Conveyances to Related Parties page3
[62-2 USTC ¶9739]
Federal Savings and Loan Association, Appellee v. Frank S. Cacciatore et
al., Appellees. (
United States of America
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
, 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
. 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
recorder on July 29, 1957.
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
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
381; Thackaberry v. Johnson, 131
App. 463, affirmed 228
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
"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
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
509; United States v. Bess [58-2 USTC ¶9595], 357
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
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
law. Seno v. Franke, 20
2d 70; Chicago Title & Trust Co. v. Mercantile Bank, 300
App. 329; Morrill v. Colehour, 82
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
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
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
long established in the state, and upon which many valuable property
rights are based." (
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." (
v. American National Bank of
, (5th cir.) [58-2 USTC ¶9564], 255 F. 2d 504, certiorari
835 United States v. Brosnan [60-2 USTC ¶9516], 363
237, 4 L. ed. 2d 1192, 80 Sup.
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
237, 242, 4 L. ed. 2d 1192, 80 Sup.
The government relies
heavily upon United States v. Bess [58-2 USTC ¶9595], 357
51, 2 L. ed. 1135, 78 Sup.
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
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 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.
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
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.
[82-1 USTC ¶9280]
United States of America
, Plaintiff v. Charles E. Bruce, et al., Defendants
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
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
, 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
was upon "all property and rights to property, whether real or
personal", belonging to Charles E. Bruce. 26 U. S. C. §6321.
Security Bank and Trust Company of
(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
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
. 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:
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)
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:
Investment Company, Inc., a
corporation, was organized and owned by Charles E. Bruce. Bruce
Investment was the alter ego of Bruce. (Brief, p. 3).
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
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"?
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
'S FEDERAL PRACTICE ¶0.443.
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.
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.
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
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,
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).
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
S. District Court, So.
, 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
121 S. Cherry St.
, 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
, Richard F. Mitchell, Department of Justice,
, D. C. 20530, for U. S.
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
The Internal Revenue
Service has a claim against Walter M. Curtin in the amount of
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.
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.
of Legal Authorities
Section 70a(5) of the
Bankruptcy Act is as follows:
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:
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. * * *"
defined in Section 1(30) of the Bankruptcy Act as follows:
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:
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. * * *
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
In Pirie v. Chicago
Title and Trust Company, 182
, 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
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.
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
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.
No. 4 699 770
No. 4 360 537
No. 4 261 676
No. 4 584 504
[62-2 USTC ¶9725]
, Plaintiff v. F. B. Carter, III, Trustee in Dissolution; Norman Jemal,
Ltd., et al., Defendants
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
, 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.,
, for Peat, Marwick, Mitchell & Co. James M. Richmond, Bank of
, for General Handkerchief Corp., A. B. Chabot & Co., Inc. &
James Betesch & Co.
TAVARES, District Judge:
In this decision the
following terms have the following meanings, unless otherwise specified:
the defendant, F. B. Carter, III, Trustee in Dissolution of Norman
Jemal, Ltd., a
means Norman Jemal, Ltd., a
corporation, now dissolved.
Norman N. Jemal, president and major stockholder of the corporation.
means Mrs. Sally Jemal, wife of Jemal and a minority stockholder in the
"Fase" means the
defendant, Earl Fase, Tax Commissioner of the Territory (now State) of
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.
parties" means the plaintiff, and the defendants other than those
who have disclaimed or been defaulted.
"IRS" means the
Internal Revenue Service of the
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.
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
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
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
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
1. Claims of Fase against the corporation
for Territorial (now State)
taxes, in the following amounts:
a. Compensation and dividend tax
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
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.
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
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.)
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
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
. 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:
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.
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,
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."
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
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,
8. On May 11, 1954, a
general excise tax liability to the
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
, 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.
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
on or about the same date. (ASF p. 3, para. 1 as am., and para. 4; Exh.
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
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
23. On March 8, 1962, the
ASF was filed herein, and on August 16, 1962, the ASF was amended by
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:
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:
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).
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
, represented by the IRS, can not be considered as such a
"purchaser for value and in good faith", but can only stand in
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:
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."
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:
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.
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.
"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).
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
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."
This feature is not mentioned in the briefs but the court felt that it
must judicially notice the applicable
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
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.
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
, Plaintiff v. Beatrice Baxter Pledger, Individually and as Executrix of
the Estate of Harris A. Pledger, Deceased, and Floyd Harris, Defendants
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.
, for defendants.
DEVANE, District Judge:
This is a suit by the
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.
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.
About 1923 Harris A.
Pledger homesteaded a tract of land in
, 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.
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.
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
received notice of this assessment on April 19, 1948, and taxpayer
having failed to pay same, filed notice of a Federal tax lien in
, 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.
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
cases on this question and this Court is of the firm opinion that these
cases establish as the law of
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
Mortgage Company v. Grennan, et al., 143 So. 761;
and Holding Corporation v. McMillen, 186 So. 188; Scott, et
al., v. Simmons, et al., 10 So. (2d) 122.
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
. The law and equities of this phase of the case are with Harris and not
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
, and The Northwestern Bank of
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
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.
, N. C., for defendants.
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.
(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
(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.
(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
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
(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
(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
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
. 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
John A. Nelson, Assistant
United States Attorney,
, 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.
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
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
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
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.
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
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
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.
Enforcement of Judgment
Ordinarily, in actions
arising under 26
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
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
. 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
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
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
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
. 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
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
(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
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.
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.
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
S. District Court, So. Dist. Fla., Miami Div., No. 9276-M-Divil,
[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
1392 N. W. 36th St.
, Vivion Rutherford, 65 S. W.
, for defendant.
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.
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
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,
, 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
, 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.
The Court finds that this
Court has jurisdiction over the persons and subject matter of this
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
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
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
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
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
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
38 S. Dearborn St.
, 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
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
910, rehearing denied 361
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.
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
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
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
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
, and that the government had a right to foreclose federal tax liens
that attached to Robert Zeddies' undivided one-half interest in the
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
because it directly tended to or did impair the rights of the
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
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.
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
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
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
. 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.
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
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
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
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
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
In December, 1959, notices
of tax liens were filed in different counties in the State of
. 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.
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
. 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
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
; the "Adams County Farm," located in
, and the "Treynor Farm," located in
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.
v. Bess, 357
51, 55 (1958). Cf. Commissioner v. Stern, 357
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.
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
law there were no gifts of the properties."
To support its thesis, the
Government relies upon general principles of law which have been
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.
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 (
), 94 N. W. 461; McGinnis v. McGinnis (
), 139 N. W. 466, 467; Olsen v. Best (
), 92 N. W. 2d 531, 533 (1958); Bird v. Stein, 258 F. 2d 168, 176
(5 Cir. 1958), cert. denied, 359
926 (1959). The rule is succinctly stated in Bogert, Trusts &
Trustees, §460 (2d ed. 1964), as follows:
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,
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:
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 (
), 100 N. W. 113, 115; In Re Wearin's Estate (
), 149 N. W. 621, 622; Yagge v. Tyler (
), 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
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.
This is termed by the
Government as "a second technical argument" to support its
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
In summary, we are
persuaded that the court's decision is correct. Accordingly, the
judgment appealed from is affirmed.
§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
to enforce the lien of the
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."
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.
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
[81-1 USTC ¶9257]
United States of America
, Plaintiff v. Thomas Mentelos and Beverly Cuniff Mentelos et al.,
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
J. V. Eskenazi, United
States Attorney, Stephen M. Pave, Assistant United States Attorney, 14
, 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.
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,
, 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 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:
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,
subject property is a house and lot located at 8620 Southwest Terrace,
. 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
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,
demanded payment. In consideration of the funds owed to her, the
defendant, Thomas Mentelos, deeded her the house.
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.
, 590 F. 2d 1377 (5th Cir. 1979).
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,
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.
has thus shown that Thomas Mentelos is liable for the full amount of the
100% penalty assessed against him, plus interest and statutory
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
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,
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
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
6, Block 3 Ranchero Homesites to Beverly Cuniff Mentelos was in all
respects valid, it is
FURTHER ORDERED AND
ADJUDGED that the
shall remove any and all tax liens levied against that property which
arose out of Thomas E. Mentelos's relationship with ARC ELECTRICAL
[42-2 USTC ¶9687]Walter G. Driver, Plaintiff in
United States of America
, Intervener and Plaintiff, v. June M. Hooper, Defendant
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.
, for plaintiff. Frank J. Hennessy, U. S. Attorney, Post Office Bldg.,
, 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.
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:
(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
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
(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.
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.
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
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.:
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).
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.
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.
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
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
The plaintiff also gives us
as authority the case of McDonald v. Dewey, 202
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.
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.
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
, by the son, Francis Phillips. He transported the jewelry to
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
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
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
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
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
for the Eastern District of New York by order of this Court.