Opinion
Docket Nos. 109045 109046 109047 109048 109084 110818.
1944-10-23
MARGARET W. GALBREATH HENDRICKSON (FORMERLY MARGARET W. GALBREATH), FORMERLY ADMINISTRATRIX OF THE ESTATE OF HUGH J. GALBREATH, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.MARGARET W. GALBREATH HENDRICKSON, FORMERLY MARGARET W. GALBREATH), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.MARGARET W. GALBREATH HENDRICKSON, FORMERLY MARGARET W. GALBREATH, ALLEGED TRANSFEREE OF THE ASSETS OF THE ESTATE OF HUGH J. GALBREATH, DECEASED, AND OF THE ESTATE OF W. C. THOMAS, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.MARGARET W. GALBREATH HENDRICKSON (FORMERLY MARGARET W. GALBREATH), ALLEGED TRUSTEE-GUARDIAN OF MARY MARGARET GALBREATH AND ALLEGED TRANSFEREE OF ASSETS OF THE ESTATE OF HUGH J. GALBREATH, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.MARGARET W. GALBREATH HENDRICKSON (FORMERLY MARGARET W. GALBREATH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ESTATE OF MARY MARGARET DOBSON, NEE GALBREATH, TRANSFEREE, P. T. LOVE, GUARDIAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
George E. H. Goodner, Esq., for the petitioners. R. E. Maiden, Esq., for the respondent.
Held, estate of deceased partner was not liable for deficiencies in unjust enrichment tax arising from reimbursements by the millers from whom flour had been purchased by the partnership. George E. H. Goodner, Esq., for the petitioners. R. E. Maiden, Esq., for the respondent.
These proceedings were brought to redetermine unjust enrichment tax and transferee liabilities of the several petitioners in various capacities.
In Docket No. 109045 the respondent has determined unjust enrichment tax liabilities against the ‘Estate of Hugh J. Galbreath, Deceased, Mrs. Margaret W. Galbreath Hendrickson, Formerly Mrs. Margaret W. Galbreath, Administratrix, ‘ as follows:
+--+ ¦¦¦¦ +--+
Year Tax liability Penalty 1936 $579.00 $144.75 1937 2,145.10 536.28
Hereinafter Mrs. Hendrickson will be called Mrs. Galbreath.
In Docket No. 109046 the respondent determined deficiencies in the amounts of $772 and $2,398.25 and penalties in the amounts of $193 and $599.56, respectively, for the years 1936 and 1937 in unjust enrichment tax liability of Mrs. Galbreath, individually, on the ground that the reimbursements were received by her ‘under a claim of right and without restriction as to their disposition.‘
In Docket No. 109047 the respondent proposed the assessment of the same deficiencies as shown in Docket No. 109045 against Mrs. Galbreath, as her personal liability as fiduciary of the estate of Hugh J. Galbreath, under section 3467, Revised Statutes of the United States, as amended, and also as transferee of the assets of the said estate and of the estate of W. C. Thomas, deceased. The liability of the Thomas estate was determined as follows:
+--+ ¦¦¦¦ +--+
Year Tax liability Penalty 1936 $193.00 $48.25 1937 715.03 178.76
In Docket No. 109048 the respondent proposed to assess against Mrs. Galbreath, as trustee-guardian for Mary Margaret Galbreath, her daughter, transferee of the assets of the Galbreath estate, the same unjust enrichment tax liability as follows:
+--+ ¦¦¦¦ +--+
Year Tax liability Penalty 1936 $579.00 $144.75 1937 2,145.10 536.28
In Docket No. 109084 the respondent determined the liability of Mrs. Galbreath for unjust enrichment tax and penalty for the year 1936 to be $193 and $48.25, respectively, as the purchaser of the interest of Thomas in the Galbreath Bakery. Galbreath owned a three-fourths and Thomas owned a one-fourth interest, respectively, in the Galbreath Bakery. Thomas sold his interest therein to Mrs. Galbreath in 1936.
In Docket No. 110818 the respondent proposed to assess against the ‘Estate of Mary Margaret Dobson, nee Galbreath, Transferee, Mr. P. T. Love, Guardian, ‘ as transferee of the assets of the Galbreath estate, unjust enrichment tax liability as follows:
+--+ ¦¦¦¦ +--+
Year Tax liability Penalty 1936 $579.00 $144.75 1937 2,145.10 536.28
FINDINGS OF FACT.
The petitioner, Mrs. Galbreath, resides in Greenville, Tennessee. P. T. Love, guardian, resides in Athens, Tennessee. All income tax and other returns were filed with the collector of internal revenue for the district of Tennessee.
From some time in 1932 until June 11, 1936, Hugh J. Galbreath and W. C. Thomas owned and operated as a partnership, under the firm name of ‘Galbreath's Bakery‘, a retail bakery business in Morristown, Tennessee. Galbreath owned a three-fourths interest and Thomas one-fourth interest therein. This partnership is sometimes referred to as the ‘original partnership.‘
During 1935 and prior to January 6, 1936, the partnership purchase flour from millers and used such flour in its business. A processing tax had been imposed on the processing of the flour from wheat, as provided in the Agricultural Adjustment Act, as amended. All of the flour so purchased was used by the partnership and the products therefrom were sold prior to January 6, 1936. The processing tax became effective on July 9, 1933, and remained in effect until invalidation of the Agricultural Adjustment Act on January 6, 1936. The prices paid for the flour by the partnership included amounts representing such processing taxes.
The partnership made and sold only bread and cakes. These commodities were manufactured according to written formulae. They were uniform in grades and in materials. The measures and weights of the ingredients were constant. The bread and cakes when baked showed only a slight variance in weight due to the loss of moisture. During 1934 and 1935 no change was made in the formulae, nor in those years were any other changes made in the methods of manufacture in the amounts, weights, or grades of the ingredients, in the sale prices of the products, or in the wrappers in which the products were marketed. The best grade of flour was used for both bread and cakes.
On January 11, 1936, Hugh J. Galbreath died intestate, terminating the partnership of himself and Thomas. After the death of Galbreath, Thomas carried on the business as the surviving partner. Upon Galbreath's death his wife and his daughter, Mary Margaret, a minor (his only child), acquired, in equal portions, his interest in the partnership, pursuant to the laws of Tennessee.
On June 17, 1936, Mrs. Galbreath was appointed administratrix of the estate of her husband by the County Chancery Court of Greene County, Tennessee. F. T. Emerson was appointed guardian ad litem for the daughter and he was succeeded on July 26, 1937, by P. T. Love, the present guardian.
At the date of Galbreath's death the assets of Galbreath's Bakery including real estate and buildings, furniture, fixtures, and equipment cash on hand, merchandise, notes receivable, and accounts receivable, totaled in value $84,259.33; and the liabilities of the business on that date totaled $45,146.79, leaving the net worth of the partnership at $39,112.54.
The legal title to the interest of the deceased partner passed to Mrs. Galbreath as the administratrix of his estate. The equitable interest therein passed to Mrs. Galbreath and her daughter Mary on the basis of one-half each, subject to all rights of creditors of the estate. Mrs. Galbreath, as administratrix, held in trust the legal title to the three-fourths interest of the deceased partner in the partnership.
Immediately after the guardian ad litem was appointed for Mary Galbreath, Mrs. Galbreath made an offer to purchase, as of June 12, 1936, Mary's interest in the bakery business and assets which belonged to the partnership at the time of Galbreath's death. The offer was presented to the Greene County Chancery Court, which appointed a master to investigate and report thereon. The offer was finally approved by the court, and pursuant thereto Mrs. Galbreath paid into the court the sum of $14,667.20 and acquired all of her daughter's one-half interest in the three-fourths interest in the bakery as of June 12, 1936. The court found that the amount so paid represented ‘the full book value of the interest of the minor defendant, Mary Margaret Galbreath, in said partnership. ‘ The amount of $14,667.20 was paid by Mrs. Galbreath to the clerk of the court on November 5, 1936. After deducting fees and costs, $13,992.45 was paid to the guardian of the daughter.
After Mrs. Galbreath acquired her interest in Galbreath's Bakery and arranged for the purchase of Mary's interest, she formed a partnership with W. C. Thomas, the partner of her former husband, as of June 12, 1936, and engaged in the bakery business with him. Her interest in this new partnership was three-fourths and that of Thomas was one-fourth. The partnership operated under the name ‘Galbreath's Baker,‘ the same name used by the original partnership.
On November 30, 1936, Mrs. Galbreath purchased Thomas' interest in the bakery business for $8,500. Payment was made out of her own money. Since that date she has owned and operated the business as its sole proprietor under its original name of ‘Galbreath's Bakery.‘ Thomas died in July or August 1937.
In December 1936 certain millers, vendors of the original partnership, made reimbursements to the order of the Galbreath Bakery aggregating $965 and representing the amounts of processing taxes included in the prices paid by the original partnership for flour purchased and used prior to the invalidation of the Agricultural Adjustment Act on January 6, 1936. Similar payments totaling $3,575.16 were made during 1937. Mrs. Galbreath received both payments and appropriated them to her own use.
On January 7, 1937, Mrs. Galbreath filed her account as administratrix of her husband's estate in the County Court of Greene County. The account showed assets totaling $33,216.06 and a distribution to herself of $14,667.20 as the value of her half of the decedent's interest in the partnership. The balance in her hands was $907.12.
On April 30, 1937, a partnership return was filed for the original partnership covering the period from January 1 to June 11, 1936. On the same day the partnership composed of Mrs. Galbreath and Thomas filed a partnership return for the period from June 12 to November 30, 1936. On the same day the estate of Hugh J. Galbreath, deceased, filed an income tax return for the calendar year 1936, reported income of $3,648.65, and paid the tax thereon.
On April 23, 1937, Mrs. Galbreath filed her income tax return for the year 1936 and included therein the $965 which she had received as reimbursements from the millers, designating such receipt ‘Refd of processing tax.‘ On March 14, 1938, she filed an income tax return for the year 1937 and included the $3,576.16 which she had received from the millers as ‘Refund of processing tax.‘
On May 16, 1938, Mrs. Galbreath filed a form of an unjust enrichment tax return for 1936, as the ‘sole owner of Galbreath Bakery.‘ The return disclosed no unjust enrichment income and hence no tax. She attached to her return the following statement:
This taxpayer did not modify its contracts of sale or adopt a new contract of sale to reflect the initiation, termination or change in amount of a Federal Excise Tax, nor did it at any such time change the sale price of any article by substantially the amount of the Federal Excise Tax on account of such Excise Tax. Nor did it at any time bill any Federal Excise Tax as a separate item to any vendee or indicate by any writing that the sale price included the amount of any such tax, nor did it contract to refund any part of the sale price in the event of recovery of any such tax or decision of its invalidity.
A similar form of unjust enrichment tax return was filed by Mrs. Galbreath for the year 1937, showing no such income or tax. She included comments similar to those appearing in her return for the year 1936.
On February 26, 1940, Mrs. Galbreath filed a claim for the refund of $461.20 representing the income tax paid by her on the $3,575.16 reported in her 1937 return. The claim was rejected by the respondent.
Prior to June 12, 1936, Mrs. Galbreath was not in business and bought no flour. The Galbreath estate bought and sold no flour and did not receive rebates on flour purchased. Mary Galbreath never engaged in business and was a minor on January 31, 1944. Upon her purchase of the Thomas interest in the bakery business Mrs. Galbreath agreed to pay, and paid by the end of December 1936, all outstanding current bills of the bakery.
On October 4, 1939, the respondent wrote a letter to Mrs. Galbreath trading as Galbreath's Bakery, transmitting a copy of his report of investigation of her unjust enrichment tax returns for the years 1936 and 1937. On December 14, 1939, he notified her that a conference with her concerning her liability for the unjust enrichment tax would be held December 27, 1939. On December 22, 1939, he postponed the conference to January 1940. On January 8, 1940, the respondent wrote to the petitioner's attorney stating that it would be necessary to give further consideration to the matter and instructing him to take no further steps until he received further advice from the respondent.
On April 2, 1941, the respondent wrote to Mrs. Galbreath a 30-day letter, informing her of unjust enrichment taxes and penalties against her aggregating $3,962.81 for the years 1936 and 1937. From the statement attached to that letter it appeared that the respondent was fully informed as to the unjust enrichment tax returns filed by her; the death of her husband; the distribution of the Galbreath estate; the purchase of her daughter's interest therein, and the acquisition of the Thomas interest in the partnership on November 30, 1936.
On April 2, 1941, the respondent also wrote a 30-day letter to Mrs. Galbreath, informing her of a further unjust enrichment tax and penalty totaling $241.26, based on her purchase of the said Thomas interest. On the same day he wrote a 30-day letter addressed to ‘Galbreath's Bakery et al.,‘ informing the addressees that they were subject to unjust enrichment taxes and penalties for both years on ‘corrected net incomes‘ totaling $4,540.16 and resulting from the distribution of the reimbursements made by the vendors of the original partnership, and on the same day he also sent a 30-day letter to ‘Galbreath's Bakery,‘ asserting a corrected net income of $965, purporting to be unjust enrichment income received during December 1936.
OPINION.
VAN FOSSAN, Judge:
In these cases the question is whether any of the petitioners are liable for unjust enrichment taxes on payments made to Mrs. Galbreath. Since she returned the amounts received as income in the years of receipt, there is no question of income tax. The respondent claims the unjust enrichment tax under section 501(a)(2) of the Revenue Act of 1936.
SEC. 501. TAX ON NET INCOME FROM CERTAIN SOURCES.(A) The following taxes shall be levied, collected, and paid for each taxable year (in addition to any other tax on net income), upon the net income of every person which arises from the sources specified below:(2) A tax equal to 80 per centum of the net income from reimbursement received by such person from his vendors of amounts representing Federal excise-tax burdens included in prices paid by such person to such vendors, to the extent that such net income does not exceed the amount of such Federal excise-tax burden which such person in turn shifted to his vendees.
It may be stated at the outset that petitioners do not contend that the partnership absorbed the tax and did not shift the burden to its vendees. Some proof to this end was introduced, but it covered only part of the critical period, this fact apparently accounting for the absence of any argument on brief that the partnership absorbed the tax.
Addressing ourselves to Docket No. 109045, it will be found respondent undertakes to fix liability on the estate of Galbreath for three-fourths of the deficiency in unjust enrichment tax and penalty, three-fourths being the share of the partnership owned by Galbreath during his lifetime. He points out that during its existence and prior to January 6, 1936 (the date of the decision of the Supreme Court in United States v. Butler, 297 U.S. 1) the partnership purchased flour from certain millers at prices which included the burden of the processing tax imposed on millers by the Agricultural Adjustment Act, as amended, on the processing of flour from wheat; that on the invalidation of the tax feature of the Adjustment Act there accrued to the partnership the right to make claim for reimbursement of the illegal taxes so exacted by the millers, which right matured into actual reimbursement during 1936 and 1937, after the dissolution of the partnership.
Respondent points out further that on the dissolution of the partnership, occasioned by the death of Galbreath on June 11, 1936, the legal title to this right to reimbursement passed to his administratrix and to Thomas, the surviving partner, in proportion to their respective interests. He contends that the three-fourths interest thus vested in Mrs. Galbreath as administratrix.
It is necessarily implicit in respondent's argument that, when the reimbursements were actually made by the millers, they were paid to and received by Mrs. Galbreath as administratrix as to three-fourths thereof and as the purchaser of Thomas' interest as to the one-fourth formerly owned by him and sold to Mrs. Galbreath on November 30, 1936. I these premises respondent contends that the estate received unjust enrichment net income, is responsible for three-fourths of the deficiency in tax, and, having failed to account therefor and file a return, is liable for the penalty, all in the absence of proof that the partnership did not shift the burden to its vendees. As to the remaining one-fourth formerly owned by Thomas, respondent contends that Mrs. Galbreath stepped into Thomas' shoes and, therefore, received a share of the reimbursement due him in her own right, with attending liability to account therefor.
In reply to the above contention of the respondent, petitioner submits that the estate of Galbreath was never in business, never in partnership, never purchased any flour, never received any reimbursements, and never assumed any liability for unjust enrichment taxes and penalties. To be liable for the tax provided by the quoted section, it is necessary that the person charged shall fit into the language of the statute. When we attempt to do this, we find the facts standing as a complete bar to liability of the estate. The argument advanced by the petitioner is well supported by the facts. It is true that the estate was never in business or in partnership, had no dealings with vendors, never purchased any flour, or received any reimbursements, never assumed any liability for such taxes, and had no net income from such source. In the face of these facts, to hold the estate liable would be to erect a structure solely from assumptions and implications. Such action is not justified. We may thus dispose of Docket No. 109045.
In Docket No. 109046 the respondent determined the deficiencies against Mrs. Galbreath individually on the ground that the reimbursements were received by her ‘under a claim of right and without restriction as to their disposition. ‘ What has been said above as to the necessity for fitting the person charged with the taxes into the statute and our inability to do this as respects the estate of Galbreath all is equally pertinent here. The mere fact that Mrs. Galbreath received the money in some capacity, the exact nature of which appears only by inference, does not make her liable for unjust enrichment taxes. The fact that she received the reimbursements ‘under a claim of right and without restriction as to their disposition,‘ if assumed, does not overcome the weight of all contrary facts in the situation. It is impossible on the facts to fit her individually into the statute.
In Docket No. 109047 respondent proposed the assessment of the same deficiencies shown in Docket No. 109045 against Mrs. Galbreath as her personal liability as fiduciary of the estate of Galbreath, under section 3467, Revised Statutes, as amended, and also as transferee of the assets of said estate and of the estate of Thomas. It goes without saying that if there was no liability against the estate of Galbreath, as we have held above, that estate could pass on no liability to its fiduciaries or its transferees. Little else need be said to dispose of the contentions advanced in support of this proposed action. Since the estate in its own capacity had no liability, it could transmit none to its fiduciary or to the transferee of its assets.
In Docket No. 109048 respondent proposes tp assess against Mrs. Galbreath as trustee-guardian for her daughter and transferee of the assets of the estate of Galbreath the same unjust enrichment tax under consideration in Docket No. 109045. For reasons given above in the immediately preceding docket number, we hold there is no liability on the part of Mrs. Galbreath as trustee-guardian for her daughter. Before there could be a liability against Mrs. Galbreath as trustee-guardian it would be necessary for there to be a liability on the part of the daughter as transferee of the assets of the Galbreath estate. Since, as we have found, there is no liability on the part of the estate, there is no liability on the part of the daughter as transferee of the assets.
A similar disposition on similar reasoning applies in the case of Docket No. 110818, wherein respondent proposed to assess against the estate of Mary Margaret Dobson, nee Galbreath, transferee, P. T. Love, guardian, as transferee of the assets of the Galbreath estate. No additional argument is necessary to dispose of that proceeding.
The sole remaining docket is No. 109084, which respondent concedes is a duplicate of part of the deficiency found in Docket No. 109046 and as to which he determined a liability on the part of Mrs. Galbreath as the purchaser of the interest of Thomas in the Galbreath Bakery. For reasons appearing above, which need not be restated, there is no liability on the part of Mrs. Galbreath as such purchaser.
Respondent points to the fact that Mrs. Galbreath received the reimbursements and converted them to her own use and on this basis argues that she must account for the same in some capacity. We have pointed out that this is a statutory tax and to be liable a person must fit the statutory picture. There is no authority in this Court to stretch the statute so as to encompass an individual who has received payments purporting to represent reimbursements, but who does not otherwise fit into the statutory frame. Since there was no liability for the tax, there are no penalties.
Reviewed by the Court.
Decisions for the petitioner will be entered in Docket Nos. 109045, 109046, 109047, and 109084. Decision of no liability as fiduciary and no transferee liability will be entered in Docket No. 109047. Decisions of no transferee liability will be entered in Docket Nos. 109048 and 110818.