Phillips et al., Executors, v. Commissioner of Internal Revenue
283 U.S. 589 (1931)
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Rule of Law:
A summary administrative procedure allowing the Commissioner of Internal Revenue to collect a dissolved corporation's unpaid taxes directly from a stockholder-transferee does not violate the Due Process Clause of the Fifth Amendment, provided the transferee is afforded an adequate opportunity for a subsequent judicial determination of their liability.
Facts:
- In 1919, the Coombe Garment Company, a Pennsylvania corporation, distributed all of its assets among its stockholders.
- I.L. Phillips, a stockholder, owned one-fourth of the company's stock and received $17,139.61 from the distribution.
- Following the distribution of its assets, the Coombe Garment Company dissolved.
- The Commissioner of Internal Revenue later determined that the corporation had unpaid income and profits taxes for 1918 and 1919.
- After collecting a small portion, an unpaid tax balance of $9,306.36 remained.
Procedural Posture:
- The Commissioner of Internal Revenue sent notice to I.L. Phillips, a former stockholder, proposing to assess and collect the entire remaining tax deficiency of the dissolved Coombe Garment Company from him.
- Phillips' executors petitioned the Board of Tax Appeals for a redetermination of the liability.
- The Board of Tax Appeals held that Phillips' estate was liable for the full amount of the unpaid taxes.
- The executors, as petitioners, appealed the Board's order to the United States Circuit Court of Appeals for the Second Circuit.
- The Circuit Court of Appeals affirmed the Board's order.
- The United States Supreme Court granted a writ of certiorari to resolve a conflict in the decisions of lower courts on this issue.
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Issue:
Does Section 280(a)(1) of the Revenue Act of 1926, which authorizes the Commissioner of Internal Revenue to summarily assess and collect a corporation's unpaid taxes from a stockholder who received the corporation's assets, violate constitutional due process guarantees by not providing for a judicial determination of liability prior to collection?
Opinions:
Majority - Justice Brandeis
No, the summary procedure does not violate constitutional due process guarantees. The right of the United States to collect its revenue through summary administrative proceedings is well-established, so long as an adequate opportunity for a later judicial determination of legal rights is provided. The governmental need for prompt revenue collection justifies the postponement of judicial inquiry. Section 280 provides two adequate avenues for judicial review: the transferee can either pay the tax and sue for a refund, or they can appeal the Commissioner's determination to the Board of Tax Appeals (and subsequently to the Circuit Court of Appeals) before payment. These post-assessment review options satisfy the requirements of due process. Furthermore, a transferee who receives corporate assets is severally liable for the corporation's unpaid taxes up to the value of the assets received, and the government is not required to join all other transferees in the collection proceeding.
Analysis:
This case solidifies the power of the federal government to use summary procedures to collect taxes, extending that power to transferees of a delinquent taxpayer's assets. It establishes that due process in tax collection does not require a pre-deprivation judicial hearing, so long as an adequate post-deprivation remedy exists. This precedent gives the IRS a potent and efficient tool to combat tax avoidance through corporate dissolution, preventing shareholders from escaping corporate tax liabilities by draining the company's assets. The decision prioritizes the government's critical need for revenue collection over the individual's interest in a prior judicial hearing for property-related disputes.
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