6321 Conveyances to Related Parties page3

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[62-2 USTC ¶9739] Chicago Federal Savings and Loan Association, Appellee v. Frank S. Cacciatore et al., Appellees. ( United States of America , Appellant.)

Illinois Supreme Court, Docket No. 37093, 185 NE2d 670, 9/28/62, Aff'g Ill. App. Ct., 62-1 USTC ¶9190

[1954 Code Sec. 6321]

Lien for taxes: Priority: Validity against third parties: Property rights of trust beneficiary: Land trust.--Under state law the beneficiary of a land trust had no interest in the real estate held by a trustee under a land trust, but had only an interest in the earnings and proceeds of the land after satisfaction of liens against it. The Government's tax lien attached to the beneficiary's right and was subordinate to mortgage liens which attached to the real estate, even though the mortgages were filed after the Government's tax lien.

William H. Avery, Walter J. Cummings, Jr., William H. Thigpen, 11 S. La Salle St., Chicago 3, David H. Ward, Springfield, Ill. (A. Edmund Peterson, Daniel S. Wentworth, Chicago Title & Trust Co., J. Leonard Higley, 111 W. Washington Blvd., Sidley, Austin, Burgess & Smith, 11 S. La Salle St., Chicago, Ill., of counsel), for appellees. Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson, Joseph Kovner, Department of Justice, Washington 25, D. C. (James P. O'Brien, United States Attorney, Chicago, Ill., of counsel), for appellant.

MR. JUSTICE UNDERWOOD delivered the opinion of the court:

On May 25, 1950, the Mutual National Bank of Chicago , as trustee under a trust agreement dated December 22, 1944, known as trust no. 1371, acquired title from one Jerry C. Lorenz and his wife to a single-family residence in Chicago . On March 8, 1957, Mutual National, as such trustee borrowed $28,500 from Chicago Federal Savings and Loan Association evidenced by its promissory note dated March 8, 1957, and secured by a mortgage and rent assignment on the real estate and acknowledged by an authorized officer of the trustee on March 11, 1957, which mortgage and rent assignment were recorded March 15, 1957. On June 3, 1958, Mutual National as such trustee borrowed $10,000 evidenced by a note payable to bearer, and secured by a trust deed conveying the real estate to Chicago Title and Trust Company as trustee, acknowledged June 5, 1958, and recorded June 10, 1958. This trust deed was specifically subject to the Chicago Federal mortgage. On December 4, 1958, Mutual National as such trustee borrowed $4,535, evidenced by a note payable to bearer, and secured by a trust deed conveying the real estate to Chicago Title and Trust Company as trustee, dated December 4, 1958, and recorded December 17, 1958.

Default having been made in the payments due under the first mortgage, Chicago Federal filed its complaint to foreclose its mortgage on July 21, 1959, making parties defendant Mutual National as trustee under the land trust, Chicago Title and Trust Company as trustee under the second and third mortgages, Frank S. Cacciatore and Lucille M. Cacciatore, as being in possession of the premises and as beneficiaries under the Mutual National trust agreement of December 22, 1944, and numerous other defendants possibly having some interest as judgment creditors, lien claimants or the like, and unknown owners, including the owners of the bearer notes secured by the second and third mortgages. The United States of America was made a defendant as claiming some interest in the premises by virtue of a tax lien for $7,911.57 against Frank Cacciatore, notice of which lien was filed by the Collector of Internal Revenue with the Cook County recorder on July 29, 1957.

The United States of America filed its answer on August 18, 1959, denying its lien is inferior to the lien of Chicago Federal, and asking the court to determine the rights and priorities of the respective parties. Chicago Title and Trust Company as trustee under the second mortgage, and one David J. Peilet as owner of the note secured by the second mortgage, answered admitting the priority of the Chicago Federal mortgage but alleging the second mortgage to be superior to all other claims. One Stephen L. Ruff was added as a party defendant as an assignee of the beneficial interest under the Mutual National trust. He answered admitting his ownership of the beneficial interest in Mutual National trust No. 1371. Thereafter, on October 28, 1959, all other defendants were either defaulted or dismissed, and the cause was referred to the master in chancery. On December 23, 1959, an amended complaint was filed adding additional defendants, none of whom are involved here. At the hearing before the master, all three notes and mortgages and the Federal tax lien were proved and admitted in evidence, and the master in his report found Ronald Wayne & Co., Inc., an Illinois corporation, to be the owner of the Chicago Federal note, mortgage and rent assignment by assignment of February 18, 1960, and Wayne & Co. was substituted as plaintiff.

On July 26, 1960, a decree of sale was entered by the circuit court of Cook County approving the master's report, overruling the exceptions to the report, and directing the sale of the premises by the master. The decree further found Wayne & Co. entitled to $38,903.49 for principal, (including $663 advanced for 1958 real-estate taxes), interest, attorneys' fees and court costs; Peilet, as owner of the second mortgage note, to be entitled to $12,426.64 for principal, interest, attorneys' fees and court costs, subject only to the prior rights of Wayne & Co.; Sam and Vita Dattulo as owners of the third mortgage note, to be entitled to $5,254.33 for principal, interest, attorneys' fees and court costs, subject only to the prior rights of Wayne & Co. and Peilet. The decree further found that Ruff had been the owner of the sole beneficial interest of the trust (Mutual National No. 1371) since December 19, 1958; "subject however to the interest of the United States of America, in said beneficial interest, in the sum of $4,826.31, plus interest at 6% per annum from March 8, 1957, which interest of the United States had attached to the beneficial interest of the trust herein at the time of the recording of the federal tax lien on July 29, 1957, * * *." In defualt of payment, sale by the master was ordered of the mortgaged premises, all subject to the usual redemption provisions, including a specific provision giving the United States of America one year from the date of sale in which to redeem.

United States of America filed notice of appeal from this decree to the Appellate Court, First District, asking that its tax lien "be found and declared to be prior to the rights, claims and interests of all other claimants in this cause, save the holder of the first mortgage * * *." On September 16, 1960, an order was entered by the circuit court making the notice of appeal a supersedeas without bond and staying the execution of the terms of the decree of sale except as to the foreclosure of the first mortgage lien. Thereafter, on December 19, 1961, the Appellate Court affirmed the decree. The United States of America petitioned for leave to appeal to this court, and Peilet and Chicago Title and Trust Company, trustee under the second mortgage, answered the petition for leave to appeal by agreeing that the issues are important and merit review by us, and therefore we granted leave to appeal. No other parties to the litigation appear here.

An examination of the record indicates that the master proceeded to sell the premises to satisfy the lien of the first mortgage, and that the sale produced $2,454.92 after payment of the first mortgage indebtedness and costs. It would appear that this litigation resolves itself to the question of who gets the $2,454.92, it apparently being conceded that both the tax lien of the United States of America and the Peilet second mortgage note amount to more than that sum.

Since the balance of the proceeds of sale will satisfy neither the second mortgage debt nor the Federal tax lien in full, it is unnecessary for us to determine the relative priority of the third mortgage debt and the Federal tax lien, as the point has become moot.

The government questions the payment of subsequently accrued taxes by the first mortgagee, the taxes being for a year subsequent to, and the payment being made subsequent to, the date of filing of the government lien. The government concedes that the first mortgage is prior to the governmental lien which was filed subsequent to the execution and recording of the first mortgage, and the mortgage instrument expressly provides for the payment of after accruing taxes. The rights of the beneficiary were necessarily subject to such after accrued taxes. Since payment of the taxes was made by the mortgagee pursuant to authority given it by the trustee prior to the date of the filing of the governmental lien, there can be no question regarding the propriety of such payment and the precedence thereof over the governmental lien. The beneficiary having previously directed the execution of the first mortgage, and the trustee having previously executed the first mortgage which authorized the mortgagee to make payment of such taxes in order to protect its security, no subsequent action could affect the authority of the mortgagee to make such payments and include the amount thereof in the total secured by the first mortgage lien. Wright v. Langley, 36 Ill. 381; Thackaberry v. Johnson, 131 Ill. App. 463, affirmed 228 Ill. 149.

In addition to the foregoing reasons for holding the subsequently accrued and paid taxes prior to the government lien, there is an entirely separate and independent ground upon which such action may be sustained. The Appellate Court was clearly correct in denying the government's claim for priority over the tax advance on the independent ground that the Federal lien against the trust beneficiary did not attach to the real estate to which the beneficiary had no title under the law of this State as is hereinafter more clearly set forth.

As between the second mortgage of June 3, 1958, and the Federal tax lien, notice of which lien was filed July 29, 1957, against Frank S. Cacciatore, the admitted beneficial owner under the Mutual National land trust until December 19, 1958, the question of priority is an important one, since it goes to the very heart of Illinois land trust transactions and the right of innocent third parties to deal with a land trustee either as purchasers or mortgagees lending upon the sole security of the trust real estate.

The tax lien notice was filed pursuant to sections 6321, 6322 and 6323 of the Internal Revenue Code of 1954 (26 U. S. C. A. 5321 et seq.). Section 6321 provided for a lien for unpaid Federal taxes in favor of the United States "upon all property and rights of property, whether real or personal, belonging to such person." Section 6322 provides the lien imposed by section 6321 shall arise at the time the assessment is made, and section 6323 provides the lien shall not be valid against "any mortgagee, pledgee, purchaser or judgment creditor until notice is filed in the office designated by the law of the state in which the property subject to the lien is situated."

In Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 4 L. ed. 2d 1365, the court said (p. 512): "The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had 'property' or 'rights to property' to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that 'in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property * * * sought to be reached by the statute.' Morgan v. Commissioner [40-1 USTC ¶9310], 309 U. S. 78, 82."

Only when the Federal tax lien has attached to the taxpayer's State-created interests, does the Federal law determine the priority of competing liens against the taxpayer's property or rights to property. United States v. Aquilino [60-2 USTC ¶9538], 363 U. S. 509; United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55, 2 L. ed. 2d 1135. So, in order to determine Cacciatore's "property" or "rights to property", we must look to the contractual documents of the trust in question.

The deed by which Mutual National as trustee took title to the real estate in 1950 provided in part: "The interest of each and every beneficiary hereunder and of all persons claiming under them or any of them shall be only in the earnings, avails and proceeds arising from the sale or other disposition of said real estate, and such interest is hereby declared to be personal property and no beneficiary hereunder shall have any title or interest, legal or equitable, in or to said real estate as such, but only an interest in the earnings, avails and proceeds thereof as aforesaid." It also contained the following:

"In no case shall any party dealing with said trustee in relation to said premises, or to whom said premises or any part thereof shall be conveyed, contracted to be sold, leased or mortgaged by said trustee, be obliged to see to the application of any purchase money, rent or money borrowed or advanced on said premises, or be obliged to see that the terms of this trust have been complied with, or be obliged to inquire into the necessity or expediency of any act of said trustee, or be obliged or privileged to inquire into any of the terms of said trust agreement; and every deed, trust deed, mortgage, lease or other instrument executed by said trustee in relation to said real estate shall be conclusive evidence in favor of every person relying upon or claiming under any such conveyance, lease or other instrument, (a) that at the time of the delivery thereof the trust created by this indenture and by said trust agreement was in full force and effect, (b) that such conveyance or other instrument was executed in accordance with the trusts, conditions and limitations contained in this indenture and in said trust agreement or in some amendment thereof and binding upon all beneficiaries thereunder, (c) that said trustee was duly authorized and empowered to execute and deliver every such deed, trust deed, lease, mortgage or other instrument, and (d) if the conveyance is made to a successor or successors in trust, that each successor or successors in trust have been properly appointed and are fully vested with all the title, estate, rights, powers, authorities, duties and obligations of its, his or their predecessor in trust."

The trust agreements dated December 22, 1944, provides that Frank C. Cacciatore shall be entitled to "the earnings, avails and proceeds of said real estate" for and during the term of his natural life, and after his death "if any property still remains in this trust, then for the use and benefit of his wife, Lucille Cacciatore." It further provides that "the interest of any beneficiary shall consist solely of a power of direction to deal with the title to said property and to manage and control said property as hereinafter provided, and the right to receive the proceeds from rentals and from mortgages, sales or other disposition of said premises, and that such right in the avails of said property shall be deemed to be personal property, and may be assigned and transferred as such; * * *."

Both the trust agreement and the deed to the trustee contain clauses used for many years in the creation of an Illinois land trust. We have recognized the validity of such a procedure to place in the trustee the full, complete and exclusive title to the real estate, both legal and equitable. The trust here is an active trust, and Cacciatore's beneficial interest is personal property as distinguished from real estate by the terms of the recorded trust deed, the trust agreement itself, and by settled Illinois law. Seno v. Franke, 20 Ill. 2d 70; Chicago Title & Trust Co. v. Mercantile Bank, 300 Ill. App. 329; Morrill v. Colehour, 82 Ill. 618.

The government contends that Peilet in dealing with the trust real estate was plainly on notice that it was trust property and hence was bound to look to the terms of the trust which would have disclosed the nature and identity of the beneficial interest. The 1950 deed to the trustee also provides in part: "In no case shall any party dealing with the trustee in relation to said premises * * * be obliged or privileged to inquire into any of the terms of said trust agreement." (Italics added.) Provisions of this type are neither contrary to law nor public policy, and are given effect as a means of enabling third parties to deal with real estate in reliance upon the record title of the land trustee. Large scale real estate developments by land trusts have been made possible only because the financing sources can rely upon the sole security of the trustee's title to the real estate. In this case the record title in Mutual National as trustee was clear and unencumbered excepting for the first mortgage. The loan by Peilet was made on the sole security of the real estate, and to hold that his failure to inquire into the identity and nature of the undisclosed beneficial interests, sacrifices his position as a second mortgagee, would severely dislocate or even destroy local property concepts and relationships.

The basic question here is not as to the nature of the beneficiaries' interest in the trust--this is concededly personal property--nor whether the lien of the government attaches to the real estate itself--concededly, it does not--nor is it as to whether the interest of the taxpayer can be subjected to the claims of his creditors--all parties agree that it can be, either by a creditor's bill, or other appropriate and timely proceedings. The crux of the case as we understand the government's position, is the contention that the lien attached to the rights of the beneficiary-taxpayer at the time the lien was filed. As of that date, July 29, 1957, no encumbrance existed upon the real estate in question with the exception of the first mortgage which the government concedes to be superior to its lien. At that time, pursuant to the provisions of the trust deed and the trust agreement, the taxpayer-beneficiary did have certain rights under the trust indenture, including the right to direct a conveyance of the real estate to himself at any time. Had this been done at that point, the taxpayer-beneficiary would have received the real estate back subject only to the first mortgage and the lien of the government's tax claim which would have thereupon attached. The government, as we understand it, therefore now contends that since its lien attached to the rights of the taxpayer at that time, and the taxpayer had the right to regain the property subject only to the lien of the first mortgage, the government should therefore stand in the taxpayer's shoes, able at the present time to proceed against the real estate, subject only to the rights of the prior encumbrance as of July 29, 1957, to-wit: the first mortgage. We find no fault with this argument as it applies to the date of filing the lien, and the government could well have successfully pursued its remedies at the time. Since this was true, the government now contends that the taxpayer could not thereafter, by his voluntary action, diminish the government's position. The government took none of the steps provided for the seizure of personal property provided by the Internal Revenue Code of 1954, (26 U. S. C. A., section 6331 et seq.). By failing to do so, it placed itself in a position similar to where its lien is filed against a depositor in a bank. While the lien does attach to the depositor's rights in the account, in the absence of a levy a transfer of the account by check or otherwise to a third party who takes it in good faith and for a good consideration, gives to the transferee a claim superior to that of the government. (United States v. O'Dell [47-1 USTC ¶9190], (6th cir.) 160 F. 2d 304; In re Holdsworth, (D. C. N. J.) [53-2 USTC ¶9589], 113 F. Supp. 878; United States v. Eiland, (4th cir.) [55-1 USTC ¶9487], 223 F. 2d 118.) We have before us, however, a situation in which the rights of innocent parties, heretofore secure in an area of stable real-estate law, have intervened and require consideration. The good faith, innocence, and lack of actual notice or knowledge of the second mortgagee is not disputed on this record.

We now come to grips with the real problem in this case. Succinctly stated, it is: Are the exigencies of expeditious revenue collections by the Federal government so extreme as to necessitate a drastic upheaval in real property concepts in this State? The government finds justification for its advocacy of this change in the "paramount claim of federal revenue." That the essential requirement for stability in real property concepts outweighs the need of the Federal government for uniform, expeditious revenue collection methods has been repeatedly recognized by the Federal courts. "We do not conceive it to be an appropriate exercise of the power and authority of a federal court to strike down a rule of property not repugnant to any law of the United States long established in the state, and upon which many valuable property rights are based." ( United States v. Hutcherson, (8th cir.) [51-1 USTC ¶9249], 188 F. 2d 326.) "Rules of property and fixing the incidents of property ownership are rules of state law which the federal courts will respect." ( United States v. American National Bank of Jacksonville , (5th cir.) [58-2 USTC ¶9564], 255 F. 2d 504, certiorari denied, 358 U. S. 835 United States v. Brosnan [60-2 USTC ¶9516], 363 U. S. 237, 4 L. ed. 2d 1192, 80 Sup. Ct. 1108.) "However, when Congress resorted to the use of liens, it came into an area of complex property relationships long since settled and regulated by state law. We believe that, so far as this Court is concerned, the need for uniformity in this instance is outweighted by the severe dislocation to local property relationships which would result from our disregarding state procedures. Long accepted non-judicial means of enforcing private liens would be embarrassed, if not nullified where federal liens are involved, and many titles already secured by such means would be cast in doubt. We think it more harmonious with the tenets of our federal system and more consistent with what Congress has already done in this area, not to inject ourselves into the network of competing private property interests, by displacing well-established state procedures governing their enforcement, or superimposing on them a new federal rule." United States v. Brosnan [60-2 USTC ¶9516], 363 U. S. 237, 242, 4 L. ed. 2d 1192, 80 Sup. Ct. 1108.

The government relies heavily upon United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 2 L. ed. 1135, 78 Sup. Ct. 1054, in support of its position here. However, there are substantial differences which, in our judgment, make Bess readily distinguishable. In the first instance, the government's brief acknowledges that the proceedings in Bess consisted of a creditor's bill brought by the United States to recover from a beneficiary of life insurance policies the amount of Federal income taxes owed by insured at his death. It is conceded in the case at bar that a creditor's bill would have been appropriate if aptly timed. Secondly, the beneficiary of the insurance policies in Bess had taken no action prejudicial to herself in reliance upon State law--here we have an innocent mortgagee who has, in reliance upon the heretofore settled law of this State, disbursed his money upon the sole security of a mortgage from the trustee under a land trust. We cannot agree that this decision is any authority for the present position of the government.

The law of this State and the decisions of reviewing courts for more than 80 years have encouraged public reliance upon the real property concepts exemplified in the land trust now before us. Millions, and probably billions, of dollars have been and now are invested in similar trust arrangements and thousands of titles depend thereon for their validity. While we recognize the needs of the Federal revenue, and the desirability of uniform collection and enforcement methods in this area, we find ourselves in complete accord with the majority opinion in United States v. Brosnan [60-2 USTC ¶9516], 363 U. S. 237, 4 L. ed. 2d 1192, 80 Sup. Ct. 1108, that such needs are "outweighed by the severe dislocation to local property relationships which would result from our disregarding state procedures." We therefore hold that the lien of the United States upon the rights of the trust beneficiary is here subordinate to the subsequently accruing taxes paid pursuant to authority given in the first mortgage, and to the lien of the second mortgage, and that the circuit court and Appellate Court were correct in so deciding. The judgment is therefore affirmed.

Judgment affirmed

 

[82-1 USTC ¶9280] United States of America , Plaintiff v. Charles E. Bruce, et al., Defendants

U. S. District Court, So. Dist. Tex., Civil Action No B-77-284, 1/8/82

[Code Secs. 6321 and 6323]

Liens for taxes: Ownership of property: Collateral estoppel.--The IRS failed to establish that real property titled to an individual taxpayer's investment company was actually owned by the taxpayer. Thus, the property was not subject to a lien to satisfy unpaid federal income and social security taxes of the taxpayer. In a state court action, a bank had previously taken title to the properties to satisfy a judgment against the taxpayer and his company. Later the properties were sold to various third parties. Because the IRS did not claim reliance on this previous judgment that concluded that the company was the alter ego of the taxpayer, there was no evidence either that the property was owned by the taxpayer or that the bank breached a duty to scour the lien records in the name of the taxpayer. Even if the government had invoked the doctrine of collateral estoppel, it was impossible to determine whether the prior judgment was based on the alter ego argument or on the fact that the company aided and abetted a fraud.

Findings of Fact and Conclusions of Law

KOZEN, District Judge:

This case was tried to the Court on a stipulated record. The basic stipulation of facts was filed on July 31, 1981. At a hearing on November 16, 1981, during which the parties argued their legal positions, they further stipulated that the trial record should be supplemented by those exhibits attached to "Trial Brief for the Plaintiff", filed on September 4, 1981. According to Rule 52(a), Fed. R. Civ. P., the Court is obliged to make findings of fact and conclusions of law. The Court now adopts all those facts stipulated by the parties. Some facts will be repeated here only as needed to explain the conclusions of law reached by the Court.

The United States files this suit against Charles E. Bruce, Mary Ann Bruce, Bruce Investment Company, Inc. (formerly Bruce Enterprises, Inc.), Security Bank and Trust Company of Ponca City, Oklahoma, Bob Amos, Mastercraft Homes, Inc., Jack F. and Betty J. Moore, John H. Floyd, and M & T Motors, to foreclose allegedly valid federal tax liens upon four tracts of land located in Hidalgo County, Texas. In 1975, the Internal Revenue Service assessed Charles E. Bruce for the unpaid federal taxes of Tenn-Tex Steel Building, Inc. (hereinafter "Tenn-Tex"). These taxes consisted of income taxes and social security taxes withheld from the wages of Tenn-Tex employees. Pursuant to 26 U. S. C. §6672, Bruce was assessed upon his status as the responsible person of Tenn-Tex who was required to collect and pay the taxes. ¹ The tax liens resulting from these assessments were filed with the County Clerk of Hidalgo County , Texas , on December 15, 1975 and February 3, 1976. 26 U. S. C. §§ 6321 & 6322; V. A. T. S. Tax.-Genn. Art. 1.07C (Supp. 1980). The lien in favor of the United States was upon "all property and rights to property, whether real or personal", belonging to Charles E. Bruce. 26 U. S. C. §6321.

Subsequently, Defendant Security Bank and Trust Company of Ponca City , Oklahoma (hereinafter "Security Bank"), brought suit against Charles E. Bruce, Bruce Investment Company, Inc. (hereinafter "Bruce Investment") and others in the United States District Court for the Northern District of Texas. Security Bank and Trust Co. v. Holman, et al., Civil Action No. 3-75-0260F (N. D. Tex. 1976). That suit was based on a "performance bond" executed by Bruce on behalf of Fabricating, Inc., a corporation owned in part by Bruce. The performance bond was signed by Bruce, individually, with the Town of Grand Junction, Tennessee, for whom Security Bank acted as trustee. On May 21, 1976, judgment was entered in favor of Security Bank against Charles E. Bruce and Bruce Investment Company, Inc., jointly and severally, in the sum of $1,488,650.32. The jury in that case found, inter alia, that Charles E. Bruce was the alter ego of Bruce Investment. On September 6, 1976, Security Bank took a warranty deed to the four tracts of land which are the subject of this suit in partial satisfaction of that judgment. Title to that property was in Bruce Investment. ² Security Bank then sold substantially all of the four tracts to Bob Amos, Mastercraft Homes, Inc., Jack F. and Betty J. Moore, John H. Floyd and M & T Motors.

Federal tax liens pursuant to 26 U. S. C. & 6321 attach to property acquired after the date of assessment as well as property owned at that time, and the lien is effective from the date of assessment. Rice Investment Co. v. United States [80-2 USTC ¶9654], 625 F. 2d 565 (5th Cir. 1980). The Government contends that the instant tax liens attached to the four tracts of land titled to Bruce Investment. Specifically, the Government argues that the property was only nominally held by Bruce Investment Company, Inc., and that Charles E. Bruce had an absolute right to the property when the lien arose. As mentioned above, Bruce Investment was later adjudicated to be the alter ego of Bruce. The Government claims that Security Bank's claim to the property is predicated solely upon that fact. It argues that Security Bank had no direct or independent dealings with Bruce Investment and that therefore any rights in favor of Security Bank must be derived from its claims against Bruce as an individual, the guarantor of the performance bond in favor of Fabricating, Inc.

This case turns on the determination of one critical question, namely whether property titled to Bruce Investment was actually owned by the taxpayer Bruce. The burden of such a demonstration is on the United States . See Hall v. United States [66-2 USTC ¶9643], 258 F. Supp. 173, 174 (S. D. Miss. 1966). The Court concludes that the Government has failed to meet its burden.

The problem is that the Government, in framing what it perceives to be the issues in this case, essentially assumes an affirmative answer to the critical question but without offering any proof. Thus, in its trial brief of September 4, 1981, the Government states:

"At the time the federal tax liens arose the property was owned by the taxpayer, Charles E. Bruce (Bruce), and title was held in the name of Bruce Investment Company, Inc. (Bruce Investment). (Brief, pp. 1, 2) (emphasis added).

The Government then poses the issue of whether Defendant Security Bank could take title to subject property from Bruce Investment free of any obligation to search the lien records in the name of Charles E. Bruce "at a time when it knew Bruce to be the actual owner of the property" (Brief, p. 2) (emphasis supplied). Elaborating on its version of the facts, the Government says:

Bruce Investment Company, Inc., a Texas corporation, was organized and owned by Charles E. Bruce. Bruce Investment was the alter ego of Bruce. (Brief, p. 3).

Obviously, from this premise, the Government's conclusion flows rather easily. The Government concludes that Security Bank "stands in the shoes" of Bruce because the only reason for Security Bank's claim against the properties in question was that "Bruce Investment and Bruce were found to be one and the same party". (Brief, pp. 8-9) (emphasis added).

Notwithstanding the foregoing assertions, the Government has not introduced one whit of independent evidence tending to establish that Bruce and Bruce Investment were one and the same entity. This failure becomes important in view of the Government's repeated insistence, both in briefs and in oral arguments, that it is not relying on offensive collateral estoppel in this case. Therein, it seems, lies the fatal flaw in the Government's position. If in fact the Government is not relying on the jury's verdict in Security Bank's Northern District suit to establish the proposition that Bruce and Bruce Investment are identical, then one must wonder how else this basic premise is established. How else can the Government assert that at the time the federal tax liens arose, "the property was owned by the taxpayer. Charles E. Bruce", or how can it assert the Security Bank had an obligation to search the lien records in the name of Charles Bruce at a time when Security Bank "knew Bruce to be the actual owner of the property"?

Without collateral estoppel, the Court finds nothing in this record to support the Government's fundamental premise. On the other hand, the Court concludes that the doctrine of collateral estoppel does not, in this case, help the Government either. While the Northern District jury did hold that Bruce was the alter ego of Bruce Investment, it also held that Bruce Investment, by and through its officers and agents, "aided and abetted" Charles E. Bruce in a scheme to defraud Security Bank in connection with the performance bond. Upon this verdict, the U. S. District Court for the Northern District of Texas entered a judgment holding Defendant Charles E. Bruce and Bruce Investment Company, Inc., jointly and severally, liable to Security Bank. (From this judgment it is impossible to determine whether Bruce Investment Company relinquished the four tracts on an alter ego theory or as an aider and abetter in the commission of a fraud). Indeed, the two verdicts would seem to contradict each other. Conceptually, if to hold one an alter ego of a corporation is to hold that the corporation has no actual existence other than through the individual, it is difficult to see how the corporation can "aid and abet" that individual in the commission of a crime. As pointed out by the Defendant, if the judgment,

might have been based upon one or more of several grounds, but does not expressly rely upon any one of them, then none of them is conclusively established under the doctrine of collateral estoppel, since it is impossible for another court to tell which issue or issues were adjudged by the rendering court. 1B MOORE 'S FEDERAL PRACTICE ¶0.443[4].

This denial of offensive collateral estoppel effect to unappealed alternate grounds of decision was recently held to be the law of the Fifth Circuit in Hicks v. Quaker Oats Co., No. 80-3537, slip op. at p. 13475 (5th Cir. Dec. 7, 1981). ³

In sum, the basic premise of the Government's case is that subject property was actually owned by the taxpayer, Charles E. Bruce, at the time the tax lien arose. The Government never claimed a lien on any assets belonging to the record owner of the property, Bruce Investment. There being no evidence of the taxpayer's ownership of the claimed property, the Government cannot prevail. Judgment will be entered for the Defendants.

Final Judgment

Based on the Findings of Fact and Conclusions of Law made this day, it is ORDERED that the Plaintiff do have and recover nothing from the Defendants in this case. Costs are taxed to the Plaintiff.

¹ 26 U. S. C. §6672 imposes personal liability on responsible persons who willfully fail to collect or pay over income withholding and social security taxes. The statute was designed to insure that employers would comply with their obligations to withhold those taxes and to pay the sums withheld by subjecting the officers responsible for the employer's purposeful delinquency to civil and criminal penalties. Slodov v. United States [78-1 USTC ¶9447], 436 U. S. 238 (1978).

² Originally, title was held in the name of Bruce Enterprises, Inc. as well as Bruce Investment Company, Inc. It appears that the two companies have subsequently merged under the name of Bruce Investment Company, Inc.

At the time the federal tax liens arose the property was owned by the taxpayer, Charles E. Bruce (Bruce), and title was held in the name of Bruce Investment Company, Inc. (Bruce Investment). (Brief, pp. 1, 2) (emphasis added).

³ Normally, offensive collateral estoppel would be used against a party which had already lost on the same issue in an earlier case. Here, however, despite its disclaimers, the Government is apparently attempting to use against Security Bank a finding from an earlier case which was won by Security Bank. Nevertheless, the Court is convinced that the rationale of Hicks, supra, would also apply to this situation. While Security Bank is the Government's primary antagonist in this case, the fact remains that the Government clearly has no claim to subject property unless it can establish the alter ego theory against the taxpayer, Bruce. Thus, there are two prongs to the Government's approach: (1) that Bruce in fact owned subject property when the lien arose; (2) that Security Bank had knowledge of this fact because of its involvement in the prior suit. The first prong, which is obviously essential, is thus sought to be established by using collateral estoppel offensively against Bruce, the losing party in the earlier case. In that respect, Hicks is fully applicable.

 

 

[75-2 USTC ¶9755]In re Walter M. Curtin, Curtin Industrial Piping, Inc. Bankrupts James S. Brannon, Trustee, Plaintiff v. Massachusetts Mutual Life Insurance Company, Walter M. Curtin and Director Internal Revenue Service, United States of America, Defendants

U. S. District Court, So. Dist. Ill. , No. Div., Bankruptcy Nos. P BK 71 439, P BK 71 248, 8/30/74

[Code Sec. 6321 and U. S. C. A. 70(a)(5) and 1(3)]

Lien for taxes: Insurance cash surrender value: State exemption laws: Priority: Bankruptcy schedule: Pension plan.--The taxpayer's claim to the chsh surrender value of insurance policies purchased pursuant to an employee pension plan that provided for the conversion of pension payments into life insurance policies, were prior to the government's claim to such funds, because the cash values of the insurance policies were exempt from the claims of creditors under the Illinois Statutes. The Court further held that the balance of the conversion account passed to the taxpayer at the time of the employer's bankruptcy and he could have obtained his interest in the conversion account and transferred it within the meaning of the Bankruptcy Act.

Barry M. Barash, Barash & Stoerzbach, 121 S. Cherry St. , Galesburg , Ill. , for bankrupt. Gilbert J. Schroeder, Gilmartin, Wisner & Hallenback, Ltd., 175 W. Jackson Blvd., Chicago, Ill., for Capital Indemnity Corp., Joseph P. Garner, Officer of General Counsel, Mass. Mutual Life Ins. Co., 1295 State St., Springfield, Mass., for Mass. Mutual Life Ins. Co., James S. Brannon, 708 Lehmann Bldg., Peoria, Ill, for trustee in bankruptcy. Max J. Lipkin, Assistant United States Attorney, Peoria , Ill. , Richard F. Mitchell, Department of Justice, Washington , D. C. 20530, for U. S.

Memorandum Opinion Statement of Fact

COVEY, District Judge:

This is a complaint filed by James S. Brannon, Trustee, praying that Massachusetts Mutual Life Insurance Company turn over to him the sum of $11,763.34 in a conversion account and the sum of $8,122.45 which represents the cash values of certain life insurance policies. Both funds came into being and were created pursuant to an employees pension plan which was executed on the 15th day of March, 1967, between Curtin Plumbing and Heating, Inc. now known as Curtin Industrial Piping, Inc., one of the bankrupts herein, and Walter M. Curtin, Carol Jean Curtin and James Alderman as trustees. Under this plan Massachusetts Mutual Life Insurance Company was to act as the insurer.

Pursuant to the plan the company was to pay certain funds periodically to the trustees and they in turn were to purchase life insurance contracts from Massachusetts Mutual on the lives of the employees with a portion of the funds and the balance was to be used to establish a separate investment fund or conversion account. The plan also provided as follows; that the board of directors of Curtin Industrial Piping, Inc. could remove any of the trustees under the pension plan and could appoint their successors; that in the event Curtin Industrial Piping, Inc. be declared bankrupt the pension plan would terminate and the trustees would then pay over to each of the participants in the pension their share of the conversion account; that no participant in the plan would be permitted to anticipate, encumber, alienate or assign any of his interest in the plan except upon the written authority of the trustees.

At all times material, herein, Walter M. Curtin served as an officer of Curtin Industrial Piping, Inc., was a member of its board of directors and owned at least 95 per cent of the stock.

On June 28, 1971, Walter M. Curtin, one of the bankrupts herein, filed a petition for relief under Chapter XIII of the Bankruptcy Act and on May 8, 1972, was adjudicated a bankrupt. James S. Brannon was thereafter appointed trustee.

On April 1, 1971, Curtin Industrial Piping, Inc., one of the bankrupts herein, filed a petition for relief under Chapter XI of the Bankruptcy Act and on March 24, 1972, was adjudicated a bankrupt.

As of the date of adjudication of both Walter M. Curtin and Curtin Industrial Piping, Inc. the value of the interest of Walter M. Curtin in the conversion account was $11,763.34. Also, on the date of adjudication the cash surrender value of the insurance policies purchased by the trustees on the life of Walter M. Curtin was $8,122.45. The beneficiaries of these policies were dependents of Walter M. Curtin.

Walter M. Curtin properly claimed his interest in the life insurance policies as exempt in his bankruptcy schedules.

The Internal Revenue Service has a claim against Walter M. Curtin in the amount of $25,628.03.

The Pleadings

On May 20, 1974, James S. Brannon, as Trustee in Bankruptcy of both Walter M. Curtin and Curtin Industrial Piping, Inc., filed a complaint against Massachusetts Mutual Life Insurance Company, Walter M. Curtin, and Director Internal Revenue Service, United States of America, requesting that Massachusetts Mutual be ordered to pay over to him the amount of Walter M. Curtin's interest in the conversion account and the cash surrender value of the life insurance policies on the life of Walter M. Curtin and the his interest in said funds be declared superior to that of Walter M. Curtin or the Internal Revenue Service. On June 3, 1974, the defendant, Walter M. Curtin, filed an answer admitting the allegations of the complaint but alleging that the cash values of the insurance policies were exempt under Chapter 73, paragraph 850 of the Illinois Revised Statutes and that the amount in the conversion account was exempt from the claims of creditors pursuant to the terms of the pension plan. On June 7, 1974, the United States of America, Internal Revenue Service filed an answer admitting the allegations of the complaint but alleging that while its interest in the respective funds was inferior to that of the trustee that its interest in the cash values of the insurance policies was prior to the interest of Walter M. Curtin. On June 21, 1974, Massachusetts Mutual Life Insurance Company filed its answer setting forth that the amount in the conversion account was $11,763.34 and that the amount of the cash values of the insurance policies on the life of Walter M. Curtin was $8,122.45 and stated that they stood ready to comply with the order of this Court as to the disposition of said funds.

Statement of Legal Authorities

The issues to be determined are first, whether the value of Walter M. Curtin's interest in the conversion account passes to the Trustee in Bankruptcy, and secondly, whether the cash values of the insurance policies pass to the Trustee in Bankruptcy or are exempt and thirdly, whether the claim of the Internal Revenue Service as to the cash values of the life insurance policies is prior to the claim of exemption of Walter M. Curtin.

Statement of Legal Authorities

Section 70a(5) of the Bankruptcy Act is as follows:

"The trustee of the estate of a bankrupt and his successor or successors, if any, upon his or their appointment and qualification, shall in turn be vested by operation of law with the title of the bankrupt as of the date of the filing of the petition initiating a proceeding under this Act, except insofar as it is to property which is held to be exempt, to all of the following kinds of property wherever located * * * * * *

* * * (5) property, including rights of action, which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process against him, or otherwise seized, impounded, or sequestered: * * *"

The general rule as to what property passes to the Trustee under this Section, is stated in Vol. 4A, Collier on Bankruptcy, Page 137-142 as follows:

"The test to be applied under Sec. 70a(5) is twofold: at the date of the filing of the petition in bankruptcy could the property have been (1) transferred by the bankrupt, or (2) levied upon and sold under judicial process against him, or otherwise seized, impounded, or sequestered? This test is simple and easily applied. If neither one of the conditions can be met, the property does not pass to the trustee by virtue of clause (5). Generally speaking, however, it is not necessary that both conditions be satisfied. Aside from an exception created by the Act itself, if the property in question is transferable, it is not essential that it also be subject to levy or seizure. Conversely, if the property is subject to levy and sale or seizure but is not transferable, it is likewise an asset of the bankrupt estate. * * *"

"Transfer" is defined in Section 1(30) of the Bankruptcy Act as follows:

`Transfer' shall include the sale and every other and different mode, direct or indirect, of disposing of or of parting with property or with an interest therein or with the possession thereof or of fixing a lien upon property or upon an interest therein, absolutely or conditionally, voluntarily, or involuntarily, by or without judicial proceedings, as a conveyance, sale, assignment, payment, pledge, mortgage, lien, encumbrance, gift, security, or otherwise; * * *" In Vol. 1 Collier on Bankruptcy, Page 130.29 and following, the author in discussing the above definition of "transfer" states:

"The word 'transfer' has always had a most comprehensive meaning under the Bankruptcy Act and, even under the former more restricted clause, has been construed to include every method of disposing of or parting with property or its possession. Payment of money, even in due course of business, is a transfer. It is immaterial in what form the payment is accomplished; it may be made not only in case but equally by check or by an order drawn by the bankrupt which operates as an equitable assignment of the funds upon which it is drawn. * * *

"Transfer, now even less that under the pre-1938 wording of the definition, is not restricted to a full change of title but includes the creation of security interests by consensual transaction. In particular it applies to the execution of mortgages and deeds of trust, whether covering real estate, chattels or other types of assets, pledges, assignments of accounts receivable trust receipts providing for a security interest in the entruster and security interests under Article 9 of the Uniform Commercial Code. Its extension to the reservation of title in a conditional sales agreement is placed beyond doubt by the Amendments of 1952."

In Pirie v. Chicago Title and Trust Company, 182 U. S. , Page 438, the Court in discussing the meaning of the word "transfer" under the Bankruptcy Act, said:

"* * * 'Transfer' is defined to be not only the sale of property, but 'every other mode of disposing or parting with property.' All technicality and narrowness of meaning is precluded. The word is used in its most comprehensive sense, and is intended to include every means and manner by which property can pass from the ownership and possession of another, * * *"

Applying these decisions and authorities to the instant case it is clear that the interest of Walter M. Curtin in the conversion account passes to the trustee. The plan terminated upon the bankruptcy of Curtin Industrial Piping, Inc. and Walter M. Curtin's interest became payable to him at that time. Therefore, on the date of the bankruptcy of Walter M. Curtin, which was subsequent to the date of the bankruptcy of Curtin Industrial Piping, Inc., Walter M. Curtin was entitled to receive the value of his interest from the trustees under the plan. Therefore, on the date of bankruptcy, Walter M. Curtin could have obtained his interest in the conversion account and transferred it within the meaning of the Bankruptcy Act.

Also, under the terms of the pension plan Curtin with the consent of the trustees could have assigned or transferred his interest in the conversion account. Since Curtin had absolute control over Curtin Industrial Piping, Inc. he therefore had absolute control over the trustees of the pension plan and because of this control could have obtained his interest in the conversion account at any time.

Therefore, both at the time of Walter M. Curtin's bankruptcy and prior thereto he could have obtained his interest in the conversion account and transferred it within the meaning of the Bankruptcy Act. It, therefore passes to the Trustee.

The interest of Walter M. Curtin in the cash values of the insurance policies are clearly exempt under the Illinois Statutes and do not pass to the trustee. See Illinois Revised Statutes, Chapter 73, paragraph 850. Since this property is exempt this Court has no jurisdiction over it and this fund should be paid to Walter M. Curtin. The claim of the Internal Revenue Service to said funds will have to be litigated in another forum.

Order

This matter comes on to be heard upon the complaint of James S. Brannon as Trustee in Bankruptcy of Walter M. Curtin and Curtin Industrial Piping, Inc. against Massachusetts Mutual Life Insurance Company, Walter M. Curtin and Director, Internal Revenue Service, United States of America; and,

All parties having entered their appearance and this Court having considered the uncontested facts, having heard the arguments of counsel and being fully advised in the premises;

IT IS ORDERED, ADJUDGED AND DECREED that defendant, Massachusetts Mutual Life Insurance Company, pay over to James S. Brannon as Trustee in Bankruptcy of Walter M. Curtin, the sum of $11,763.34 representing the amount of said bankrupt's interest in a conversion account arising under the terms of a certain pension plan wherein Curin Industrial Piping, Inc. was the company and the Massachusetts Mutual Life Insurance Company was the insurer and Walter M. Curtin was the participant.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that Massachusetts Mutual Life Insurance Company pay over to Walter M. Curtin the cash surrender values of the following four insurance policies which were purchased on the life of Walter M. Curtin pursuant to the provisions of said pension plan.

Policy No. 4 699 770

Policy No. 4 360 537

Policy No. 4 261 676

Policy No. 4 584 504

 

 

[62-2 USTC ¶9725] United States of America , Plaintiff v. F. B. Carter, III, Trustee in Dissolution; Norman Jemal, Ltd., et al., Defendants

U. S. District Court, Dist. Hawaii, Civil No. 1673, 8/29/62

[1954 Code Secs. 6321 and 6323]

Lien for taxes: Ownership of leasehold: Bill of sale construed.--A corporation, organized by an individual to take over two businesses which he had conducted, and to which he had executed a bill of sale, covering a lease of land on which a building was to be constructed, was found to be the owner of the leasehold and building, so that the property was not subject to a lien for tax deficiencies later assessed against the individual and his wife. Although there was no formal assignment of the leasehold until after the tax liabilities arose, the bill of sale and other circumstances were sufficient to impress the leasehold and improvements with a trust in favor of the corporation.

Herman T. F. Lum, United States Attorney, Honolulu , Hawaii , for plaintiff. Richard K. Sharpless, 500 Gasco Bldg., 1060 Bishop St., Honolulu, Hawaii, for F. B. Carter, III. Ronald B. Greig, Deputy Attorney General, Tax Office Bldg., Room 211, Honolulu, Hawaii, for Territory of Hawaii. Harold S. Wright, Bishop Trust Bldg., Honolulu , Hawaii , for Peat, Marwick, Mitchell & Co. James M. Richmond, Bank of Hawaii Bldg., Honolulu , Hawaii , for General Handkerchief Corp., A. B. Chabot & Co., Inc. & James Betesch & Co.

Decision

I. Definitions

TAVARES, District Judge:

In this decision the following terms have the following meanings, unless otherwise specified:

"Carter" means the defendant, F. B. Carter, III, Trustee in Dissolution of Norman Jemal, Ltd., a Hawaii corporation.

"Corporation" means Norman Jemal, Ltd., a Hawaii corporation, now dissolved.

"Jemal" means Norman N. Jemal, president and major stockholder of the corporation.

"Mrs. Jemal" means Mrs. Sally Jemal, wife of Jemal and a minority stockholder in the corporation.

"Fase" means the defendant, Earl Fase, Tax Commissioner of the Territory (now State) of Hawaii .

"Fase's brief" means the memorandum on behalf of Fase and other defendants filed herein May 4, 1962.

"ASF" means the "Statement of the Case and Exhibits 1 through 8A," including an Agreed Statement of Facts, signed by counsel for all the interested parties and filed herein on March 8, 1962, and the Stipulation to Amend Portion of Statement of the Case filed herein on August 15, 1962.

"Interested parties" means the plaintiff, and the defendants other than those who have disclaimed or been defaulted.

"IRS" means the Internal Revenue Service of the United States or the Commissioner of Internal Revenue or his duly authorized subordinate or subordinates.

Any reference to an exhibit, unless otherwise specified, means an exhibit attached to and incorporated by reference in the ASF and means the original of which the exhibit is a copy.

II. Nature of the Case

This is a suit brought by the United States of America, plaintiff, against F. B. Carter, III, hereinafter called Carter, as Trustee in dissolution of Norman Jemal, Ltd., a Hawaii corporation, and certain other defendants, seeking to collect Federal income and other tax claims, and to determine priority of claims against a fund of about $125,000 held in escrow by the defendant, Carter.

The matter has been submitted to this court for determination on an Agreed Statement of Facts, as amended, signed by counsel for all interested parties, excluding defendants who have either disclaimed or against whom defaults have been entered. This court has jurisdiction under 28 U. S. C. §§ 1340 and 1345.

The aggregate of the plaintiff's Federal tax claims is as follows:

1. Against the corporation, total of

plus interest; ...........................         $45,882.63

2. Against Jemal, individually, a

total of

plus interest; ...........................          75,372.39

3. Against Mrs. Jemal, individually,

a total of

plus interest; ...........................           2,618.51

4. Againt both Jemal and Mrs. Jemal

jointly, a total of

plus interest. ...........................           2,160.61

 

The claims of the other remaining defendants who have not disclaimed or been defaulted are as follows:

1. Claims of Fase against the corporation

for Territorial (now State)

taxes, in the following amounts:

a. Compensation and dividend tax

amounting to

plus interest, and ............................          $ 491.60

b. General excise tax amounting to

plus interest. ................................          8,649.34

2. Claims of the other creditors of the

corporation in the following

amounts:

a. Peat, Marwick, Mitchell & Co.,

(a partnership), for accounting

and tax services

plus interest .................................         $4,560.95

b. James Betesch & Co.

plus interest. ................................          2,474.85

c. A. B. Chabot & Co., Inc.

plus interest. ................................          2,675.23

d. General Handkerchief Corp.

plus interest. ................................          4,851.55

 

The suit arises by reason of the fact that practically the sole remaining asset of the defendants, Jemal, Mrs. Jemal, the corporation and/or Carter as such Trustee, out of which any of the above-mentioned claims can be paid, is or was the leasehold, including improvements thereon, which leasehold and improvements as stated in the Complaint, were sold by Carter for the sum of $125,000 under an escrow agreement between the District Director of Internal Revenue for the District of Hawaii, the Tax Commissioner of the Territory (now State) of Hawaii and Carter, a copy of which is attached to the ASF as Exhibit 5.

The proceeds of the sale of the lease and improvements, amounting to approximately $125,000, are now being held by the defendant, Carter, under the terms of that escrow agreement and it is necessary to determine the priorities of the various claims involved in this action because the total amount of all the claims plus interest against the fund exceeds the amount of the fund.

III. Findings of Fact

The various material events or transactions bearing on the present question, took place as follows:

1. The lease in question was executed by Jemal individually as lessee, and the Executors and Trustees under the Will and of the Estate of James Robinson, deceased, under date of February 15, 1947. It covered certain real property located at Fort and Pauahi Streets, Honolulu, Hawaii, was for a term of 60 years, required that by or before January 1, 1950, the lessee would construct on the leased premises a building costing at least $100,000 and gave the lessee the right to assign the lease to a corporation of which the lessee was the majority stockholder. A copy of the lease is attached to the ASF as Exhibit 1. The lease on its face indicates that the land covered thereby is covered by a pending application to register the same in the Land Court of the Territory of Hawaii (under the Hawaii Torrens law) and in fact the land was, on June 17, 1947, so registered under original Certificate of Title No. 38193, issued in Land Court Application No. 1473. (ASF p. 3, para. 1 as amended.)

2. On April 1, 1947, Jemal caused to be created the said Hawaii corporation, known as Norman Jemal, Ltd., of which he became, and remained until the corporation was dissolved, the president and principal stockholder, owning 22,297 out of a total issued capital stock of 25,000 shares of $10 par value each. Mrs. Jemal was, during the same period, vice-president and owner of 2,700 shares of the capital stock of the corporation, leaving only three qualifying shares held by three other persons. (ASF p. 3, para. 2; Exh. 2; Exh. 6, para. V B.)

[Corporation as Owner of Leasehold Improvements]

3. a. The corporation was organized for the purpose, among other things, of taking over the assets and operation of the merchandising businesses previously operated by Jemal in two stores on Fort Street under the names of "Jemal & Co." and "Jemal's House of Linens." (Exhs. 2 and 3.) It in fact did take over the assets and operation thenceforth of both of said merchandising businesses (ASF p. 3, para. 2), a bill of sale (Exh. 3) under date of April 21, 1947, having been executed and delivered by Jemal to the corporation on the same date as the filing of the Affidavit of Incorporation. (Exh. 2.)

b. Attached to the Affidavit of Incorporation (as Schedule A thereof) as required by RLH 1945, Section 8308 ¹ is a balance sheet of the two merchandising businesses showing the assets of these businesses as of March 31, 1947, with an aggregate value of $281,891.58, including under the subheading "Investment," an item reading "Land and building (To be conveyed to Norman Jemal, Ltd.) . . . $40,000."

c. The building required by the lease to be constructed by the lessee was in fact constructed by and at the expense of the corporation at a cost of about $200,000, the construction being completed somewhat later than contemplated by the language of the lease but before the assessments in question and without affecting the validity of the lease.

d. No formal assignment of the lease, other than the bill of sale (Exh. 3), which was apparently never filed with the Assistant Registrar of the Land Court of the Territory (now State) of Hawaii, ² was executed until the formal assignment of lease (Exh. 4), of September 11, 1956, (mentioned in para. 13, post) was executed and filed, and noted on succeeding Transfer Certificate of Title No. 42133 (ASF, p. 3, para. 1, as am.). Under RLH 1945, Section 12649, hereinafter quoted, legal title to the leasehold did not actually pass until the formal assignment (Exh. 4), was accepted and filed by the Assistant Registrar of the Land Court . However, since unrecorded documents can operate as contracts between the parties, under the same statute, the bill of sale (Exh. 3), and other circumstances would be sufficient to impress the entire leasehold and improvements with a trust in favor of the corporation, as hereinafter stated under Conclusions of Law.

e. Moreover, as stated in ASF p. 4, para. 7, in his sworn Petition to the Tax Court (Exh. 6), Jemal stated that the lease and building belonged to the corporation. Also, as a part of the settlement which determined the tax liabilities of Jemal, Mrs. Jemal and the corporation, hereinafter mentioned, Jemal was required by the government to, and did, "reaffirm those allegations in a written statement and . . . agree that the leasehold could be used to satisfy any taxes determined to be due by the corporation." The same agreement was also signed by Mrs. Jemal. (ASF p. 4, para. 7; See, also, Exh. 8, dated Sept. 5, 1956, filed with the IRS, Sept. 11, 1956).

f. Exhibit 8 states, among other things, as follows:

"The undersigned, Norman Jemal, individually and as president of Norman Jemal, Ltd., hereby expressly affirms the sworn statement made by him in the petition to the Tax Court . . . Docket No. 54560, dated September 7, 1954, to the effect that a certain lease entered into on February 15, 1947 . . . as well as all improvements thereon and income therefrom, are the property of the undersigned, Norman Jemal, Ltd. . . . and are not the property of the undersigned, Norman Jemal.

"The undersigned, Norman Jemal, individually and as president of Norman Jemal, Ltd., also expressly affirms the sworn statement made by him on January 28, 1955, in the protest by him . . . to the District Director . . . to the effect that while there was no written assignment of the above-mentioned lease from Norman Jemal and Norman Jemal, Ltd., upon its incorporation on April 1, 1947, the lease and the building which was constructed on the leased land . . . at a cost of approximately $216,000.00 are the property of Norman Jemal, Ltd., and that the corporation exhibits filed with the Treasurer, Territory of Hawaii, have shown the property as belonging to the corporation, Norman Jemal, Ltd."

g. Furthermore, the agreement (Exh. 8), which was the basis for the stipulated decree of the Tax Court entered on November 13, 1956 (Exh. 7), stipulated that, in consideration of the settlement of the Federal income tax balance of Jemal personally as alleged transferee on the basis that there was no transferee liability (which on its face would presuppose that Jemal had, on September 5, 1956, no beneficial interest in the lease and improvements) Jemal, individually and as president of the corporation agreed to pledge the lease and building as security for the payment of the deficiencies in Federal income tax of the corporation and agreed "to waive whatever rights, legal or otherwise, he may have in this matter as the purported lessee of the premises . . ."

h. Further, the agreement (Exh. 8), stipulated that Jemal, individually and as president of the corporation, agreed to assume full liability for the payment of said income tax deficiencies of the corporation "in the event of the dissolution or liquidation of the corporation or any other occurrence whereby assets of" the corporation "would revert to him, and to satisfy such liability to the fullest extent out of the income from the leased premises . . . and the improvements thereon, and/or from the proceeds from the sale or other disposition, in full or in part, of such properties, and to pledge the . . . lease and the building . . . as security for the payment of these tax deficiencies."

[Deficiency Assessments]

4. In January, 1954, Federal income taxes for 1943, 1944 and 1945 were assessed against Jemal individually, totalling about $68,000. (ASF p. 5, para. 8.)

5. In February, 1954, jeopardy assessments of Federal income taxes for the fiscal years 1948, 1949, 1950 and 1951 were assessed against the corporation, totalling in excess of $230,000, including penalties. (ASF p. 4, para. 7; Exh. 8A.)

At the same time, jeopardy assessments were made against Jemal individually as alleged transferee on the theory that he was transferee of the corporation to the extent of the value of the building erected on the lease, which ostensibly stood in his name. (ASF p. 4, para. 7, Exh. 6.) This assessment against Jemal as alleged transferee was later settled, as hereinbefore stated, by a settlement in which the IRS agreed that there was no transferee liability.

6. In February, 1954, assessment lists for the jeopardy assessments against the corporation mentioned in paragraph 5, other than for the fiscal year 1950, were received by the IRS and Notices of Lien were filed with respect thereto. (Exh. A attached to Complaint.)

7. In April, 1954, notice of deficiency assessments for the fiscal years 1948, 1949, 1950 and 1951, totalling in excess of $230,000, including penalties, was sent by registered mail to the corporation. (Exh. 8A, letter dated April 12, 1954, attached.)

8. On May 11, 1954, a general excise tax liability to the Territory of Hawaii in the amount of $4,252.88, plus penalty of $199.86, accrued against the corporation. (Answer of Fase, p. 3, para. 4.)

9. On July 29, 1954, a general excise tax in the amount of $1,654.02, plus $164.51 interest also accrued against the corporation. (Answer of Fase, p. 3, para. 4).

10. In September, 1954, petitions or amended petitions were filed in the Tax Court of the United States , in Docket Numbers 54560 and 54561, by Jemal and the corporation respectively, for redetermination of deficiencies assessed as stated, supra, in paragraphs 6 and 7. The issues raised by the Federal income tax assessments and the Tax Court petitions mentioned above were ultimately settled by a stipulated Tax Court decision entered November 13, 1956, (ASF p. 4, para. 7, Exh. 7), hereinafter further discussed. (See para. 15, infra).

11. On February 8, 1955, a compensation and dividends tax against the corporation in favor of the Territory accrued in the amount of $165.33, plus penalty of $16.53 and interest. (Answer of Fase, p. 2, para. 2).

12. On April 13, 1955, a general excise tax against the corporation and in favor of the Territory accrued in the amount of $498.67, plus penalty of $49.87 and interest. (Answer of Fase, p. 3, para. 4).

13. On September 5, 1956, Jemal and Mrs. Jemal signed and swore to an agreement for the settlement of the taxes involved in both petitions before the Tax Court, Docket Numbers 54560 and 54561, whereby the liability of the corporation for the deficiency taxes was fixed in the amount of $37,611.85, plus $1,651.24 penalty. (ASF p. 4, para. 7; Exh. 8). This settlement agreement (Exhibit 8), was filed in the appellate division of the IRS office on September 11, 1956. On the same date, September 11, 1956, Jemal executed a formal assignment of the lease to the corporation and the same was filed with the Assistant Registrar of the Land Court on or about the same date. (ASF p. 3, para. 1 as am., and para. 4; Exh. 4).

14. On September 13, 1956, the corporation was dissolved and Carter was appointed Trustee for the creditors and stockholders of the corporation. (ASF p. 3, para. 4).

15. On November 7, 1956, counsel for the IRS and for the corporation and Jemal executed a stipulation pursuant to which the decision of the Tax Court was entered on November 13, 1956, whereby the dispute covered by Docket No. 54561 was finally determined as stated above, finding a total liability of the corporation for the delinquent taxes in the amounts set out in paragraph 13 supra for the years concerned. (ASF p. 4, para. 7; Exh. 7).

16. On November 20, 1956, an additional compensation and dividends tax against the corporation and in favor of the Territory accrued in the amount of $210.65, plus penalty of $21.05 and interest. (Answer of Fase, p. 2, para. 2).

17. On November 30, 1956, Federal income tax assessments against Jemal and Mrs. Jemal for tax years 1947 and 1948, individually for 1947 and jointly for 1948, in a total of about $12,500, were received in the IRS office, Notice and Demand therefor issued December 3, 1956, and Notices of Lien were filed January 31, 1957. (ASF p. 5, para. 8; Exh. B attached to Complaint).

19. On December 27, 1956, an additional general excise tax in favor of the Territory and against the corporation accrued in the amount of $54.29, plus interest. (Answer of Fase, p. 3, para. 4).

20. On January 31, 1957, the IRS filed Notices of Liens for the taxes assessed as stated in paragraph 18, supra. (Exh. A attached to Complaint).

21. In January of 1957, Carter negotiated a sale of the lease and improvements for $125,000. In order to secure this price, it was necessary to sell the leasehold and improvements free and clear of all tax liens. Since both the IRS and Fase claimed tax liens on the same property, it was necessary to secure releases from both. Accordingly, an agreement was signed by the District Director of Internal Revenue and Fase as Tax Commissioner, agreeing to such sale free of tax liens and transferring their respective tax liens to the proceeds of such sale, it being agreed that such proceeds should be held by Carter in escrow, pending determination of the rights of the United States and the Territory to the fund. (See escrow agreement dated February 20, 1957, ASF Exh. 5 and ASF p. 4, paras. 5 and 6).

22. As contemplated by the escrow agreement, supra, the United States filed suit as plaintiff in the above-entitled matter on June 10, 1958, bringing in as defendants Carter, Fase and the other defendants. Subsequently, the defendants, Territorial Collectors and City Transfer Co., Ltd., filed Answers and Disclaimers and the defendants, Jemal, Mrs. Jemal, Frank Nichols, Ltd., and Walter T. Fujikami, failed to file Answers, and defaults were entered against them. This left as the interested defendants Carter and Fase and, in addition, four other defendants who in effect claimed as general creditors of the corporation.

23. On March 8, 1962, the ASF was filed herein, and on August 16, 1962, the ASF was amended by stipulation.

IV. Conclusions of Law

1. The balance sheet attached, as Schedule A thereof, to the Affidavit of Incorporation (Exh. 2), must be read in connection with the requirements of RLH 1945, Section 8308, supra, footnote 1, the evident purpose of which was to require a disclosure, to persons then or thereafter dealing with the corporation, of its capital structure, especially where the corporation took over the assets of an existing business in return for capital stock. Thus read, the item, "Land and building (To be conveyed to Norman Jemal, Ltd.) . . . $40,000.00," clearly appears to cover the leasehold then held by Jemal personally and indicates that he intended, as of March 31, 1947, to convey this leasehold to the corporation to be formed (and which was formed less than a month thereafter on April 21, 1947), in return for fully paid capital stock to be issued to him and his wife for these and the other assets listed.

It is to be noted that the proposed capitalization of the company was to be $250,000 and that hence the valuation of $281,891.58 shown by the balance sheet would have to include the $40,000 evaluation of the leasehold and building in order to make up the $250,000 of fully paid capital stock to be issued. Furthermore, the bill of sale, a copy of which was required to be filed with the Affidavit of Incorporation under said Section 8308, purported to convey to the corporation all of the assets of Jemal & Co. and Jemal's House of Linens "as shown on Schedule A hereto attached and made a part hereof." (Exh. 3).

In this connection this court disagrees with the arguments in plaintiff's memorandum and agrees with those of the defendants, Fase and others, and holds that the words of futurity--to wit--"(To be conveyed to Norman Jemal, Ltd.)," (italics suppplied)--contained in the balance sheet (Sch. A), are not inconsistent with an intent to make a present conveyance by the bill of sale of the leasehold, for the balance sheet on its face obviously speaks as of an earlier date than the bill of sale. Hence, there is no inconsistency. Reading the balance sheet and the bill of sale together, along with the requirements of the statute, renders this intention clear. To hold otherwise would require a holding that the parties acted illegally and in violation of the statute. ³ There is always a presumption that parties have acted legally and in this case there is nothing in the ASF to rebut that presumption. Rather, the evidence clearly supports the presumption.

2. Accordingly, as between the parties, i.e., as between Jemal on the one hand and the corporation on the other, this court holds that the bill of sale itself (Exh. 2), was intended, and, had the land covered by the lease not been registered land, the bill of sale would have been sufficient, (a) either to convey to the corporation the leasehold or (b) to constitute a specifically enforceable contract to convey the leasehold to the corporation and to constitute Jemal as trustee of a constructive or resulting trust for the benefit of the corporation.

3. Having determined what would have been the status of the leasehold property, but for its being registered land, i.e., land registered under our so-called Torrens Law or Land Court Registration statutes, ⁴ we must next consider the effect of those statutes, (RLH 1945, Chapter 307), particularly Section 12649 thereof, which provides that:

"An owner of registered land may convey, mortgage, lease, charge or otherwise deal with the same as fully as if it had not been registered. He may use forms of deeds, mortgages, leases or other voluntary instruments like those now in use and sufficient in law for the purpose intended. But no deed, mortgage or other voluntary instrument, except a will and a lease for a term not exceeding one year, purporting to convey or affect registered land, shall take effect as a conveyance or bind the land, but shall operate only as a contract between the parties, and as evidence of authority to the registrar or assistant registrar to make registration. The act of registration shall be the operative act to convey or affect the land, and in all cases under this chapter the registration shall be made in the office of the assistant registrar in the bureau of conveyances. The land court may provide by its rules for fomrs of conveyances respecting registered land." (Italics supplied)

4. In this connection, one of the statutes mentioned provides the answer to this phase of the question. RLH 1945, Section 12667 provides that:

"Whoever claims an interest in registered land by reason of any implied or constructive trust shall file for registration a statement thereof with the assistant registrar. The statement shall contain a description of the land, and a reference to the number of the certificate of title and the volume and page of the registration book where it is entered. The claim shall not affect the title of a purchaser for value and in good faith before its registration." (Italics supplied).

This statute places Hawaii in the same category as other jurisdictions which hold, generally, that only purchasers for value and in good faith, i.e., without notice, are protected, even as to registered land, as against existing but unregistered equities in the land in favor of other persons. 7 C. J. S., Registration of Land Titles, 548, Section 35c(2). For the purposes of this case the United States , represented by the IRS, can not be considered as such a "purchaser for value and in good faith", but can only stand in Jemal's shows.

5. The court agrees with the principle, stated in the brief of Fase and other defendants, page 11, that "The sufficiency of the Bill of Sale is a matter for determination under Hawaiian law" Aquilino v. United States (1959), [60-2 USTC ¶9538] 363 U. S. 509, 512-514; Commissioner v. Stern (1958), [58-2 USTC ¶9594] 357 U. S. 39, 45; United States v. Bess (1958), [58-2 USTC ¶9595] 357 U. S. 51, 53.

6. The decisions ⁵ cited in the brief of Fase and other defendants, pages 12 to 18, fully support this court's conclusions as to the effectivenss of the bill of sale to convey title to the leasehold as between Jemal and the corporation, except as that conclusion might be adversely affected by the Land Court Registration statutes. As already stated, supra, even these statutes do not change the result.

7. If the corporation were technically, as well as beneficially, the legal owner of the leasehold when the Federal tax liens for the taxes of Jemal and/or Mrs. Jemal became effective, the leasehold would not be subject to such liens and the claims even of general creditors of the corporation would be entitled to satisfaction out of the corporate assets before any distribution to the stockholders or creditors of stockholders. The priorities of the parties as against the plaintiff are controlled by Title 26, U. S. C., §§ 6321 and 6323, the pertinent portions of which read as follows:

"Section 6321. Lien for Taxes. If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

"Section 6323. Validity against mortgagees, pledgees, purchasers, and judgment creditors. (a) Invalidity of lien without notice.--Except as otherwise provided in subsection (c), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate--." (Italics supplied).

As stated in the government's memorandum, pages 1 and 2:

"Under section 3670 of the Internal Revenue Code of 1939 and section 6321 of the Internal Revenue Code of 1954, if any person liable to pay any tax neglects or refuses to pay after demand, the amount due becomes a lien in favor of the United States upon all property and rights to property belonging to such person. If the tax was assessed prior to January 1, 1955, section 3671 of the 1939 Code governs, and the lien arises at the time the assessment list was received by the collector and continues until the liability is satisfied or becomes unenforceable by reason of lapse of time. If the tax is assessed after January 1, 1955, the lien arises upon assessment and continues until the amount is satisfied or becomes unenforceable by reason of lapse of time. Section 6322, Internal Revenue Code of 1954.

"The federal tax lien is fully effective upon assessment, or when the assessment list is received, except as to mortgagees, pledgees, purchasers, or judgment creditors." (Italics added).

8. Thus, it will be seen that both the government and the other interested parties agree, and properly so, that purchasers of the leasehold from Jemal prior to the effective dates of the Federal liens would be protected against any Federal liens claimed against Jemal individually.

9. This court, again, agrees with the contention set out in the memorandum of Fase and other defendants and with the authorities therein cited, pages 19-23, that the corporation was at least a purchaser of the property and that, if the bill of sale was technically insufficient to transfer to the corporation legal title to the leasehold, it at least was sufficient (a) either to constitute an irrevocable and specifically enforceable contract by Jemal to convey the leasehold to the corporation or (b) to constitute Jemal a mere holder of the naked title for the benefit of the corporation and, under the principle of equitable conversion, to constitute Jemal trustee of the title for the benefit of the purchaser. ⁶

10. For the foregoing reasons, this court holds that the plaintiff is not entitled to any part of the fund except for the taxes of the corporation itself, plus interest, and except to the extent that Jemal and Mrs. Jemal might be entitled, as stockholders of the corporation, to portions thereof.

The foregoing Findings of Fact, insofar as they may qualify as Conclusions of Law, are also adopted as Conclusions of Law and the foregoing Conclusions of Law, insofar as they may qualify as Findings of Fact, are also adopted as Findings of Fact.

Inasmuch as there is some uncertainty in the record as to the amounts retainable by the trustee, Carter, for "reasonable and customary fees and expenses of sale" and as to the exact amount available in the escrow fund for distribution, the successful parties are instructed to endeavor to secure from all interested parties, including the plaintiff and Carter, a stipulation as to the exact amount in the fund available for distribution and to incorporate such figure in the final judgment. If there is any dispute in this regard, the court will hold a further hearing to determine the same.

A Judgment in accordance with this decision will be prepared by counsel for the prevailing defendants and approved as to form by counsel for all of the interested parties. If counsel cannot agree on the form thereof, the court will hold a hearing thereon.

¹ "Sec. 8308. Affidavit. An Affidavit sworn to by the president, secretary and treasurer of the corporation . . . shall be filed . . . at the time of filing the articles of association, which affidavit shall set forth the number of authorized shares of the proposed corporation, the par value of such shares as have par value, the name of the subscribers for shares, the number of shares subscribed for by each subscriber, the subscription price or prices for the shares subscribed for by each subscriber, the amount of the capital paid in by each subscriber, and the manner in which the same has been paid in (cash, services or property). When an object of the corporation is to acquire the assets and business of any existing enterprise in exchange for the issuance of shares of the capital stock of the corporation or when it is proposed that in excess of fifty per centum of the authorized shares of the corporation are to be issued for property and services or either, the affidavit shall also contain a summary description of the assets and business to be so acquired or of such property or services and a valuation of such assets, together with a copy of the instrument or instruments of transfer by which it is proposed that the corporation shall acquire such assets and business or property . . ." (Italics supplied).

² This court knows enough about the requirements for registering transfers of registered land, to know that a document in the general form of said Exh. 3 would not have been accepted for registering by the Assistant Registrar of the Land Court .

³ RLH 1945, Section 8348, provides: "Penalty for false statements. Any person or persons who shall make a false statement in any affidavit, return, statement or certificate of stock in regard to a corporation, or who shall overvalue any property mentioned in such affidavit, statement or return, or who shall do business as a corporation or hold themselves out to be a corporation without having complied with the provisions of law, shall be held to be guilty of a misdemeanor, and upon conviction shall be punished by a fine not exceeding five thousand dollars."

⁴ This feature is not mentioned in the briefs but the court felt that it must judicially notice the applicable Hawaii statutes, and therefore, at the court's informal suggestion, para. 1 on p. 3 of the ASF was amended by the stipulation to clearly indicate the facts as to the registration of the land in the Land Court .

⁵ These include: Aylett v. Keaweamahi (1892), 8 Hawaii 320; Nahaolelua v. Kaaahu (1895), 10 Hawaii 18, 20; Kapule v., Mokuhiwa (1899), 12 Hawaii 15; Nahaolelua v. Henn (1911), 20 Hawaii 613, 615; Levy v. Lovell (1919), 24 Hawaii 716; Moranho v. DeAguiar (1919), 25 Hawaii 267.

⁶ Some of the authorities cited in said memorandum which support the foregoing conclusions are: Niagara County Savings Bank v. Reese (1958), 179 N. Y. S. (2d) 453; National Refining Co. v. United States (1947), 8th Cir., [47-1 USTC ¶9221] 160 Fed. (2d) 951; and III American Law of Property (1952), Casner Ed., Sections 11.22, 11.26 and 11.29.

 

 

[58-1 USTC ¶9303]The United States of America , Plaintiff v. Beatrice Baxter Pledger, Individually and as Executrix of the Estate of Harris A. Pledger, Deceased, and Floyd Harris, Defendants

U. S. District Court, No. Dist. Fla., Marianna Div., Civil Action No. 385, 158 FSupp 612, 2/10/58

Collection: Tax lien: Conveyance by taxpayer.--The Government's suit to enforce a tax lien for 1943 and 1944 upon property at one time homesteaded in Florida by the deceased taxpayer and later conveyed by him to his nephew was dismissed. Although the property had been conveyed to the nephew in 1941 but had not been recorded until 1954, the nephew's possession defeated the Government's tax lien. Further, the Court held that the Government was not of the class of subsequent good faith creditors that suffered because of the nephew's failure to record his deed prior to the filing of the tax lien.

George Harrold Carswell, United States Attorney, Wilfred C. Varn, Assistant United States Attorney, Tallahassee, Fla., for plaintiff. Ben F. Barnes, B. L. Solomon, Marianna , Fla. , for defendants.

Memorandum-Decision

DEVANE, District Judge:

This is a suit by the United States to enforce a tax lien in the amount of $11,565.17, plus interest, for unpaid Federal income taxes assessed against Harris A. Pledger during his lifetime for the years 1943 and 1944. The suit is a three-pronged affair. The United States first seeks to recover a judgment against Beatrice Baxter Pledger as Executrix of the Estate of Harris A. Pledger for the full amount of the tax lien plus interest; second, to recover a judgment against Beatrice Baxter Pledger individually for the sum of $4,460.35, with legal interest from September 7, 1951, representing the cash surrender value on five insurance policies upon the life of Harris A. Pledger, which was paid by the insurance companies to Mrs. Pledger promply after the death of Mr. Pledger; and third, to subject certain real estate owned by Floyd Harris to the judgment recovered against Beatrice Baxter Pledger as Executrix of the Estate of Harris A. Pledger.

[Facts]

The facts in the case are not in dispute. They have all been covered by stipulations, by affidavits and by the deposition of Floyd Harris. Each party to the suit has filed a Motion for Summary Judgment and the Court will dispose of each demand of the plaintiff separately.

1. As to the plaintiff's suit against Beatrice Baxter Pledger as Executrix of the Estate of Harris A. Pledger, the parties are in agreement and have so stipulated that the estate is indebted to the plaintiff in the sum of $11,565.17, plus interest as provided by law from April 19, 1948, and a judgment will be entered in favor of plaintiff and against the Executrix of the Estate of Harris A. Pledger for the amount due.

2. That parties are likewise in agreement that the cash surrender value of the five insurance policies carried by Harris A. Pledger amounted to $4,460.35 at the time of his death, that Mrs. Pledger collected this sum of money and is indebted to plaintiff for the amount so collected, plus interest from September 7, 1951. A judgment will be entered in favor of plaintiff and against Beatrice Baxter Pledger individually for the amount due by her.

3. Plaintiff's claim against Floyd Harris is quite a different matter and for reasons stated below, the Court finds and holds that the property owned by Floyd Harris described in the Complaint filed herein cannot be subjected to plaintiff's income tax lien and sold to satisfy the judgment against the estate of Harris A. Pledger. The facts surrounding this controversy are briefly summarized below.

[Taxpayer Homesteaded Property]

About 1923 Harris A. Pledger homesteaded a tract of land in Bay County , Florida , lying along the Gulf of Mexico . At that time and now the highest and best use for this property was and is the construction of cottages for recreational purposes. Floyd Harris was a nephew of Harris A. Pledger and worked for and assisted Pledger in the occupancy required under the law to homestead this property. Sometime after Pledger secured a deed to the property, he conveyed to Harris the tract of land here involved as compensation for services rendered in helping homestead said property. The deed of conveyance bears date of July 15, 1941. It was not recorded until December 20, 1954. Subsequently, on September 29, 1943, Pledger conveyed to Harris a 50 foot tract of land which turned out to be a reconveyance of part of the land covered in the Pledger deed of July 15, 1941. Harris testified that when Pledger conveyed this property to him, it was under an agreement for the sale of an additional 50 feet of land adjoining that which he had already purchased and that he was not aware of the error in the deed until this controversy arose. Harris further testified that Pledger sold all his remaining holdings in the homesteaded tract about the same time. The second deed to the 50 foot tract was recorded July 3, 1944.

[Two Conveyances of Same Land]

The Government insists, and counsel for Harris concedes, that the second deed of conveyance for the 50 foot tract is a nullity as Pledger had already conveyed this property to Harris. The stipulation in the case further shows that Harris built a beach cottage on this property in the spring of 1946 and has been continuously in possession of the property since that time. No part of the entire tract was ever placed under fence.

[Enforcement of Lien Against Conveyed Property]

In 1948 the Commissioner of Internal Revenue assessed additional income taxes plus interest against Harris A. Pledger for the years 1943 and 1944 in the sum stated above. The Collector of Internal Revenue for Florida received notice of this assessment on April 19, 1948, and taxpayer having failed to pay same, filed notice of a Federal tax lien in Bay County , Florida , on November 24, 1950. Pledger died September 7, 1951, leaving no estate and plaintiff made no effort to enforce its tax lien against Pledger until after Harris had recorded his deed to the property in controversy on December 20, 1954, when plaintiff moved to subject this property to the satisfaction of its lien.

Plaintiff concedes that it has no valid claim against the 50 foot tract on which the house constructed and owned by Harris is located. Plaintiff fixes this 50 foot tract as the boundary line of the property on which the tax lien does not attach due to the fact that this is the description of the property included in the second deed from Pledger to Harris dated September 29, 1943, and recorded July 3, 1944. This property along with other property on the Gulf of Mexico near Panama City has enjoyed a phenomenal rise in value during the last several years, and while there is no stipulation or evidence in the record as to the present fair market value of the property plaintiff here seeks to impress its lien upon, it was conceded by counsel for the parties at the hearing that the property was in all probability worth more than plaintiff's tax lien.

[Possession of Transferee at Issue]

In the Complaint plaintiff alleged that this property was conveyed to Harris without consideration, but it abandoned that claim during the trial of the case and relies here solely upon its contention that Harris did not have such possession of the property the plaintiff seeks to subject to its tax lien as would defeat the tax lien. There are numerous Florida cases on this question and this Court is of the firm opinion that these cases establish as the law of Florida that the possession of Harris to the entire tract was sufficient to defeat the tax lien. Only three cases will be cited in support of this statement. Others may be found cited in these cases. They are as follows: Marion Mortgage Company v. Grennan, et al., 143 So. 761; Florida Land and Holding Corporation v. McMillen, 186 So. 188; Scott, et al., v. Simmons, et al., 10 So. (2d) 122.

[Transferee's Possession Defeats Lien]

It is the opinion of this Court that Harris' possession extended to the entire tract conveyed to him by Pledger under the deed of conveyance dated July 15, 1941, and such possession was and does defeat plaintiff's lien for taxes in this case. The Court holds further that plaintiff is not of the class of subsequent good faith creditors that suffered because of Harris' failure to record his deed prior to the filing of the tax lien in Bay County , Florida . The law and equities of this phase of the case are with Harris and not with plaintiff.

Judgments in the case will be entered in conformity with this Memorandum-Decision.

 

 

[58-2 USTC ¶9560] United States of America , Plaintiff v. Harold Franklin Rector, Annie Mae Rector, Minnie Rector, and Ray Jennings, as Trustee for The Northwestern Bank of Taylorsville , North Carolina , and The Northwestern Bank of Taylorsville , North Carolina , Defendants

U. S. District Court, West. Dist. N. C., Statesville Civil No. 327, 5/1/58

[1939 Code Secs. 3670 and 3672--similar to 1954 Code Secs. 6321 and 6323]

Tax lien: Application to previously transferred property: Effect of continued exercise of rights of ownership.--A tract of land was purchased by taxpayer in 1943, but as he was unable to make the stipulated payments, taxpayer's mother completed such payments and taxpayer conveyed the land to her by warranty deed in 1944. The taxpayer erected a house on such land in which he lived and exercised other rights of ownership. In this action the Commissioner seeks a judgment against taxpayer for unpaid taxes, which were first asserted in 1954 and lien recorded in 1955, and also seeks to enforce its claim for such unpaid taxes against the land in question. The Court, on motion for dismissal, allowed judgment to be entered against the taxpayer for the amount claimed, but held that the lien could not be enforced against the taxpayer's mother and that she held a valid title to the land and could not be divested of her title because of the continuing exercise of rights of ownership by the taxpayer.

James M. Baley, Jr., United States Attorney, William Waggoner, Jr., Assistant United States Attorney, for plaintiff. Patton & Ervin, Morganton, N. C., Ray S. Jennings, Taylorsville , N. C., for defendants.

Findings of Fact and Conclusions of Law

WARLICK, District Judge:

This action was brought by the United States Government against the defendants herein for the purpose of recovering judgment against the defendant, Harold Franklin Rector, and for the further purpose of enforcing a tax lien claimed pursuant to Section 3670, 26 USCA, against a certain tract of real estate situate and being in Alexander County, North Carolina.

The case was tried before a jury and at the conclusion of the evidence for the plaintiff and when plaintiff had rested its case, the defendants, other than Harold Franklin Rector, moved for a dismissal as is provided in Rule 41(b) of the Federal Rules of Civil Procedure. This motion was granted and as required in said rule, the following facts are found.

Findings of Fact

(1) That on May 28, 1943, C. C. Holland and wife, Texie Holland, conveyed the 231 acre tract described in the complaint to Harold Rector; that the said deed of May 28, 1943, was duly registered in the office of the Register of Deeds of Alexander County, N. C., on June 4, 1943; and that said deed appears of record in the Alexander County Registry in Book 37 at page 130.

(2) That thereafter, to wit, on August 4, 1944, Harold Rector and his wife, Annie Mae Rector, conveyed the said 231 acre tract to Minnie Rector, the mother of Harold Rector; that the said deed of August 4, 1944, was duly registered in the office of the Register of Deeds of Alexander County, N. C., on December 6, 1944; and that said deed appears of record in the Alexander County Registry in Book 38 at page 527.

(3) That on August 5, 1948, Minnie Rector and husband, Gentry Rector executed a deed of trust to J. Ray Jennings, as Trustee, for the benefit of Lawrence Fox, said deed of trust describing the 231 acre tract hereinabove referred to and being given as security for a loan of $2,000.00; that said deed of trust appears of record in the office of the Register of Deeds of Alexander County in Book 58 at page 265; and that said deed of trust was subsequently cancelled of record.

(4) That on September 13, 1954, Minnie Rector, widow, executed a warranty deed to Ralph L. Bowman and wife, Doris Bowman, conveying to the said grantees 29.33 acres of the 231 acre tract described in the Complaint; and that said deed was duly registered and appears of record in the office of the Register of Deeds of Alexander County, N. C., in Book 48, at page 585.

(5) That on March 26, 1955, Minnie Rector, widow, executed a deed of trust to J. Ray Jennings, as Trustee, for the benefit of the Northwestern Bank, said deed of trust describing that portion of the 231 acre tract described in the Complaint remaining after the aforesaid deed to Ralph L. Bowman, and being given to secure an indebtedness of $3,600.00; that said deed of trust was duly registered and appears of record in the office of the Register of Deeds of Alexander County, N. C., in Book 73 at page 55; and that said deed of trust has not been cancelled of record, there being an unpaid balance of $3,000.00 still due thereon.

(6) That on October 6, 1954, the United States Government made a claim against Harold Franklin Rector for taxes due for the manufacture of distilled spirits in the sum of $12,264.74, by mailing to the said Rector a first class letter containing a statement of the Government's Claim; that no assessment or claim was made by the Government against Harold Rector, prior to October 6, 1954; that thereafter, to wit, on March 5, 1955, the Government filed in the office of the Register of Deeds of Alexander County, N. C., a tax lien in the amount of $12,264.74 against all of the property of Harold Franklin Rector; that said lien has not been cancelled of record; and that no part of the sum claimed, namely, $12,264.74, has been paid.

(7) That a 2011/2 acre tract of land in Alexander County is listed on the tax books of said county for the years 1944 through 1953 on assessment sheets bearing the name Harold Rector at the top and at the bottom thereof; that the same tract is listed for the years 1954 through 1957 on assessment sheets bearing the name Mrs. Harold Rector or Annie Mae Rector at the top and Harold Rector or Mrs. Harold Rector at the bottom thereof; that the 1955 tax listings indicate that 30 acres were sold off of the 2011/2 acre tract to Ralph Bowman; that beginning in 1956 the listed land was shown as comprising 1711/2 acres rather than 2011/2 acres; and that each of the assessment sheets for the period 1944 through 1957, inclusive, contained this statement at the bottom above the signature line: "I, ..... do solemnly swear (or affirm) that I am an officer or agent of the taxpayer named on the attached list, that as such I am duly authorized to submit said list, that I am familiar with the extent and value of all said taxpayer's property subject to taxation in this township, that the above and foregoing list is a full, true, and complete list of all and each kind of property which it is the duty of the above named taxpayer to list as owner or fiduciary, as said list indicates".

(8) That Harold Rector signed the following documents pertaining to the land described in the Complaint; the 1957 alloted acreage report, and the application for cost sharing under the Agriculture Conservation Program over a 6 year period; that Harold Rector filed for and received the payments from the Government under the Agriculture Conservation Program; that some of the acreage reserve forms pertaining to the land in suit were signed by Minnie Rector and others were signed by Annie Mae Rector as "operator"; and that in 1956 in an application signed by Minnie Rector it was stated that the Soil Bank payment was to be divided between Harold Rector and Minnie Rector.

(9) That the Rural Electrification Authority obtained a right-of-way across the land in controversy in March, 1947; that the right of way agreement was signed by Harold Rector and his wife; that said right of way agreement contained this statement in part "The undersigned covenants that he is the owner of the above described lands and that the said lands are free and clear of encumbrances and liens of whatsoever character".

(10) That in 1948 Lawrence Fox was visited by Harold Rector and his father, Gentry Rector; that Gentry Rector talked to Lawrence Fox about borrowing some money from him; that Fox advised Gentry Rector that he would loan him $2,000.00 if he would have a note and deed of trust prepared; that on August 5, 1948, Harold Rector delivered a note and deed of trust covering the land in controversy and signed by Gentry Rector and Minnie Rector to Lawrence Fox; that Lawrence Fox gave the money to Harold Rector upon receipt of said note and deed of trust; and that said deed of trust is the deed of trust referred to in Paragraph (3) of these Findings of Fact.

(11) That in September, 1954, Ralph L. Bowman purchased a portion of the land in question; that prior to the purchase he discussed the matter with Harold Rector; that Bowman directed his attorney to search the title to said land; that as a consequence of this title search, he took a deed for the property from Minnie Rector; that he paid for the land in a check in the sum of $2,000.00, made payable to Minnie Rector; that on the reverse side of the cancelled check these endorsements appeared: "Minnie Rector, Ralph L. Bowman as identification, and Harold Rector"; and that the deed received by Ralph L. Bowman in connection with this transaction is the deed referred to in Paragraph (4) of these Findings of Fact.

(12) That Harold Rector has signed and filed with the Northwestern Bank personal financial statements on August 25, 1950, and on April 16, 1953; that both of said statements listed real estate as follows: "Home place, 201 acres"; that on March 21, 1955, the said Bank loaned Harold Rector $1,200.00 on the strength of one of these statements; that on March 26, 1955, the Northwestern Bank loaned Minnie Rector the sum of $3,600.00; that Minnie Rector executed a promissory note in favor of said Bank and delivered to said Bank as security for said loan a deed of trust covering the lands in controversy; that if Minnie Rector is not the owner of the lands in controversy said Bank has an unsecured debt of $3,000.00, the balance still due on said note; and that said deed of trust is the deed of trust referred to in Paragraph (5) of these Findings of Fact.

(13) That Harold Rector resides in a house located on the land in controversy; that he erected a brick veneered house on this property in 1947 and has been living there since the house was finished; that he provided the funds for the construction of the house; that Minnie Rector lived with Harold Rector on the farm only off and on; that the farm was in Minnie Rector's name and that Harold Rector was more or less the manager for her; and that Harold Rector did not pay rent to Minnie Rector in money for the use of the farm, but that she did take whatever he wanted to give her in the way of foodstuff, etc.

(14) That the warranty deed from C. C. Holland and wife, Texie Holland, to Harold Rector, referred to in Paragraph (1) of these Findings of Fact, and the warranty deed from Harold Rector and wife, Annie Mae Rector, to Minnie Rector, referred to in Paragraph (2) of these Findings of Fact, are in due and proper form, are under seal, and contain recitations that they are executed for "Ten Dollars and other considerations"; that Harold Rector was unable to make the payments which he had agreed to make to C. C. Holland as the purchase price for the land described in the deed of May 28, 1943, from C. C. Holland, and wife, Texie Holland, to Harold Rector; that Minnie Rector and her husband, Gentry Rector, had to take over and did take over the payments due to C. C. Holland; that these payments were made by Minnie Rector to C. C. Holland out of the funds received by Minnie Rector from the United States Government in the form of remuneration for the death of another of her sons during World War II; that it took Minnie Rector several years to pay C. C. Holland, but that he was paid the full amount of the agreed purchase price; and that the land purchased from C. C. Holland by Harold Rector was conveyed to Minnie Rector by Harold Rector and wife, Annie Mae Rector, on August 4, 1944, as aforesaid.

Conclusions of Law

(1) This court has jurisdiction of the parties and the subject matter of this action.

(2) The defendant, Minnie Rector, is the legal owner of the land in controversy, she having acquired the same by a valid warranty deed dated August 4, 1944, properly registered in the office of the Register of Deeds of Alexander County, North Carolina, on December 6, 1944, and duly recorded in said Registry in Book 38 at page 527. The said Minnie Rector gave a valuable consideration for said property and she is still the sole owner thereof, aside from the conveyance of 29.33 acres thereof to Ralph Bowman, as aforesaid, and the interest of the Northwestern Bank under the existing deed of trust herein above referred to.

(3) The lien created by the provisions of Section 3670, 26 USCA in favor of the United States is a lien upon all property and right to property, whether real or personal, belonging to the person liable for the tax at the time demand is made upon him for the payment thereof.

(4) At the time demand was made upon Harold Franklin Rector for the payment of said tax, to wit, on October 6, 1954, and at the time the tax lien was filed against Harold Franklin Rector, to wit, on March 5, 1955, the real property in controversy did not belong to the said Harold Franklin Rector, the legal title on said dates and for sometime prior thereto being in Minnie Rector.

(5) The facts that Harold Franklin Rector listed said property for ad valorem taxes in Alexander County on an assessment sheet with his name at the top and bottom thereof, that he signed the 1957 allotted acreage report pertaining to said land and filed for and received payments under the Agriculture Conservation Program over a six year period from the United States Government; that he executed a right of way agreement with the Rural Electrification Authority in which he asserted the ownership of the premises in question, that he listed said land as a personal asset in two financial statements filed with a bank, that he participated in a sale of a portion of the real estate, and in the obtaining of a loan thereon, to the extent set forth in the above Findings of Fact, and that he erected a dwelling house on said premises and has resided thereon since 1947, did not divest the said Minnie Rector of her legal title to and ownership of said property and did not bestow upon Harold Franklin Rector any interest in said land, either legal or equitable, which the Government is entitled to have applied to the satisfaction of the tax lien against the said Harold Franklin Rector.

(6) The defendant, Harold Franklin Rector, is indebted to the United States Government in the sum of $12,264.74, and the United States Government is entitled to judgment against the said Harold Franklin Rector in the sum of $12,264.74, together with penalties and interest thereon as allowed by law.

(7) The United States Government is not entitled to a lien against the property involved in this controversy and described in the Complaint filed herein, and is not entitled to foreclose said lien against this property, or to use or take said property in any manner for the purpose of satisfying its tax lien or the judgment awarded herein against the defendant Harold Franklin Rector.

(8) The United States Government is not entitled to judgment against the defendant Minnie Rector, the defendant Annie Mae Rector, the defendant Ray Jennings, as Trustee, and the defendant, The Northwestern Bank of Taylorsville, North Carolina, for the reasons hereinbefore set forth, and upon a proper motion having been made by counsel for these defendants, at the close of the Government's evidence, the action brought against these defendants, and each of them, should be and is hereby dismissed.

 

 

[82-1 USTC ¶9202] United States of America , Plaintiff v. Donald H. and Kathleen Young, et al., Defendants

U. S. District Court, East. Dist. Wis., Case No. 76-C-332, 12/11/81

[Code Sec. 6672]

Failure to collect and pay over tax: Responsible persons: Evidence of willfulness: Fraudulent conveyance: Liability of transferee.--Judgment was entered against the taxpayers, who were husband and wife, for their failure as responsible persons of a corporation to pay over trust fund taxes of the corporation to the government. As to the wife, she willfully failed to pay over the taxes due by knowingly using available funds to prefer other creditors over the United States . However, the taxpayers' children were not liable as transferees and fraudulent conveyors of a parcel of property formerly owned by the taxpayers which was the subject of a federal tax lien. The evidence established that neither the son, to whom the taxpayers transferred the parcel after the IRS tax assessment, nor the daughter to whom title was subsequently transferred, was involved in the fraudulent scheme. Further, the government's claim for foreclosure of the daughter's current residence under a tracing theory was dismissed as meritless. However, the government's request for foreclosure of another parcel of property owned by the taxpayers to partially satisfy the judgment was granted.

John A. Nelson, Assistant United States Attorney, Milwaukee , Wis. 53202 , for plaintiff. Harry T. Christon, 238 West Wisconsin Ave., Milwaukee, Wis. 53202, for Donald H. Young and Kathleen Young, Michael R. Wherry, Mulcahy & Wherry, 815 E. Mason St., Milwaukee, Wis. 53202, Ward Dunphy, Kluwin, Dunphy, Hankin & McNulty, 1100 West Wells St., Milwaukee, Wis. 53233, for Werowinski, David M. Kaiser, 135 West Wells St., Milwaukee, Wis. 53203, Charles F. Higgins, 230 Wells St., Milwaukee, Wis. 53203, for Wood.

Memorandum and Order

WARREN, District Judge:

In this civil action, the United States of America (the "Government") seeks to obtain judgments against Donald H. Young and Kathleen Young, husband and wife, for their alleged failure as responsible persons of the Ace Roofing and Sheet Metal, Inc. (the "Company") to pay over to the Government trust fund taxes of that company for the second through fourth quarters of 1969. In addition, the Government seeks judgments against Donald Bruce Young and Ronald J. and Patricia A. Werowinski as transferees and fraudulent conveyors of a parcel of property formerly owned by Donald H. and Kathleen Young which, the Government claims, is subject to a federal tax lien. Finally, the Government seeks to enforce its tax lien, in part, by foreclosing a 15 foot by 200 foot parcel of property currently owned by Donald H. and Kathleen Young.

In a memorandum and order filed April 3, 1979, the Court granted the Government's motion for partial judgment and found Donald H. Young liable under 26 U. S. C. §6672 for the Company's unpaid trust fund taxes. The Court reached that decision after concluding that Donald H. Young was a responsible person required to collect the taxes in question and that he willfully failed to pay the taxes over to the Government. In its April, 1979, memorandum and order, the Court also found Kathleen Young to be a responsible person required to collect taxes for the Company. It denied the Government's motion for summary judgment with respect to her, however, after concluding that genuine issues remained as to whether she knew the taxes were due and whether she knew they were not paid.

On November 10, 1980, the first day of a three-day court trial, the Government presented its evidence in support of its claims. On December 3, 1980, the Court dismissed the Government's claim against Donald Bruce Young. On December 22, 1980, the remaining defendants presented their defenses, and on April 9, 1981, the parties presented their closing arguments to the Court. The following constitutes the Court's findings of fact and conclusions of law required by Rule 52(a) of the Federal Rules of Civil Procedure.

I. Liability of Kathleen Young

Because the Court determined that Kathleen Young was a responsible person required to collect the trust taxes for the Company prior to the trial, the only issues remaining for trial on the Government's claim against her were whether she knew the taxes were due and whether she willfully failed to pay them.

To establish that Kathleen Young knew the taxes were being withheld but not being paid over to the Government during the time in question, the Government relied primarily on Kathleen Young's affirmative response to the following request for admission:

1(b) You knew that monies being withheld from the employees of Ace Roofing and Sheet Metal, Inc., were not being paid over to the United States at various times during the second through fourth quarters of 1969.

Answer: Yes.

To establish that Kathleen Young willfully failed to pay over the trust taxes to the Government, the Government relied on portions of her testimony from trial. Specifically, it contended her willfullness was established by admissions that she was a part-time bookkeeper for the Company, that on weekends she balanced the Company's checkbooks with her husband, and that she decided with her husband which creditors would be paid.

To establish Kathleen Young's liability under section 6672, the Government also relied on the cancelled payroll checks and checks to creditors other than the Government which were endorsed by her during the second through the fourth quarters of 1969. In addition, the Government relied on Exhibit F, a Report of Interview with her conducted by Agent A. G. Seemann on February 2, 1971. Mrs. Young testified that she signed the report and that she always read things before signing. During the interview, in response to a series of questions, she indicated she first became aware that the taxes were not being paid when the first payment could not be met; that she tried to collect the money to pay it; and that she knew some materialmen were paid during the period tax liabilities were accruing.

During questioning by her attorney, Kathleen Young attempted to minimize her involvement with the Company. She testified that during the period in question she worked as a housewife and full-time typist for Western Union in addition to working part-time for the Company. She said she never signed any of the Company's tax returns and that it was not her job to pay the Company's taxes.

Having considered Kathleen Young's testimony and the evidence pertaining to the Government's section 6672 claim, the Court has little difficulty in finding that Kathleen Young willfully failed to pay over the trust fund taxes due the Government during the second through fourth quarters of 1969. Although her day-to-day involvement with the Company was relatively minor in comparison to the involvement of her husband, her admission that she knew the taxes were not being paid while materialmen were being paid, and the copies of cancelled payroll checks and checks to creditors other than the Government firmly establish that she willfully failed to pay over the taxes due the Government by knowingly using available funds to prefer other creditors over the United States. Monday v. United States [70-1 USTC ¶9205], 421 F. 2d 1210 (7th Cir. 1970). Therefore, judgment against her in the amount of $11,206.02, the amount assessed by the Government on August 13, 1971, plus interest from that date, will be entered forthwith.

II. Enforcement of Judgment

Ordinarily, in actions arising under 26 U. S. C. §6672, the Court need only determine whether a violation of the statute has occurred. In this action, however, the Court's role is not completed at this juncture because the Government seeks to enforce its judgment against Donald H. and Kathleen Young by tracing a tax lien filed against a parcel of property formerly owned by them to the current residence of Patricia A. and Ronald J. Werowinski, their daughter and son-in-law. In addition, the Government seeks recovery against Donald Bruce Young, the son of Donald H. and Kathleen Young, and the Werowinskis on the basis of their alleged involvement in transactions which the Government asserts were fraudulent. After discussing the events surrounding the transfer of the property in question, the Court will address the Government's alternative theories for enforcing its judgment.

A. Property Transfers. Three parcels of property, owned or formerly owned by various members of the Young family, are involved in this action. Parcel I is a 63 foot by 200 foot vacant lot located in Franklin , Wisconsin . In 1971, the lot was owned by Mildred Young, Donald H. Young's mother. In September of 1973, Mildred Young sold this parcel to the Werowinskis. In 1979, the Werowinskis transferred this parcel, along with Parcel II, to Robert E. and Ruth L. Frederickson. Neither the Fredericksons nor Mildred Young are parties to this action. The Government has never filed a tax lien against this parcel and does not seek to enforce its judgment against it at this time.

Parcel III is a 15 foot by 200 foot driveway located in the same area as Parcel I. Donald H. and Kathleen Young are the owners of this parcel. The Government does seek to enforce its judgment by foreclosure of this parcel. At trial, neither Donald H. nor Kathleen Young objected to the Government's request to foreclose this property to partially satisfy its judgment. Accordingly, the Court will order foreclosure of Parcel III.

Parcel II, a 63 foot by 200 foot lot adjacent to Parcel I, is the crucial piece of property involved in this action. Donald H. and Kathleen Young bought this parcel in 1956 from Donald H. Young's father and built a home there. In August of 1967, they mortgaged their residence to G. Hayward Wood for a loan of $9,000.00. In March of 1969, they further mortgaged their residence to Wood for a loan of $4,014.00.

The interrelation between the tax problems of Donald H. and Kathleen Young, their other financial problems, and the ownership of Parcel II became quite involved in 1971. In February of 1971, at the request of the Internal Revenue Service (IRS), Donald H. Young, on behalf of the Company, submitted a statement of financial condition showing outstanding taxes in the sum of approximately $14,000.00.

On March 22, 1971, Donald H. and Kathleen Young filed their respective petitions in bankruptcy. On July 8, 1971, the Referee closed their respective files as "no asset" cases. In those actions, both Donald H. and Kathleen Young listed as a debt the unpaid trust fund taxes of the Company.

On August 10, 1971, the IRS mailed to Donald H. and Kathleen Young notices of a proposed settlement in the amount of $11,206.02 arising from their failure to pay the Company's taxes. On August 13, 1971, the IRS assessed Donald H. and Kathleen Young $11,206.02 for the Company's unpaid trust fund taxes for the second through fourth quarters of 1969. On August 22, 1971, nine days after the IRS had assessed them for the unpaid taxes, Donald H. and Kathleen Young deeded Parcel II to their 21 year old son, Donald Bruce Young, for no consideration. Donald Bruce Young held legal title to the property until September of 1973, when he transferred title to his sister Patricia and her husband Ronald.

On December 3, 1971, the Government filed a Notice of Tax Lien of its tax assessments of August 13, 1971, against Donald H. and Kathleen Young. This notice did not contain a legal description of Parcel II and was filed only under the names of Donald H. and Kathleen Young.

In January of 1972, at the request of the IRS, Donald H. and Kathleen Young filed a joint statement of financial condition setting forth no assets.

Although they no longer held legal title to Parcel II, Donald H. and Kathleen Young listed the property for sale with Ritter Realty in July of 1972. The asking price was $22,000.00. In October of 1972, a title binder was prepared for Katherine Hoffman, a prospective purchaser of Parcel II. That title binder made reference to the notice of the lien filed by the Government against Donald H. and Kathleen Young. Shortly after the preparation of the title binder, the potential sale to Ms. Hoffman fell through.

It is unclear exactly how long Donald H. and Kathleen Young remained in the house on Parcel II after they transferred title of the property to their son. Testimony of the witnesses at trial revealed that Kathleen Young moved from the house to the northern part of the state in October of 1972, that the house was vacant for an unspecified period of time; and that the house was rented for one month to tenants who damaged the premises.

In approximately June of 1973, Ronald J. and Patricia Werowinski began renting the home on Parcel II. The Werowinskis paid $150.00 per month rent and mailed the money directly to Donald H. Young. Patricia Werowinski testified that during the time she and her husband were renting the house on Parcel II, she considered the home to be her parents' home.

During the summer of 1973, the Werowinskis began making plans to purchase Parcels I and II. They retained Attorney James Lippert to handle the transaction for them. Attorney Kenneth Ogie, the same attorney who Kathleen Young testified advised her and her husband to transfer title of Parcel II to their son, handled the closing for Donald H. and Kathleen Young.

Attorney Lippert testified he had no contact with Donald H. or Kathleen Young prior to the closing of the property sale on September 18, 1973, and was not aware the Youngs were represented by counsel until Attorney Ogie appeared at the closing. He also testified that he obtained a title binder which did not reflect the outstanding tax lien.

Although the sale of Parcels I and II was completed in September of 1973, Attorney Lippert spent additional time after the closing attempting to determine whether a mortgage the Youngs had with Attorney Ogie's wife had ever been satisfied. Originally, the title company said the $1,000.00 mortgage had not been satisfied and would, therefore, continue to be a lien on the property. Upon further checking, Attorney Lippert discovered the mortgage had been satisfied, and he informed the Werowinskis of this in February of 1974.

Attorney Lippert received $200.00 for his services for the Werowinskis, a figure he testified was higher than his normal fee because of the problems caused by the confusion over the Ogie mortgage.

The Werowinskis purchased Parcel I for $1,000.00 and Parcel II for $21,000.00, amounts which the Government conceded at trial were fair market prices. Because the only evidence of the actual distribution of the $22,000.00 price consists of three unsigned closing statements, the Court is unable to determine exactly how the proceeds were distributed. It does appear, however, that of the $22,000.00 sales price, $16,452.50 was allocated to G. A. Wood to satisfy the two mortgages he held on Parcel II; $1,161.04 was used to pay delinquent taxes and interest for 1971 and 1972; and $375.70 was used to pay for various closing costs. As a result of these deductions the actual amount due Donald H. and Kathleen Young was $3,826.76 (Defendant's exhibit 13).

In July of 1974, the Government refiled its Notice of Federal tax liens. This lien notice contained a property description of the homestead. On May 19, 1976, the Government instituted this action setting forth its various liens and its claim against the homestead. It did not, however, file a lis pendens pertaining to Parcel II, either at the time it filed suit or at any time subsequent to the filing of the suit.

Finally, in 1979, the Werowinskis, without notifying the Government, sold Parcels I and II to Robert E. and Ruth L. Frederickson for $58,125.00.

B. The Tracing Theory. The Government seeks recovery from the Werowinskis on two distinct theories--a tracing theory and a fraudulent conveyance theory. Under its tracing theory, the Government contends its lien on Parcel II "traces" to the current residence of the Werowinskis because the Werowinskis used the proceeds from the sale of Parcel II to purchase their current residence.

The Court finds the Government's tracing theory meritless. The Werowinskis have never been the subject of the Government's liens. Consequently, absent a showing of fraud, it would be unjust to hold them liable for debts incurred by other taxpayers merely because they were former owners of the property the Government claims was encumbered by a lien at the time they owned it.

C. The Fraudulent Conveyance. The transfer of Parcel II from Donald H. and Kathleen Young to Donald Bruce Young and the subsequent transfer from Donald Bruce Young to the Werowinskis are the most troubling aspects of this action. The Court is convinced that the overriding, if not sole, reason for the original transfer of Parcel II to Donald Bruce Young was to defraud the Government of the trust fund taxes due it. There is testimony in the record that Attorney Ogie advised Donald H. and Kathleen Young to make the original transfer of the property to their son. In addition, the Court questions Attorney Ogie's candor in his deposition testimony, portions of which were introduced at trial. The issue to be resolved here, however, does not directly concern Attorney Ogie's questionable involvement in this action. Rather, the issue to be resolved is whether Donald Bruce Yound and/or the Werowinskis were involved in the fraud against the Government.

(1) Donald Bruce Young.

Donald Bruce Young testified at trial that he agreed to accept title to Parcel II in 1969 after his father, who was moving up north, asked him to do so. He said he did not know what a warranty deed or quit claim was and did not know the legal implications of the transfer. He stated that Attorney Ogie was the attorney who handled the transfer and that he never saw the quit claim deed. He initially testified he did not realize there was a lien on his parents when he transferred the property to the Werowinskis. However, after counsel for the Government confronted him with his previous deposition testimony in which he said he did know of the lien at the time of the second transfer, he said he was confused about the lien.

During the time he "owned" Parcel II, Donald Bruce Young never lived in the house located there. Nor did he ever pay any taxes on the property, purchase any insurance or make any mortgage payments. He performed no maintenance other than chores such as cutting the lawn. Donald Bruce Young further testified that at the closing of the sale of Parcels I and II to the Werowinskis, Attorney Ogie told him where to sign the documents and directed him to take a check to the Glendale Bank at Bayshore Shopping Center . He said he cashed the check and gave the money to his parents.

After listening to Donald Bruce Young's testimony, the Court reached the conclusion that he knew his parents were having financial difficulties in 1971 and knew there was a federal tax lien against them when he transferred the house in 1973. Despite Donald Bruce Young's knowledge of these facts, the Court nonetheless concluded that Donald Bruce Young was not a part of the scheme to defraud the Government.

Several factors led the Court to this decision. First, the Court is of the opinion that Donald Bruce Young was ignorant of the legal implication of the transfer. At the time of the initial transfer, he was a 21 year old high school dropout with no background in real estate. Furthermore, he never examined any of the documents prepared in connection with the transfer and relied on his parents' attorney for guidance.

Second, the Court is of the opinion that Donald Bruce Young was also ignorant of the true reasons for the initial transfer of the property to him. He knew his parents were planning to move up north and planning to sell their home. Consequently, in agreeing to the transfer of the property to him, it is conceivable that he merely thought he was complying with his father's desire to have legal title vested in someone in the Milwaukee area to make it easier to sell the property. Moreover, although he acknowledged during his deposition that he knew of federal tax liens against his parents when he "sold" the property to the Werowinskis, there was no evidence showing that he knew of the assessment against them at the time he obtained title to the property.

Finally, although Donald Bruce Young knew the Government had tax liens against his parents in 1973 when he transferred the property to the Werowinskis, there was no evidence presented at trial which showed he knew there had been a lien filed against Parcel II. It is also important to note that at the closing in 1973, just as in 1971, Donald Bruce Young merely followed the directions of Attorney Ogie.

In summary, on the basis of Donald Bruce Young's ignorance of the legal implications of the transfer of the property, his ignorance of the true reasons for the transfer and his total reliance on Attorney Ogie for advice, the Court rejects the Government's claim that he was involved in the scheme to defraud the Government and orders its claims against Donald Bruce Young be dismissed with prejudice.

(2) The Werowinskis.

Having carefully reviewed the evidence presented at trial, the Court also finds the Werowinskis were not a part of the scheme to defraud the Government.

Two essentially undisputed facts lead the Court to this conclusion. First, at all times they were dealing with Donald H. and Kathleen Young, the Werowinskis were bargaining at arm's length. During the time they were renting from the Youngs, they paid $150.00 per month rent. More important, they purchased Parcel II for $21,000.00, an amount the Government conceded was a fair market value. Had the Werowinskis known of the tax lien, it would have been foolhardy for them to pay the fair market value for the property.

Second, Attorney Lippert's involvement in the sale of Parcel II to the Werowinskis also rebuts the Government's contention that they were part of the fraud. It simply would not have made sense for the Werowinskis to retain Attorney Lippert for the closing had they known Parcel II was encumbered by a lien because the risk of Attorney Lippert, an experienced real estate attorney, discovering the lien would have been too great. The Court found Mr. Lippert to be a credible witness and is satisfied that he played no part in the scheme to defraud the Government. He carried out his duties professionally prior to the closing and continued to represent his clients after the closing by clearing up the confusion over the mortgage to Attorney Ogie's wife.

Based on the foregoing, the Court dismisses the Government's claims against Ronald J. and Patricia A. Werowinski and denies its request for foreclosure of their current residence.

Although the evidence presented at trial was insufficient to prove that Donald Bruce Young or the Werowinskis were involved in the scheme to defraud the Government, the Court is not of the opinion that the Government was unjustified in pursuing its claims against these defendants. Their knowledge of their parents' tax problems and other financial problems provided the Government with sufficient ground for believing they too were involved in defrauding the Government.

III. Viability of Government's Lien on Parcel II

In their post-trial brief, the Werowinskis recognize that the Government has withdrawn its claim for a lien against Parcel II. Notwithstanding the Government's actions, the Werowinskis believe there remains a cloud on the title of that real estate and they ask the Court to clear the title at this time by denying any lien against that property.

Because the Government no longer seeks to foreclose its lien against the current owners of that Parcel II in this action, the Court rejects the Werowinskis' contention that the Government's failure to join those owners as indispensable parties requires dismissal of its lien. Whether the Government can enforce its lien against the current owners of Parcel II is simply no longer an issue in this case.

IV. Summary

Based on the foregoing, it is ordered that:

(1) judgment be entered against Donald H. and Kathleen Young and in favor of the United States of America in the amount of $11,206.02, plus interest, from August 13, 1971;

(2) the Government's request for foreclosure of Parcel III be and hereby is granted. The Government is to submit to the Court its proposal for the sale of this property within thirty (30) days of the date of this order;

(3) the Government's claims against Donald Bruce Young, Patricia H. Werowinski and Ronald J. Werowinski be and hereby are dismissed with prejudice;

(4) the Government's claim for foreclosure of the Werowinskis' current residence be and hereby is dismissed with prejudice.

 

 

[62-1 USTC ¶9126] United States of America , Plaintiff v. Silas E. Chambers, Helen Chambers, Rosemary Chambers, Dr. Lassar Alexander, Defendants

U. S. District Court, So. Dist. Fla., Miami Div., No. 9276-M-Divil, 11/30/61

[1954 Code Secs. 6321 and 7403]

Lien for taxes: Propety of another: Valid gift.--The District Court held that money representing the proceeds of a note and mortgage deposited in a special account in a Florida bank in the name of the delinquent taxpayer's minor daughter was not subject to a Federal tax lien against the property of the taxpayer. For some years prior to the filing of the lien, the taxpayer had made gifts of $3,000 per year to his daughter, which had been deposited in the Florida bank in the daughter's checking account. From this account, the daughter advanced $15,000 to a third party in return for a note and mortgage. The Court held that the taxpayer, by depositing the gifts to his daughter in a bank, divested himself of control over said money and made a valid gift to her. The note and mortgage, and the proceeds therefrom, were the property of the daughter, free and clear of the Federal tax lien.

E. Coleman Madsen, United States Attorney, Box 1070, Miami, Fla., Norman E. Bayles, Tax Division, Department of Justice, Washington 25, D. C., for plaintiff. George Okell, Sr., 1392 N. W. 36th St. , Vivion Rutherford, 65 S. W. First St. , Miami , Fla. , for defendant.

Findings of Fact and Conclusions of Law

CHOATE, District Judge:

The above-entitled action came regularly before the Court for Trial without a jury upon the 17th day of November, 1960, plaintiff appearing by its attorney, E. Coleman Madsen, United States Attorney for the Southern District of Florida, and Norman E. Bayles, Trial Attorney, Tax Division, Department of Justice, and defendants appearing by their attorneys, George S. Okell, Sr. and Vivion B. Rutherford, and the Court having heard and considered the evidence and testimony produced by and on behalf of the plaintiff and the defendants and the briefs submitted by counsel, and being full advised in the premises, does hereby make and enter its findings of fact and conclusions of law.

Findings of Fact

1. This action was brought pursuant to the authorization and at the request of the Commissioner of Internal Revenue, a delegate of the Secretary of the Treasury, and at the direction of the Attorney General of the United States for the collection of Internal Revenue Taxes.

2. On October 4, 1954, the Tax Court of the United States adjudicated the tax liabilities of the defendant, Silas E. Chambers, including penalties and interest for each of the years 1941 through 1946, inclusive, to be $516,922.30 including the sums reduced to judgment by Order of this Court on March 20, 1958 [58-1 USTC ¶9436]. Notice of the federal tax lien in the amount of $728,891.30 including the sums reduced to judgment herein was filed with the Clerk, Circuit Court, Dade County , Florida , on November 12, 1952.

3. On June 11, 1953, a notice of levy was served upon the defendant, Dr. Alexander, by a representative of the plaintiff, and demand made upon him to deliver to the District Director of Internal Revenue all money or property or rights to property belonging to Rosemary Chambers and/or Dr. Silas E. Chambers. Subsequently thereto, Dr. Alexander has deposited the monthly payments due on the note and mortgage in a special account with the Coral Gables Federal Savings and Loan Association of Coral Gables, Florida pending final disposition of the rights of the respective parties to the fund.

4. That on April 12, 1947, Rosemary Chambers was a minor nine years of age and that Silas E. Chambers was her natural parent and Guardian. That for some years previous her father had given her Three Thousand Dollars ($3,000.00) a year as a gift. That part of said money had been deposited in the American National Bank of Miami , Florida , in a commercial checking account in the name of Rosemary Chambers, on which account only Rosemary Chambers could check.

5. That on April 11, 1947, Rosemary Chambers by check on Amercian National Bank transmitted a Fifteen Thousand Dollars ($15,000.00) check to Smathers Thompson Maxwell and Dyer, her attorneys, in the making of a loan to Dr. Lassar K. Alexander of Twenty Thousand Dollars ($20,000.00); that the remaining Five Thousand Dollars ($5,000.00) to make up the loan was supplied by her father, Silas E. Chambers that as evidence of this loan a Twenty Thousand Dollars ($20,000.00) mortgage and note was given to Rosemary Chambers by Dr. Lassar K. Alexander, and recorded in Mortgage Book 1781 at Page 465, of the Public Records of Dade County, Florida. That thereafter Dr. Lassar K. Alexander made monthly payments of One Hundred Dollars ($100.00) plus interest to Silas E. Chambers as Guardian or Rosemary Chambers, until the present suit was instituted, thereafter Dr. Lassar K. Alexander paid his monthly payments and interest into an account at the Florida National Bank at Coral Gables to be held subject to the outcome of this suit.

6. Silas E. Chambers received back his Five Thousand Dollars ($5,000.00) advance and has no further interest in the mortgage.

Conclusions of Law

The Court finds that this Court has jurisdiction over the persons and subject matter of this cause.

In McKinnon v. First National Bank, 82 So. 748, 6 A. L. R. 111, the Florida Supreme Court passed on a similar situation. Here the father made deposits to the individual accounts of four minor children. The deposits to the credit of the children with interest amounted to something over Eleven Thousand Dollars ($11,000.00) was drawn by the father, and loaned to the president of the bank, taking his individual notes payable to each of the children from whose account the money was drawn. These notes were never paid. None of the children had a legal guardian. None of the checks on which he drew out the money was signed by any of the children, or in the manner indicated on the indentification cards. The suit was by the minor against the bank for an accounting of the minor's funds.

The Court said: Page 750 "This case hinges upon the question whether the father at the time he made the deposits to the credit of his children intended them as free gifts as of the dates of the deposits. If so, the funds became the property of the infants, and he lost domination over it and it passed completely out of his control as their natural guardian."

The Court further found the law to be: Page 750 "A guardian by nature is entitled to the charge only of the person, and not of the personal estate of the ward."

Page 749: "In order than the deposit of money in a bank to the credit of another person shall operate as a valid gift intervivos, it must appear not only that the depositor intended a gift, but also that he executed his intention, and there must be an acceptance of the gift by the donee. But where a gift made to an infant is beneficial and not burdensome, the law will presume acceptance, or as some Courts say: 'the law accepts if for him.'"

The Supreme Court in deciding against the bank and holding them liable for the unauthorized checking of the children's accounts said: Page 750.

"From all the facts and circumstances surrounding this case, we are satisfied that McKinnon, at the time he made the deposits in the bank to the credit of his children, intended the money so deposited to be a free gift to them; and there is nothing in the testimony to show that there was any understanding or agreement between him and the bank that he was to keep control of the funds, and to dispose of them as he saw fit. The money passed absolutely and irrevocably from his custody and control and the bank had no authority to pay it out on his order."

The facts in the instant case are analogous, and we think the above case is controlling the instant cause and find that Silas E. Chambers by depositing part of the gifts to Rosemary Chambers in the bank in her name divested himself of any control over said money and made a valid gift to her; and we further find as a conclusion of law that the Fifteen Thousand Dollars ($15,000.00) advanced to Dr. Alexander K. Lassar as evidenced by the mortgage and note was the property of Rosemary Chambers, and that the mortgage and note are the property of Rosemary Chambers, and that she is entitled to the proceeds from the note and mortgage deposited by Dr. Lassar K. Alexander in the bank and amounts remaining unpaid on said note and mortgage.

IT IS THEREFORE, ORDERED AND ADJUDGED:

1. That this Court has jurisdiction over the persons and subject matter of this cause.

2. That Rosemary Chambers is the valid owner and holder free and clear of any lien of the United States for the tax liability of Silas E. Chambers, of the note and mortgage given by Dr. Lassar K. Alexander to Rosemary Chambers in the amount of Twenty Thousand Dollars ($20,000.00) dated April 12, 1947, and recorded in Mortgage Book 1781, at Page 466, of the Public Records of Dade County, Florida and the proceeds therefrom, the Five Thousand Dollars ($5,000.00) of Dr. Silas Chambers having been returned to him.

This matter having come on before the Court and the Court having heretofore entered its Findings of Fact and Conclusions of Law, herein, and being fully informed in the premises, it is thereupon,

ORDERED and ADJUDGED that judgment be and the same is hereby entered in favor of the defendant, Rosemary Chambers and against the plaintiff herein, the United States of America , and that the United States shall take nothing by its suit, and it is further,

ORDERED and ADJUDGED that the money representing the proceeds of that certain note and mortgage executed by Dr. Lassar Alexander and deposited in a special account, in the Coral Gables Federal Savings & Loan Association of Coral Gables, Florida, be and the same is hereby declared to be the individual property of Rosemary Chambers, and the Coral Gables Federal Savings & Loan Association be and it is hereby directed to release said funds, upon the Order of said Rosemary Chambers.

 

 

[66-1 USTC ¶9273]Erna Brand Zeddies and Ann Louise Henderson, Plaintiffs-Appellants v. United States of America, Defendant-Appellee United States of America, Plaintiff-Appellee v. Sheldon K. Rachman, Administrator of the Estate of Robert Zeddies, deceased, et al., Defendants, Erna Brand Zeddies and Ann Louise Henderson, Defendants-Appellants

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 15329, 357 F2d 897, 3/3/66, Reversing unreported District Court opinion

[1954 Code Sec. 6323]

Lien for taxes: Conveyance in fraud of United States: Failure of proof.--The Government failed to prove that a taxpayer's gratuitous conveyance to his daughter of his interest in real estate was fraudulent where the conveyance was made before the Government rejected the taxpayer's offer to compromise alleged income tax deficiencies. The financial statement submitted with the offer indicated that, at that time, the taxpayer would have been able to discharge his tax liabilities in the proposed amount, and there was no evidence concerning his assets and liabilities as of the year of the conveyance or for the period between that year and the year in which the offer in compromise was made.

John B. Jones, Jr., Lee A. Jackson, David O. Walter, Mark S. Rothman, Department of Justice, Washington, D. C. 20530, Edward V. Hanrahan, United States Attorney, John Peter Lulinski, Assistant United States Attorney, Chicago, Ill., for plaintiff-appellee and defendant-appellee. John J. Yowell, G. Kent Yowell, 38 S. Dearborn St. , Chicago , Ill. , for defendants-appellants and plaintiffs-appellants.

Before HASTINGS, Chief Judge, DUFFY, Circuit Judge, and GRUBB, District Judge.

GRUBB, District Judge:

This is an appeal from a judgment in favor of the United States in the amount of $417,248.57, together with interest, and declaring the right of the government to foreclose a lien on one-half of certain escrow funds which are the proceeds on the sale of a residential property in the amount of $28,500 to be applied toward satisfaction of the judgment.

The property in question, hereinafter referred to as the "Kenilworth" property, was acquired by Robert Zeddies, now deceased, and his wife, Erna Brand Zeddies, in the year 1943, the parties taking title in joint tenancy. In 1953, Robert Zeddies conveyed his interest in the Kenilworth property to his daughter Ann, now Ann Louise Henderson. Robert Zeddies died in the year 1962.

The government's claims relate to income tax liabilities of Robert Zeddies for the years 1944 through 1947, during which years Zeddies made certain over-ceiling payments in avoidance of O. P. A. regulations. A compromise settlement covering the years 1942 through 1947 was proposed by Zeddies in 1949. Thereafter, various court decisions recognized "black market" payments as a part of the cost of goods sold and the Internal Revenue Service acquiesced in this result. The government not having accepted nor rejected the proposed compromise settlement, Zeddies withdrew his offer in 1953.

On January 11, 1955, the government formally rejected the offer and the Commissioner gave notice of deficiency which resulted in the Tax Court litigation in which the income tax liability for the years in question was adjudicated. The determination of the Tax Court was affirmed by this court in Zeddies v. Commissioner of Internal Revenue [59-1 USTC ¶9267], 264 F. 2d 120 (7th Cir. 1959), cert. denied 360 U. S. 910, rehearing denied 361 U. S. 855. Assessment of the deficiency as determined by the Tax Court was made in 1958 and notices of tax liens against all the property of Robert Zeddies were filed in that year.

[Fraudulent Conveyance]

After filing of a suit in state court to remove clouds on the title, which action was removed to federal court by the defendant United States, Civil Action No. 64-C-642, and entry of an order approving an agreement releasing the claimed liens upon the escrow of one-half of the proceeds of sale, a sale of the Kenilworth property was consummated by Erna Zeddies and Ann Louise Henderson in 1964. One day before removal of the state court action, the United States commenced Civil Action No. 64-C-629, seeking to have declared null and void the allegedly fraudulent conveyance in 1953 of the one-half interest in the Kenilworth property from Robert Zeddies to his daughter Ann. These actions were consolidated for purposes of trial and the judgment from which this appeal is taken was entered.

The district court found that Erna Zeddies supplied at least 95% of the entire consideration paid in the acquisition of the Kenilworth property in 1943; that it was the intent of Robert and Erna Zeddies at the time they took title in their joint names that Robert Zeddies would have a present interest in the undivided one-half interest in the property and a right of survivorship in the entire property; that no funds were contributed by the daughter Ann towards the purchase price and that Robert Zeddies gratuitously conveyed his interest in said property to his daughter by means of an intermediary.

Additionally, it was found that on July 20, 1953, the date of the conveyance from Robert Zeddies to his daughter Ann, Robert Zeddies' total liabilities exceeded his total assets, and that after said gratuitous conveyance, Robert Zeddies failed to retain sufficient assets to satisfy his indebtedness to the United States of America . The court concluded that the 1953 conveyance from Robert Zeddies to his daughter Ann was fraudulent and void as to the United States , and that the government had a right to foreclose federal tax liens that attached to Robert Zeddies' undivided one-half interest in the property.

Appellants are Erna Brand Zeddies and Ann Louise Henderson. They challenge certain findings of the district court as not supported by the evidence and contend that the initial acquisition of the Kenilworth property by Robert Zeddies and Erna Zeddies, taking title in joint tenancy, did not constitute a gift from the wife to her husband, but gave rise to a resulting trust since the purchase money was furnished by the wife and, it is claimed, by the daughter. Further, it is contended that the government had failed to meet its burden of establishing that the 1953 conveyance from Robert Zeddies to his daughter Ann was fraudulent in fact or in law.

Assuming that the transaction by which Robert and Erna Zeddies acquired the Kenilworth property was in the nature of a gift from the wife to her husband, the government nevertheless cannot rely on foreclosure of its liens, as in United States v. Trilling [64-1 USTC ¶9292], 328 F. 2d 699 (7th Cir. 1964), because assessment of liability for income tax was made after the taxpayer, Robert Zeddies, had parted with legal title to the property. Statutory liens under Section 6322, Title 26 U. S. C. A. arise at the time assessment is made. United States v. Speers [66-1 USTC ¶9101], 86 S. Ct. 411, fn. 412, 34 LW 4061 (1965). In the instant case, the government can only recover on a theory of avoidance of this conveyance as made in fraud of its rights as a creditor. See United States v. Fidelity & Deposit Co. of Maryland [54-2 USTC ¶9486], 214 F. 2d 565, 568 (5th Cir. 1954.)

To reach the escrow funds in satisfaction of the outstanding tax liabilities of Robert Zeddies, it must be established that the conveyance from father to daughter was invalid as against the United States because it directly tended to or did impair the rights of the United States as a creditor at the time of the conveyance. Flynn v. O'Dell, 281 F. 2d 810, 816 (7th Cir. 1960); Birney v. Solomon, 348 Ill. 410, 414, 181 N. E. 318, 320 (1932).

In this respect the district court found that there remained an outstanding balance of income taxes, penalties and interest assessed in 1958; that the 1953 conveyance was gratuitous and at a time when Robert Zeddies' total liabilities exceeded his total assets; and that after said conveyance, Robert Zeddies failed to retain sufficient assets to satisfy his indebtedness to the United States of America. The facts as to the outstanding unpaid taxes and the gratuitousness of the conveyance from father to daughter are not disputed.

[Taxpayer's Financial Status]

Review of the entire record discloses the following evidence concerning the financial status of Robert Zeddies. By his offer in compromise in the year 1949, Zeddies recognized a tax liability for a number of years including 1944 through 1947, at least in the amount of $65,000. His financial statement submitted together with his offer listed his interest in the Kenilworth property among his assets. According to this statement, he had no other outstanding debts at that time and would have been able to discharge his tax liabilities in the proposed amount. At that time, Zeddies also anticipated future earnings of some $34,000 annually, subject to exigencies of economic conditions and health.

There is no evidence at all concerning Robert Zeddies' assets or liabilities as of the year of the gratuitous conveyance, 1953, or, for that matter, during the period from 1949 until after the assessment was made in 1958. Although it may be inferred that he remembered that he had outstanding tax liabilities for prior years arising from his failure to file correct income tax returns for the years 1942 to 1947 inclusive, since he withdrew his offer made in 1949 it may also be inferred that he believed that the amount of his tax liability would be diminished in view of the deductibility of overpayments as part of the cost of goods sold. In any event, Robert Zeddies did not receive notice of deficiencies for the years in question until January of 1955, more than a year and a half after the time of the conveyance.

The evidence of record concerning the financial status of Robert Zeddies at the critical time of the allegedly fraudulent conveyance is insufficient to support the finding that his liabilities exceeded his assets. The district court may have considered the fact that a substantial balance of unpaid taxes remained outstanding at the time of the death of Robert Zeddies and remains outstanding to date, and related this knowledge back to the year 1953 to find that Zeddies failed to retain sufficient assets to satisfy his indebtedness to the United States . In view of the gap of time between the year 1949 and 1958 and later as to which there is no evidence concerning the financial status of Robert Zeddies, the finding lacks basis in evidence of probative value, which would suffice to sustain the burden of the government to show the invalidity of the conveyance.

Determinations of fraudulent conveyances in the authorities relied on by the government rest on a firmer evidentiary basis as to the impaired financial condition of the debtor-transferor and the creditor status of the claimant. In Flynn v. O'Dell, 281 F. 2d 810 (7th Cir. 1960), the conveyance was within one year of the filing of a petition for bankruptcy and there was evidence of the existence of a secured creditor and other proven debts at the time of the conveyance. The gratuitous transfer of a husband's one-half interest in property jointly held with his wife was within one week after the husband encountered financial difficulties in United States v. Fidelity & Deposit Co. of Maryland [54-2 USTC ¶9486], 214 F. 2d 565 (5th Cir. 1954). In Spikings v. Ellis, 290 Ill. App. 585, 8 N. E. 2d 962 (1937), the conveyance was held fraudulent as to a creditor who had made demand on a note prior to the transfer. In Second National Bank of Robinson v. Jones, 309 Ill. App. 358, 33 N. E. 2d 732 (1941), a material event in the series of conveyances, that is, the secret, gratuitous reservation of some mineral leases to the debtor's wife which diminished the husband's assets, took place after the execution of a note on which judgment after default was obtained subsequent to the time of the invalid conveyance. In these cases there was proof of a debt as well as financial impairment antedating or substantially contemporaneous with the conveyance held in fraud of creditors. The government's proof in our case falls short of establishing that the conveyance from Robert Zeddies to his daughter Ann was in fraud of the rights of the United States as a creditor.

Our decision that there is failure of proof on the question of the invalidity of the conveyance makes unnecessary a determination whether Robert Zeddies initially acquired his one-half interest in the Kenilworth property as a gift from his wife or on resulting trust, since as noted above, even if there was a gift, there can be no foreclosure of lien in this case and recovery for the government must be based on a showing of the invalidity of the conveyance which antedated the tax assessment.

For the foregoing reasons, the judgment of the district court in the consolidated cases is hereby REVERSED, with directions to enter judgment for the plaintiffs-appellants Erna Brand Zeddies and Ann Louise Henderson and against the defendant-appellee United States in Case No. 64-C-642, and judgment for defendants-appellants Erna Brand Zeddies and Ann Louise Henderson, and against plaintiff-appellee United States in Case No. 64-C-629, dismissing the action.

 

 

[65-2 USTC ¶9533] United States of America , Appellant v. Harry Schroeder, Amanda Schroeder, Richard Schroeder and Jacqueline L. Schroeder, Appellees

(CA-8), U. S. Court of Appeals, 8th Circuit, No. 17,794, 348 F2d 223, 7/6/65, Affirming District Court, 65-2 USTC ¶9650

[1954 Code Sec. 6321]

Lien for taxes: Gift of farm lands: Resulting trust.--The evidence supported the finding that the taxpayer, who supplied part of the purchase price for farm lands conveyed to his son, made valid of the lands to his son, so that they were not subject to a lien for taxes owed by the taxpayer-father. This was true although the father operated the farms, derived the income therefrom, made payments on mortgages, kept the buildings in repair, and paid taxes. There was not a resulting trust in favor of the taxpayer when the properties were conveyed to his son, and the transfers to the son were not fraudulent conveyances.

Michael Mulroney, Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson, Joseph Kovner, Department of Justice, Tax Division, Washington, D. C. 20530, Donald A. Wine, United States Attorney, Des Moines, Iowa, for appellant. Leland C. White, 713 Court St., Harlan, Iowa, Bert B. Rand, 729 15th St., N. W., Washington, D. C., for appellees.

Before VOGEL, MATTHES and RIDGE, Circuit Judges.

MATTHES, Circuit Judge:

The issue in this case is whether three tracts of Iowa farm land are owned by Harry Schroeder and should be subjected to the payment of delinquent federal taxes. The district court found that such property belonged to Richard Schroeder, Harry's son, and dismissed the Government's cause of action as to this phase of the case. From this judgment [65-2 USTC ¶9650] the Government has appealed. We affirm.

The pertinent background facts have been established by administrative and judicial proceedings and are, of course, not in dispute.

By letter dated July 3, 1951, the Commissioner of Internal Revenue notified Harry Schroeder and his wife, Amanda, that determination of their income tax liability for the taxable years ended December 31 in each of the years 1942, 1944, 1945, 1946 and 1947 disclosed a deficiency of $679,545.55 plus fraud and delinquent penalties totaling $383,990.82. The Schroeders unsuccessfully sought a redetermination of the deficiencies and penalties in the Tax Court. Schroeder v. Commissioner [Dec. 22,541(M); 23,164(M)], P-H Memo. T. C. ¶57,162 (1957), affirmed [61-2 USTC ¶9531] 291 F. 2d 649 (8 Cir. 1961), cert. denied 368 U. S. 985 (1962).

In December, 1959, notices of tax liens were filed in different counties in the State of Iowa . On April 10, 1961, the district court appointed a receiver to take and have complete and exclusive control and custody of all assets of Harry and Amanda Schroeder. In March, 1961, the Government filed this action in the United States District Court seeking, among other relief, a foreclosure of the tax liens and the sale of certain real estate alleged to be the property of either Harry Schroeder or Harry and his wife, Amanda. In the complaint, as amended, the Government averred in substance that a number of parcels of real estate, legal title to which was in other individuals, were in truth and in fact the property of Harry Schroeder and were subject to the Government's liens.

[Ownership of Real Estate]

Apparently there were two trials, one involving three parcels of real estate and another involving five parcels. Two judgments were entered. On June 10, 1963, the court filed findings of fact and conclusions of law and entered a final judgment in regard to two farms and residence property situated in Tabor, Iowa . Specifically, the court found that the Randolph Farm, title to which was in Mark A. Kilpatrick, grandson of the Schroeders, and the County Line Farm, title to which was in Harry Paul Kilpatrick, another grandson, were subject to the liens of the Government but that the Tabor, Iowa property was not subject to the liens. See United States v. Schroeder [63-2 USTC ¶9608]. No appeal was taken from that judgment. Thereafter, a trial ensued involving the three farms at issue in this appeal and two other tracts, title to which was in Bert Colwell. On April 8, 1964, the court filed its memorandum opinion in which it found that three of the tracts which had been previously conveyed to Richard Schroeder were not subject to the tax liens. The court further determined, however, that the deed to Bert Colwell conveying two tracts was an instrument of security for indebtedness of Harry Schroeder to Colwell and decreed that Colwell was entitled to a lien on the proceeds derived from the sale of the Colwell tracts. The court's opinion is reported at . . . F. Supp. . . .. As stated, the Government appealed from that portion of the judgment decreeing Richard to be the owner of the three farms.

Thus, we have a situation where the Government succeeded in having the tax liens impressed upon certain tracts of real estate even though other parties held legal title thereto, and failed in its effort to subject the three tracts here involved to the tax liens.

The three subject tracts are referred to and designated as the "Allen Farm," located in Mills County , Iowa ; the "Adams County Farm," located in Adams County , Iowa , and the "Treynor Farm," located in Pottawattamie County , Iowa .

The Allen Farm, containing 40 acres, was conveyed by Ed Allen to Richard H. Schroeder by deed dated November 18, 1947. A small tract, containing 1.56 acres, also a part of the Allen Farm, was conveyed to Richard by deed dated July 19, 1948.

The Adams County Farm, containing 517 acres, was conveyed by Adolph A. Claussen and wife to Richard Schroeder by deed dated March 8, 1951.

The Treynor Farm was conveyed by Edd Schroeder (a brother of Harry) by deed dated March 23, 1951. In the premises of this deed Harry Schroeder was designated as the grantee; however, the habendum clause contains the name "Richard Harry Schroeder." On November 28, 1951, Harry and Amanda executed a deed, in which Richard Schroeder was named as grantee. This deed recites that it was the intent of the grantors to correct error in the name of the grantee in the deed from Edd Schroeder and wife to Harry. All of the aforementioned deeds were promptly filed for record.

Before reaching the contentions of the Government and as a prelude, we recognize the applicability of §§ 6321, 6322 and 7403 of the Internal Revenue Code of 1954. ¹ We also agree with the Government that state, not federal, law creates the property and property rights to which the tax lien attaches. United States v. Bess, 357 U. S. 51, 55 (1958). Cf. Commissioner v. Stern, 357 U. S. 39 (1958).

The Government advances three major contentions: (1) the district court erred in holding that Harry Schroeder made a gift of the three tracts of land to his son, Richard, so that Harry had no property or rights to property in such land which could be subject to payment of his tax liability; (2) the district court erred in failing to hold that a resulting trust arose in favor of the taxpayer Harry at the time the properties were conveyed to Richard; (3) assuming there was a transfer of the properties to Richard the court erred in failing to hold that the transfer was a fraudulent conveyance as to taxpayer's creditor, the United States.

Gift Issue

Although there was no explicit finding by the district court that Richard acquired the subject farms as gifts from his father, this finding is implicit in the opinion considered in its entirety. Moreover, the Government's approach here is that "the district court believed that the taxpayer [Harry] made gifts of the three tracts to Richard." From this starting point the Government urges that "as a matter of Iowa law there were no gifts of the properties."

To support its thesis, the Government relies upon general principles of law which have been announced in Iowa gift cases, namely, (1) to constitute a gift of land there must be an intent to make a gift, an intent to deliver the subject matter of the gift, and actual delivery of the subject matter. Three of the four cases appearing in boldface type cited to this proposition, Hagerty v. Hagerty (Iowa), 172 N. W. 259; Runnels v. Anderson (Iowa), 173 N. W. 91; Oliver v. Perry (Iowa), 109 N. W. 183, involved asserted oral gifts of land, and in the fourth case, Lathrop v. Knoop (Iowa), 210 N. W. 764, the deed was never delivered or recorded during the grantor's lifetime. (2) The donor of a gift of land must transfer all right and domain over the res of the gift. Again, Hagerty v. Hagerty and Oliver v. Perry, supra, are cited together with Creveling v. Brown (Iowa), 125 N. W. 807, and Dolph v. Wortman (Iowa), 183 N. W. 814, both non-delivery and nonrecording of deed cases. (3) The giving of a deed to land is merely evidence of an intent to deliver; it is not conclusive of delivery. Cited to this proposition are Dolph v. Wortman, Lathrop v. Knopp, Creveling v. Brown, supra.

Recognized essential elements common to gifts inter vivos are (a) a clear and unmistakable intention on the part of the donor to make a gift of his property, 24 Am. Jur., Gifts, §21; 38 C. J. S., Gifts, §15; (b) the gift must be fully executed--intention to transfer title--an actual or constructive delivery by the donor, and an acceptance by donee, 24 Am. Jur., Gifts, 22; 38 C. J. S., Gifts, §§ 18, 29.

Also pertinent here is the settled and salutary principle that where there is a close relationship between the party who pays the purchase price and one who takes the title, such as husband and wife or father and son, there is a presumption that a gift was intended. Luckhart v. Luckhart ( Iowa ), 94 N. W. 461; McGinnis v. McGinnis ( Iowa ), 139 N. W. 466, 467; Olsen v. Best ( Nebr. ), 92 N. W. 2d 531, 533 (1958); Bird v. Stein, 258 F. 2d 168, 176 (5 Cir. 1958), cert. denied, 359 U. S. 926 (1959). The rule is succinctly stated in Bogert, Trusts & Trustees, §460 (2d ed. 1964), as follows:

"Another group of alleged purchase-money trust cases where close relationship is of much importance is that where a parent and child are involved. Here the courts laid down the rule that, if a father pays the consideration and has the conveyance run to his child, there is a rebuttable presumption of a gift. * * * The basis for the presumption is the common practice of fathers to make gifts to their children, either on account of the legal duty to support which operates during the minority of the child, or because of love and affection * * *."

Recognizing (1) that title to real estate may be conveyed by gift, oral or written, (2) that the deeds to Richard were delivered and recorded, and (3) that there was direct evidence that a gift was intended, ² the Government nonetheless takes the position that the record shows "that while a gift may have been intended, there was no expressed intent to make a present gift of the farms. Rather, Richard was to get the farms in the future when he was financially able to run them;" that "[m]ore important than what the taxpayer [Harry] and Richard said, however, is what they did--or what the taxpayer did not do." The Government then labors at some length in demonstrating that Harry exercised dominion over and control of the three farms after they had been transferred to Richard, a fact which is not in dispute. But there are other relevant and cogent circumstances.

As we have seen, the Allen Farm was acquired by Richard in November, 1947. Richard was then 17 years old. The uncontradicted evidence shows that Harry gave the amount of the purchase price, approximately $2,350, to Richard, who deposited it in a bank and issued his check to the grantors. The consideration for the Adams Farm, acquired by Richard in 1951, was $57,500. The farm was conveyed subject to a mortgage for $35,200. Approximately $12,300 was paid by Harry. The Government concedes that of the remaining $10,000 Richard furnished "about $5,700.00 * * * proceeds of saving bonds given to Richard in prior years." ³ There is, however, evidence from which the district court could and did find that Richard furnished and paid the entire $10,000. The Treynor Farm, also acquired by Richard in 1951, had been in the Schroeder family for two prior generations. Richard's grandfather conveyed this farm to Edd Schroeder, a brother of Harry, who conveyed the same subject to a mortgage securing an unpaid balance of about $19,000. The remainder of the purchase price, over $10,000, was paid by Harry to Edd's creditors.

To be sure, as the Government asserts, Harry operated the three farms, derived the income from the farming operations, made the payments on the two mortgages, kept the buildings in repair, and paid the taxes and insurance premiums. This was done pursuant to an "agreement or understanding" between Harry and Richard. ⁴ Richard was a member of the armed services for a period of approximately two years beginning in October, 1951. When he returned home "[H]e didn't have any money, and the cattle--we were all losing money at that time--and he didn't have any money so we kept going until after he got ahold of a little money so he could go on it himself."

The financial status of Harry in 1947 and in 1951 is pertinent to the gift issue. During a pre-trial conference, a colloquy occurred between the attorney for Richard and his wife, and the attorney for the Tax Division, Department of Justice, in regard to Harry's solvency in 1947 and in 1951. The attorney representing the Tax Division, in response to an inquiry, stated:

"We will not attempt to show insolvency in the strict sense. We may show the financial condition of Mr. Schroeder at the time of the transfer of the property, but we're not in a position to show that in the years * * * 1947 and '48, particularly * * * down through '51, that he was actually insolvent in the sense that his debts exceeded his assets. However, there may be evidence that he was close to the line in '52 and '53. We're not making any attempt to show insolvency of any of those years as such through expert competent testimony along that line."

Additionally, an internal revenue agent who began an examination of Harry and Amanda's income tax returns in November, 1947, testified that in 1947 their net worth was in excess of $1,000,000. Harry Schroeder testified without objection that in 1951 his net worth was "well over a million dollars." The district court considered and discussed the solvency question at some length and stated in part:

"The solvency or insolvency which is material is that which existed at the time of the transfer * * *. There is proof that in 1947 and in 1951, Harry Schroeder could have paid his debts and there is no evidence to the contrary. The fact that he is now insolvent is not sufficient to hold otherwise. Neither was it shown that Harry Schroeder was contemplating insolvency. The evidence adduced by the defendants inferred that he was not contemplating insolvency." . . . F. Supp. . . ..

The picture portrayed by this record is understandable. Richard was a dutiful and obedient son who labored, apparently without pay, on his parents' farms from an early age until he responded to the call of his country. He was the natural object of his father's bounty. Under the conditions existing in 1947 and 1951, Harry was within his rights in disposing of his property in accordance with the dictates of his conscience. The question of intent--whether Harry Schroeder intended to make a present gift of the farms was one of fact for the district court to resolve. Stroup v. Bridger ( Iowa ), 100 N. W. 113, 115; In Re Wearin's Estate ( Iowa ), 149 N. W. 621, 622; Yagge v. Tyler ( Iowa ), 280 N. W. 559, 562. A fair appraisal of the record convinces us that the Government wholly failed to sustain the burden of rebutting the presumption of a gift--a presumption which must be indulged on these facts; and that the court's findings on this issue are not clearly erroneous.

Resulting Trust Theory

Here, the Government asserts that "a somewhat more technical argument supports" its position, the gist and core of such argument being that there was "clear and certain" evidence to show an intent not to convey a beneficial interest in the properties to Richard.

We are familiar with the essential elements of a resulting trust. They need not be stated here. The determination that valid gifts were consummated at the time the deeds were executed and delivered effectively forecloses and concludes the resulting trust theory.

Fraudulent Conveyance Issue

This is termed by the Government as "a second technical argument" to support its position.

Premising its contention on the rule that "a voluntary conveyance, even to children, * * * is constructively fraudulent as to an existing creditor, unless the grantor had remaining after the conveyance sufficient property to satisfy the claims of his creditors * * *," Campbell v. Campbell (Iowa), 105 N. W. 583, 584, the Government challenges the district court's finding of solvency in 1947--and in 1951. This facet of the case has heretofore been discussed.

We subscribe to the adage "Be just before you are generous," but there is no basis in fact for its application. The Government is in the dilemma of having no record support for its position. Indeed, its efforts in this direction are far from impressive. Apart from the concession of Government's counsel in the pre-trial conference set out, supra, it appears beyond doubt that Harry and Amanda Schroeder's net worth in 1947 was in excess of $1,000,000. And the appellees' evidence, in the form of Harry's testimony and supporting documentary evidence, affords adequate proof to support the court's finding that Harry was also solvent in the year 1951.

In summary, we are persuaded that the court's decision is correct. Accordingly, the judgment appealed from is affirmed.

¹ §6321 provides that if any person fails to pay any tax after demand, the amount of the tax that is due shall be a lien in favor of the United States upon all property of such person.

§6322 provides that unless another date is specifically fixed by law the lien shall arise at the time the assessment is made.

§7403 provides, inter alia, for the filing of an action in a district court of the United States to enforce the lien of the United States .

² Harry testified the gifts were motivated because "Bud [Richard] always stayed home and worked and he never took any part in high school activities. Just come home from school and go to work from the time he was about twelve years old and I figured he was entitled to something. * * * That's the reason I gave him the money to buy those places with and put them in his name."

³ In a footnote the Government suggests it would be appropriate to permit Richard to participate in the net proceeds of the sale of the property to the extent of his contribution to the purchase in the ratio his contribution bears to the total purchase price.

⁴ Harry's testimony in this regard was:

"Q. Then I believe you also testified that thereafter you operated the farms and paid the taxes and the mortgage, interest, and so forth?

"A. And the payments.

"Q. Was there any reason why or did you have any agreement or understanding with your son as to that?

"A. Yeah,--he had to go to the Army, so I just kept running them like that and I paid the down payment, the land payments and the interest and the taxes and took the crops off of them, and if I made money, I made money, and, if I didn't, I didn't."

Richard testified that during the time he was in service his father "was going to take care of them * * * and treat them as

 

[81-1 USTC ¶9257] United States of America , Plaintiff v. Thomas Mentelos and Beverly Cuniff Mentelos et al., Defendants

U. S. District Court, So. Dist. Fla., Case No. 78-1480-CIV-EBD, 5/12/80

[Code Secs. 6321 and 6672]

Penalties: Failure to collect and pay payroll taxes: Corporate officer: Responsible person: Willfulness: Tax liens: Time of attachment: Prior conveyance by taxpayer.--The taxpayer, a manager and officer of a corporation with the authority to co-sign corporate checks and hire and fire employees, was found to be a responsible person within the meaning of §6672 and was liable for the assessed 100% penalty for failure to pay withholding taxes. Willfulness was proven because he was aware that the corporation was not paying or segregating amounts deducted from the employees' paychecks while payments to other creditors were made by the corporation. The taxpayer conveyed real property to his future wife for valuable consideration before the date of assessment and the notice and demand for payment was issued. Thus the federal tax liens did not attach to the conveyed property and the court ordered the liens removed.

J. V. Eskenazi, United States Attorney, Stephen M. Pave, Assistant United States Attorney, 14 N. E. First Ave. , Miami , Fla. 33132 , for plaintiff. William B. Roman, 150 Southeast Third Ave., Miami, Fla. 33131, for defendant Atico, Leslie Alan Schere, Duran, Cantera, Kalish, Schere & Press, 1250 S. W. 1st St., Miami, Fla. 33135, for John & Nell Penick, Vincent J. Brennan, 1096 54th Ave., Vero Beach, Fla. 32960.

Findings of Fact

DAVIS, District Judge:

During the relevant periods in questions, the last three quarters of 1970 and the first quarter of 1971, the defendant, THOMAS MENTELOS, was associated with the ARC ELECTRICAL CORPORATION (The Corporation). The Corporation was a two-man operation, with the defendant, Thomas Mentelos, being one of the two principals involved. Responsibility and ownership were split equally between the two parties. Thomas Mentelos was a 50% shareholder of the Corporation, managed the Corporation's daily affairs, was an officer of the Corporation, and had the power to hire and fire employees. In addition, his signature was required upon any check which was drawn on the Corporation's bank account.

During the relevant period, the Corporation failed to pay to the United States of America the "trust fund" Withholding and FICA taxes that had been withheld from the wages of its employees. After attempts to collect the tax revenues from the Corporation proved unsuccessful, the United States assessed a 100% penalty against Thomas Mentelos pursuant to §6672 of the Internal Revenne Code of 1954 as amended 26 U. S. C. §6672. The outstanding liabilities from those assessments amount to §30,932.76, plus interest and statutory additions as allowed by law. The assessments were made on September 10, 1974, and Notices of Federal Tax Liens were filed with the Clerk of the Circuit Court, Dade County , Florida , on October 3, 1974, and March 8, 1975. The former 1981 Standard Federal Tax Reports Notice listed Thomas Mentelos as the taxpayer, and the latter Notice listed Beverly Cuniff Mentelos as the nominee of Thomas Mentelos.

Thomas Mentelos was aware at all times that the federal tax liabilities were accumulating and that the Corporation was neither paying the taxes nor segregating the "trust fund" amounts as they were deducted from the pay checks of the Corporation's employees. On April 2, 1974, the defendant, Thomas Mentelos, executed Internal Revenue Service Form 2751, Proposed Assessment of 100% Penalty, wherein he consented to the assessment and the collection of the total penalty, and waived the privilege of filing a claim for abatement after assessment. At the time Thomas Mentelos signed this form, he was either aware or reasonably should have been aware that he was personally liable to the United States for the "trust fund" tax liabilities of the Corporation. In this consent form, the name of the Corporation was incorrectly spelled, but Thomas E. Mentelos knew that he was signing a document concerning the Corporation wherein he previously owned 50% of the outstanding stock.

The defendant, Thomas Mentelos, acquired the residence which is the subject of this action [hereinafter the "subject property"], in November of 1972. Said real property may more accurately be described as follows:

Lot 6, Block 3, Ranchero Homesites, according to the Plat thereof, recorded in Plat Book 53 at Page 38 of the Public Records of Dade County, Florida.

The subject property is a house and lot located at 8620 Southwest Terrace, Miami , Florida 33156 . By warranty deed of August 26, 1974, the defendant, Thomas Mentelos, conveyed the subject property to the defendant, Beverly Cuniff Mentelos, then named Beverly Cuniff. Defendant Beverly Cuniff Mentelos had lived with Thomas Mentelos and his son since shortly after he had moved into the residence in November, 1972. The couple lived together as would a husband and wife, and they were eventually married in May of 1975. The Menteloses remain married to this date and have maintained their residence at the subject property from 1972 until the present time.

The testimony is undisputed as to the defendant, Thomas Mentelos agreeing to pay the defendant Beverly Cuniff $100.00 per week to move into his house and take care of the house and his young son in late 1972 or early 1973. After paying Beverly a few weekly payments of $100.00. Thomas Mentelos stated that he was without sufficient funds to continue the payments. After approximately one and one-half years, Beverly demanded payment. In consideration of the funds owed to her, the defendant, Thomas Mentelos, deeded her the house.

Conclusions of Law

This Court has jurisdiction of the parties hereto and of the subject matter of this action.

The defendant Thomas E. Mentelos' duties, responsibilities and position in the Corporation, as set out in the Findings of Fact, establish conclusively that he was a resonsible person in the ARC ELECTRICAL CORPORATION. Mazo v. United States , 590 F. 2d 1377 (5th Cir. 1979).

Once the United States has established that a person is a responsible person, and an assessment has been made, the burden of proving lack of willfulness is on the taxpayer. In this instance, not only had defendant not met his burden, but the United States has demonstrated wilfulness by showing that other payments were made by the Corporation at a time when Thomas Metelos was aware of the unpaid tax liabilities. Mazo v. United States, supra.

The United States has thus shown that Thomas Mentelos is liable for the full amount of the 100% penalty assessed against him, plus interest and statutory additions.

Federal tax liens did not come into existence with respect to all property and rights to property belonging to the defendant, Thomas E. Mentelos until the date of assessment, and notice and demand for payment, on September 10, 1974. Therefore, Federal tax liens did not attach to the legal title of the subject property, which defendant Thomas E. Mentelos had conveyed to defendant, Beverly Cuniff Mentelos, on August 26, 1974. In such a situation, where a taxpayer disposes of property prior to the existence of Federal tax liens, the United States may seek relief under the applicable fraudulent conveyance laws of the particular state in which the property and taxpayer are located.

Commissioner v. Stern [58-2 USTC ¶9594], 357 U. S. 39 (1958); United States v. Ressler [77-1 USTC ¶9459], 433 F. Supp. 459 (S. D. Fla. 1977), per curiam aff'd [78-2 USTC ¶9571], 576 F. 2d 650 (6th Cir. 1978).

The defendant, Beverly Cuniff Mentelos, while a single woman, did in fact give good, valuable, full and adequate consideration that supports the conveyance to her in the property deeded to her by Thomas E. Mentelos, August 26, 1974 and which is published in the Clerk of Circuit Court, Dade County , Florida on September 5, 1974.

That conveyance was lawful and complete on its face and was not a fraudulent conveyance.

For the reasons thus stated, it is

ORDERED AND ADJUDGED that the defendant, Thomas E. Mentelos is liable to the United States for unpaid assessments in the amount of $30,932.76, plus interest and statutory additions as provided by law.

Since the conveyance of the real property known as Lot 6, Block 3 Ranchero Homesites to Beverly Cuniff Mentelos was in all respects valid, it is

FURTHER ORDERED AND ADJUDGED that the United States shall remove any and all tax liens levied against that property which arose out of Thomas E. Mentelos's relationship with ARC ELECTRICAL CORPORATION.

 

 

[42-2 USTC ¶9687]Walter G. Driver, Plaintiff in Interpleader, the United States of America , Intervener and Plaintiff, v. June M. Hooper, Defendant

In the District Court of the United States for the Northern District of California, Southern Division, No. 22202-S, Filed October 2, 1942

Property subject to lien: Wife's property not subject to lien for husband's taxes.--On the facts, it appears that defendant received a valid gift of her husband's interest in 1504 shares of the F Packing Company in June, 1941, and therefore, no lien may be asserted against those shares on account of income taxes which may be due from defendant's husband, which taxes were assessed by jeopardy assessments in January, 1942.

I. M. Peckham, 333 Montgomery St. , San Francisco , Calif. , for plaintiff. Frank J. Hennessy, U. S. Attorney, Post Office Bldg., San Francisco , Calif. , for defendant Clifford C. Anglim. William J. Mahaney, 155 Sansome St., San Francisco, Calif., and Louis Janin, Mills Tower, San Francisco, Calif., for defendant June M. Hooper.

Findings of Fact and Conclusions of Law

SURE, D. J.:

The above entitled cause came on regularly for trial before the above entitled court, Honorable A. F. St. Sure presiding therein, sitting without a jury.

Plaintiff appeared by its attorney, Frank J. Hennessy, United States Attorney, being represented by Esther B. Phillips, Assistant United States Attorney. Defendant appeared by her attorneys, William J. Mahaney and Louis Janin.

Witnesses were sworn and testimony given at the said hearing, and the Court being fully advised in the facts and the law, makes its Findings of Fact as follows:

[The Facts]

(1) The defendant, June M. Hooper, is and at all times material has been a resident of the Northern District of California.

(2) Said defendant is and at all times material has been the wife of Walter S. Hooper.

(3) The Collector of Internal Revenue for the Northern District of California, Clifford C. Anglim, by jeopardy assessments on January 22, 1942, assessed income taxes against said Walter S. Hooper in total amounts, including penalties and interest as follows:

For 1937 ....              $ 467.71

For 1938 ....              1,275.50

For 1939 ....              1,438.91

For 1940 ....                887.42

                           5,982.68

                      (no penalties

For 1941 ....          or interest)

 

(4) Thereafter and on January 23, 1942, said Collector of Internal Revenue asserted a lien for such assessments in favor of the United States and upon 1504 shares of stock of the Farallone Packing Company (now Broval, Inc.) represented by voting trust certificates in the possession of Walter G. Driver.

(5) Said shares were originally acquired by Walter S. Hooper prior to June 21, 1941, and the trust certificates therefor were endorsed by him in blank and placed with the Bank of America, N. T. & S. A. as security for a loan from said bank to Walter S. Hooper.

(6) On June 24, 1941, Walter S. Hooper obtained said trust certificates from said bank and delivered the stock to defendant, June M. Hooper. Walter S. Hooper stated at the time he delivered the stock to his wife that he wanted her to have it as her own and hoped that it would support her and the children during his absence. June M. Hooper delivered the stock to one A. Boyd Puccinelli to be used as security for a bail bond for Walter S. Hooper and was given a receipt as true owner thereof. The securities were to be returned to defendant, June M. Hooper, when the bond had been discharged.

(7) Walter S. Hooper intended that the said shares should belong to and be the property of June M. Hooper; he expected to be absent from home and unable to support her and her children for some time and desired the stock and proceeds to be used by defendant, June M. Hooper, for such purpose until he could again support them.

(8) Under the admissions in the pleadings, the proofs submitted, and the oral stipulations of counsel the court has jurisdiction to determine the title to the stock and whether the said stock was subject to the lien claimed.

Conclusions of Law

From the foregoing Findings of Fact the court makes its Conclusions of Law as follows:

(1) The 1504 shares of Broval, Inc. are owned and ever since June 24, 1941 have been owned by the defendant, June M. Hooper, and not by Walter S. Hooper. Said Walter S. Hooper made a valid gift of his interest in said 1504 shares of stock on June 24, 1941 to said June M. Hooper.

(2) The United States of America has no lien upon said shares by virtue of taxes which may be due from Walter S. Hooper.

Let judgment be entered in accordance with the above Findings of Fact and Conclusions of Law.

 

 

[37-1 USTC ¶9242]United States of America, Plaintiff, v. Bank of Rockville Centre Trust Company, as administrator cum testamento annexo of the estate of John M. Phillips, deceased, Corn Exchange Bank Trust Company, a corporation, Helen Phillips Haran, William B. Welsh and Marian M. Cassidy, Defendants

United States District Court, Eastern District of New York, Equity No. 7214, 19 FSupp 124, Decided April 6, 1937In a suit in equity to foreclose a lien for unpaid income taxes of decedent for 1917 to 1928, the Government's right of action is denied, it being held that its lien on jewelry in a certain safe deposit vault was filed subsequent to a transfer by gift to another. Presumption that transfer of jewelry was fraudulent, and made to defeat Government's claim for taxes due, is overcome by evidence.

Leo J. Hickey, United States Attorney, for the plaintiff; James W. Morris, Assistant Attorney General, Andrew D. Sharpe, Frederic C. Rita, Special Assistants to the Attorney General, and Frank J. Parker, Assistant United States Attorney of counsel. Wood & Gehrig, attorneys for defendant Bank of Rockville Centre Trust Company, as administrator cum testamento annexo of the estate of John M. Phillips, deceased; James M. Gehrig, Jeremiah Wood and Ward Wilklow, of counsel. Laughlin, Gerard, Bowers & Halpin, attorneys for Corn Exchange Safe Deposit Company; Mr. Falck, of counsel. Charles R. Weeks, attorney for defendant Helen Phillips Haran; John R. Niesley, of counsel. L. J. Harvey, attorney for defendant William B. Welsh. Bondy & Schloss, attorneys for defendant Marian M. Cassidy; I. Russell Stein, Norm P. S. Schloss and Adolph Sonnenthal, of counsel.

ABRUZZO, D. J.:

The United States of America instituted this suit in equity to foreclose a lien for unpaid income taxes, penalties and interest of one, John M. Phillips, deceased, upon certain jewelry contained in a safe deposit box of the defendant Corn Exchange Bank Safe Deposit Company (improperly named Corn Exchange Bank Trust Company in the bill of complaint).

[Facts]

The theory of the government's bill of complaint was that the jewelry was owned by John M. Phillips, deceased, at the time of his death and that it now forms part of his estate. The bill further contended that because Phillips died owing large sums for income taxes, penalties and interest the government was entitled to a judgment which would decree that the jewelry did in fact belong to John M. Phillips, deceased, at the time of his death, and that the Court should direct that it be sold and the proceeds applied to the payment of taxes which he owed.

On the trial of the action, the government adopted a new theory; to wit, that Phillips, during his life-time and while insolvent, had transferred and given the jewelry either to his wife or to his daughter as a gift. The government sought to have this transfer set aside on the theory that they were a judgment creditor. The government elected to stand on this latter theory.

At the end of the trial, the government asked the Court for leave to go back to its original cause of action as alleged in the bill of complaint and further requested the Court to consider the matter on either aspect of the case. The Court granted this motion and has considered the case on both theories as advanced by the government.

The Revenue Act of 1926, c. 27, 44 Stat. 9 and Revenue Act of 1928, c. 852, 45 Stat. 791 are cited by the government is support of its contention.

The government in support of its first theory proved that its judgment was filed on July 16, 1934 against the Bank of Rockville Centre Trust Company, administrator cum testamento annexo of the estate of John M. Phillips, deceased, in the sum of $2,412,455.41. The assessment against John M. Phillips was made in March 1928 for approximately $1,370,000, this assessment being for taxes owed from 1917 to 1928 inclusive. As the gift of this jewelry was made in 1927, the indebtedness of the deceased at the time thereof would be somewhat less than $1,370,000. No claim was made that Phillips owed other debts at that time. Included in the judgment of July 16, 1934 is this amount of $1,370,000, plus penalties and interest. The government produced no other proof with reference to the transfer in 1927, excepting that it did file its lien against the jewelry while it was in a safe deposit vault in the Corn Exchange Bank Safe Deposit Company (improperly named Corn Exchange Bank Trust Company in the bill of complaint) on June 27, 1929. The jewelry was in the name of the defendant Helen Phillips Haran, the daughter of the deceased, and William B. Welsh, her general guardian. The government further established that no part of the judgment for taxes upon the estate had been paid, excepting a small amount.

[Two Issues: Ruling on First]

The question to be determined first is whether the jewelry was the property of the deceased, John M. Phillips, at the time of his death; and secondly, if he had made a transfer of the said jewelry, whether it was in fraud of his creditor, the plaintiff. There is ample proof from which the Court can make a determination that a transfer of this jewelry was made to either the wife, Marian M. Cassidy, or to the daughter, Helen Phillips Haran, in 1927. The government offered no proof to contradict this testimony. The government's contention that the jewelry was the property of John M. Phillips at the time of his death must therefore be overruled. It remains to consider the government's alternative theory.

[Consideration of Second Issue]

In 1927, when the transfer was made, the uncontradicted and undisputed proof is that the deceased had been assessed less than $1,370,000 for taxes, which as will be seen was later reduced to judgment in 1934 for over $2,400,000. The Court is assuming that in 1927 John M. Phillips, deceased, owed to the government almost $1,370,000 and that the government was a creditor of the deceased for that amount, even though it was not reduced to judgment at that time.

The government contended that in view of the fact that the judgment in 1934 could not be collected, there is a presumption that the transfer made in 1927 was fraudulent and made to defeat the claim of the government for taxes due. The Government cites as its authority GA Nun v. Palmer, 216 N. Y. 603, which states as follows:

* * * that a transfer without consideration by one who is then a debtor raises a presumption of fraud. The creditor may stand upon that presumption until it is repelled.

The plaintiff also gives us as authority the case of McDonald v. Dewey, 202 U. S. 510.

However, contrary to the government's theory the facts indicate that the net income of the deceased, John M. Phillips, for the several years 1917 to 1928 was very large. He had control of a monopoly on a lock joint pipe enterprise that was immensely profitable. Apart from this, however, in the latter part of 1926 or the early part of 1927, he was possessed of and owned New York City bonds valued at $1,350,000. In that same period, the deceased was also the owner of and possessed of at least $20,000 in cash. A judgment obtained at that time may have uncovered other assets as there was some evidence that he was engaged in a real estate transaction in which he had made a deposit of a large sum of money. There was also proof that at the time of his death there was a great deal of material on hand in connection with his business, the value of which was not clearly disclosed, but which amounted to quite an amount. Needless to say, the plaintiff was in a better position to collect its assessment of taxes had it done so in 1927 rather than in 1934.

[Conclusion on Second Issue]

The facts are clear and uncontroverted that the deceased was solvent at the time the transfer was made. The presumption that the transfer was made in fraud of a creditor is overcome by the defendants' proof. Therefore, the court must necessarily find upon the evidence adduced at the trial that the government's second theory of its cause of action is not sustained.

[Jewelry Held Property of Widow]

The point at issue remaining is the question of ownership as between the wife, Marian M. Cassidy, and the daughter, Helen Phillips Haran.

The daughter contends that a gift of this jewelry was made to her in 1927. She was then fifteen years of age. The jewelry was found in a safe deposit vault at the Ambassador Hotel in Atlantic City , New Jersey , by the son, Francis Phillips. He transported the jewelry to Long Island where he kept it for two or three years in a camera box, carrying it with him from place to place. The young man then turned it over to the daughter, Helen Phillips Haran, a defendant herein, who placed the jewelry in a safe deposit box in the Corn Exchange Bank Safe Deposit Company (improperly named Corn Exchange Bank Trust Company in the bill of complaint) where it was discovered by the government and its lien placed thereon. The daughter, Helen Phillips Haran, claimed that her father, John M. Phillips, deceased, purchased the jewelry for her so that she might be beautifully arrayed when she became older in order that she might more easily find a suitable husband. Francis Phillips and Helen Phillips Haran are the step-children of the defendant wife, Marian M. Cassidy, and their actions immediately following the death of their father, John M. Phillips, was to say the least highly suspicious. Having physical possession of the jewelry it would appear that the daughter, Helen Phillips Haran, has endeavored to find a way to keep them. Her witnesses attempted to prove that the deceased gave his daughter this jewelry as a gift. There is some testimony that this fifteen year old child was given the jewelry to play with at the safe deposit vault.

On the other hand, the wife, Marian M. Cassidy, contended that this jewelry had been given to her as a gift. She produced various witnesses who testified to facts indicating that the jewelry had been given to her, that she had been wearing it on many occasions and that it in fact belonged to her. There was further evidence that a great deal of jewelry of the same type in question had been purchased by the deceased for his wife during his life-time. This was not disputed.

The deceased, John M. Phillips, had an apartment at the Ambassador Hotel in Atlantic City, New Jersey, where he had a vault which was accessible not only to him but to his wife and son. It is very possible, as contended by the wife, that the son, Francis Phillips, immediately upon the death of his father, went to the safe deposit vault and divested it of its entire contents. Phillips died at a time when his wife, Marian M. Cassidy, was in Brooklyn, and upon being notified Mrs. Cassidy hastened to Atlantic City .

No other jewelry was bought for the daughter and it seems improbable that the deceased would have purchased such elaborate jewelry for his fifteen year old child. Conversely, it is highly probable that it was purchased for a person of more mature years. The jewelry in dispute was in keeping with the type that the deceased had purchased for his wife on other occasions prior to his death. The witnesses for the wife, Marian M. Cassidy, were convincing and more worthy of belief than those of the daughter. All the probabilities, common sense and logic were on the side of the wife and widow, Marian M. Cassidy. The Court, therefore, finds that the jewelry was in fact transferred and given to the wife, the defendant Marian M. Cassidy, in 1927 and she is the sole person entitled to the possession thereof.

The wife was not made a party to the original cause of action but she sought leave to intervene in order to assert and maintain her right as owner and this relief was granted.

That the Court has jurisdiction over the subject matter of this action was not disputed. This question comes within Rule 23 of the rules of equity and is squarely passed upon the case of Ames Realty Co. v. Bigh Indian Mining Co., 146 Fed. 166. The many other cases cited in the briefs are ample authority for the Court's jurisdiction to entertain and give judgment upon the cross-claim involved.

In view of this decision, it is unnecessary to take up the question of the claim of the Bank of Rockville Centre Trust Company, as administrator cum testamento annexo of the estate of John M. Phillips, deceased, nor of the Corn Exchange Bank Safe Deposit Company (improperly named Corn Exchange Bank Trust Company in the bill of complaint) who was also made a defendant to this action.

Judgment should accordingly be entered in conformity with this decision, decreeing that the defendant, Marian M. Cassidy, is the rightful owner of the jewelry which was placed and is now in the possession of the Marshal of the United States for the Eastern District of New York by order of this Court.