuming this waiver to be valid and giving it a construction most favorable to the respondent, nevertheless it is of no significance herein, as the time was extended thereunder only to December 31, 1925. The first notice of deficiency sent to certain of the petitioners was mailed November 6, 1926.
What we have heretofore stated with respect to the 1918 taxes applies equally here. Since the assessment*1095 was made May 27, 1920, prior to the enactment of the 1924 Act, the statutory period is not extended under the 1924 Act or the 1926 Act, and collection of the unpaid portion of the original 1919 assessment is therefore barred.
The remaining issue is whether Walter E. Hettman was a transferee within the meaning of section 280 of the 1926 Act. The stipulated facts show that Kibele transferred certain shares of stock in *385 the taxpayer "merely for the purpose of having said Walter E. Hettman represent him, * * * at the meetings of the stockholders and directors" of the taxpayer corporation. Upon dissolution of the corporation Hettman received and immediately thereafter paid over to Kibele his proportionate part of the assets.
In our opinion these facts present a stronger case for the petitioner Hettman than did the facts in , wherein we said:
Respondent contends that since the stock stood in petitioner's name when the payment was made, he was a transferee of the property of the corporation, thus overlooking the provisions of section 280 to the effect that petitioner must be liable for the obligations of the Oil Company, *1096 either at law or in equity. Here petitioner's liability was purely equitable and his liability was one which could be enforced only upon equitable principles. See ; ; and . Here the right of Kenny to the proceeds of his stock was absolute and his equity was prior and superior to the equity of those asserting corporate obligations, including respondent. The stock was at all times Kenny's stock and the proceeds were at all times the property of Kenny. It would be exceedingly inequitable to compel petitioner to pay to the Government that which never was his property and which, in compliance with law and good faith he has long since paid to the person absolutely entitled thereto. Cf. . We are of opinion that petitioner's maximum liability was the amount of $3,960, which was the whole amount received by him in his own right.
In view of the foregoing decision we hold that Walter E. Hettman is not a transferee of the taxpayer within the meaning*1097 of section 280 of the 1926 Act, and that the deficiencies in the other proceedings shall be redetermined in accordance herewith. In view of the fact that Kibele is one of the petitioners herein, his liability should be computed upon the basis of the liquidating dividends from the taxpayer corporation, amounting to $8,203.60 plus $1,400.60, which Hettman received for him.
Decision will be entered under Rule 50.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Max L. Gordon; Andy Martines; Ivor B. Bell; George W. Ley; Mary C. Ley; Albert O. Pegg; Kathleen M. Turner; Walter E. Hettman; Joseph Costello; and C. B. Kibele. ↩