Court Opinion

ID: 4592697
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:08:31.826485+00
Date Added: 2024-06-11T07:50:54.579958
License: Public Domain

VIRGINIA H. PARMELEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  MARY REYNALE ROWLANDS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Parmelee v. CommissionerDocket Nos. 28072, 28111.United States Board of Tax Appeals24 B.T.A. 48; 1931 BTA LEXIS 1705; September 17, 1931, Promulgated *1705  1.  Held that the assessment of tax against the taxpayer was made within the period of limitations properly applicable thereto and that the respondent's action in proceeding against the petitioners as transferees is timely.  2.  Respondent's disallowance of a deduction for bad debts sustained.  Samuel B. King, Esq., for the petitioners.  J. E. Marshall, Esq., and W. F. Wattles, Esq., for the respondent.  TRAMMELL *48  Under section 280 of theRevenue Act of 1926 the respondent has proposed for assessment against each of the petitioners as distributees of the assets of the estate of Erskine M. Parmelee a deficiency in the income tax of Erskine M. Parmelee in the amount of $1,571.45 for 1921.  The matters put in issue by the petitioners are (1) whether the tax was assessed against Erskine M. Parmelee or his transferees within the period of limitation provided by statute; (2) whether the respondent erred in disallowing a deduction for a bad debt taken by Erskine M. Parmelee in his income-tax return for 1921 and (3) whether the petitioners are transferees within the meaning of section 280 of the Revenue Act of 1926.  At the hearing the petitioners*1706 *49  conceded their liability as transferees.  The proceedings were consolidated for hearing and decision.  FINDINGS OF FACT.  Erskine M. Parmelee, hereinafter referred to as the taxpayer, died testate and a resident of Chicago, Ill., on December 31, 1924.  Virginia H. Parmelee, the widow of Erskine M. Parmelee, is a resident of Chicago, Ill.  Mary Reynale Rowlands, his daughter, is a resident of Sheboygan, Wis.In the early part of 1915 the taxpayer purchased certain shares of stock in the Betsy Ross Candy Company of Illinois, which was organized in January of that year.  During 1915 he advanced as loans to the corporation amounts totaling between $15,000 and $16,000.  Near the end of 1915 the corporation surrendered its charter and the taxpayer's investment in the stock of the company became a total loss in that year.  Upon the surrender of the charter of the Betsy Ross Candy Company of Illinois a new corporation known as the Betsy Ross Candy Manufacturing Company was formed.  The new corporation operated under that name until October, 1917, when it amended its charter, increased its capital stock and changed its name to the Betsy Ross Candy Corporation.  Beginning*1707  in 1917 the taxpayer, who was the majority stockholder, financed the Betsy Ross Candy Corporation.  By the early part of 1918 the taxpayer held notes of the corporation in the amount of about $26,000 and the corporation owed him on open account about $75,000.  About 1917 it was decided to transform the plant from one in which candy was made by hand into one in which candy would be made by machinery.  Consequently, about that time those in charge began installing candy-making machinery.  As late as the fall of 1923 machinery was being installed in the plant.  It was the taxpayer's idea to transform the plant into a machine-production plant and that when it reached the point where it could be operated on a competitive basis with other manufacturing plants he would offer it for sale.  The taxpayer also endeavored to keep the business intact and in operation so as to pay off all the creditors of the corporation.  The business, under whatever name carried on, operated at a loss every year from its beginning in 1915 until the time of the taxpayer's death.  On March 15, 1922, the taxpayer filed his income-tax return for 1921, upon which was shown no tax liability.  In the return he took*1708  a deduction of $15,000 for a bad debt, which was explained as follows: Item of $15,000.00 represents proportion of indebtedness of Betsy Ross Candy Corporation, 412 Orlean St. Chicago., due to Mr. Parmelee, which indebtedness *50  was cancelled by Mr. Parmelee at 12/31/21 and the amount transferred to Surplus on the books of the Betsy Ross Candy Corporation as of that date.  The cancellation of the debt was made with a view to improving the financial condition of the Company in the event of possible sale thereof.  The amount of $15,000 was selected to be deducted for the reason that it represented money loaned to the Betsy Ross Candy Company of Illinois for operating purposes during that period in 1915 between the time the taxpayer bought his first shares of stock in the company and the time in the fall of that year when the company surrendered its charter and the Betsy Ross Candy Manufacturing Company was organized.  In an audit of the return the respondent disallowed the deduction and on January 21, 1926, assessed a tax of $1,571.45 against the taxpayer's estate.  Thereafter on March 8, 1927, the respondent notified the petitioners by separate notices that under the provisions*1709  of section 280 of the Revenue Act of 1926 he proposed to assess against each of them, as distributee of the estate of the taxpayer, the amount of the tax assessed against the taxpayer's estate.  OPINION.  TRAMMELL: The petitioners having conceded that as distributees of the estate of the taxpayer they are liable as transferees, there are only two issues for our determination.  In view of this concession we have not set out the facts relating to this issue or made a finding thereon.  The first issue, while vaguely stated, is whether the collection of the tax is now barred by limitation.  The statute of limitations applicable is: SEC. 280. (b)(1) Within one year after the expiration of the period of limitation for assessment against the taxpayer; or (2) If the period of limitation for assessment against the taxpayer expired before the enactment of this Act but assessment against the taxpayer was made within such period, - then within six years after the making of such assessment against the taxpayer, but in no case later than one year after the enactment of this Act.  On March 15, 1922, the taxpayer filed his return for 1921, reporting no tax due thereon.  The Commissioner*1710  had four years to assess the tax against the taxpayer, which would be March 15, 1926.  He therefore had, under section 280(b)(1), until March 15, 1927, that is, one year after the period allowed for assessment against the taxpayer had expired, to assess the tax against these petitioners or to send a notice of deficiency to them.  The notices of deficiency mailed on March 8, 1927, were timely and the statute does not bar assessment and collection from petitioners as transferees.  Since the period of limitation for assessment against the taxpayer had not expired before the passage of the 1926 Act, section 280(b)(2) is not applicable.  *51  Petitioners allege that an assessment made against the estate on January 21, 1926, was ineffective upon several grounds, but in our opinion, it is immaterial whether that assessment was made at all or not, or, if made, whether it was properly made.  Section 280(c) provides as follows: (c) For the purposes of this section, if the taxpayer is deceased, or in the case of a corporation, has terminated its existence, the period of limitation for assessment against the taxpayer shall be the period that would be in effect had the death or termination*1711  of existence not occurred.  The Commissioner had the same period to assess the tax regardless of whether the taxpayer had died.  He was not required to assess against either the taxpayer or his estate in order to give him the one year after the expiration of the period of assessment against the taxpayer in which to proceed against the transferees.  The remaining issue is whether the respondent erred in disallowing the deduction of $15,000 taken by the taxpayer as a bad debt.  In order to be deductible the amount must have been ascertained to be worthless and charged off during the taxable year.  Since no question has been raised as to the amount being duly charged off, our discussion will be limited to the question of whether the indebtedness was ascertained to be worthless in 1921.  The indebtedness represented loans made by the taxpayer during 1915 to the Betsy Ross Candy Company, which in that year surrendered its charter and went out of business.  What its financial condition was at the time it went out of business we do not know, except that it was such that the taxpayer lost his investment in its stock.  Whether the corporation before dissolution was in a position to have*1712  paid any part or all of the indebtedness is not disclosed by the record.  All we know is that the indebtedness was not paid, and after the dissolution and surrender of its charter of course it could not pay.  The Betsy Ross Candy Manufacturing Company, which was formed about the time of the dissolution of the Betsy Ross Candy Manufacturing Company of Illinois, gave to the taxpayer its notes for the indebtedness owing to him by the dissolved corporation.  The petitioners state in their brief that the Betsy Ross Candy Manufacturing Company was under no legal obligation to pay the taxpayer for the money advanced by him to the dissolved corporation.  If not, then the indebtedness became worthless in 1915 when the old corporation was dissolved.  If it was liable, then there is no evidence that anything occurred in 1921 which would have warranted an ascertainment of worthlessness in that year any more than in any other year subsequent to 1915, or even subsequent to 1921.  The taxpayer stated in his return that he had canceled the indebtedness and the amount was added to surplus of the corporation.  If this be true *52  and there is no evidence on the question sufficient to overcome*1713  such statement by the taxpayer, then, of course, no deduction is allowable.  Since the petitioners have failed to introduce evidence sufficient to overcome the presumption of correctness of the Commissioner's determination, we think the action of the respondent in disallowing the deduction must be sustained.  Judgment will be entered under Rule 50.