Commissioner v. Breyer (151 F.2d 267, 1945)

McALLISTER, Circuit Judge.

These cases, while varying in factual background, present a common question, and are, accordingly, dealt with in the same opinion.

Breyer Cases

Henry W. Breyer died testate March 5, 1936, survived by his wife, son, and daughter. Executors of deceased’s will were the widow, son, Girard Trust Company, and Wilber F. Scott.

Some five years before his death, decedent entered into three separate contracts with his wife, son, and daughter, granting them the right to purchase 50%, 25%, and 25%, respectively, of all the stock of the Henry W. Breyer Company owned by him at the time of his death, at the price of $25 per share. Five months after his death, his widow, son, and daughter, paid to the Executors of his will $200,000, $100,000, and $100,000, respectively, and received therefor 8,000, 4,000, and 4,000 shares of the company’s stock. On the following day, August 6, 1936, the Executors filed an estate tax return for the estate of the deceased, and paid estate tax due thereon of $2,675,396.33.

However, an additional federal estate tax was thereafter assessed by the Commissioner, based on the inclusion in the estate of the 16,000 shares of the company’s stock (which had theretofore been received by the widow and two children for the aggregate payment of $400,000) at their full market value — and of various gifts made in contemplation of death. Pursuant to such assessment, the Commissioner, on July 23, 1938, mailed to the Executors deficiency notice showing deficiency of $10,732,916.16.

Subsequently, on the filing of a petition hy the Executors with the Board of Tax Appeals for redetermination of the deficiency, a stipulation was entered into between the Breyers, the Executors, and the Commissioner, in which the tax deficiency was determined to be $6,036,191.85 (including an allowable credit for state taxes in tire amount of $1,751,264.63). This stipulation was conditioned upon the payment of the aforementioned federal and state taxes with interest, by the Executors, and the widow and children of the deceased in manner as follows: the Executors, to pay $900,788.63 with interest; the widow, $2,-567,701.61 with interest, and each of the two children, $1,283,850.81 with interest— each of the latter, in satisfaction of his “liability at law and in equity as a transferee of the assets of the decedent’s estate.”

These sums were paid in accordance with the stipulation. Thereafter, the Executors paid to the trustees of the three trusts created by the will of the deceased for the benefit of the widow and two children, a total of $3,694,742.55, the last of such payments being made in October, 1939. Upon making such final payment, there remained no more assets of the estate in the hands of the Executors.

In their income tax returns for 1938 and 1939, the widow, the son, and the daughter, claimed as deductions, the sums paid as statutory interest on the deficiencies in the aforesaid estate taxes under Section 23(b) of the Revenue Act of 1938, Section 23(b) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 23(b), which provides that in computing net income for income tax, there should be allowed as deductions all interest paid or accrued within the taxable year on indebtedness. The Commissioner disallowed -the deductions, and determined deficiencies accordingly. On appeal, the Tax Court held that the deductions were allowable and reversed the Commissioner’s determination; and the Commissioner here asks review of such decision.

Koppers Cases

Koppers Company, as sole stockholder, and as transferee, received in liquidation all of the assets of several corporations. During the taxable year of 1938, the company paid deficiencies in taxes of such corporations for prior years and interest thereon.

Claiming that it was liable for the tax deficiencies of the above mentioned corporations, the company contended that the amount of interest which it paid thereon was interest on its own indebtedness, and, as such, was deductible by it under Section 23(b).

The Commissioner of Internal Revenue refused to allow such deductions. On appeal to the Tax Court of the United States, it was held that that part of the interest which accrued on the above described deficiencies subsequent to the date on which the company received the assets of the named corporations, was interest on its own indebtedness and was deductible as interest under Section 23(b), but that the interest which accrued from the due date to the date the property was transferred to the company was not deductible. Both Koppers Company and the Commissioner have appealed from this determination. 3 T.C. 62.

The issue in the foregoing cases is whether the payments of interest on the deficiencies in question were payments on the indebtedness of those paying the interest, and so entitled, under Section 23(b), to deductions for “interest paid or accrued within the taxable year on indebtedness” of the taxpayers.

Counsel for the Commissioner argue that the payments of interest were, in the Breyer cases, payments on the indebtedness of the estate, and, in the Koppers cases, payments on the indebtedness of the prior corporations — and that in no case were such payments of interest made upon the indebtedness of those who paid them. It is conceded that the claimed deductions may not be taken unless the interest was owed upon the indebtedness of the taxpayers. See Scripps v. Commissioner, 6 Cir., 96 F.2d 492, certiorari denied, 305 U.S. 625, 59 S.Ct. 87, 83 L.Ed. 400. Since the payments of interest were made — as claimed by the Commissioner — upon indebtedness not owed by those making the payments, they are, it is insisted, not subject to deduction by such parties, under Section 23(b), in computing their net income.

In arriving at its determination, the Tax Court considered that the question whether the interest was paid upon the obligations of those making the payment or upon the obligations of their transferors depended upon the construction given to Section 311 (a) (1) of the Revenue Act of 1938, 26 U.S.C.A. Int.Rev.Code, § 311(a) (1) which provides:

“(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 deficiency in a tax imposed by this chapter (including the provisions in the case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds) :

“(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 by law) imposed upon the taxpayer by this chapter.”

Disposing of the aforementioned arguments of the Commissioner, and sustaining the contentions of the taxpayers, the Tax Court observed that there was no break in the liability of the transferor corporations, in the Koppers cases, or on the part of the estate in the Breyer cases, to pay their respective deficiencies, with interest thereon from the date prescribed for payment of the tax, to the date on which the deficiencies were assessed. However, it was said that there was a break in the liability of the transferors which the statute imposed as such upon the transferees, and that when the assets were distributed to the transferees, that event measured the “liability of each transferor imposed as such upon the transferee, petitioner, by Section 311, supra. At that time, each transferor owed respondent the amount of its deficiency with interest thereon from the date of its determination. The petitioner took the assets encumbered with those debts. The debts as well as the assets became those of the petitioner. And the interest which thereafter accrued on those- debts was, therefore, interest on the obligations of petitioner.” It was further remarked that the intention of Congress to this effect was disclosed by the legislative history of the statutory section in question, particularly as instanced in the Conference Committee Report No. 356, 69th Congress, 1st Session, under Amendment No. 86, wherein it was set forth that “the liability of the taxpayer for the tax, including all interest and penalties, is fixed as of the time of the transfer of the assets. No further interest subsequently accrues upon such liability as assumed by the transferee, except the interest mider Section 276(b) and (c), 26 U.S.C.A. Int. Rev.Code, § 276(b, c), for failure to pay upon notice and demand after the outlined procedure has been completed and interest at 6% a year for reimbursing the Government at the usual rate for loss of the use of the money due it.” It was accordingly held that the interest on the deficiencies for the period after the transferees received the assets, was paid as interest on the indebtedness of the transferees and was, therefore, deductible from gross income for income tax purposes.

In reviewing the decision of the Tax Court, it is to be observed that the Court emphasized that the statutory provision, Section 311 of the Revenue Act of 1938, “may well be ambiguous,” and further, that “the court cases and those of the Board of Tax Appeals construing the nature and effect of transferee and similar liabilities are not reconcilable. That inconsistency does not result from any difference of opinion as to the extent of the liability of a transferor. It arises in the character and measure of the liability of the transferor collectible as such from a transferee.” In holding that the transferees were entitled to the deductions from gross income for the interest paid, the Tax Court overruled two of its previous cases, at the same time declaring that the contention that the transferees did not owe and pay the interest in question upon their own indebtedness rested upon an attenuated and unjustified application of the trust fund doctrine.

We concur in the determination of the Tax Court, and are of the opinion that its decision should be sustained for two reasons — first, because, in our view, it is intended by the provision of the statute in question, Section 311, that transferees are to be treated the same as any other taxpayers and allowed the deduction for interest paid in the same way as the transferors would be allowed such deduction; and second, because the decision of the Tax Court in these cases seems, peculiarly, to call for application of the rule announced by the Supreme Court in the case of Dobson v. Commissioner, 320 U.S. 489, 64 S.Ct. 239, 88 L.Ed. 248.

With respect to the disposition of the statutory question, it is provided by Section 311 that the liability of a transferee in respect of the tax and interest shall be assessed, collected, and paid in the same manner and subject to the same provisions as in the case of a deficiency against the taxpayer. The procedure prescribed for collection of the tax from a transferee is the same as that followed when payment is sought directly from a transferor. Phillips v. Commissioner, 283 U.S. 589, 51 S.Ct 608, 75 L.Ed. 1289. The transferee is a taxpayer. Phillips v. Commissioner, supra; United States v. Updike, 281 U.S. 489, 50 S.Ct. 367, 74 L.Ed. 984; Routzahn v. Tyrolear, 6 Cir., 36 F.2d 208. Under the statute, the transferee is liable for payment of the interest on the deficiency. That being the case, does he owe it? Is it his indebtedness?

Certainly, the longer he delays payment of the deficiency, the longer he enjoys the use of that amouunt of money. When he finally pays the deficiency, he is liable for the payment of interest thereon until date of payment. It would seem that, in such a case, the transferee would be paying what he owed for the use of the money representing the deficiency — and that such a payment would be on his own indebtedness. If immediately at the time of the transfer of assets, instead of months afterward, the deficiency be paid, it would be the transferee, rather than the transferor, who would be saved the payment of the additional interest. The reference in the above mentioned Conference Report on Section 311 (Section 280 of the Revenue Act of 1926) to the liability for the deficiency as of the time of the transfer of the assets, “as assumed by the transferee” supports the contention that the liability of a transferee, resultant upon a transfer of assets, is an indebtedness on his part to the Government.

Moreover, the amount of the liability for which a transferee is liable is to 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 the tax. Section 311(a), supra. A transferee who retains assets for his own use which, to the extent of a deficiency, belong to the Government, is liable for the interest that would have been otherwise charged against his transferor. Robinette v. Commissioner, 6 Cir., 139 F.2d 285. If interest on the deficiency is to be assessed against, and collected from, a transferee in the same manner and subject to the same provisions and limitations as in the case of a deficiency in the tax, then such interest is to be collected subject to the allowance of that interest, as a deduction to the transferee, in the same manner as would be allowed to the transferor. Some cases appear to emphasize that because the liability for payment of a deficiency and interest thereon on the part of a transferor is secondary, it should not, therefore, be considered that he makes such payment on his own indebtedness. We can see no reason for uncertainty as to the right of deduction upon such ground.

As has been mentioned, the Tax Court held that denial to a transferee of a deduction for interest paid on a deficiency, rest