Before KERNER, FINNEGAN and LINDLEY, Circuit Judges.
This is a petition to review an order of the Tax Court, which assessed deficiencies against Bates Motor Transport Lines, Inc., for the years 1942 and 1944, and which also declared the transferee liability of Harry F. Chaddick for taxes of the said Bates Corporation in the year 1944.
It appears that during the years in question the individual petitioner, Harry F. Chaddick, was president of Bates Motor Transport Lines, Inc., and also of Standard Freight Lines, Inc., his corporate co-petitioners, both of which were organized under the laws of Illinois. All the petitioners filed their income and excess profits tax returns with the Collector of Internal Revenue, for the first collection district of Illinois, at Chicago. Both corporate petitioners are common carriers of freight by motor transport.
In May of 1942, Chaddick, as president of Bates, hereinafter referred to as taxpayer, entered into a motor freight land-grant equalization agreement with the Quartermaster General of the War Department. Under the terms of this agreement the taxpayer undertook "to protect the government of the United States against any cost in excess of the lowest net land-grant charge lawfully available on such shipment from origin to destination at time of movement derived from lawful rates of common carriers filed with the Interstate Commerce Commission or appropriate State Commission." Taxpayer attempted to ascertain what the applicable land-grant rates were and was advised that they could not be furnished. Taxpayer was told to submit its bills at the prevailing tariff rates and that the General Accounting Office, on an audit of the bills, would determine the applicable land-grant rates, advise taxpayer thereof and make demand for repayment to the government of any excess charges. Thereafter, during the tax years in question, taxpayer proceeded to transport government property. Upon completing deliveries it forwarded its bills with the bills of lading attached, showing transportation charges computed at its prevailing tariffs, to the proper government disbursing officer, who, after payment, forwarded the bills, together with the bills of lading, to the General Accounting Office for audit. The payment to taxpayer by the disbursing officer was made, on an average, about six months after taxpayer submitted its bills. The payments were received by taxpayer without restriction as to their use, were deposited in its general funds, and were subject to check for any purpose taxpayer desired. After taxpayer had been operating for about six months after this arrangement, Chaddick estimated that the rates under the land-grant agreement would average about 17% less than those contained in taxpayer's prevailing tariff rates. He thereupon sought to substitute for the existing agreement one which would give the government a rate 17% below taxpayer's prevailing tariff rates, which taxpayer would use in submitting future bills, but this proposal was rejected.
During the years 1944 and 1945, the General Accounting Office audited all the bills submitted by taxpayer for transportation of government property during 1942. About October of 1945, the Comptroller General announced that it would be the policy of the General Accounting Office to make no demand for refund of payments in excess of the land-grant rates where the excess payment on a bill of lading was $10 or less, unless a repetitive situation was presented; and that this practice was to be followed even where a bill submitted involved several bills of lading and the excess charges totaled more than $10.
As a result of the audit of the bills submitted by taxpayer in 1942, the General Accounting Office determined that overpayments totaling $1,160.32 had been made by the government. These overpayments were recovered by the government in 1944 and 1945 by deductions made from bills submitted by taxpayer and paid in those years. When the time for hearing before the Tax Court arrived, the General Accounting Office had also completed the audit of approximately 80% of the bills submitted in 1944 by the taxpayer, and had determined only one overpayment for that year in the sum of $39.40.
Taxpayer filed its returns on the accrual and calendar year basis. In reporting its taxable income for 1942 and 1944 it reduced its gross operating revenues from transportation of government property by 17% amounting to $7,262.91 for 1942 and $14,117.62 for 1944, on the ground that these amounts represented its estimated liability to the government for excessive billings during those years. It set up on its books a "reserve" account to which it credited these amounts excluded from its taxable income. The Commissioner added these respective amounts to the 1942 and 1944 income of taxpayer, on the ground that the full amount of transportation charges billed to and collected from the government was includible in its taxable income.
This "reserve" account at the end of 1944, when the assets of taxpayer were transferred to Standard Freight Lines, Inc., as hereinafter set out, was carried as a "reserve" account in the books of Standard Freight until 1947 when it was transferred by the latter company to its "surplus" account. Whether or not taxpayer or its successor ever reported any part of this "reserve" account as income does not appear from this record.
The Tax Court held that the taxpayer need not in the taxable years of 1942 and 1944 report the full amounts it collected from the government in those years for transportation charges, but could properly exclude such portion as it was obligated to repay under the land-grant rate agreement. It held, however, that the taxpayer could exclude from its taxable income only the amounts it was actually required to repay, not the much greater amounts it estimated that it might be called upon to repay, because taxpayer's estimates were unsubstantiated and the only evidence of the amounts repayable was that adduced by the Commissioner showing how much was actually paid up to the date of the hearing below.
On the second branch of the case, transferee liability, it appears that on September 18, 1944, taxpayer and Standard Freight Lines, Inc. entered into an agreement, signed by Chaddick as president of both corporations whereby taxpayer was to transfer all its assets to Standard and to liquidate. In consideration thereof, Standard was to assume the taxpayer's liabilities and issue 306 shares of its stock to stockholders of taxpayer on a share for share basis. The agreement was consummated on December 31, 1944, and pursuant thereto Chaddick received 196 shares of Standard stock in exchange for a like number of shares in taxpayer corporation. The shares of Standard issued to Chaddick had a value of $21,303.24. At the time the agreement was consummated taxpayer's assets exceeded its liabilities, exclusive of stock, by $60,275.38. The assets and liabilities of taxpayer were recorded on the books of Standard, and after an adjustment of one account the excess of the assets received over liabilities assumed was reflected on Standard's books as $56,508.72, and Standard's capital stock account was credited with this amount to record the issuance of its shares to taxpayer's shareholders for "Net Tangible Asset Value."
On March 4, 1948, the Commissioner notified Chaddick that a determination of taxpayer's tax liability disclosed deficiencies in income and excess profits taxes for 1944 of $3,360.06 and $1,579.81, respectively, and that the deficiencies, plus interest, constituted Chaddick's liability as transferee of taxpayer's assets. Chaddick denied transferee liability, claiming that no assets were transferred to him. The Tax Court held that Chaddick was not relieved of transferee liability merely because the shares of Standard exchanged for taxpayer's net assets were issued directly to him instead of being first issued to taxpayer and then redistributed to Chaddick on liquidation of the taxpayer corporation.
In the proceeding here the petitioners contend that the amount credited by Bates Motor Transport Lines, Inc. to its "surplus" account in the years 1942 and 1944 were reasonable, and that no tax deficiencies should have been assessed against that taxpayer for those years. It is further urged that the Tax Court erred in its decision that H. F. Chaddick was liable as a transferee for any tax deficiency against taxpayer Bates.
1. In considering the contention on behalf of taxpayer Bates, we must keep in mind the principle announced by the Supreme Court in North American Oil Consolidated v. Burnet, 286 U.S. 417, wherein it was said on ...