Appendix — National Pneumatic Co. v. United States

APPENDIX A

an the or. i Stats Gout 7 Gains

No. 468-61

_ (Decided July 15, 1966) :

e

N ATIONAL “PNEUMATIC COMPAN : CHARLES

FROST, AS AGENT FOR TRANSFEREES OF NA-

TIONAL PNEUMATIC COMPANY AND CHARLES

FROST, 3 v. THE UNITED STATES

Harry Levine, attorney of record, for plaintiffs,

William Laverick, with whom was Assistant Attorney

General Mitchell Rogovin, for defendant. Lyle M. Turner,

Philip R. M 6 and David D. Rosenstein, of counsel.

Before Cowen, Chief Judge, RNR BH Dorrte, Davis,

and — Judges.

OPINION

— Judge, delivered the opinion of the court:

This is a suit for refund of $731,500.46 in interest assessed

and collected from plaintiffs with respect to the Federal in-

come and excess profits tax liabilities of National Pneumatic

Company: (hereinafter “taxpayer”) for the years.1944 and

1945. The taxpayer was a corporation organized under the

laws of West Virginia. Its principal office was in New York

City. It was duly dissolved in 1949, and all of its assets,

subject to its liabilities, were distributed to its stockholders

-in redemption and cancellation of their stock ene and

in liquidation of the corporation.

Charles Frost was one of the N Se of tax-

payer, and as such, he was one of the principal transferees of

its assets upon its dissolution. On August 24, 1949, all of

the stockholders of taxpayer appointed Charles Frost as their

agent to receive, hold, sell, or dispose of the property so

distributed by taxpayer. He was to.satisfy the debts of the

.__ taxpayer, any mortgages or liens against its property, and to

hold and distribute to the stockholders what was left over.

Pursuant to an audit of the returns of the taxpayer cover-

ing the 2 years here involved (1944 and 1945), among others,

the Commissioner of Internal Revenue, on May 26, 1954,

forwarded to the taxpayer and to each of its transferees

statutory notiges of deficiency. The statutory notice showed

unpaid incomund excess profits taxes in the sum of $1,348,-

585.21. Exhibit B attached to the statutory notice computed

the book value of assets distributed over liabilities assumed

_ by the. transferees to be $3,317,45943. Exhibit B also con-

‘ tained a statement showing transferee liabilities based on a

1 Pro rata distribution of the assets. Taxpayer and its trans-

ferees did not agree to the assessments proposed in the

statutory notices. However, while the conflict of opinion

. between this court’s decision in Olympic Radio and Tele-

vision, Inc. v. United States, 124 Ct. Cl. 33, 108 F. Supp. 109 :

(1952), rev’d 349 U.S, 232 (1955) and the Second Circuit N

Court of Appeals decision in Lewyt Corp. v. Commissioner,

215 F. 2d 518 (1954) aff'd in part and rev'd in part, 349 US. .

237 (1955), remained unresolved, settlement could not be

effected despite conferences between the parties. |

| On August 23, 1954, taxpayer and all the transferees filed

petitions in the Tax Court of the United States for the years

covered by the statutory notices. The Tax Court lacked

jurisdiction to determine the matters at issue in 1945, because

an overassessment was“ proposed for that year. On May

- 28, 1955, the Supreme Court resolved the Olympic Radio-

_ Lewyt cases conflict by upholding the Second Circuit in

- Lewyt. On August 4, 1955, counsel for taxpayer and the

- transferees moved the Tax Court to amend all the petitions

filed by them to conform to the decisions of the Supreme

Court which motions-were granted by the Tax Court. Upon

resolution by the Supreme Court of the confliet of opinion

aforementioned, conferences on the administrative level were

renewed ind agreement settling the issues were, reached.

Thereupon, in the Tax. Court proceedings, stipulations em-

bodying these agreéments and determining the tax liabilities

of each of the transferees of the taxpayer were executed on

\

a 13 21, 1957, i the respective 3 Sui all 1

— . stipulations provided for back tax payment in .

of $790,683.12 plus statutory interest thereon. The Tax

a Court, i in conformity with the aforementioned stipulations

submitted to it, entered its orders determining the tax lia-

bilities due from each of the transferees plus statutory inter-

est thereon. These orders were severally dated September

27, 1957, October 8, 1957, and October 9, 1957. *

Thereafter, notices and demands for payment were sent

to each of the transferees. The demand included, for the

2 years here involved, delinquency interest of $275,248.77

as well as assessed interest on liabilities, some of which,

according to-plaintiffs, had been eliminated by the aforesaid

-. stipulations and the orders of the Tax Court.! Thi assessed

interest totaled $456,251.69. The total interest gue (both

assessed and delinquency) was $731,500.46—the. amount

now sought in refund. The largess of the interest is due

to the fact that it was computed from the dates payment

was originally due from the transferor under 26 U.S. C.

88 292 (a) and 294 (b) (1952 ed.). The total amount due was

thereafter paid and ‘suit was brought for refund of the

interest. N

It is plaintiffs 8 that the interest computations were

erroneous in that defendant failed to abide by the decisions

of the Tax Court of the United States, which decisions de-

termined the tax liabilities of the transferees pursuant to

. stipulations by the parties. The Tax Court decisions de-

termined the transferees’ liabilities as to income and excess

profits taxes plus statutory interest thereon,” and plain-

_ tiffs allege that defendant illegally went beyond the quoted

phrase by adding so-called delinquency, interest to the

amounts due, Further, plaintiffs allege that defendant f

computed interest on certain original tax liabilities which

were later reduced.or expunged by the Tax Court, and that

this action was improper as to tlie transferees under New

York state law..

The correctness of plaintiffs? position hinges on the de-

terminatien of the question of whether assumed liabilities

exceeded assets received or vice versa. Both parties agree -

1 Plaintiffs 158 not persuaded. us that the interest collected included in-

terest, with respect to ‘abilities eliminated | in the Tax Court. „

~ — J 90 2

4a 8

5

n

*

that under two Tax Court decisions, Lowy v. Commissioner,

K 85 T. C. 393 (1960), and Stein v. Commissioner, 37 T. C. 945

(1962), following Patterson v. Sims, 281 F. 2d 577 (5th Cir.

1960), interest that begins to rungagainst transferees liable

for taxes of a transferor under § 311.of the 1939 Revenue

Code, 26 U.S.C. § 311 (1952 ed.),? is completely determined

by Federal law except when liabilities assumed exceed assets

received. When liabilities exceed assets, state law governs

the date of the assessment of interest. The reason for this

rule is set out in Stein v. Commissioner, supra, at p. 961:

In cases where the transferred assets exceed

the total liability of. the transferor, the interest being

charged i&upon the deficiency, and is therefore a right

: created by the Internal. Revenue Code. However,

where, as here, the transferred assets are insufficient to

pay the transferor’s total liability, interest is not assessed

against the deficiencies because the transferee’s liability

for such deficiencieg7is limited to the amount actually

transferred to him. Interest may be charged against

—

the transferee only for the use of the transferred assets,

and since this involves the extent of transferee liability,

it is determined by State law..

In the present case, defendant—believing assets exceeded

liabilities assumed, issued notices and demands for payments

of the amount stipulated in the Tax Court orders plus ghatu-

tory interest under 26 U.S.C. 88 292 (a) and 294 (b). Plain-

tiffs contend these interest assessments were erroneous since,

according to plaintiffs, liabilities assumed exceeded assets

‘received. If paintiffs are correct, then state law would

govern the date that interest began to run. .

„ Our problem is therefore one of accounting. We must

7” determine from the facts stipulated by the parties. whether

ye. or not the assets received exceeded liabilities. We turn,

. therefore, to the findings of fact for our answer. ;

1311. Transferred assets—(a) Method of Collection. The amounts of the

following liabilities.shall * * * be assegsed, 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 chapter (including the provisions in casé

of delinquency din payment after notice and demand, * ad fe Oa

ye . (1) Transf ; ;

The liability, at law or in équity, of a transferee of propertycof 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 chapter.

*

5a

Finding 15 contains a schedule filed as part of taxpayer's

income tax returns in 1950, entitled Distributions in Liqui-

dation to Spéckholders.” Such schedule shows an excess of

book value of assets distributed over liabilities assumed in 2 *

the amount of 92,542, 291.60. However, that schedule did

not include taxes assessed and on thé rolls of the District

Director of Internal Revenue, against taxpayer in the sum

of 85, 240,778.92. (See finding 9.) It is therefore apparent

that at the time of dissolution, liabilities apparently exceeded .

assets. However, hindsight shows us that these were paper

values. Turning again to the distribution schedule in find-

ing 15, the following comments may be made. The record

does not contain probative evidence which would indicate

that Items #1, 2, 3, 5, and 6 had a market value different

from the book value and therefore the latter is accepted here.

The parties ha ve stipulated, hgwever, that Item 4—the 80,000

“

shares of Redmond stock, had a value of $1,100,000 instead |

+

of the book value of $2,075,511.64. (Finding 16.) Further,

the $674,866 claim for redetermination of excessive profits

was never realized for distribution purposes, since the tax

thereon: was 8539,892.80 (which was paid to the Internal

Revenue Service) and the balance satisfied an outstanding

assessment of excess profits taxes for 1941. (Findings 10

and 15.) We therefore adjust the value of distributions to

the transferees, for the purpose of this action, to read as

follows: 2 ame ;

Items Distributed value

#1 and #2. 1 1 $1, 221, 383. 40

#3 —— . 56, 250. 00

#4 - 1,100, 000. 00

#5 -------- 1,217,000. 74

*6 —— — 4, 222. 22:

Total — C63, 598, 856. 36

_ The liabilities column was a fairly accurate estimate re-

flecting the actual value of liabilities assuméd. Only the

first figure has been shown to have changed. Total taxes

paid (Income and excess profits with attendant interest)

equaled $883,969.25. - This figure is derived from the table

included in finding 10. That table shows the total amount

paid by cash to be $960,058.89. Subtracting from that total

2 ‘ 6a .

the amount refunded on May 12, 1961, of $76,089.64, the net

amount of $883,969.25 is reached. Adjusting the liabilities

column in the schedule in finding 15 to reflect the $883,969.25

figure, total liabilities are shown to be $2,806,252.73.

A comparison of the liabilities and assets. column shows

the assets column figures to be the larger: The difference

between the two is $792,603.63. In other words, assets re- .

_ ceived exceeded by this figure liabilities assumed. This fig-

ure is larger than the $731,500.36 interest assessed. against

and paid by plaintiffs. Since assets received exceeded liabili-

ties assumed, the $731,500.36 interest sum was properly as-

sessed against plaintiffs under the rationale of the Stéin case,

supra. . * ; 8

Furthermore, there is no adequate reason for believing

that the New Vork law would hold the transferees to lesser

interest than they have been charged. The two significant

facts are that (a) the transferred assets exceeded the lia-

bilities (including the interest collected), and (b) the

transferor-corporation together with the transferee-plain-

tiffs stipulated in the Tax Court for the assessment and col-

lection of the liability “plus statutory interest,” and the Tax

Court’s order provided for payment of the tax liabilities

“plus statutory interest thereon.” The most natural mean-

ing of “plus statutory interest” and “plus statutory interest

thereon” would cover both deficiency interest (under Section

292 of the Internal Revenue Code of 1939) and delinquegey

interest (under Section 294). These components are both

prescribed by the Federal statute, and both are recognized

as parts of the tax. See Lowy v. Commissioner, supra, 35

TF. C. 398, 394-395, 397. We have been shown nothing in

the New Tork legislation or decisions which would preclude

the transferees and Internal Revenue Service from agreeing

that the former should pay all of the tax, including this

statutory interest.? At least that would seem to be so where

the transferred assets are greater than the tax liabilities.

(with the interest) and there is nothing to suggest harm to

other creditors. In this instanee, we find that the assets did

exceed the liabilities, and there is no reason to conjure up

detriment to third parties. Ste

nee Ledyard v. Bull, 119 N.Y. 62, 74.

re

Ss

Ta

Plaintiffs are not entitled to sate and the petition is

nm or FACT

The court, having considered the evidence, the report of

Trial Commissioner Lloyd Fletcher, and the briefs and argu-

ment of counsel, makes findings of fact as follows:

1. Plaintiff, National Pneumatic Company (hereinafter

sometimes referred to as “taxpayer”) was organized as a

corporation on February 6, 1910, under the laws of the State

of West Virginia. Its principal office was at 420 Lexington

Avenue, New York, New York. It was duly dissolved on

September 9, 1949, and all its assets, subject to its liabilities,

Ia

te

were distributed to its stockholders in the manner herein-

after stated, in redemption and cancellation of their stock

and in liquidation of the corporati

2. Charles Frost, with office at the above address, was one

| of the principal stockholders of the taxpayer during the

years here involved, and as such, one of the principal trans-

ferees of its assets upon dissolution.

Shortly after voting to dissolve the taxpayer, all its stock

holders, by instrument in writing dated August 24, 1949,

appointed said Charles Frost, their agent with power,

among other powers, to receive and hold on their behalf,

any and all property of every kind and nature distributed

in liquidation and dissolution of the corporation, to sell. or

otherwise dispose of such property, to satisfy the debts and

any mortgage encumbrance or lien against such property,

to hold for their benefit any unexpended avails and to make

distribution thereof to them as expeditiously as the same

could advantageously be accomplished and to prosecute, or

defend, in his own name, or in the name of the taxpayer,

and to submit to arbitration, settle, and to accept a com-

promise with respect to any claim existing in their favor, or

against them, based on or involving any property received,

or anything resulting from the liquidation and dissolution

of the taxpayer or distributions made by its board of direc-

tors pursuant thereto. A copy of this instrument was filed

at the time with the District Director of Internal Revenue,

Upper Manhattan District (now the Manhattan e

of New York.

84

3. Pursuant to an audit of the returns of the taxpayer

covering the two years here involved (1944 and 1945), among

others, the Commissioner of Internal Revenue on May 26,

1954, forwarded to the taxpayer and to each of its trans-

ferees statutory notices of deficieney. The statutory notice

issued to Charles Frost (which éxemplifies the statutory no-

tices issued to all the transferees) set forth on page 1 of the

statement the tax liabilities of the National Pneumatic Com-

' pany, transferor, as determined by the Internal Revenue

Service, in a tabular form as follows: 5

S

STATEMENT

: National Pneumatic Company, Transferor

— 420 Lexington Avenue N

New Vork 17, New Vork

Taz, Liability for the Taxable Years Ended December 81, 1944, 1945,

704 Te

Taxable Years Ended February 28, 1949 and 1960

ea ] ee Balance Total

Year Liability Assessed | Overassess-| Deficiency | of unpaid | transferee

Col. 1 Col. 2 Col. 3 ment Col. 5 assessed liability

. Col. 4 3 Col. Col. 7

INCOME TAX ps

F $180, 302.35 | $213, 414. 20 838,111.88 $150, 302. 35 | $150, 302. 35

1 88. 150.57 108, 707. 10 12, 547.83 94,909.57 |, 94,909. 57

1 603, 314. 08 569, 554. 999 8 22899 33, 759. 09

eee 45, 083. 89 . aes UCU CO 45, 083. 89

1949... 361,378.64 153, 088. 70 |-.........-- 1 208. 289. 94

) 88 198, 805. 22 * | 108, 906. 23 |............ 198, 805. 22

Totals._|$1, 485, 043. 75 |$1, 044, 764. 99 | $45, 650. 38 688, 938. 14 (8246, 211. 92 $731, 150.06

DECLARED VALUE EXCESS PROFITS TAX - |

1044. . 381, 111.31 $16, 190.16 — $14, 921. 15 | $55,790.16 | $70,711.31

EXCESS PROFITS TAX

$846,036.44 | $504,720.78 f $251,315.66 |... . $251, 315. 66

123 290,158.18 | 744,851.31 8445, 565 i $206, 408. 18 286.408. 18

Totals..|$1, 145, 194. 62 $1, 339, 572. 09 [s445, ona. 13 6251. 218 6 8. 408, 18 $546, 723. 84

Page 2 of the statement in the statutory notice provided,

in part, as follows: ns

Mr. Crrartes Frost, Transferee

420 Lexington Avenue

New York 17, New Vork

- Transferee liability (See exhibit “B” attached)__. $995, 237. 82

Value of assets held to have been distributed ;

in 1949. $3, 317, 459. 43

le Year January 1, 1948 to. February 29, 1948; and

3 , . ; 1 5 $

Your percentage of capital stock ownership in

National Pneumatic Company at time of dis-

tribution of assets g 5 : 30 percent

Transferee. liability 30 percent of $3,317,459.48.. $995, 287. 82

0 The above stated amount, plus interest as provided

ö by law, represents your liability as a transferee of assets

of National Pneumatic Company, 420 Lexington Ave-

nue, New York 17, New York, for deficiencies in income

tax, declared value excess-profits tax, and excess profits

tax, and for the unpaid balance of income, declared value

excess- profits and excess profits taxes due from National

Pneumatic Company for the taxable years January 1,

1944 to February 28, 1950, inclusive. * N

Tue records of this office indicate that the National 1

Pneumatic Company, 420 Lexington Avenue, New Vork,

has been dissolved and that assets. were transferred to

you during the year 1949. é |

_ Inasmuch as the value of assets received by you

amounted to $995,237.82, your liability is limited to that

amount. é

Exhibit B attached to the statutory notice contained a state-

ment showing transferee liabilities based on distribution of

assets and computed the book value of assets distributed

over liabilities assumed to be $3,317,459.43, as follows:

Per return (Exhibit 4) _.... $2,542, 201. 60

Add: 20 f

„Land and buildings Wai 1, 058, 671. 28

Machinery and equipment= aie 89, 318. 29

Furniture and fixtures. . 5, 319. 34

Automobile — 85 564. 76

Leasehold improvements te 3, 651. 06

Inventory 8 177, 146. 08

Accounts receivable. 4, 423. 36

Total 3 8 $3, 881, 385. 72

Net additional Federal Taxes proposed —— 260, 822. 44

Net as determined by Revenue Agent. $8, 620, 568. 28

Total assets as above $3, 881, 385. 72

Total deficiencies, _

of statement... 3782, 174. 95

taxes, Exb. A-. 806, 410. 26 61. 348, 585, 21

Federal taxes deducted in deter-

mining distributions in liquida- *

. tion to stockholders of -

291.60, Exhibit 4 of return 784, 658. 92 563, 926: 29

Excess of book value of assets distributed over N

liabilities assumed revised $3, 317, 459. 48

223-651—66—_2 8

—

a 10a

Exhibit B held that the $8,817 450 48 had been distributed

as follows: 7

Percent of | Distribution | . Transferee

JJ SOOT | Ly. cy PO lability

National Pneumatic Co., Inc. : 146. 82 | $1, 348, 585.

Frost 30 percent *. 48 1.5 85

Estate of Frank Gampbeli 2 percent | 788. 1% 706,190.

Zolto 10 percent ' $81,745.94] 331, 748.

Campbell. 10 percent 331, 745. 94 331, 745.

Hetate of Louie Goldring 5 — ‘ — oes or 3

Robert Frost. 6 percent 199,047.57 | 190,047.

, Judith Levine... 2 percent . 66,340.19 66, 349.

William L. Frost Zpercent| 66, 349.19 66, 349.

‘Theodore Frost. 2 percent 66,349, 19 66, 349.

7 Richard H. Frost. 2 pereent 60. 349. 19 66, 349.

: 100 percent | 8,317, 40.

2 — Company Rnewy = Ma

A Ser eee eie A — — 1

Revised distribution 1,804, 146. 82

4. ‘Taxpayer and its transferees did not agree to the assess-

ments proposed in the statutory notices referred to in the

preceding finding. However, while the conflict of opinion

between this court’s decision in Olympic Radio and Televi-

sion, Inc. v. United States, 124 Ct. Cl. 33, 108 F. Supp. 109

(1952), rev’d 349. U.S. 232 (1955) and the Second Circuit

Court of Appeals decision in Lewyt Corp. v. Commiisioner,

215 F. 2d 518 (1954), aff'd in part and rev'd in part, 349 i

U.S. 237 (1955), remained unresolved, settlement could not

be effected despite conference between the parties.

5. On August 23, 1954, taxpayer and.all the transferees

filed. petitions in the Tax Court of the United States for the

years covéred by the statutory notices. The Tax Court lacked

_ jurisdiction to determine the matters at issue in 1945 because

an overassessment was proposed for that year.

6. On May 23, 1955, the United States Supreme Court re-

solved the conflict by upholding the Second Cireuit Court

of Appeals in the Lewyt case and reversing this court in the /

Olympic Radio case. On August 4, 1955, counsel for

‘payer and the transferees moved the Tax Court to. d

all the petitions filed by them to conform to the ions

of the Supreme Court which motions were granted by the

Tax Court. N

SSSSLSLLSNBE

Upon resolution by the Supreme Court of the conflict of

opinions aforementioned, conferences on the administrative.

level were renewed and agreements settling the issues were

reached. Thereupon, in the Tax Court proceedings, stipula-

tions embodying these agreements and determining the tax

~~ liabilities of each of the transferees of the taxpayer were

executed on or about August 21, 1957, by counsel for each

of the transferees and by or on behalf of the Chief Counsel,

Internal Revenue Service for the Commissioner of Internal

Revenue. The stipulations specifically provided that these

liabilities were for the amounts determined “plus statutory .

interest thereon.” The Charles Frost Stipulation is typical

of all the stipulations (except as 3 fo amounts), and reads as

follows: : 2 5

It is hereby stipulated that there is a liability due

the following statement:

2) Rooms Tax

Year ended : a Amount

December 31, 1944 ' $150, 302. 35

December 31, 1945 7 94. 909. 57

December 31, 1947. : 33, 759.008 ~~

Period January 1, 1948 to February 29, 1948________ None

Fiscal year ended February 28, 1949 2. 074. 37

Fiscal year ended February 28, 1950 — None

: DECLARED VALUE EXCESS PROFITS TAX 3

December 31, 1944 ä — 33, 878. 90

ö 870110 EXCESS PROFITS TAX '

December 31, 1944 — 239, 199. 30

December 31, 1945. . 236, 564. 54

Effective upon entry of decision pursuant to this stipu-

lation petitioner waives the restrictions, if any, contained .

in the Internal Revenue Code, on the assessment and

collection of the liability plus statutory interest. . -

The Tax Court, in confermity. with the aforesaid stipula-

tions submitted to it, entered its orders determining the tax

_ liabilities. due from each of the transferees “plus statutory —

; j 12a *

interest thereon.“ These orders were severally dated Sep-

tember 27, 1957, October 8, 1957, and October 9, 1957.

7. The decision of the Tax Court in the case of each of the

transferees was identical except as to the amount for which

each of the transferees was liable. The decision determin-

ing the liability of Charles Frost, oneof the plaintiffs herein,

was entered October 8, 1957, and reads as follows:

Pursuant to written stipulation signed by counsel for :

the parties in the above-entitled case and filed with the

Court on September 20, 1957 at Washington, D.C., it is

- OrpereD AND Dromrp: That there is a liability due

from the petitioner as transferee of assets of National

Pneumatic Company, New York, New York, for in-

come taxes, decl value excess profits tax and excess

profits tax due from that corporation for the years and

rae amounts, plus statutory: interest thereon as

ollows:

The decision then goes on to reproduce the tabular material

contained in the aforesaid stipulation, as set forth in finding 6,

supra. Thereafter, on October 25, 1957, the Tax Court en-

‘tered an order amending its decision so as to correct a typo-

graphical error in the figure representing liability for excess

Profits tax for the taxable year ended December 31, 1945.

8. On or about January 15, 1958, notices and demands for

payment issued out of the office of the aforesaid District

Director addressed to the taxpayer and to each of the trans-

ferees. Upon representations on behalf of the transferees,

the District Director on or about July 1, 1958, subthitted a

revised schedule of the taxes due and interest thereon to

June 30, 1958, and demanded payment in accordance there-

with. The schedule included, for the two years here. in-

volved, delinquency interest of $326,818.29 as well as assessed

interest on liabilities some of which had been eliminated by

the aforesaid stipulations and the orders of the Tax Court

entered pursuant thereto. Conferences at the administrative

level at which objections were made to the interest computa-

tions resulted in the elimination of $51,569.52 of delinquency _-

interest, thus leaving a total of delinquency interest for the

years 1944 and 1945 of $275,248.77. See finding 17, yr

9. At the time of the dissolution of the taxpayer, there

were unpaid assessments against it on the rolls of the then

| 13a |

Collector of Internal Revenue!’ Third District of New York, ,

later Director of Internal Revenue, Manhattan District of ;

New York, for income taxes, declared value excess profits

taxes, and excess profits taxes for the years here involved.

Claims filed by the taxpayer were pending for the adjust-

ment and refund, of the taxes for the two years here involved.

The taxes assessed and an the rolls of the District Director

_ Of Internal Revenue on the date of dissolution of National

. Pneumatic Company, amounted to $5,240,778.92.. The net

additional taxes asserted against the transferees in the stat-

utory notice of May 26, 1954; amounted to $260,822.44; On

the dute of taxpayer's dissolution the total repayable to the

Department of the Army in renegotiation proceedings as de-

termined prior to dissolution amounted, with interest, to

$1,491,927.27. The aggregate of the aforesaid liabilities

‘amounts to 86, 993,528.63. 3 f

10. Of the amount of 85, 240, 778.92 mentioned in the pre-

ceding finding, $3,684,343.25 was abated on August 10, 1951; .

$458,240.66 was abated by the decision of the Tax Court on

October 8, 1957, in proceedings before it by the transferees ;

$138,136.12 was paid through credits to which the transferees

were entitled and by payments made by them of 8960, 058.89.

Of the latter amount, 576,089.64 was refunded on. May 12,

1961: The following chart sets forth in. detail the assess-

ments on the rolls of the District Director, the dates when

finally determined, and the ultimate abatements or payments

made with respect thereto:

1

*

: 0

“punjes uses 8 Jo n 4 e

3 ¢ a A

“1961 ‘zt e ynogs 30 wo , 4q he

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19/08 oy o sez =| Tee fe THE ‘BBL “WL. GAU HH nn

5 O /t [et | 60 08 64 81%. % eee es ‘ae ‘199 ¥ n “sve

t [It | Ct v. ovLus tt vt d mA . une

H e del d : M e eat en 4 n

a wet “6 .

pred oye qm ga prea e a % D r Do nos out TRL * 5

— tq do SUSTIBCET Vy — — a

~

.

9

15a

computed by the District Director, thereafter was insisted

‘upon by him. Final payment, as demanded, was made by

Charles Frost, as agent for the transferées, on or about De-.

cember 1, 1958.

12. On or about April 29, 1959, plaintiffs filed in the office

of. the aforementioned District Director, a claim for refund

of the interest paid for the taxable year 1944 in the amount

' of $414,032.60. On pr about May 12, 1961, the taxpayer was

advised by a tax adjustment voucher issued out of the office |

of the said District Director, that of the aforesaid amount

claimed there was allowed $76,089.64 of assessed interest to-

gether with statutory interest thereon. In a letter dated

May 15, 1961, the said District Director informed the tax-

payer that, to the extent not allowed, the claim was disal-

lowed. o amount thus disallowed is 8337, 942.96. :

On or about April 99,1959, plaintiffs filed in the office of

. ‘the: aforemgntioned District Director, a claim for refund

of the interest paid for the taxable year 1945 in the amount

>. of $898,557.50. By letter dated June 14, 1960, the District

Director gave notice of disallowance in full of the said claim.

The aggregate of the two disallowed claims thus amounted

to $781,500.46. :

13. On or about October 10, 1949, Charles Frost, as agent

for the transferees of National Pneumatic Company, en-

tered into a contract with John Hancock Mutual Insurance

Company to sell the Rahway plant which was distributed to

‘him as such agent upon the dissolution of National Pneu-

matic Company. The sale was closed on or about. Decem-

ber 1, 1949, The proceeds amounting to $1,400,000.00 were

used to pay, on or about December 16, 1949, renegotiation

liabilities of National Pneumatic Company for 1945 amount-

ing to $718,963.53 consisting of excessive profits of $699,530

and interest of $19,433.53, and on or about Januaty 3, 1950,

a similar liability for 1943 of $576,605.22. Interest amount-

ing to $196,358.52 on the aggregate of the two amounts of

$699,530 and $576,605.22, namely, $1,276,135.22, was paid b;

Charles Frost, as agent, in installments, the last payment

being made on June 80, 1955. The aggregate of these pay-

ments amounted to $1,491,927.27 and discharged the renego-

Q

- 11, Payment of the balances of principal and interest, as

*

~

2

16a 1

tiation liabilities in that amount together with interest

thereon. ;

14. On demand of the District, Director of Internal Reve-

nue, Manhattan Distric- , Charles Frost, as agent for all the

> transferees, delivered to the said District Director 80,000

shares of stock of Redmond Company, Inc. being all its out-

standing stock, suꝭject to a custady agreement. Among the

terms of the said agreement were the following: (a) restric-

tions dn the payment of dividends, (b) an understanding

that at all times the District Director had the right to take

any and all steps necessary or proper to accomplish the

collection in full of all liabilities outstanding on his. records

and to proceed in any mannér he considered necessary for

its accomplishment. - er |

15. Haskins & Sells, auditors of the taxpayer, prepared its

‘final income tax return for the fiseal year ended February 28,

1950. - part of the taxpayer’s said final income tax return,

sheet setting forth the assets and liabilities of the National

as attached, as Schedule L, the following balance

Pneumatic Company, as of February 28, 1949:

é ; ASSETS. - * Soe oe

„% ˙ ——. aeabndpents 367, 959. 69

Accounts receivable % $1,162,915. 68

Less reserve ſor doubtful accounts 21,361. 32

—:: nueraiccwankccuiuscsiss ae

. * . 5 —

Inventor pane nonce n —— m— 31.066. 199. 00

; ey

Investments *

. * 2356, 253. 00

. ac ei 2,200,445. 62

Wa . 32.256.698. 62

Capital assets: . . ea

Bu 6——ꝗ1— — K $1,141,084 80

Machinery and equipment 1,144, 133. 52

- Furniture and fixturess . . 66,465. 64

Automobiles mum — * 11.089. 64

H ͥ —ͤ— CMTE OD

Less reserve for depreeiat ion —— 366.310. 19

. F CARAS

=” 5 te minhinatiaies rn. 1 170, 500. 00

33 8 —— $2,176,963. 41

t 4 fe

‘ . 17a

Assfrs— continue =

Other assets:

1 rn 812,858. 05

Prepaid insurance, eto . 28. 187. 2

. . 339.013. 07

ä e eee $6,748,390. 15 nf

LIABILITIES . See ine

Accounts ap ENE TEE AOU OT AL TG $151,673. 84

Notes and loans ¢ aypble : a 8 . | ,

Maturity of less than one year_________ — 8425, 011. 39 oo

- Maturity of more than one — 6.677. 37 8 b

TP. ˙ ˙aà—̃—ñ—ñ6 ane

° Accrued expenses: ~ fire

Interest ES EEN EROS ae emirate ae $657 , 137. 91

Compens¢tion insuranceg—ꝛͤ-— 8,997. 40

: Royalties payable..____________ 8 8 400. 00

Vacation pay and other acerued expenses 47, 680. 23

— SE eS . $714,215. 54

Other liabilities: 8 e .

Reserve for Federal income taxes. $1,684,155. 91

Reserve for other taxes. 11.045. 49

Reserve for renegotiation——— 570, 299. 48

—S -+-+-2-+, $2,265, 500. 88

Capital stock ... 8 $2,024,000. 00

Capital surplus...........2.%...2.:.....--3. $314,764. 09

Earned surplus pigeon Renee $846, 547. 04 .

8 ee ee 86. 748, 390. 15

Also included in the final income tax return, as Exhibit

IV, was the following schedule prepared as of February 28,

1950, and entitled “Distributions in Liquidation to Stock-

holders” :

Distributions. in liquidation: . Values as per books

g I and #2—Land, buildings and appurte- ;

: PPTP — 61, 221, 383. 40 a

#3—3,750 shares .of Standard Facto . „

Corporation preferred stock. 56, 250. 00 —

#4—80,000 shares of Redmond Company,

„ Kn 2, 075, 511.64

: #5—1,217,000 shares of National Pneu-

‘ matic Co., i ff: | ree 1, 217, 74 N

neh ($606.24) and other assets Hy 298.93) 67 2

a Claim for -redetermination of excessive Penne

rofits for the year 1942 under the ‘

megotiation Act. ............:..°.... 674. 866. 00

CC . — 6, 249, 234. 00 :

*

N . ; Values books

Liabilities assumed by stock- * N

buolders: ;

Federal income taxes. . 3784, 658. 92

excessive profits to be

refunded (see claim

above); amount indèter-

minable at the present

. . .

Renegotiation of excessive profits 1, 234, 829. 48

Accrued interest on taxes and 8

„ renegotiation 592, 078. 26

Voucher parole. b 34, 337. 69

Accrued legal fe. 10, 000. 00

vances —— . —— 51, 038 05

Total 1 ae 2, 706, 942. 40

Excess of book value of assets distributed ver

liabilities assumed—Schedule M... 2, 542, 291. 60

** (A) Formerly Holtrer-Cabot, Inc. National’ Pneumatic Company discontinued

_ftations on October 14, 1649 and completed dr db of ll w assets

The tax liability of the taxpayer-to the Treasury Depart-

ment as the result of its claim for.redetermination of 1942

excessive profits of $674,866, carried in the aforesaid Exhibit

TV as an asset, was not known at the ie of the preparation

of the balance sheet and the statement of taxpayer’s liquida-

tign account. Consequently, taxpayer’s auditors, Haskins &

Salle, made no adjustment in their aforesaid schedule of )

distributions for any tax liability of taxpayer on its claim

for refund of excessive profits in the sum of $674,866. The

tax determined by and paid to the Internal Revenue Service

amounted to $539,892.80. The balance of the excessive profits

refund, namely, $134,973.20, plus, interest of $34,166.46, a

total of $169,139.66, satisfied an outstanding assessment of

excess profits tax for the year 1941. ‘

16. The liquidation account prepared by Haskins & Sells,

as set forth in the preceding finding, discloses that 80,000

shares of stock of Redmond Company, Inc. were’ valued at

$2,075,511.64. The actual value at date of dissolution of thg

taxpayer, as stipulated by the parties, was $1,100,000, a

difference of $975,511.64. If the aforesaid liquidation ac-

count is adjusted by reducing the value of the Redmond stock

in the amount of $975,511.64 and further by eliminating

therefrom the claim for redetermination of 1942 excessive

profits in the amount of $674,866, the value of distributions

~ {

2 3

*

° 8 ° - 19a .

to the transferees totaled $3,598,856.36._ The liabilities ac-

count, as set forth in the preceding finding shows 8784, 658.92

et aside for income taxes. The actual amount paid, how-

ever, was $883,969.25. (See finding 10 which reveals a

8960,/058.89 total paid by cash and a later $76,089.64 refund “25

made by defendant.) Adjusting the liabilities column in :

the schedule in finding 15 to reflect the $883,969.25 figure,

total liabilities are shown to be $2,806,252.73. The computed

figure for excess of asset values distributed over liabilities as-

sumed is therefore reduced from $2,542,291.60 to $792,603.63.

17. The interest. paid on December 1, 1958 (see finding 11,

supra), by the plaintiffs with respect to the tax liabilities f

the National Pneumatic’ Company for the years 1944 and

1945, which remains at issue in this case and the refund of

which is claimed by the plaintiffs, is as follows:

Assessed | Delinate Total

interest. — | | 7%

: aon Nan: F

Year ended December 31, 1944: ; 5 i

IT Acct. #41080443/45._____ ues. 2b 5 ORF EE Roe $58, 453.80 | $58, 453.80 0

IT Acct. #9 23 47, Spl. 18, 000 . | 67,536.08 | 67,536.08

DVEP Acct. #6-415001/46,....... RS, SES 18, 356.66 | 18, 356. 66

DVEP Acct. #12-6-67, Spl. N- 2,000 10, 003. 46 687. 04 10, 780. 50

. nr 13, 721. 37 13,721.37

EP Acct. #12 6 57, Spl. N- 2.00 157, 856. 33 11, 238.22 | 160, 004. 55

a 1 $160,993.17 | $837, 942. 96

Year ended December 31, 1945: |

..... 860, 287.59 | 666, 287. 50

DVEP Acct. #12-6-57, Spl. N 2,00 . $681.13 |. 18.70 600. 83

. scccccedeeceseoieleeesees-..,..,. 38,334.42 | 38, 334.42

EP Acct. #12 6-57, Spl. #N-2,060............_. 287, 620.77 614.89 | 288, 235.66

Totals. — 2. 301. 0 $105, 255.60 | $393, 887. 80 a N

The assessed interest for 1944 of $167,949.79 tabulated

above was computed by the Internal Revenue Service as

follows: .

3

S

Dave ee ee .

20a

Declared Value Excess Profits Taz

(Identified above as DVEP acct. #12-

6-57, Spl. #N—2,000)

On $7,007.01 (attributable to General

Adjustments) from 3-15-45 (due

date of return) to 10-27-57 (30 —

g days from date of Tax Court deci- 8

** N sion, Docket No. 54376) faetor

ee : „„ i Se = $5,304.11

ee ‘On $7,914.14 (attributable to carry-

back from 1946).from 9-26-47 (date

of CB Sch. No. 6269) to 10-27-57

(30 days from date of Tax Court

Decision (Docket No. 54376) factor a

——. =. 4,789.35

. 1 5 310, 093. 46

0 Excess Profits Tax .

i _ (Identified above EP acct. #12657, Spl.

#N—2,020) ‘

On $48,075.32 (attributable to General ‘

Adjustments) from 3-15-45 (due . ae )

date o. ret urn) to 3-15-47 (due date

of éarryback year) factor. 12 2865, 769. 04

On 8251, 315.66 (attributable to Ex- 1

‘cessive allowance of NOL. CB from

1946) from 9-26-47 (date of Sch.

No. IT: CB-6269) to 10-27-57 (30

_days from date of Tax Court De-

cision, Docket No. 54376) factor 0

60516438 1 —— = 152, 089. 29

1 AA eis 157, 856. 33

8 — —

Total assessed interest ee eee 167, 949. 74

The delinquency interest for 1944 of $169,993, 17 tabulated

above was computed by the Internal * Service as

follows: 0

. Income tar a

(1). GT Acct. #41080443/45) on

‘ $74, 548.00 from 6-5-45 (date of

Notice and Demand) to 6-30-58 6

e of Payment) factor . 7841093. = $58, 453. 80

(EP Acct.

4 = La

(2) (IT Acct. #923 47, Spl. 1 5, 000) on

$104,707.10 from 9-30-47 (date of

Notice and Demand) to 6-30-58

(date of payment) factor. 645

Declared Value Excess Profite Taz

(1) (DVEP -Acct. #5-415001/46) on

$34,133.22, from 7-10-46 (date of

Notice and Demand) to 6-27-55

(date of payment) factor. 5377945

(2) (DVEP -Acct. 12-86-57, Spl EN

2,000) on $25,014.61 from 1-5-58

(date of Notice and Demand) to

6-30-58 (date of payment) factor

Excess Profits Tax

#5-402200/46) (1) on

$3,042.34 from 7-10-46, (date of

Notice and Demand) to 6-27-55

(date of payment) factor .537794___

(2) On $10,000 from 7-10-46 (date of

Notice and Demand) to 12-28-55

(date of payment) factor .5679589__

(3) On $10,000 from 7-10-46 (date of

Notice and Demand) to 21-56 (date

of payment) factor. 5736164...

(4) On $1,156.36 from 7-10-46 (date

of Notice and Demand) to 35-56

(date of 0 factor. 578945

(EP Acct. #12-6-57, Spl’ #N=2, 020)

on $409, 171. 99-. from 1-15-58

(date of Notice and Demand) to

6-30-58 (date of payment) factor

962 1620628 ee ——— =

Total delinqueney interest

Total of assessed and de-

linqueney interest in issue

8

= 67,536.08

$125, 989. 88

4

18, 356. 66

es 687. 04

19, 043. 90

= | 1, 636.15

5, 679. 59

5,736. 16

— 669. 47

13, 721. 37

11, 238, 22

24, 959. 59

109, pos. 17

8

Declared Value Excess Profits Taz ' :

(DVEP Acct. #12-6-57, Spl. IN ö

2,040) On $3,025.05 (general ad-

justment deficiency ‘extinguished

by 3806(b) ‘adjustment) from 2

3-15-46 (due date of return) to . 1

12-1649 (date of repayment a

to Government agency) factor 1

3 » » ——— = $681. 13

Excess Profits Tur 5 ,

(EP Acct. #12-6-57, Spl. #N-

2,060) (1) On $99, 427.61 from |

3-15-46 (due date of return)

to 12-16-49 (date of payment

to Government Agency) factor

(2) On $445, 693. 13 from 3-15-46

(due date of return) to 1216-9

(date of payment to Government

Agency) factor . 22516438. = 100, $54 22

. (3) On $236, 564 54 from 3-15-46

Que date of return) to 10-27-57 Be

(30 days from date of Tax Court ‘|

Decision, Docket No. 54376) factor

69697260_.....--.- = 1164) 879. 00

— ᷣ ͤ—— 287, 620. 77

Total assessed interest 282288, 301. 90

Oi 2164, 879. 00,

Total nondelinquency interest

— ͤ—ůůů 123, 422. 90

The delinquency interest ie 1945 tabulated above was

computed by the Internal Revenue Service as s follows:

e Tax

ar Acct. 64109383 /46) on 822, 789, 89

_ from 7-15-46 (determining date of 7

interest on assessment) to 33-58 .

(date of payment) factor . 6976301. $15, 898. 92

On $24,039.89 from 6-15-46 (due date

of 2nd installment) to 3-3-58 (date

of payment) factor. 7026301. = 16,891.15

é Thus amount is actually delinquency interest Which was assessed.

2

ae 23a

On $48,535.59 from 8-30-46 (date of

Notice and Demand) to 3-3-58 (date va

of payment) factor. 6901643. --------= $33, 497. 52

—A Gras 8

Declared Value Excess Profits Tur

(DVEP ‘Acct. #12-6-57, Spl. EN 2,040)

On $681.13 from 1-15-58 (date of

Notice and Demand) to 6-30-58 ‘(date

of payment) factor 3 = 18. 70

. Excess Profits Tur ;

(EP Acct. #4002737/46) On $8,843.64

from 3-15-46 (due date of first in-

stallment) to 3-5-56 (date of pay-

ment) factor 598123— _ 1 5, 289. 58

On $10,000.00 from 3-15-46 (due date

of first installment) to 4-2-56 (date f

payment) factor. 60295899. = 6, 029. 59

On $10,000.00 ‘from 3-15-46 (due date 28

of first installment) to 5-1-56 (date

of payment) factor. 6076301. 6, 076. 30

payment) factor. 6126301 6, 128. 30

payment) factor. 61730133. 6, 173. 01

first installment) to 7-31-56 (date of -

payment) factor. 6226301. —— 6, 226. 30

payment) factor. 6924657. 8, 445. 25

of payment) factor. 6791095. 25, 673. 12

of payment) factor. 6896027. = 34, 480. 14

$66, 287. 59

of payment) factor. 696315. = . 3,183.48

of payment) factor. 72410958. = 95,577.14:

203, 280. 21

0

24a

Amount assessed Acct. #12-6-57,

1 —ͤ — * 5 $164, 879. 00

2

reals 5 38, 401. 21

(EP Acct. #12-6-57 Spl. N- 2060) On

822,387.55 from 1-15-58 (date of

Notice and Demand) to 6-30-58 (date

of payment) factor 0274657 6 = $614. 89

Total Delinquency interest 5 270, 201.39

Total of assessed and delinqueney . —

interest in issue in 1945. N a 2 393, 624. 29

18. Plaintiffs have made no transfer or assignment of ae

claims or any part thereof. No action other than as afore-

said has‘ been taken thereon by Congress, by any depart-

ment of the Government of the United States, in the Tax

Court of the United States, or in any other judicial

—*

CONCLUSION OF ad

Upon the foregoing findings of fact, which are made 1 ae

part of the judgment herein, the court concludes as a matter

of law that plaintiffs are not entitled to recover, and the

petition is dismissed.

. efuimed in the petition, however, s $908,557.50, : *

U. s. GOVERNMENT PRINTING OFFICE:1966

8 89 * 0 N i os ;

* ° 1b °

APPENDIX B

Statutes Invo.vep

Internal Revenue Code of 1939:

Sec. 311 Transferred Assets.

(a) Method of Collection. — 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 de-

ficiency in a tax imposed by this chapter (including

the provisions in case of delinquency in payment

after notice and demand, the provisions author:,

izing distraint and proceedings in court for col-

lection, and the provisions prohibiting claims and

suits for refunds) : „ rh

(1) Transferees.—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 b

law) imposed-upon the taxpayer by this chapter.

* . „ ꝙ2 « * 8 N

Any such liability may be either as to the amount

of tax shown on the return or as to any deficieney a

in tax. (26 U.S.C. 1952 ed. Sec. 311) 3 *

Debtor and Creditor Law of the State of New Vork:

Section 271 . 2

A person is insolvent when the present fair salable N

value of his assets is less than the amount that will Ma

be required to pay his probable liability on his

existing debts as they become absolute and matured.’ ’

Section 273

Every conveyance made and every obligation in-

curred by a person who is or will be thereby

rendered insolvent. is fraudulent as to creditors

without regard to his actual intent if the convey- |

ance is made or the obligation is incurred without

à fair consideration. i 5 : “at