Welfare Loan Society v. Commissioner

*1114 The Commissioner determined a deficiency of $2,053.91 in income tax for the year 1925, which deficiency is alleged in the original petition to be due to the failure of the Commissioner to allow as a deduction from gross income debts in the amount of $40,234.10, ascertained to be worthless during the taxable*1966 year. After the original petition and answer were filed, the petitioner on August 9, 1929, moved the Board for permission to amend its original petition, which motion was granted. The amendment to the original petition was accordingly filed, and sets forth that the deficiency alleged is due to the error of the Commissioner in disallowing, as a deduction from gross income, debts due to the Welfare Loan Society, a Delaware corporation, stated to be the taxpayer, ascertained to be worthless and charged off during the taxable year, amounting to $40,304.02; that said Delaware corporation sold, as of December 31, 1925, all its assets, business and good will to a Pennsylvania corporation bearing a like name; that the stockholders in the Pennsylvania corporation were not the same as the stockholders in the Delaware corporation; and the assets sold to the Pennsylvania corporation were actually transferred and delivered to the Pennsylvania corporation as of December 31, 1925, and sale and delivery ratified by the corporations on July 8, 1926; and that all operations from January 1, 1926, were for the benefit of the Pennsylvania corporation. This "amendment" to the original petition was verified*1967 by Andrew H. Vogel, secretary and treasurer of the Pennsylvania corporation, the Welfare Loan Society of Lancaster, Pa.

The 1925 return upon which the deficiency in question is based was filed May 11, 1926, by the Welfare Loan Society of Lancaster, Pa., a corporation organized under the laws of the State of Pennsylvania, and to said corporation the 60-day notice of January 29, 1927, was mailed. The allegation in the original petition that taxpayer is a corporation organized under the laws of the State of Pennsylvania under the name of Welfare Loan Society of Lancaster, Pa., is admitted in respondent's answer.

At the hearing it was contended by the petitioner that the taxes in controversy, if any due, were those of the Welfare Loan Society, a Delaware corporation, and that the Welfare Loan Society, a *1115 Pennsylvania corporation, did no business and had no income in 1925. It was contended upon the part of the respondent that the questions to be decided were "whether or not the Pennsylvania corporation was, in fact, operating in 1925 and whether it had income," or whether the business was that of the Delaware corporation and not that of the Pennsylvania corporation, *1968 the petitioner.

There was no objection or exception to any of the evidence offered on the hearing.

FINDINGS OF FACT.

The Welfare Loan Society of Lancaster, Pa., a Pennsylvania corporation (hereinafter referred to as the Pennsylvania corporation), was incorporated August 10, 1925, to take over the business of the Welfare Loan Society, a Delaware corporation (hereinafter referred to as the Delaware corporation).

During the year 1925 and prior thereto and until February 8, 1926, A. H. Vogel was business manager of the Delaware corporation and on said February 8, 1926, he was made treasurer of the Pennsylvania corporation, and on said February 8, 1926, the Pennsylvania corporation, by its board of directors, purchased from the Delaware corporation, through A. H. Vogel as its manager, and took over as of January 1, 1926, all the assets and good will of the Delaware corporation.

On May 10, 1926, the treasurer of the Pennsylvania corporation, said A. H. Vogel, verified the income-tax return of the Pennsylvania corporation for thf year 1925 and caused the same to be filed with the appropriate collector of internal revenue. This return was made and prepared, by an accountant*1969 employed by said A. H. Vogel, from the books of the Delaware corporation and not from any books, accounts or other records of the Pennsylvania corporation. Attached to and as a part of the return was the following statement:

The business operated by this Corporation was formerly operated by a Corporation of the same name organized under the laws of Delaware. The controlling interest in the Delaware Corporation was owned by the Hawkins Mortgage Company, which went into receivership in 1924. On or about January 1, 1925, the business of the Welfare Loan Society of Lancaster, Pa., was taken over and operated by a trustee for the benefit of stockholders who had supplied the capital for the Company, most of whom were residents of Pennsylvania. On August 10, 1925, a new Corporation, to wit, the within respondent, was organized to operate this business. A reorganization was effected whereby the stockholders of the Delaware Corporation received their ratable shares of interest in the business by exchanging their Delaware stock for stock in this Corporation.

Accordingly, this report is submitted as if the business had been conducted by the Pennsylvania Corporation during the entire*1970 year, on the ground that the business was conducted in its interest and for its account during the entire year.

*1116 The Pennsylvania corporation issued no capital stock prior to 1926; had no funds or money of its own prior to that year; carried on no business in 1925 and had no income in that year; and the 1925 return was inadvertently filed in its name. The statement attached to the return and embraced in the last paragraph as quoted above apparently means that as the Pennsylvania corporation purchased the assets of the Delaware corporation as of January 1, 1926, it received whatever accumulations and profits were made by the Delaware corporation during the year 1925, and we find as a fact that the business of the Delaware corporation for the year 1925 was in no other way conducted in the interest or for the account of the Pennsylvania corporation. The return so filed was not filed as the return of the Delaware corporation. The stockholders of the Dalaware corporation and the Pennsylvania corporation were not all the same.

OPINION.

SEAWELL: The original petition herein was filed by the Welfare Loan Society of Lancaster, Pa., a Pennsylvania corporation, incorporated*1971 in August, 1925, of which A. H. Vogel was stockholder, treasurer, and manager.

The attempt in the so-called amendment to the original petition to substitute the Welfare Loan Society, a Delaware corporation, of which said A. H. Vogel had been business manager in 1925, for the Pennsylvania corporation of a "like name," was and is a nullity. The amendment, allowed by the order of the Board, was not a substitution for the original pleading, albeit probably so intended by the pleader. Inartificially drawn as it may be, it should be considered in connection with the original petition even though in some respects the two pleadings are in conflict. At the trial the pleadings were so considered by all concerned; no objection was made to the testimony as relating to issues not raised by the pleadings. The pleadings could have been amended to conform to the evidence. Rule 18.

The return was filed by the Pennsylvania corporation; the deficiency notice, based on this return, was directed to it; and the original petition and this amendment (so-called) were filed by the same corporation. We have no jurisdiction over any other taxpayer in this proceeding.

The Pennsylvania corporation, *1972 the petitioner, had no income, did no business in the taxable year, as set forth in our findings of fact, and there could, therefore, be no deficiency in tax against it.

No tax return for 1925 of the Welfare Loan Society, the Delaware corporation, is in evidence, if any was ever filed, and there is no evidence that any deficiency notice was mailed to it. No adjudication of its tax liability for 1925, if any, can in this proceeding be had as to it.

*1117 If there is any liability on the part of the petitioner, the Pennsylvania corporation, for income tax for the year 1925, it is as a transferee, and its liability as such is not within the issues now before us or within our jurisdiction in this proceeding to decide. .

Reviewed by the Board.

Judgment of no deficiency will be entered.