Fraudulent
Conveyances Part1 page12
United States of America
v. Margaret E. St. Mary, as the Executrix of the Estate of Robert N.
St. Mary; Margaret E. St. Mary; Rosslyn Realty Company; Lehigh Valley
Development Company; Lucille S. St. Mary; Robert P. Stoudt; and H. E.
Stoudt & Sons, Inc
U.
S. District Court, East. Dist. Pa., Civil Action No. 69-832, 334 FSupp
799, 10/29/71
[Code Secs. 6321 and 6323]
Lein for taxes: Validity of lien: Foreclosure action: Transferred
assets: Fraudulent transfers.--The court set aside the
decedent-taxpayer's conveyances of his stock in two closely-held
corporations to a third person, whom he later married, on the ground
that the transfers were fraudulent under Pennsylvania law. Therefore,
the government could foreclose its tax liens against the transferred
stocks. The conveyances were found to be fraudulent because the stocks
were transferred at a time when the taxpayer was insolvent, there was no
consideration for the transfers, and the taxpayer owed large amounts of
unassessed income taxes. In addition, the court held that the government
could enforce its lien against the stocks because the taxpayer exercised
control over the stocks after the transfers and had attempted to sell
them to business associates after the alleged transfers.
Louis C. Bechtle, United
States Attorney,
Philadelphia
,
Pa.
, for plaintiff. Alphonsus R. Romeika, 215 S. Broad St., Philadelphia,
Pa., James J. McConnell, 1600 Hamilton St., Allentown, Pa., Mark H.
Scoblionko, 40 S. 5th St., Allentown, Pa., for defendant.
Findings
of Fact, Discussion Conclusions of Law and Order
LORD, JR., Chief Judge:
This is a civil action by
the United States of America to reduce to judgment certain federal
income tax assessments against Robert N. St. Mary (hereinafter sometimes
Taxpayer), and Margaret E. St. Mary; to set aside certain conveyances by
the Taxpayer of his 50 percent interests in the stock of both Rosslyn
Realty Company and Lehigh Valley Development Company to Lucille S. St.
Mary; and to foreclose tax liens thereon.
After a four day trial to
the Court sitting without a jury, briefs were ordered. Upon
consideration of the testimony and the learned briefs submitted by both
counsel, the Court enters the following:
Findings
of Fact
1. On February 18, 1966, a
delegate of the Secretary of Treasury made timely assessments against
Robert N. St. Mary and Margaret E. St. Mary for unpaid federal income
taxes and interest for the years 1960 through 1962 in the amounts of
$139,915.90.
2. On June 17, 1966, a
delegate of the Secretary of Treasury made timely assessments against
Robert N. St. Mary for unpaid income taxes and interest for the year
1963 in the amount of $13,194.22.
3. Notices of these liens
were filed in
Lehigh County
,
Pennsylvania
, on May 17, 1966, and in
Northampton County
,
Pennsylvania
, on May 18, 1966, with respect to the assessments for 1960 through
1962, and in
Lehigh County
,
Pennsylvania
, on September 8, 1966, with respect to the assessment for 1963.
4. Taxpayer died on May 25,
1969, and his first wife, Margaret E. St. Mary was substituted as
defendant herein in place of Robert N. St. Mary on January 12, 1971.
5. A consent judgment was
entered against Margaret E. St. Mary, individually and as executrix of
the estate of the Taxpayer, covering the tax liabilities enumerated in
Findings One and two plus statutory interest stipulated to by counsel
for the Government and Margaret E. St. Mary.
6. Robert P. Stoudt and H.
E. Stoudt & Sons, Inc., failed to either answer the amended
complaint or to appear and defend at the time of the trial in this
matter, and a default judgment was taken against them at that time.
7. Prior to June 6, 1965,
Taxpayer was the owner of a 50 percent stock interest of Lehigh Valley
Development Company, and of a 50 percent interest in the stock of
Rosslyn Realty Company.
8. For several years prior
to June 6, 1965, Taxpayer's tax returns were being audited by the
Internal Revenue Service, and as a result, a deficiency was proposed by
the investigating agent on June 4, 1965, in the amount of $109,000.00,
which did not include interest.
9. Although Taxpayer's wife
had instituted proceedings for child support, and Taxpayer was aware of
this, he sold his 50 percent interest in a Nightingale Nursing Home and
had the monthly income derived from the sale paid into the inactive
Hamburg Realty Corporation, in order to prevent his creditors from
attaching his share of the proceeds of the sale.
10. For a number of years
to June, 1965, Taxpayer had incurred great indebtedness for
hospitalization, lodging, plumbing bills, gasoline and miscellaneous
items, and evidence throughout not only a laxity in paying his bills,
but an affirmative intent to avoid payment.
11. On or about January 5,
1965, Taxpayer, in connection with an unrelated tax matter in which he
had failed to pay an employee's withholding taxes, filed a financial
statement which indicated that his liabilities were far in excess of his
assets.
12. For an extended period
after 1963, Taxpayer experienced severe physical difficulties, which led
to his being advised on numerous occasions by his physician that he
would die.
12(a). Taxpayer also
developed emotional problems, as well as continuing to lead a totally
disorganized financial life.
13. As a result of these
facts, in late 1963, Lucille Schmuldt began to care for Robert N. St.
Mary and to expend sums for his benefit.
13(a). Lucille Schmuldt
provided Taxpayer with food, clothing, medicines, housing and spending
money, from late 1963 to June of 1965.
14. On June 6, 1965,
Taxpayer transferred his 50 percent interest in Lehigh Valley
Development Company and his 50 percent interest in Rosslyn Realty
Company to Mrs. Schmuldt.
15. On June 6, 1965, the
date of the transfer, Lehigh Valley Development Company owned the
Sears & Roebuck
Building
in
Bethlehem
,
Pennsylvania
, along with several parking lots. The total assets of the company were
approximately $690,000.00 and it had consistently been able to meet its
fixed liabilities, and its financial condition had remained stable, for
a period of about eight years.
16. On June 6, 1965,
Rosslyn Realty Company owned the Bell Telephone building in
Allentown
,
Pennsylvania
, as well as several garages, all of which were leased to the Bell
Telephone Company in
Allentown
. The total assets of the company were approximately $270,000.00, and it
had been able to meet its fixed liabilities, and its financial condition
had been stable, for about eight years.
17. In the only transaction
involving Rosslyn Realty Company, Robert P. Stoudt loaned Robert N. St.
Mary $1,000.00 on September 18, 1968, taking the 50 percent interest of
Taxpayer as collateral security for the loan. At the present time, a
half-interest in the corporation has a market value of between
$15,000.00 and $20,000.00.
18. On or about May 20,
1966, Taxpayer furnished a revenue officer with a financial statement
which indicated that his liabilities were substantially in excess of his
assets.
19. In July of 1967
Margaret E. St. Mary formally divorced the Taxpayer.
20. In August, 1967,
Taxpayer married Mrs. Lucille Schmuldt.
21. On February 15, 1968,
Taxpayer pledged the stock of Lehigh Valley Development Company for an
$11,500.00 loan from H. E. Stoudt & Sons, Inc. with the consent of
Lucille Schmuldt St. Mary.
22. On September 18, 1968,
Taxpayer pledged his interest in Rosslyn Realty Company as collateral
for a guarantee by Robert P. Stoudt of a loan which Taxpayer obtained
from a local bank.
23. The transfer of June 6,
1965, by Robert N. St. Mary to Lucille S. St. Mary, was a transfer of a
valuable assets.
23(a). The transfer of June
6, 1965, was made while the liabilities of the Taxpayer were greatly in
excess of his assets.
24. The transfer of June 6,
1965, by Taxpayer to the second Mrs. St. Mary was not supported by
adequate or fair consideration.
25. The transfer of June 6,
1965, was intended to hinder and delay creditors of Robert N. St. Mary,
including the
United States of America
.
26. The transfer of June 6,
1965 was made in contemplation of death and the subsequent exercise of
dominion and control over his shares of stock in Lehigh Valley
Development Company and Rosslyn Realty Company indicated that Robert N.
St. Mary treated the stock as his own and in fact revoked the previous
transfers to Lucille Schmuldt.
Discussion
The Court feels compelled
to discuss four major areas of contention before entering its
conclusions of law. The questions are whether or not a conveyance by
Taxpayer to his second wife was fraudulent as to the Government; if not,
was the conveyance revoked by Taxpayer; whether or not under the
Pennsylvania "Dead Man's Rule" the testimony of the first
three witnesses for the Government was competent and admissible; and
whether a tape recording of Robert N. St. Mary's voice was admissible to
show consideration and intent. In discussing these areas of law, the
Court is indebted to counsel for both the Government and Mrs. St. Mary
for their extraordinarily well-written briefs.
[Fraudulent
Conveyances]
We find that the conveyance
made by Taxpayer may be set aside under
Pennsylvania
law as fraudulent. 39 P. S. §354 provides
Every conveyance made and
every obligation incurred by a person who is or will be thereby rendered
insolvent, is fraudulent as to creditors, without regard to his actual
intent, if the conveyance is made or the obligation is incurred without
fair consideration.
Using these twin criteria
of insolvency and lack of consideration, we find the conveyance could
not have been a valid one. It has been amply demonstrated to the Court
that Taxpayer was insolvent, as evidenced by his ever-increasing
indebtedness and concommitent failure to pay bills. The consistent
Pennsylvania
view has been that the test of solvency is the present ability to pay
debts, and not the ability to trade on credit, which Taxpayer did until
the time of his death. See, e.g., Larrimer v. Feeney, 411 Pa. 604
(1963).
Lucille Schmuldt St. Mary
has denied the Government's allegation that Taxpayer was insolvent at
the time of the conveyance, because the tax liability had not been
assessed against him. This is clearly not correct. Section 6151 of the
Internal Revenue Code of 1954 provides that when a tax return is
required, the person required to make such a return must do so without
formal notice or demand from the Government; he must, further, pay the
tax due. In the event of a deficiency, as defined in Section 6211 of the
Internal Revenue Code of 1954, the computation of the income tax
deficiency by the Internal Revenue Service is considered as having been
made by the taxpayer and the tax so computed is considered as the tax
shown upon the taxpayer's return. Section 6211(b)(3), Internal Revenue
Code of 1954. Money withheld during the taxable year is deemed payable
on the 15th day of the fourth month following the close of the taxable
year. Section 6513(b) of the Internal Revenue Code of 1954. In addition,
interest and penalties are computed from the last date prescribed for
payment of the tax. Sections 6601 and 6653(a) of the Internal Revenue
Code of 1954. See also, United States v. 58th Street Plaza Theatre,
Inc. [68-1 USTC ¶9407], 287 F. Supp. 475 (S. D. N. Y. 1968).
We are faced with the
unavoidable conclusion that the date of paying one's taxes is a matter
of public knowledge, and that such knowledge was certainly within the
realm of experience of Taxpayer who was not only an attorney, but also
held an advanced degree in the law of taxation.
The
United States
is deemed a creditor of the taxpayer from the date when the obligation
to pay income taxes accrues. Coca-Cola Bottling Co. of Tuscon v. C.
I. R. [CCH Dec. 25,380], 37 T. C. 1006 (1962), aff'd [64-2
USTC ¶9643] 334 F. 2d 875 (9th Cir. 1964); United States v. Kaplan,
267 F. 2d 114 (2nd Cir. 1959); United States v. 58th Street Plaza
Theatre, Inc., supra.
In the Plaza Theatre
case, the court was construing the New York Debtor and Creditor Law,
§§ 270-278, which is, in all relevant portions, identical with the
Pennsylvania Fraudulent Conveyance Act, 39 P. S. §§ 351-363. We adopt
the reasoning of that court that
[t]o permit taxpayers to
manipulate assets during the pendency of Tax Court or I. R. S.
proceedings and still shield themselves from transferee liability merely
because such transfers were made prior to final decisions, would be
manifestly unjust. The better result places the government in
essentially the same position as that of a private creditor. Successful
creditors . . . are not limited to reaching only those assets
transferred after their claims have been reduced to a judgment.
Id.
at 501. See also, United
States v. Schofield [57-2 USTC ¶9795], 152 F. Supp. 529, 532, n. 8
(E. D. Pa. 1957); and 9 Mertens, Law of Federal Income Taxation,
§§ 52.32, 52.37. Here, the Court is convinced that Taxpayer engaged in
many schemes to delay the Internal Revenue Service in its investigation,
all of which resulted in substantial delay in making the assessments
against the Taxpayer, and provided him with ample time to manipulate his
assets during the pending Internal Revenue Service review.
Moreover, 39 P. S. §351
indicates that the term debts as used in the statute includes a
contingent or unmatured liability; and for the purpose of the law of
fraudulent conveyances, a contingent liability has the same status as
one which is fixed. First National Bank of Marietta v. Hoffines,
429 Pa. 109 (1968); Fidelity Trust Co. v. Union National Bank,
313 Pa. 467, cert. denied, 291 U. S. 680 (1933). Therefore, even
if the unassessed taxes were contingent, unmatured liabilities, they
would still be taken into account in determining whether the grantor was
insolvent.
[Taxpayer
Insolvent]
The second Mrs. St. Mary
has denied the Government's allegation that taxpayer was insolvent at
the time of the conveyance. However, his tax liability was approximately
$144,000.00 at the time of the conveyance, and, as noted above, whether
assessed or not, this sum was a liability in determining solvency.
Finally, in this regard,
there was uncontradicted testimony that Taxpayer was indebted to the
Allentowne House for lodging, to the
Mary
Fletcher
Hospital
in
Vermont
for medical expenses, to the Kershner Plumbing Company, and to the Town
and Country Oil Company prior to the transfer. His legal practice was
deteriorating as a result of ill health, and his first wife was required
to take legal steps to secure child support. Revenue officials obtained
financial statements showing that Taxpayer was insolvent six months
before and eleven months after the transfer. It is obvious, therefore,
that his assets did not exceed his liabilities.
It has been advanced by
counsel for Mrs. St. Mary that her ministering to Taxpayer during times
of great personal illness forms the basis for consideration to be found
for the transfer.
A construction of 39 P. S.
§354 shows that certain principles are well settled within this
controlling section of the applicable state law. When the conveyor is in
debt at the time of the conveyance, the burden rests upon the grantee to
establish by clear and convincing evidence that either the conveyor was
solvent, Farmers Trust Company of Lancaster v. Bevis, 331 Pa. 89
(1938), and was by such conveyance not rendered insolvent; or that a
fair consideration had been paid for the conveyance. First National
Bank of Marietta v. Hoffines, supra; Peoples Savings & Dime Bank
& Trust Co. v. Scott, 303 Pa. 294 (1931). This Court recognized
this principle in Winter v. Welker, 174 F. Supp. 836 (E. D. Pa.
1959).
In the Winter case,
the Court refused to accept checks showing payments over a seven month
period between a husband and wife as clear and satisfactory evidence
because none of the checks revealed the purpose for which the checks had
been drawn. In the instant case, Mrs. St. Mary offered into evidence
certain checks drawn to the order of certain drugstores or hospital
associations, which she alleged were for medical expenses incurred on
behalf of Taxpayer. We find no great evidentiary weight can be given to
these documents as Mrs. St. Mary had said at her deposition that they
did not exist; this is so particularly in view of the fact that she had
commenced an action against Robert Stoudt on similar issues prior
to her deposition.
The two cases cited by Mrs.
Lucille S. St. Mary are not persuasive. In Holden v. Banes, 140
Pa. 63 (1891), a creditor sought to overturn a conveyance as being
fraudulent as made in satisfaction of a promise made by a woman during
coverture; and in Rorison v. Davey, 355 Pa. 128 (1946), a mother
requested her daughter to remain at home to care for her.
[Consideration
and Control]
Here, however, we are
confronted with a woman under no obligation, or even request, to provide
such services to Taxpayer. She testified under oath that the services
were voluntary and rendered with no expectation of repayment.
Consequently, there can have been no debt from Taxpayer to the then Mrs.
Schmuldt. Even if we had found a preexisting debt, which we did not, it
would have to be based on clear and substantial evidence, Karkus v.
Siefert, 169 F. Supp. 662 (D. N. J. 1958), and more than the
testimony of interest parties would have been required to meet this
burden.
We think it clear,
therefore, that the transfer by Taxpayer to Lucille Schmuldt St. Mary
cannot stand.
Considering the transfer as
a gift, we find also that there was a revocation of this gift which
subsequently placed ownership of the stock in the hands of Robert N. St.
Mary. At that time, regardless of the fraudulent conveyance, the
Government's tax lien, which arose early in 1966, attached to the
property pursuant to Section 6321 of the Internal Revenue Code of 1954,
Title 26. Taxpayer attempted to sell the property in his own right to
his business associate, Robert P. Stoudt, who admitted at trial that he
had actual notice of the Government's tax liens against Taxpayer prior
to the alleged transfers of the property. See, Internal Revenue Code of
1954, Title 26, §6323(b)(1)(A)(B). The stock was never endorsed over to
Lucille St. Mary, and it was not until some years later that the close
corporations involved had any knowledge of the purported transfer.
Following the transfer, Taxpayer exercised power to vote the stock in
question and eventually placed it as collateral security for two loans.
We are forced to conclude,
therefore, that the transfer was revoked by Taxpayer, who, after the
transfer, conducted himself as the owner of the stock.
[Admissibility
of Evidence]
Defense counsel attempted
to block the introduction into evidence of testimony of several of the
Government's witnesses, alleging that they were precluded from
testifying by 28 P. S. §322, popularly known as the Dead Man's Act, 1
which, in general, provides that if a party has died, his right has
passed on to a party on the record who represents his interests, and any
witness with an adverse interest is disqualified from testifying as to
anything before the death, unless he falls within an exemption not
relevant here.
The thrust of this argument
rests upon the persuasive case of Melinder v. United States [68-1
USTC ¶9253], 281 F. Supp. 451 (W. D. Okla. 1968), where the court, in a
situation strikingly similar to the one before this Court, refused to
consider much of the testimony of Revenue agents, considering it to be
prohibited by the Oklahoma Dead Man's Act, 12 O. S. §384, a statute
comparable to the one before us.
Despite the strength of
this argument, we must apply Pennsylvania law to this issue, and feel
the state's Supreme Court the best interpreter of this statute. In the
recent case of Clay Estate, 438 Pa. 183 (1970), quoting from Hendrickson
Estate, 388 Pa. 39 (1957), the court stated that for the exception
to the general rule of competence to come into play, under the Dead
Man's Act, three things were required:
[T]he
deceased must have had an actual right or interest in the matter at
issue, i. e., an interest in the immediate result of the suit; (2) the
interest of the witness--not simply the testimony--must be adverse; (3)
a right of the deceased must have passed to a party of record who
represents the deceased's interest. Id. at 190.
The second condition
requires an adverse interest, not merely adverse testimony, i. e.,
the witness must be in a position that he will either directly gain or
lose by the outcome of the proceedings. King v. King, 96 Pa.
Super. 585 (1929), or that the record will be legal evidence for or
against him in some other action, Braine v. Spalding, 52 Pa. 247
(1866); Hart, Schaffner & Marx v. Koch, 107 Pa. Super. 528
(1933). 2
Trustees of a charitable corporation have been held not to be
disqualified as witnesses in an action between the corporation and a
third party who has died, because they are merely agents. Groome's
Estate, 337 Pa. 250 (1940). By analogy, the Revenue officers called
were merely agents, with no direct gain or loss possible as a result of
the outcome of the trial.
We turn, finally, to the
admissibility into evidence of a tape-recording of the deceased
Taxpayer, offered by defense counsel to show consideration for the
transfer, or the intent underlying it. 3
The nature of the tape was
such that the Court was not informed as to who was present at the time
of its recording, or who operated the machine. There was no introduction
to the recording, which began with the Taxpayer reading off names and
numbers. There was no specific reference to the Lehigh Valley
Development Company, or to Rosslyn Realty Company, the tape merely
referring to the Sears & Roebuck Building which was owned by the
Lehigh Valley organization at the time the tape was allegedly made. A
substantial portion of the tape was garbled, and the constant clicking
on and off of the microphone was very noticeable. 4
Without needlessly
prolonging this opinion, it is sufficient for the Court to note that
declarations after the act stating past intent or motive governing at
the time of the act are not admissible, as they are considered
self-serving declarations made by one in his own interest at a time and
place out of court. 5
Whereupon, in consideration
of all of the above, the Court hereby enters the following:
Conclusions
of Law
1. The fifty percent stock
interests of Robert N. St. Mary in Lehigh Valley Development Company and
Rosslyn Realty Company transferred by him to Lucille Schmuldt on June 6,
1965, constituted assets out of which part of the tax liability due
against Taxpayer to the United States could have been satisfied.
2. Robert N. St. Mary was
insolvent at the time of the transfer of June 6, 1965.
3. Fair and valuable
consideration was not given by Lucille S. St. Mary to Robert N. St. Mary
in exchange for the stock interests above enumerated.
4. The transfer was
intended by the Taxpayer to hinder and prevent the United States from
satisfying its claim against the Taxpayer.
5. The transfer is void,
and the assets involved are liable to the payment of any judgment
entered in this proceeding in favor of the United States of America.
6. The preliminary
injunction issued in this proceeding should be dissolved, and the shares
of stock of Lehigh Valley Development Company and Rosslyn Realty Company
should be turned over to the plaintiff to satisfy its tax liens.
Order
And Now, to wit, this 29th
day of October, A. D. 1971, it is Ordered that the preliminary
injunction in this matter be and the same is hereby Dissolved.
It is Further Ordered that
the shares of stock representing the fifty percent stock interest of the
Taxpayer, Robert N. St. Mary, be Surrendered to the United States in
partial satisfaction of its tax liens.
It is Further Ordered that
the United States of America have judgment against Margaret E. St. Mary
individually and as the Executrix of the Estate of Robert N. St. Mary in
the amount of $167,399.01, together with interest thereon.
It is Further Ordered that
the United States of America have judgment against Margaret E. St. Mary
as Executrix of the Estate of Robert N. St. Mary in the amount of
$16,997.26, with interest thereon.
And It Is So Ordered.
1
The Act reads, in relevant part, as follows:
Nor, where any party to a
thing or contract in action is dead, or has been adjudged a lunatic and
his right thereto or therein has passed, either by his own act or by the
act of the law, to a party on the record who represents his interest in
the subject in controversy, shall any surviving or remaining party to
such thing or contract, or any other person whose interest shall be
adverse to the said right of such deceased or lunatic party, be a
competent witness to any matter occurring before the death of said party
or the adjudication of his lunacy, . . . Id. at page 305.
2
See also, Provident Tradesmens Bank & Trust Co. v. Lumbermens
Mutual Casualty Co., 218 F. Supp. 802, 805 (E. D. Pa. 1963).
3
Both counsel briefed at length the question of whether or not the Dead
Man's Rule applies to the testimony offered by Lucille Schmuldt St.
Mary. We feel that this would have presented a greater evidentiary
question had the Court been inclined to recognize her claims of valid
transfer. Having rejected the transfer as invalid however, to merely
discuss her testimony as improper with regard to the transfer would be
at best repetitious.
4
The entire tape was not played because portions of it contained a
personal message to Lucille Schmuldt St. Mary from Robert N. St. Mary.
This deletion was agreed to by all counsel.
5
Other evidentiary points raised by both counsel for the Government and
Lucille S. St. Mary are merely cumulative. See, e.g., n. 2, supra.
The United States of America, Plaintiff v. George
Edward Barnes, John E. Barnes, and Virginia A. Barnes, Defendant
U.
S. District Court, West. Dist. Okla., Civil No. 70-44, 7/23/71
[Code Sec. 6321--Result unchanged by '69 Tax Reform Act]
Tax liens: Property subject to lien: Fraudulent conveyance of real
estate.--The taxpayer's conveyance of his one-half interest in real
estate was in fraud of the rights of the United States as a creditor of
the taxpayer for his income tax liabilities. The conveyance was
therefore void insofar as the rights of the United States were
concerned, and the taxpayer's interest in the real estate was subject to
the federal tax liens which arose at the time of the assessments made
against him.
William R. Burkett, United
States Attorney, Givens L. Adams, Assistant United States Attorney,
Oklahoma City, Okla., Earl Kaplan, John J. McCarthy, Johnnie M. Walters,
Assistant Attorney General, John Wood, Thomas H. Boerschinger,
Department of Justice, Washington, D. C. 20530, for plaintiff. John
Connolly, 1005 Kermac Bldg., Oklahoma City, Okla., for defendant.
Findings
of Fact and Conclusions of Law
EUBANKS, District Judge:
This case having been tried
before the Court, and the parties having presented their evidence in
support of their positions, and the Court having considered the
complaint, answers, testimony and exhibits in this case, the Court
enters the following findings of fact and conclusions of law:
Findings
of Fact
1. The United States
commenced this action on January 29, 1970, to reduce to judgment federal
tax liens outstanding against the defendant-taxpayer, George Edward
Barnes, hereinafter sometimes referred to as George, and to set aside
the conveyance of a parcel of real estate from George to his brother,
John E. Barnes, hereinafter sometimes referred to as John, alleging that
said conveyance was in fraud of the Government's rights as a creditor of
George.
2. The subject real estate
is composed of two adjoining quarter sections of land, three hundred and
twenty acres, situated southwest of the City of Lawton, Oklahoma, title
to which is held in the name of Virginia Barnes, the wife of John. The
legal description of said real estate is:
The Southwest Quarter (SW
1/4) of Section Three (3) and the Southeast Quarter (SE 1/4) of Section
Four (4), Township One (1) North, Range Twelve (12) West of the Indian
Meridian, in Comanche County, Oklahoma.
3. The answer of George and
the answer of John and Virginia Barnes were filed on February 10, 1970,
generally denying the complaint of the United States.
[Income
Tax Liabilities]
4. The federal income tax
liabilities of George for the periods set forth below are based upon
assessments made against him by a delegate of the Secretary of the
Treasury. Originally the assessments for some of the tax years involved
included a penalty for civil fraud pursuant to Section 6653(b) of the
Internal Revenue Code of 1954. In its opening statement at the trial the
Government informed the Court that it was dropping from its case those
parts of the assessments made against George which were based upon the
assertion of a civil fraud penalty. The outstanding balance of the
assessments for income taxes made against George, excluding those
portions based upon the civil fraud penalty, is set forth below:
Balance of
Assessment
With Interest
Tax Date of Amount to June
Period Assessment Assessed 1, 1971 [TEH] **
1957 ...... 10/2/64 $13,679.56 (T) $24,392.33
5,304.86 (I)
1958 ...... 10/2/64 $8,140.44 (T)
2,668.39 (I) $14,026.17
1959 ...... 10/2/64 5,232.48 (T)
1,398.65 (I) 1,108.17
1960 ...... 10/2/64 3,561.64 (T)
738.92 (I) 5,803.36
1961 ...... 6/8/62 8,158.06 (T)
407.90 (P1)
72.93 (I) 4,484.56
1962 ...... 5/17/63 4,269.19 (T)
22.46 (I) 2,982.65
1962 ...... 2/24/67 3,568.35 (T)
178.42 (P1) 5,530.51
826.00 (I)
(Audit Tax
Deficiency)
1963 ...... 2/24/67 719,18 (T)
133.03 (P2)
123.32 (I) 1,206.60
_k $59,534.35
>k Total plus interest from June 1971 at the daily rate of $5.52.
"T" Indicates the amount of tax assessed.
"P1" Indicates the amount of delinquency penalty assessed in
accordance with Section 6651(a) of the Internal Revenue Code of 1954.
"P2" Indicates the amount of negligence penalty assessed in
accordance with Section 6653 (a) of the Internal Revenue Code of 1954.
** Interest computed to current date pursuant to affidavit attached
hereto.
5. At the trial the
defendant agreed that the assessments for income taxes asserted against
George were timely made and that the Government's action to collect
thereon was not barred by the statute of limitations.
6. The tax liabilities
represented in the assessments against George for the years 1957 through
1960, inclusive, are the results of deficiencies in taxes asserted by
the Internal Revenue Service as a result of a "net worth"
examination of George by agents of the Internal Revenue Service.
7. The income tax
assessment for the year 1961 against George was the result of an unpaid
tax return filed by him.
8. The first assessment
against George for the year 1962, made on 5/17/63, was the result of an
unpaid tax return filed by George. The subsequent assessment for the
year 1962, made on 2/24/67, and the assessment for the year 1963 against
George was the result of an audit of George's income tax returns by the
Internal Revenue Service, pursuant to which certain adjustments were
made to his tax liability, the principal reason for said adjustments
being George's inability to substantiate losses claimed to be incurred
in his gambling activities.
9. George Barnes' principal
occupation since the late 1930's had been that of a gambler.
10. George Barnes testified
that he had filed income tax returns for the years involved, that he
kept a book in which his winnings and his losses were recorded, and that
his returns were prepared from this book. George Barnes contended that
his returns reflected all his income.
11. George did not put any
of his books and records into evidence.
12. There was testimony
that certain books and records had been lost, but these were not for
years involved in the suit.
13. The accountants for
George during the years involved, Raymond Thomison and Vernie Rodgers,
testified that although George may have brought some books and records
with him for use in preparing his income tax returns for the years
involved in his suit, they did not examine said books and records, if
brought, for the years involved, and prepared said returns from
information received orally from George.
14. George Barnes testified
that it was his practice to discard his banking records immediately upon
receipt.
[Real
Estate]
15. The subject rural real
estate was purchased by George and John in January of 1958 for the sum
of $26,000. George and John contributed $13,000 each, which amount
represented proceeds received by them upon the sale of a building
jointly owned by them in Lawton, Oklahoma. Although the building which
was sold in Lawton, Oklahoma was held in the name of John and Virginia
Barnes, and the title of the subject real estate southwest of Lawton,
Oklahoma was taken in the name of Virginia Barnes, Virginia Barnes had
only nominal title in these properties, and the beneficial interest was
held jointly by George and John.
16. In 1961 the Internal
Revenue Service commenced an investigation of the income tax liabilities
of George and on May 15, 1961 George met with agents of the Internal
Revenue Service and discussed, in the presence of a stenographer,
matters relating to his tax liabilities.
17. At this interview
George discussed the 320 acre piece of real estate and stated with
regard thereto that it was probably worth a lot more than "we have
it in at".
18. Subsequent to April 15,
1962, George Barnes filed a delinquent unpaid income tax return for the
year 1961 showing a tax liability of $8,158.06.
19. On September 12, 1962,
George Barnes, together with his attorneys, attended a meeting with
agents of the Internal Revenue Service at which he was advised that as a
result of their investigation they were proposing that deficiencies be
asserted against him for income taxes for the years 1956 through 1960,
as a result of unreported income in the amount of $96,020.32 which they
had determined was attributable to him.
20. Subsequent to April 15,
1963, George filed a delinquent unpaid federal income tax return for the
tax year 1962 in the amount of $4,269.19.
21. In May of 1963, George
approached his brother John, informed him that he needed money
immediately and wanted to sell his interest in the subject real estate
to John. John tried to dissuade George but gave him a check in the
amount of $13,000, which was the amount George had put into the property
5 years and 5 months previously when the brothers had purchased it.
22. In the discussions
between George and John preceding the sale of George's interest in the
real estate, George informed John that he was broke. John told George
the property was worth more than $13,000.00 and might, in time, become
much more valuable and tried to get George to hold on to the property.
George Barnes admitted owing $3,000 which he had borrowed in 1957 and
stated that he owed "about a couple of thousand dollars in Las
Vegas". In addition, prior to the sale George was indebted to the
United States for unpaid income tax returns which he had filed for the
years 1961 and 1962 totaling $12,427.25. George was also indebted for
the deficiencies asserted against him for the years 1957 through 1960,
inclusively, although these deficiencies had not yet been assessed.
23. The only assets which
George had at the time were the subject real estate situated southwest
of the City of Lawton, Oklahoma and a one-half interest in the Saddle
Club located in Oklahoma City. The Saddle Club was sold for $25,000 in
1964. The Saddle Club was not in George's name, but was in the name of
his partner, Everett Johnson.
24. George had no
explanation as to why his interest in the Saddle Club was in the name of
another person.
25. In discussions which
took place between George and John prior to the sale of the subject real
estate, George stated to John that he owed money to the Government for
taxes.
26. Prior to the sale of
the subject real estate from George to John, John had been contacted, in
1961 and thereafter, by agents of the Internal Revenue Service in the
course of their investigation into the tax liabilities of George, and
John was thus aware of the possibility that additional taxes could be
asserted against George.
27. At the trial John
testified that he felt that in May of 1963 a one-half interest in the
subject real estate was worth from $18,000 to $22,000.
28. The subject real estate
consists of two adjoining quarter sections of 160 acres each.
29. A qualified expert
witness placed the fair market value of the subject 320 acres at $52,000
or $162.16 per acre, as of May 1963, with a $40,000.00 value at a forced
sale.
30. This is a fair estimate
as to the value of George's one-half interest in the subject real
estate, his interest being 160 acres.
31. The fair market value
of a one-half interest in the subject real estate in May of 1963 was
$26,000. at an open sale and $20,000. at a forced sale.
Conclusions
of Law
1. The testimony of George
Edward Barnes was not sufficient to overcome the prima facie correctness
of the assessments made against him for tax deficiencies for the years
1957 through 1963. United States v. Rindskopf, 105 U. S. 418, 422
(1881); United States v. Lease [65-2 USTC ¶9478], 346 F. 2d 696
(CA-2 1965); United States v. Dobbelman, 69-2 USTC ¶9591 p.
85580 (D. C. Minn. decided 6/24/69), and thus it is concluded that
George Edward Barnes is indebted to the United States for income tax,
penalty and interest for the years and in the amounts set forth in
findings of fact number 4.
2. The conveyance by George
Edward Barnes of his one-half interest in the subject real estate
described in paragraph 2 of the findings of fact above, in May of 1963,
was in fraud of the rights of the United States as a creditor of George
for his federal income tax liabilities. This conveyance is therefore
void insofar as the rights of the plaintiff, the United States, as a
creditor are concerned, and George's interest in the subject real estate
is subject to the federal tax liens of the United States which arose at
the time of the assessments made against him.
3. The liens of the United
States on the real estate described in paragraph 2 of the findings of
fact above, are subject to the claim of John Barnes in the amount of
$13,000, which is the amount he expended in the transaction regarding
this real estate in May of 1963, with interest upon said $13,000 since
May of 1963 as provided by law.
4. Although Virginia Barnes
is the owner of record of the 320 acres involved herein she holds only
bare legal title and the equitable ownership therein and thereto has at
all times since January 1958 been held by George and John as tenants in
common so it is an undivided one-half interest in the whole that will be
subject to the lien of the Government with the other undivided one-half
interest remaining with John.
5. The counsel for the
plaintiff, the United States of America, is ordered to prepare an
appropriate judgment order, providing, inter alia, for the foreclosure
of the Government's liens against the subject real estate, and the
distribution of the proceeds of the sale thereof, within 30 days from
the entry of this order.
United States of America, Plaintiff v. Joseph D.
Dobbelmann, et al., Defendants
U.
S. District Court, Dist. Minn., Fourth Div., 4-67 Civ. 394, 6/24/69
[1939 Code Secs. 291, 293, and 294, 1954 Code Secs. 6601(a), 6651(a),
6654(a), and 6672]
Additions to tax: Failure to file: Underpayment and nonpayment of
tax: Cancelled checks as evidence.--The Court upheld the
Commissioner's additions to tax for fraudulent failure to file tax
returns, underpayment of tax, and under-estimation of tax based on
cancelled checks cashed by taxpayer. The additions were either conceded
or not contested by the taxpayer, as an individual or in his capacity as
responsible officer of the Acme Mfg. Co.
[Code
Sec. 6321]
Federal tax lien: Mortgaged real estate: Ownership: Attempt to
defraud Government: Priority of lien v. mortgage.--The Court found
that title to a parcel of real estate remained in the taxpayer though he
had a friend redeem it and transfer it to the taxpayer's wife. The
transfer was an attempt to defraud the Government. The property was
subject to the Federal tax lien, except for the conceded priority of a
mortgage held by the Twin City Federal Savings and Loan Association.
Thomas H. Boerschinger,
Department of Justice, Washington, D. C. 20530, Patrick J. Foley, United
States Attorney, Minneapolis, Minn., for plaintiff. David A. Bailly,
Cragg, Bailly & Herzog, 300 Midland Bank Bldg., Minneapolis, Minn.,
for defendants.
Findings
of Fact and Conclusions of Law
NORDBYE, District Judge:
This case having been tried
before the Court, and the parties having presented their evidence in
support of their positions, and the Court having considered the
complaint, answers, testimony and exhibits in this case, the Court
enters the following Findings of Fact and Conclusions of Law:
Findings
of Fact
1. The United States
commenced this action on December 15, 1967, to reduce to judgment
federal tax liens outstanding against the defendant taxpayers, Joseph D.
and Madeline Dobbelmann, and to foreclose said liens against a parcel of
real estate commonly known as 5213 Richwood Drive, Edina, Minnesota,
more particularly described as follows:
Lot four (4), Block two
(2), Richmond Hills 2nd Addition, according to the map or plot thereof
on file or of record in the office of the Registrar of Titles in and for
Hennepin County, Minnesota, including any part of any street or alley
abutting said premises vacated ro to be vacated.
2. The defendant taxpayers
filed their answer on January 23, 1968, generally denying the complaint
of the United States.
3. The Twin City Federal
Savings and Loan Association filed its answer on September 18, 1968,
asserting a prior lien in the subject real estate by virtue of its
mortgage on said premises and on September 28, 1968, a stipulation was
filed whereby the United States acceded to the priority of Twin City's
mortgage.
4. The federal tax liens
outstanding against Joseph Dobbelmann are based upon assessments made
against him by a delegate of the Secretary of the Treasury on May 19,
1958, for unpaid income taxes and on April 24, 1959, for unpaid
withholding taxes as a responsible officer of the Acme Mfg. Co., Inc.,
pursuant to Section 6672 of the Internal Revenue Code of 1954. The
outstanding balance of said assessments is set forth below:
INCOME
TAX
Interest to
Amount Balance of June 2, 1969
Tax Period Assessed Payment Assessment [TEH] ** Total
1950 $1,420.66 (T)
355.17 (P)
710.33 (P1)
213.09 (P2)
611.82 (I) ....... $238.93 $3,072.14 $2,057.51 $ 5,129.65
1951 918.98 (T)
229.75 (P)
459.49 (P1)
179.73 (P2)
340.62 (I) ....... 2,128.57 1,425.91 3,554.48
1952 2,712.18 (T)
1,356.09 (P1)
406.84 (P2) ...... 5,317.67 3,561.65 8,879.32
842.56 (I)
1953 4,065.44 (T)
1,016.36 (P)
2,032.76 (P1)
609.83 (P2) ...... 8,743.38 5,790.48 14,533.86
1,019.03 (I)
RESPONSIBLE OFFICER ASSESSMENTS
Interest to
Period June 2, 1969
of Tax Assessment [TEH] ** Total
1/Q/56-2/Q/56 $1,554.74 $ 942.57 $ 2,497.31
1/Q/56
2/Q/57
1/Q/58
2/Q/58 ....... 5,401.46 3,276.17 8,677.63
$43,272.25
(T)--Indicates amount of tax deficiency.
(P)--Indicates penalty assessed pursuant to Section 291(a) of the
Internal Revenue Code of 1939.
(P1)--Indicates penalty assessed pursuant to Section 293(b) of the
Internal Revenue Code of 1939.
(P2)--Indicates penalty assessed pursuant to Section 294(d) of the
Internal Revenue Code of 1939.
(I)--Indicates amount of interest assessed pursuant to Section 6601(a)
of the Internal Revenue Code of 1954.
**--Interest computed pursuant to affidavit attached hereto.
5. The federal tax liens
outstanding against Joseph D. Dobbelmann and Madeline Dobbelmann,
jointly and severally, are based upon assessments made on July 17, 1964,
by a delegate of the Secretary of the Treasury for unpaid income taxes.
The outstanding balances of said assessments are set forth below:
Interest to
June 2, 1969
Tax Period Amount Assessed Total [TEH] ** Total
1960 $165.77 (T)
41.44 (P)
32.38 (I) .......... $ 239.59 $ 60.35 $ 299.94
1961 660.21 (T)
165.05 (P)
12.78 (p1)
89.34 (I) .......... 927.38 244.71 1,172.09
1962 842.15 (T)
210.54 (P)
15.60 (p1)
63.43 (I) .......... 1,131.72 300.35 1,445.67
1963 297.80 (T)
29.78 (P)
4.56 (I) ........... 332.14 95.60 427.74
$3,345.44
(T)--Indicates amount of tax assessed.
(P)--Indicates penalty assessed for late filing of return pursuant to
Section 6651(a) of the Internal Revenue Code of 1954.
(p1)--Indicates penalty for failure to pay estimated income tax pursuant
to Section 6654(a) of the Internal Revenue Code of 1954.
(I)--Indicates amount of interest assessed pursuant to Section 6601(a)
of the Internal Revenue Code of 1954.
**--Interest computed to current date pursuant to affidavit attached
hereto.
These assessments are supported by unpaid returns signed by Joseph D.
Dobbelmann and Madeline Dobbelmann, and there was no contest as to them.
6. On February 12, 1962,
Joseph D. Dobbelmann executed a tax collection waiver, Form 900,
extending the statute of limitations of collection for the liabilities
set forth in paragraph 4 above until December 31, 1967.
7. Joseph D. Dobbelmann did
not file federal income returns for the years 1950 and 1953.
8. Prior to the time when
Joseph D. Dobbelmann was required to file his federal income tax return
for 1950, his bookkeeping service prepared and delivered to him a
Schedule C, income from trade or business, for attachment to his federal
income tax return for the year 1950, which showed net income to Joseph
D. Dobbelmann, d/b/a Dorflo Mfg. Co., in the amount of $7,678.95.
9. When this Schedule C was
delivered, Dobbelmann stated to his bookkeeping service that he did not
pay them to provide a return which showed that he owed tax and thereupon
terminated their services.
10. On April 27, 1964,
Joseph D. Dobbelmann filed an affidavit in a divorce action in the
District Court of Hennepin County, in which he stated that he had filed
a federal income tax return for the year 1953, showing income in the
amount of $5,000, and had paid a tax thereon of $133.20.
11. In October of 1951,
Joseph D. Dobbelmann incorporated his proprietorship, Dorflo Mfg. Co.,
into the Acme Mfg. Co., Inc., a corporation wholly owned by Joseph D.
Dobbelmann.
12. During the tax years
1950 through 1953, inclusive, besides the business which was done under
the name of Joseph D. Dobbelmann, d/b/a Dorflo Mfg. Co., and under the
name of the Acme Mfg. Co., Inc., business was done either by Joseph D.
Dobbelmann or the Acme Mfg. Co., Inc., under the name of the D and S
Sales Co., the Kruse Mfg. Co., and Wood Specialties, Inc.
13. During the tax years
1950 through 1953, inclusive, Joseph D. Dobbelmann, either through his
corporation or individually, manufactured and sold crating materials and
tool stands to a corporation known as Shopmaster, Inc. The invoices sent
to Shopmaster, Inc., for the goods sold were under the name of Kruse
Manufacturing Company, or Wood Specialties, Inc., or Joseph D.
Dobbelmann. The checks issued by Shopmaster, Inc., in payment for its
purchases were all endorsed by Joseph D. Dobbelmann, except some checks
payable to Wood Specialties were endorsed for Dobbelmann by a part-time
employee, Howard K. Thurston, at Dobbelmann's request, and thus the
payments were eventually received by him.
14. The amount paid out by
Shopmaster, Inc., during the period 1950 through 1953, inclusive, as set
forth above, was $20,040.20. The receipt of these funds was not shown on
the books of Joseph D. Dobbelmann, d/b/a Dorflo Mfg. Co., for the period
from January 1950 to the date of incorporation, October 1951. Nor, after
incorporation, was the receipt of said payments shown on the books of
Acme Mfg. Co., Inc., from the date of October 1951 until December of
1953.
15. Since the $6,581.03 in
payments received from Shopmaster in the year 1950, a year in which
Joseph D. Dobbelmann did not file a tax return, was not reflected on the
books of Joseph D. Dobbelmann, d/b/a Dorflo Mfg. Co., the bookkeeping
service of the taxpayer which prepared the unfiled Schedule C for him
did not pick up and include this amount as income in the Schedule C
described in paragraph 8.
16. The federal income tax
return filed by Joseph D. Dobbelmann for 1951 does not specifically show
the receipt of any payments from Shopmaster, Inc., as income. However,
there is some income reported by him not traceable to any source in the
books of Dorflo Mfg. Co., or Acme Mfg. Co., Inc., so it can be presumed
in taxpayer's favor that only $900 of the $6,634 received from
Shopmaster was not reported as income in 1951.
17. The return filed by
Joseph D. Dobbelmann for the year 1952 does not report as income any
portion of the $3,692.94 received by him from Shopmaster, Inc., in that
year.
18. Since no return was
filed by Joseph D. Dobbelmann in 1953, none of the $3,132.23 received by
him from Shopmaster was reported as income for that year. Moreover, the
$5,000 in income on which Joseph D. Dobbelmann erroneously said he paid
tax in his affidavit filed in the District Court of Hennepin County
could not have included any income from Shopmaster, since the books of
Acme Mfg. Co., Inc., showed that this amount was paid to him as salary
in 1953.
19. In 1952, Joseph D.
Dobbelmann received as income the sum of $446.34 in the form of a check
payable to D and S Sales, endorsed by Joseph D. Dobbelmann, which check
was drawn by the Chicago, Milwaukee & St. Paul Railroad in
settlement of a freight claim. The receipt of this check was not
reflected on the books of the Acme Mfg. Co., Inc.
20. In 1953, Joseph D.
Dobbelmann received as income the sum of $1,000, which amount was
credited by the builder on the purchase price of a house purchased in
the name of his wife, Mary Dobbelmann, in consideration of the receipt
of 50 door frames manufactured by the Acme Mfg. Co., Inc. This
transaction was not reflected on the books of Acme Mfg. Co., Inc.
21. The income tax
deficiencies assessed against Joseph D. Dobbelmann for the years 1950
through 1953, inclusive, set forth in paragraph 4 above, are supported
by various adjustments which were made to the books and records of
Joseph D. Dobbelmann, d/b/a Dorflo Mfg. Co., and the books and records
of the Acme Mfg. Co., Inc.
22. Joseph D. Dobbelmann
signed an agreement consenting to the assessment of 100 percent
penalties against him as a responsible officer of the Acme Mfg. Co.,
Inc., which assessments set forth in paragraph 4. No evidence or
testimony was offered at trial in contravention of said assessments.
23. At the trial, the
taxpayer did not produce any books or records in contravention of the
Government's evidence and was unable to recall his income for the years
1950 through 1953.
24. On October 5, 1953, one
Mary Dobbelmann, the wife of Joseph D. Dobbelmann at that time, entered
into a contract for deed for the purchase of the real estate described
in paragraph 1 of these Findings of Fact for the sum of $22,000, $3,000
of which was paid at the time the contract for deed was signed, and a
mortgage was given to the Northwestern Federal Savings and Loan
Association and the proceeds therefrom amounting to some $17,500 and
other considerations provided by Joseph D. Dobbelmann were applied on
the purchase price.
25. On January 15, 1957,
Mary and Joseph D. Dobbelmann were divorced and in the judgment granting
the divorce it was provided that the real estate in question was to be
decreed to Mary Dobbelmann without any right of her husband, Joseph D.
Dobbelmann, unless the latter within a certain period of time paid to
Dobbelmann the sum of $3,000. After the divorce decree was entered,
Joseph D. Dobbelmann remarried and his present wife is Madeline
Dobbelmann.
26. Early in 1960, the
Northwestern Federal Savings and Loan Association commenced mortgage
foreclosure proceedings against the real estate in question and at this
time Joseph D. Dobbelmann and his wife, Madeline, were living in the
premises. Before the redemption period expired, and after the mortgage
foreclosure sale, Joseph D. Dobbelmann arranged with his friend, one
Albert J. Fischer, to obtain a new mortgage on the property in the
amount of $17,000 from the Twin City Federal Savings and Loan
Association. The title to the property at this time subject to the sale
in the mortgage foreclosure proceedings remained in Mary Dobbelmann,
Joseph D. Dobbelmann's former wife. The redemption from the Northwestern
Federal Savings and Loan mortgage foreclosure sale required some
$18,628.49, and the difference between that sum and the amount of money
to be obtained from a new mortgage to Twin City Federal was, according
to the weight of the evidence herein, furnished by the defendant Joseph
D. Dobbelmann. The redemption, however, was made by Albert J. Fischer as
an accommodation to Joseph D. Dobbelmann, and the right to redeem from
the Northwestern Federal mortgage foreclosure rested in Fischer by
reason of a quit claim deed to him from Mary A. Messicci, the former
Mary Dobbelmann, the title remaining in her presumably because Joseph D.
Dobbelmann had not paid to her the $3,000 in conformance with the
divorce decree on January 15, 1957. In any event, it appeared that at
some time after the divorce decree was entered and before January 30,
1961, Mary Dobbelmann, then known as Mary A. Messicci, received the
money due her under the divorce decree, and at the request of Joseph D.
Dobbelmann, signed a quit claim deed of the property herein to Albert J.
Fischer on or about January 30, 1961. Albert J. Fischer, however, never
paid any money for any interest in this property and any connection
which he had with the new mortgage obtained from Twin City Federal was a
mere accommodation for Joseph D. Dobbelmann and at all times pertinent
to the lien of the United States for taxes due, the title to this
property in question was vested in Joseph D. Dobbelmann.
27. Thereafter, at the
request of Joseph D. Dobbelmann, Fischer and his wife quitclaimed the
property in question to Dobbelmann's wife, Madeline, on July 17, 1961.
At this time, the defendant Joseph D. Dobbelmann told Fischer that he,
Dobbelmann, did not want the property to be in his name in that he owed
the Government a lot of money and requested Fischer to put the title to
the property in the name of his wife, Madeline. The quit claim deed made
by Fischer to Madeline Dobbelmann was designed and intended by Joseph D.
Dobbelmann to defraud the Government of the taxes due the United States
from the said Joseph D. Dobbelmann, and his wife, Madeline Dobbelmann,
had no knowledge of the transaction between Fischer and her husband in
that the quit claim deed from Fischer and his wife to her was delivered
to her husband and she had no part in the arrangements for this
transaction.
28. During the year 1958 or
thereabouts, the evidence sustained a finding that Madeline Dobbelmann,
the then wife of Joseph D. Dobbelmann, did provide her husband with
funds in the sum of approximately $3,000 which she understood was to
avoid foreclosure proceedings at that time by Northwestern Federal.
However, it does not appear from the evidence that by reason of that
payment Madeline Dobbelmann intended to have any lien or interest in the
real estate involved herein other than to safeguard the dower rights she
had in the homestead as the wife of Joseph D. Dobbelmann. The payment by
her was not coupled with any agreement that her contribution should vest
her with any title to the homestead.
Conclusions
of Law
1. This Court has
jurisdiction over the parties and subject matter of this case. (28 U. S.
C. 1340 and 1345, 26 U. S. C. 7402, 7403).
2. The evidence submitted
by the United States in support of the fraud penalties assessed against
Joseph D. Dobbelmann for the years 1950 through 1953 was clear and
convincing and established the propriety of this assessment.
3. The testimony of Joseph
D. Dobbelmann failed to overcome the prima facie correctness of the
assessments made against him for tax deficiencies for the years 1950
through 1953 and as a responsible officer of the Acme Mfg. Co., Inc.
4. Joseph D. Dobbelmann is
indebted to the United States in the amount of $43,272.25, plus interest
thereon as provided by law, upon the assessments described in paragraph
4 of the Findings of Fact.
5. Joseph D. and Madeline
Dobbelmann are indebted, jointly and severally, to the United States in
the amount of $3,345.44, plus interest thereon as provided by law, upon
the assessments described in paragraph 5 of the Findings of Fact.
6. The United States
acquired tax liens against Joseph D. and Madeline Dobbelmann on the
dates of the assessments against them as described in paragraphs 4 and 5
of these findings, said liens under Section 6321, Title 26, U. S. C., in
the sum of $46,617.69, attached as specific liens to all the rights and
interests of Joseph D. Dobbelmann and Madeline Dobbelmann in the parcel
of real estate commonly known as 5213 Richwood Drive, Edina, Minnesota,
and described in paragraph 1 of these findings, subject, however, to the
superior lien of the mortgage in favor of the defendant Twin City
Federal Savings and Loan Association dated February 20, 1961, and filed
February 23, 1961, as Document No. 651063 in the office of the Registrar
of Titles, Hennepin County, said mortgage being given by Albert J.
Fischer and Johanna O. Fischer, his wife, to secure the payment of an
installment mortgage note dated February 20, 1961, in the principal sum
of $17,000.
7. A judgment and decree in
accordance herewith foreclosing the liens of the United States in the
sum of $46,617.69 upon and against the real estate described in
paragraph 1 of these findings and ordering that said real estate be sold
in accordance with law to satisfy said liens subject to the mortgage
lien of Twin City Federal Savings and Loan Association as set forth in
paragraph 6 of the Conclusions of Law herein, may be presented to the
Court. Judgment will then be entered accordingly. Exceptions are
reserved.
Memorandum
It will be observed that
the Court has adopted the proposed findings of the plaintiff in
paragraphs 1 to 23, inclusive. After due consideration, the Court has
determined that at all times pertinent hereto, Joseph D. Dobbelmann was
the owner of this property and the transfer of title by Fischer to
Madeline Dobbelmann was merely a device and scheme engineered by Joseph
D. Dobbelmann to defraud and defeat the Government's tax liens attaching
to this property. Any contributions which were made by Dobbelmann's
wife, Madeline, to any payment on any mortgage on said property, or
otherwise, were not made with the intent and purpose of creating or
granting to her, and did not grant or create, any lien, title, or estate
in her in the real property referred to herein. The mortgage payments or
contributions made by her on and to the upkeep of this property were
similar to the contributions which a wife frequently makes to her
husband in order to safeguard their homestead. Moreover, the $3,000 she
advanced allegedly to prevent a foreclosure by the Northwestern Federal
of its mortgage would be less than the $3,345.45 lien that the
Government has upon the property by reason of Joseph D. Dobbelmann's and
Madeline Dobbelmann's joint tax liabilities as set forth in paragraph 5
of the Findings of Fact entered herein.
This memorandum is hereby
made a part of the foregoing Findings of Fact and Conclusions of Law.
United States of America, Plaintiff v. Jerome A.
Wiltse, et al., Defendants
U.
S. District Court, Central Dist. Calif., No. 66-1673-WPG Civil, 4/23/68
[1954 Code Sec. 6323]
Lien for taxes: Fraudulent conveyance of real estate.--Conveyance
of real estate by the delinquent taxpayer was fraudulent as to
creditors. Therefore, title to the real estate constructively remained
in the taxpayer and was subject to the tax lien.
William Matthew Byrne, Jr.,
United States Attorney, Loyal E. Keir, Assistant United States Attorney,
Chief, Tax Division, Richard L. Fishman, Assistant United States
Attorney, Los Angeles, Calif., pro se.
Order
Granting Relief Prayed for by United States of America and Stay of
Execution
GRAY, District Judge:
This cause having come on
for trial on April 9, 1968, due notice having been given to all parties,
and the plaintiff United States of America being represented by Wm.
Matthew Byrne, Jr., United States Attorney for the Central District of
California, Loyal E. Keir, Assistant United States Attorney, Chief, Tax
Division and Richard L. Fishman, Assistant United States Attorney,
personally appearing, and defendant Jerome A. Wiltse personally
appearing, and none of the other defendants having entered an
appearance, and the Court having considered the pleadings, evidence and
arguments of the parties,
IT IS HEREBY ORDERED,
ADJUDGED AND DECREED that the defendants, Jerome A. Wiltse and Lillian
Wiltse are indebted to the United States of America for Federal
Individual Income Taxes as follows:
Assessed Interest for 1952 .... $2,195.78
Assessed Tax for 1953 ......... 3,101.61
Assessed Interest for 1953 .... 2,008.87
Accrued Interest for 1953 ..... 756.73
Total ......................... [TEH] * $8,062.99
* Plus statutory interest at the rate of fifty cents per day after April
15, 1968. the conveyance of the real property described the conveyance
of the read property described in paragraph XI of the Complaint in this
action be set aside as fraudulent as to creditors;
IT IS FURTHER ORDERED that
the tax liens arising from the assessments set forth in paragraph X of
the Complaint in this action be enforced against the real property
described in paragraph XI of the Complaint by a sale of said property by
the United States Marshal, the proceeds from said sale to be applied
against the outstanding tax liability of the defendants, Jerome A. and
Lillian Wiltse, the United States of America to be granted a deficiency
judgment in the amount of any unpaid balance of the tax liability after
the proceeds of the sale are applied to the tax liability plus interest,
IT IS FURTHER ORDERED that
execution of this order be stayed for a period of ninety days from entry
for the purpose of allowing for the payment by the defendants of the
$8,062.99, plus interest, the occurrence of which shall be cause for
dismissal of this action.
United States of America, Plaintiff v. Ruth N.
Ream, Individually and as Executrix of the Estate of Norman W. Ream;
Duncannon National Bank; Atlantic Refining Company; Mrs. David Lane;
Donald Musselman and Daniel Musselman, d/b/a Musselman Funeral Home;
Household Consumers Discount Company; Chester Graff; and Nelson Zeigler,
Defendants
U.
S. District Court, Middle Dist. Pa., Civil Action No. 8346, 10/9/67
[1954 Code Secs. 6321 and 6901]
Lien for taxes: Fraudulent transfer of land: Statute of limitations:
State law.--A transfer of real estate from joint tenancy to tenancy
by the entireties made by a delinquent taxpayer in fraud of his
creditors was null and void as to Federal income tax liens. Sale of the
transferred lands was not barred by the state statute of limitations
because the Federal Government is not bound by such statutes.
Bernard J. Brown, United
States Attorney, P. O. Bldg., Scranton, Pa., for plaintiff. Dowling and
Dowling, 25 S. Front St., Harrisburg, Pa., for Duncannon Nat'l Bank;
Culver and Griffin, 5 Poplar St., Towanda, Pa., for Mrs. David Lane;
Landis and McIntosh, 30 S. Court House Ave., Carlisle, Pa., for
Household Consumer Discount Co.; Goldberg, Evans and Katzman, Blackstone
Bldg., Harrisburg, Pa., for Ruth Ream; Myers, Myers, Flower &
Johnson, Lemoyne Trust Bldg., Lemoyne, Pa., for Donald & David
Musselman, for defendants.
Order
[State Statute No Bar]
FOLLMER, District Judge:
This cause having come on
to be heard upon the motion for summary judgment pursuant to Rule 56 of
the Federal Rules of Civil Procedure filed by the plaintiff, United
States of America, and it appearing to the court that there is no
material issue of fact and that the plaintiff is entitled to judgment as
a matter of law. Defendant has conceded that the United States of
America is not bound by the Statute of Limitations of a state. I
conclude that the Pennsylvania Statute of Repose, Act of April 22, 1856,
P. L. 532, Sec. 6, 12 P. S. §83, is no bar to the relief sought in this
case. No "implied or resulting" trust is here sought to be
imposed. This case involved the transfer of land by a debtor in fraud of
his creditors. Note distinction made in United States v. Schofield
[60-1 USTC ¶9123], 179 F. Supp. 332 (E. D. Pa. 1959).
[Liens
for Taxes]
NOW, this 6 day of October,
1967, it is hereby ORDERED, ADJUDGED AND DECREED:
1. That the plaintiff,
United States of America, have and recover from the defendant Ruth N.
Ream, as Executrix of the Estate of Norman W. Ream, for the unpaid and
outstanding 1945, 1946 and 1947 federal income tax liabilities,
including penalties and accrued interest, of Norman W. Ream, now
deceased, a judgment in the amount of $152,391.51, plus interest thereon
at the legal rate from the date hereof until paid, together with costs
as taxed by the Clerk of the Court.
2. That the plaintiff,
United States of America, has, by reason of the assessment of the taxes
described above, a valid lien upon the following described real property
located in Perdix, Penn Township, Perry County, Pennsylvania:
Tract
No. 1. Beginning at a stone pile and stake at the land or late of Burton
F. Blough and J. H. Plank; thence by lands south eighty-eight (88)
degrees thirty (30) minutes east two hundred thirty (230) feet to a
stone at the land now or late of Carrie F. Baker; thence by said Baker
land south one (1) degree thirty (30) minutes west one hundred
thirty-two (132) feet to a stone at the northern line of a thirty-foot
roadway known as Timberland Road; thence along the northern side of said
road north eighty-seven (87) degrees thirty (30) minutes west two
hundred thirty (230) feet to a stone at line of land now or late of
Burton F. Blough and J. H. Plank; thence north (1) degree thirty (30)
minutes east one hundred forty-two (142) feet to a stone pile and stake,
the place of beginning.
Tract
No. 2. Being Plot #7, excepting the land now owned or formerly owned by
Annie Bowman, of a tract of land formerly owned by Aaron Doan, deceased,
draft of which is Recorded in Deed Book 86, page 211, Said tract of land
being acquired by Aaron Doan from the Commonwealth of Pennsylvania by
deed patent, recorded in Deed Book "E", Vol. 3, Page 290,
which tract of land was bounded on the north by the lands now or
formerly of James Young, on the west by lands now or formerly of J. M.
Zitch, on the east by lands now or formerly of William Keiby, Aaron Doan
died on or about July 15, 1916, and by his last will and testament
devised to his son Ira H. Doan the plot hereinbefore mentioned, said
Will being recorded in the Register of Wills office for Perry County in
Will Book "I", Vol. 1, page 435. Containing approximately one
acre of land, and having thereon erected a one and one-half story frame
dwelling house.
Tract
No. 3. Beginning at a point on the south side of the State Road leading
from Duncannon to Marysville, at the center of a poplar tree, on the
dividing line between lots Nos. 6 & 7 on plan hereinafter referred
to; thence southwardly along the western line of Lot No. 7 a distance of
two hundred and fifteen (215) feet, more or less, to land of Baker,
formerly William Kirby; thence westwardly along the south line of lot
No. 6 a distance of thirteen (13) feet, to a point, and thence
northwardly a distance of two hundred and fifteen (215) feet, more or
less, to a point, the place of beginning. Being part of Lot No. 6 on
plan of lots of Aaron Doan. Recorded in Perry County Deed Book 86, Page
211.
Tract
No. 4. Beginning at an oak tree on the south (west) side of a public
road; thence westwardly (northwardly) along said public road fifty-three
(53) feet to a maple tree at line of land of B. F. Blough, formerly
Aaron Doan; thence southwardly (westwardly) along said land ninety-nine
(99) feet to a poplar tree; thence eastwardly (southwardly) along land
of B. F. Blough, formerly of Aaron doan, fifty-three (53) feet to a
stone and land now or late of Aaron Doan; thence northwardly
(eastwardly) along said land ninety-nine (99) feet to an oak tree at
public road and place of beginning. Being part of Lot No. 7 on plot of
land of Aaron Doan.
Tract
No. 5. Beginning at the southwest corner of Lot No. 28 according to the
Plan of Lots laid out by Wm. C. McFadden as recorded in the Office of
the Recorder of Deeds of the said County of Perry in Deed Book
"A", Vol. 3, pages 148 and 149; thence in a westerly direction
along the southern line of Lots Nos. 27 and 26 in the said Plan of Lots
a distance of 112 feet to a post; thence in a northeasterly direction
through the said lots Nos. 27 and 26 and by the remaining parts thereof
now or late of Perdix Realty Company a distance of 3631/4 feet, more or
less, to a post on the northern line of the said Lot No. 27 as affected
by the conveyance of a strip of land by Catharine McFadden and Wm. C.
McFadden, her husband, to the Pennsylvania Railroad Company by deed
recorded in the said Recorder's Office in Deed Book "A", Vol.
3, page 370; thence in an easterly direction along the northerly line of
the said Lot No. 27 as affected aforesaid, a distance of 64 feet to the
northwest corner of the said Lot No. 28 as affected by the said
conveyance to the said Railroad Company; thence in a southerly direction
along the westerly line of the said lot No. 28, now or late of Burton F.
Blough, a distance of 360 feet, more or less, to the place of Beginning,
containing 116 perches, more or less. Being a part of Lots Nos. 26 and
27 in said Plan of Lots.
Tract
No. 6. Beginning at the southeast corner of Lot No. 29 according to the
said Plan of Lots; thence in an easterly direction along the southerly
line of Lot No. 30 in the said Plan of Lots a distance of sixteen (16)
feet to a post; thence in a northeasterly direction through the said Lot
No. 30 and by the remaining portion thereof, now or late of Perdix
Realty Company, a distance of 363 feet, more or less, to a post in the
northerly line of the said Lot No. 30 as affected by the said conveyance
to the said The Penna, Railroad Company; thence in a westerly direction
along the northern line of said Lot No. 30 as affected aforesaid, and by
lands now or late of said Railroad Company a distance of 64 feet to the
northeast corner of the said Lot No. 29 as affected by the said
conveyance to the said Railroad Company; thence in a southerly direction
along the eastern line of the said lot No. 29 as affected aforesaid, a
distance of 359 feet, more or less, to the place of Beginning,
containing 50 perches, more or less. Being a part of Lot No. 30 in said
Plan of Lots.
Tract
No. 7. Beginning on the southern line of forty (40) feet wide private
road, which road is projected to adjoin the southern line of the right
of way of The Pennsylvania Railroad Company to run parallel therewith,
at the northeast corner of Lot No. 27 on the Plan of Lots hereinafter
referred to, the said corner being twenty-one hundred and twenty (2120)
feet distant in an easterly direction from the eastern side or line of a
private Road which cuts the first mentioned private road at right angles
and leads from the public road, now or lately, running from Marysville
to Duncannon, to the former vacated road connecting said towns; thence
eastwardly along the first mentioned private road two hundred (200) feet
to Lot No. 30 on said plan; thence southwardly along said Lot No. 30
three hundred and fifty-eight (358) feet, more or less, to a point;
thence westwardly two hundred (200) feet to Lot No. 27 on said plan;
thence northwardly along said Lot No. 27, three hundred sixty (360)
feet, more or less, to the place of Beginning. Being Lots No. 28 and 29
as laid down on a Plan of Lots at Cove Station, P. R. R., by William C.
McFadden, recorded in Perry County Deed Book "A", Vol. 3, at
page 148, save and except that the lots hereby conveyed are sixty feet
less in depth than as represented on said Plan, said sixty feet having
been taken from the northern part of front of said lots and conveyed to
the Pennsylvania Railroad Company.
Tract
No. 8. Beginning at an Oak Tree on the southern line of the public Road
leading from Marysville to Duncannon in the northeast corner of land of
C. G. Owen Estate; thence southwardly along the eastern line of said
Owen Estate land, a distance of 230 feet, more or less, to land of
Thomas Martin; thence eastwardly along the northern line of the Thomas
Martin land, a distance of 87 feet to a point; thence northwardly in a
line parallel with the eastern line of the Owen lot, a distance of 230
feet, more or less, to the said road; thence westwardly along the
southern line of said highway, a distance of 87 feet, more or less, to
the place of Beginning.
[Void
Transfer]
3. That the conveyance of
the above-described real property on May 1, 1957, by Norman W. Ream and
Ruth N. Ream to Norman W. Ream and Ruth N. Ream, as tenants by the
entireties, is null and void as to the United States of America and is
hereby set aside insofar as it is necessary in order to subject the said
premises to the relief herein granted.
4. That the federal tax
lien of the plaintiff upon the above-described real property is superior
to the claims of each and all of the defendants herein, except the
mortgage claim of the defendant, Duncannon National Bank.
5. That the above-described
real property located in Perdix, Penn Township, Perry County,
Pennsylvania, be sold free and clear of all liens and encumbrances by
the United States Marshall for the Middle District of Pennsylvania. That
the said United States Marshal give public notice of the time, place and
terms of such sale, together with a description of the premises to be
sold, by previously causing notice thereof to be published once each
week for four consecutive weeks in at least one newspaper regularly
issued and of general circulation which is located in the Middle
District of Pennsylvania, the first such publication to be not less than
four weeks before the date of sale. That the said Marshal may adjourn
the sale so advertised by giving public notice by proclamation. That the
plaintiff or any of the parties to this cause may become the purchaser
or purchasers at such sale, and upon the sale being made, the Marshal
shall execute and deliver to the purchaser or purchasers a good and
sufficient deed as required by law.
6. That the proceeds of
said sale be distributed in the following manner:
(a)
First, the costs and expenses of said sale to be reimbursed to the
Marshal;
(b)
Second, the proceeds to be paid to the defendant, Duncannon National
Bank, in an amount sufficient to satisfy its outstanding mortgage liens
and said property under date of June 10, 1957.
(c)
Third, the balance of the proceeds, to the plaintiff, United States of
America, in partial payment of its federal tax lien.
United States of America, Plaintiff v. Idus
Prather, Jennie Lou Prather, Louise Prather, and J. P. Atkinson,
Defendants
U.
S. District Court. No. Dist. Ga., Newnan Div., Civil No. 699, 10/10/66
[1954 Code Sec. 6321]
Lien for taxes: Fraudulent conveyance: Priority: Fact finding.--The
Government's tax lien for unpaid marihuana transfer taxes and interest
attached to a parcel of real property transferred by the defendant to
his daughter since the transfer was fraudulently made to defeat the
collection of taxes. Judgment entered for amount of tax plus interest
due and priority of existing creditor's lien over the Government's lien
determined.
Charles L. Goodson, United
States Attorney, P. O. Box 912, Atlanta, Ga., for plaintiff. Charles
& Dan C. Mitchell, 808 Five Points Center Bldg., Atlanta, Ga., for
Prather; Walter Sanders, Sanders, Mottola & Haugen, 151/2 Greenville
St., P. O. Box 596, Newnan, Ga., for Atkinson; for defendants.
Findings
of Fact and Conclusions of Law
MORGAN, District Judge:
This cause came on for
trial on May 30, 1966, and was heard by the Court without a jury. The
Court, having considered the pleadings and the evidence presented at the
trial of this matter, makes the following findings of fact and
conclusions of law.
Findings
of Fact
1. This is a civil action
brought by the United States of America, which arises under the internal
revenue laws, for the collection of marihuana transfer excise taxes
assessed against the defendant, Idus Prather, plus interest as provided
by law. The suit was commenced on February 15, 1965, by the filing of a
complaint.
2. The pending civil
action, Civil No. 699, was authorized and sanctioned by Bertrand M.
Harding, Acting Commissioner of Internal Revenue, a delegate of the
Secretary of the Treasury, and was brought at the direction of the
Attorney General of the United States, pursuant to Section 7401 of the
Internal Revenue Code of 1954.
3. On January 3, 1964, the
District Director of Internal Revenue, Atlanta, Georgia, made assessment
against the defendant, Idus Prather, in the amount of $148,900 for
marihuana transfer excise taxes on 1,489 ounces of marihuana for the
taxable periods October 30, 1963, November 4, 1963, November 7, 1963,
November 14, 1963 and November 21, 1963.
4. Notice of this
assessment was given to, and demand for payment was made of the
defendant, Idus Prather, on January 6, 1964.
5. The defendant, Idus
Prather, has neglected and refused to pay the amount assessed against
him on January 3, 1964, after demand for payment by the District
Director of Internal Revenue, Atlanta, Georgia.
6. On January 2, 1951, and
at all times subsequent thereto, the defendant, Idus Prather, has been
the owner of, or has had an interest in the following described tract of
real property situated in Meriwether County, Georgia, which is more
fully described as follows:
All that
tract or parcel of land lying and being in Meriwether County, Georgia,
and being 79 acres, more or less, in Land Lot 189 in the 8th Land
District, and being all of said lot owned by R. J. Atkinson at the time
of his death, and bounded on the east by R. J. Atkinson, deceased, south
by W. L. Pinkston, West by W. L. Pinkston, and Greenville-Newnan paved
highway and north by old Maffett place. This being the same land more
particularly described in deed to Atkinson Bros. by Mrs. Alice Blalock
recorded Deed Book Y Page 608 and in deed from W. L. Pinkston to
Atkinson Brothers recorded Book 2 Page 585 in Office of Clerk of
Meriwether Superior Court.
7. By deed dated November
26, 1963, which was filed of record on November 30, 1963, the defendant,
Idus Prather, voluntarily transferred or conveyed to his daughter,
Louise Prather, the tract of real property described above.
8. The fair market value of
the tract of real property described in paragraph 6 above was $5,000 on
November 26, 1963.
9. The total fair market
value of all property, real and personal, owned by the defendant, Idus
Prather, not including the tract of real property described in paragraph
6 above, was less than the total amount of liabilities owed by Idus
Prather on November 26, 1963.
10. The defendant, Idus
Prather, and his family have resided on the tract of real property
involved in this action since the year 1955.
11. The defendant, Idus
Prather, received monetary payments from the Meriwether County A. B. C.
S. Office, Greenville, Georgia, for praticipating in the feed grain
program as owner and operator of the farm comprising the tract of real
property involved in this action during the year 1965, and on March 25,
1965, filed application for payment for participating in the feed grain
program for the year 1966, as owner and operator.
12. No consideration was
received by the defendant, Idus Prather, from Louise Prather, in
exchange for the transfer and conveyance of the tract of real property
involved in this action to her on November 26, 1963.
13. On January 2, 1951,
Idus Prather, executed a note and Deed to Secure Debt in favor of the
defendant, J. P. Atkinson, which deed was recorded in accordance with
law on January 2, 1951. Various removals of the original note and loans
of money were made and there is presently due and owing to J. P.
Atkinson from Idus Prather on the removal note the sum of $2,206.29,
including interest to July 1, 1966.
Conclusions
of Law
1. This Court has
jurisdiction of the parties and the subject matter of this action.
Sections 1340 and 1345 of Title 28 of the United States Code; Section
7402 of the Internal Revenue Code of 1954.
2. The assessment made
against the defendant, Idus Prather, for marihuana transfer excise taxes
is presumed to be correct and the burden is on the taxpayer to show that
he does not owe the assessed liability. Wickwire v. Reinecke [1
USTC ¶265], 275 U. S. 101; United States v. Nindahopf, 105 U. S.
418; United States v. Strebler [63-1 USTC ¶7278], 313 F. 2d 402
(C. A. 8th); Price v. United States [64-2 USTC ¶9708], 335 F. 2d
671 (C. A. 5th).
3. The defendant, Idus
Prather, failed to introduce any evidence on his behalf, and, therefore,
has failed to carry his burden of showing that he does not owe the
assessment against him for marihuana transfer excise taxes. United
States v. Rindskopf, supra; United States v. Strelber, supra.
4. The plaintiff, United
States of America, is entitled to judgment against the defendant, Idus
Prather, in the amount of $148,900 plus interest as provided by law, and
costs.
5. The amount of the
indebtedness of the defendant, Idus Prather, to the plaintiff, United
States of America, for marihuana transfer excise taxes and interest is
secured by a lien on all property and rights to property, whether real
or personal, belonging to Idus Prather. Section 6321 of the Internal
Revenue Code of 1954.
6. The lien and claim of
the defendant, J. P. Atkinson, is entitled to payment prior to the lien
and claim of the United States. Section 6321 of the Internal Revenue
Code of 1954.
7. The United States of
America was an existing creditor of Idus Prather on the date of the
conveyance of the parcel of real property involved herein to his
daughter, Louise Prather, on November 26, 1963. Section 4741 of the
Internal Revenue Code of 1954; United States v. Hickox [66-1 USTC
¶15,679], 356 F. 2d 969 (C. A. 5th); Bussell v. Glenn, 197 Ga.
816, 30 S. E. 2d 617 (1944); Zimmern v. United States [37-1 USTC
¶9024], 87 F. 2d 179 (C. A. 5th).
8. The defendant, Idus
Prather, was insolvent at the time of the conveyance of real property to
his daughter, Louise Prather, on November 26, 1963. Keeter v. Bank of
Ellijay, 190 Ga. 525, 9 S. E. 2d 761 (1940).
9. Transactions between
near relatives to the prejudice of creditors are to be closely scanned
and their bona fides clearly established. United States v. Hickox,
supra; State Banking Co. v. Miller, 185 Ga. 653, 196 S. E. 47
(1938).
10. The retention of use
and possession of real property after an absolute sale by the debtor
raises a presumption of fraud. United States v. Hickox, supra; State
Banking Co. v. Miller, supra.
11. The evidence presented
by the plaintiff, United States of America, in this case was sufficient
to establish prima facie that the conveyance by Idus Prather to his
daughter, Louise Prather, on November 26, 1963, was fraudulent, and the
burden of showing good faith was shifted to the defendants, Idus Prather
and Louise Prather. United States v. Hickox, supra; United States v.
Phillips [46-1 USTC ¶9262], 59 F. Supp. 1006 (DC SD Ga.); Jones
v. J. S. H. Co., 199 Ga. 755, 35 S. E. 2d 288 (1945); State
Banking Co. v. Miller, supra.
12. The defendants, Idus
Prather and Louise Prather, did not introduce any evidence on their
behalf and, therefore, have failed to sustain their burden of
establishing the bona fides of the covenance. United States v.
Hickox, supra; State Banking Co. v. Miller, supra.
13. The transfer and
conveyance of the parcel of real property by Idus Prather to his
daughter, Louise Prather, by deed dated November 26, 1963, was a
voluntary conveyance made at a time that Idus Prather was lawfully
indebted to the United States of America and is declared null and void
as a fraudulent conveyance, pursuant to the provisions of Section
28-201(3) of the Code of Georgia Annot. (1952). Cunningham v.
Avakian, 192 Ga. 391, 15 S. E. 2d 493 (1941); Downs v. Powell,
215 Ga. 62, 108 S. E. 2d 715 (1959). See also Section 48-110 of the Ga.
Code, Annot. (1952).
14. The lien of the United
States for unpaid marihuana transfer excise taxes and interest attached
to the parcel of real property which is the subject of this action.
Section 6321 of the Internal Revenue Code of 1954.
United States of America, Plaintiff v. Harry
Schroeder, Amanda Schroeder, Harry Paul Kilpatrick, and Mark A.
Kilpatrick, et al., Defendants
U.
S. District Court, So. Dist. Iowa, West. Div., Civil No. 2-422, 6/10/63
[1954 Code Sec. 6321]
Lien for taxes: Voluntary conveyances of real estate to
grandchildren: Application of Federal tax liens against the grantors.--The
court, on the basis of the evidence before it, found that two separate
properties of the defendant-taxpayers, identified as the "Randolph
Farm" and the "County Line Farm," had been voluntarily,
and without consideration, conveyed to their grandchildren, in fraud of
creditors, at a time when the United States government was asserting a
claim for a large amount of taxes, penalties and interest against them
(see the earlier decision of the same District Court, involving the same
defendant-taxpayers, reported at 62-2 USTC ¶9635). The title to said
properties was, therefore, adjudged to have constructively remained in
the defendant-taxpayers, and the said conveyances to be null and void
and of no effect. It was, accordingly, further decreed that the said
properties were, therefore, subject to the lien of the United States
government for unpaid income taxes. The plaintiff was, however, held to
have failed to maintain the burden of proof with respect to certain
other properties, which were decreed to be free of the plaintiff's lien.
Donald A. Wine, United
States Attorney, 202 U. S. Court House, Des Moines, Iowa, Philip J.
Willson, 301-8 Park Bldg., Council Bluffs, Iowa, Homer Miller, Special
Assistant to Attorney General, Tax Division, Department of Justice,
Washington 25, D. C., for plaintiff. Ivan D. Wilson, City National Bank
Bldg., Shenandoah, Iowa, for defendants.
Findings
of Fact, Conclusions of Law, and Decree with Respect to Harry Paul
Kilpatrick and Mark A. Kilpatrick
HANSON, District Judge:
Now, on this 10th day of
June, 1963, this matter comes on for hearing before the Court without a
jury. The plaintiff, United States of America, appears by Donald A.
Wine, United States Attorney for the Southern District of Iowa, and by
Homer Miller, Special Assistant to the Attorney General of the United
States; John C. Stevens, Receiver, appears personally and by his
attorney, Philip J. Willson; the defendants Harry Paul Kilpatrick and
Mark A. Kilpatrick appear by their Guardian Ad Litem, Ivan D. Wilson,
and by their natural guardians Paul Kilpatrick and Barbara Kilpatrick;
and Paul Kilpatrick and Barbara Kilpatrick, who also appear personally
and by their attorney, Ivan D. Wilson.
The Court having heard the
evidence adduced and the arguments of counsel, makes the following
Findings of Fact, Conclusions of Law, and Decree.
Findings
of Fact
The United States of
America filed an Amended Complaint on October 16, 1961, alleging that
the following described real estate, to-wit:
E1/2 of
SE1/4 of Section 30, Township 70, Range 41, West of the 5th P. M.,
Fremont County, Iowa,
was
subject to the lien of plaintiff for income taxes and was the property
of Harry and Amanda Schroeder, although legal title was in the name of
Mark A. Kilpatrick, a minor;
And that the real estate
described as
SW 1/4
of NW 1/4, and NW 1/4 of SW1/4, and SW1/4 of SW1/4, all in Section 36,
Township 71, Range 42, West of the 5th P. M., Mills County, Iowa,
was
subject to the lien of plaintiff against Harry and Amanda Schroeder for
income taxes and was owned by Harry and Amanda Schroeder, although legal
title was in the name of Harry Paul Kilpatrick, a minor.
That at the time of said
transfers of real estate to Harry Paul Kilpatrick and Mark A.
Kilpatrick, the Internal Revenue Service had claimed a large amount of
taxes, penalty and interest against Harry and Amanda Schroeder, none of
which was paid.
That by answer filed in
this cause, wherein the Guardian Ad Litem denied the essential elements
of plaintiff's claim, this matter was placed at issue.
Randolph
Farm
The evidence shows that the
property in the legal title of Mark A. Kilpatrick (hereinafter referred
to as the "Randolph Farm") was purchased by Harry Schroeder on
February 21, 1951, from Pearl A. Vanatta and that a Warranty Deed was
given at that time to Harry Schroeder, and that Harry Schroeder paid the
entire consideration for said farm by payment of cash and assumption of
a mortgage to the Metropolitan Life Insurance Company.
That thereafter, to-wit,
February 11, 1953, Harry and Amanda Schroeder conveyed the Randolph Farm
to their grandson, Mark A. Kilpatrick, by Warranty Deed without any
consideration.
That from the date of the
transfer to Mark A. Kilpatrick until after plaintiff's original
complaint was filed against Harry and Amanda Schroeder in 1961 Harry
Schroeder made all the payments on the mortgage to Metropolitan Life
Insurance Company and was carried as the transferee in the records of
Metropolitan Life Insurance Company during that period.
That no guardianship
proceedings were established for the said Mark A. Kilpatrick, and that
from the date of transfer until after the filing of plaintiff's
complaint in this matter, the minor received no income from said
property; but that Harry Schroeder managed said farm and treated it as
his own, receiving all the income from said farm, paying the taxes,
insurance and upkeep thereon, and exercised all the rights of ownership
in said Randolph Farm.
That Harry Schroeder
submitted balance sheets to the Omaha National Bank and its predecessor,
Livestock National Bank, of Omaha, for the years 1953, 1954, 1955, 1956,
1957 and 1959, listing said Randolph Farm as his asset.
That the records of
Internal Revenue Service show that no gift tax return was filed by Harry
Schroeder from 1944 to 1961 and, further, show no filing of income tax
returns for the years 1953 through 1961 by Mark A. Kilpatrick.
That various tenants of the
said Randolph Farm dealt only with Harry Schroeder for the years 1953 to
1961 and that the landlord's share of crops was paid to Harry Schroeder.
That Harry Schroeder has
stated in his deposition that he made payments on the mortgage on said
Randolph Farm; that he received the landlord's share of the income; and
that no income was given to his grandson.
That Paul Kilpatrick,
father and natural guardian of the said Mark A. Kilpatrick stated in a
deposition, as part of the records in this case, that his son Mark A.
Kilpatrick made no payments to Harry Schroeder for said farm and that
his son received no income for the use of said farm.
County
Line Farm
The evidence shows that the
property in the legal title of Harry Paul Kilpatrick was purchased by
Harry Schroeder from Matilda Gee on March 12, 1946, and that a Warranty
Deed was given on that date to Harry and Amanda Schroeder; that
subsequently on February 14, 1953, Harry and Amanda Schroeder conveyed
said property hereinafter referred to as "County Line Farm" to
their grandson Harry Paul Kilpatrick, a minor.
That Harry and Amanda
Schroeder paid $12,240.00 for this farm from their own assets and
borrowed $6,500.00 from Travelers Insurance Company.
That at the time of
conveyance to Harry Paul Kilpatrick the balance of the real estate
mortgage was $2,000.00 and that no consideration was received by Harry
and Amanda Schroeder.
That the Travelers
Insurance Company loan was not transferred to Harry Paul Kilpatrick when
the Warranty Deed was given on February 14, 1953, and that the $2,000.00
mortgage balance was paid by Harry Schroeder on September 9, 1953.
That no guardianship was
established for Harry Paul Kilpatrick showing ownership of said farm
after said conveyance in 1953 and that no income tax return was filed by
or on behalf of Harry Paul Kilpatrick for the years 1953 to 1961.
That no gift tax return was
filed by Harry and Amanda Schroeder for the years 1944 to 1962.
That for the years 1953 to
August 1961 Harry Schroeder operated said farm as his own, claiming the
landlord's share of the income, hired tenants on said farm, built and
paid for certain improvements on said farm, and paid the taxes and
insurance on said farm.
That Harry Schroeder
represented to the Omaha National Bank and its predecessor Livestock
National Bank, Omaha, Nebraska, that said County Line Farm was his own
on balance sheets supplied to said lending organization for the years
1953, 1954, 1955, 1956, 1957 and 1959 as his asset.
That the deposition of
Harry Schroeder which is part of the files in this case, disclosed that
he purchased said farm and put it in the grandson's name because he had
put one in his son's name, and that he managed said farm and took the
income therefrom and paid no part of said income to Harry Paul
Kilpatrick for the years 1953 to 1961.
That Paul Kilpatrick, in a
deposition which is a part of the files in this case, stated that he did
not know the circumstances under which legal title was put in the name
of his son and that neither his son, nor he nor his wife paid any amount
for said farm, and that no income was paid to him or his son from the
operation of said farm from 1953 to 1961.
Residence
Property
That the plaintiff has
adduced no evidence showing that the lien of the judgment against Harry
and Amanda Schroeder is a lien against the residence property in the
name of Paul Kilpatrick and Barbara Kilpatrick, husband and wife,
described in the Amended Complaint as amended, as follows:
Lot 3
and the North 90 feet of Lot 4, all in Block 12, in the Town of Tabor,
Fremont County, Iowa.
Conclusions
of Law
That the transfers of the
Randolph Farm and the County Line Farm were made voluntarily and without
consideration by Harry and Amanda Schroeder at a time when plaintiff
claimed a large sum of money for income taxes, penalty and interest.
That said transfers were
made by said Harry and Amanda Schroeder to hinder and delay their
creditors.
That Harry and Amanda
Schroeder retained all the incidences of ownership in said real property
and that said minors were vested with only naked legal title, and that
title to said property remained constructively in the said Harry and
Amanda Schroeder.
That the transfers by the
said Harry and Amanda Schroeder of the Randolph Farm and the County Line
Farm were made with the intent to defraud creditors of the said Harry
and Amanda Schroeder, including plaintiff herein.
That the lien of
plaintiff's judgment does not attack to the residence property in the
title of Paul Kilpatrick and Barbara Kilpatrick above described.
That Paul Kilpatrick is one
and the same person as Paul H. Kilpatrick and Barbara Kilpatrick is one
and the same person as Barbara Ann Kilpatrick.
That the plaintiff has
failed to present any evidence that would warrant the Court finding it
had any lien whatsoever on Lot 3 and the North 90 feet of Lot 4, all in
Block 12, Town of Tabor, Fremont County, Iowa, and said real estate
should be relieved of any lien or right as claimed by the plaintiff in
its Complaint and Amendments thereto.
Decree
IT IS THEREFORE ORDERED,
ADJUDGED AND DECREED that the real estate known and described as
E1/2 of
SE1/4 of Section 30, Township 70, Range 41, West of the 5th P. M.,
Fremont County, Iowa,
in
which legal title is in Mark A. Kilpatrick, be and the same is hereby
made subject to the lien of plaintiff for income taxes, penalty and
interest; and that the conveyance to Mark A. Kilpatrick be and the same
is hereby declared to be null and void and of no effect.
IT IS FURTHER ORDERED,
ADJUDGED AND DECREED that the real estate known and described as
SW1/4 of
NW1/4, and NW1/4 of SW1/4, and SW1/4 of SW1/4, all in Section 36,
Township 71, Range 42, West of the 5th P. M., Mills County, Iowa,
in
which legal title is in Harry Paul Kilpatrick, be and the same is hereby
made subject to the lien of plaintiff for income taxes, penalty and
interest; and that the conveyance to Harry Paul Kilpatrick be and the
same is hereby declared to be null and void and of no effect.
IT IS FURTHER ORDERED,
ADJUDGED AND DECREED that the real estate known and described as
Lot 3
and the North 90 feet of Lot 4, all in Block 12, in the Town of Tabor,
Fremont County, Iowa,
in
which legal title is in Paul H. Kilpatrick, also known as Paul
Kilpatrick, being one and the same person, and Barbara Ann Kilpatrick,
sometimes referred to as Barbara Kilpatrick, being one and the same
person, be and the same is hereby declared to be free of plaintiff's
lien against Harry and Amanda Schroeder and that the plaintiff has no
further claim or interest in the foregoing described real estate.
IT IS FURTHER ORDERED that
no costs be assessed against the minors Mark A. Kilpatrick and Harry
Paul Kilpatrick, nor against Paul Kilpatrick and Barbara Kilpatrick in
this matter.
Stipulation
of Settlement of Claims of Paul Kilpatrick and Barbara Kilpatrick in the
Receivership of Harry Schroeder, et al.
It is hereby stipulated and
agreed by and between the United States of America by its attorney
Donald A. Wine, United States Attorney, John C. Stevens, Receiver in the
above entitled matter, by his attorney Philip J. Wilson, and by Paul and
Barbara Kilpatrick, as follows:
That Paul and Barbara
Kilpatrick have made claim in the receivership in the above matter in
the total sum of Fifty Thousand, Eighty-six and 26/100 Dollars
($50,086.26) consisting of the value of 84 head of cattle allegedly
owned by Paul and Barbara Kilpatrick, taken over by the receiver as
property of Harry Schroeder and/or Schroeder Packing Company and sold by
the receiver in the amount of $25,075.76; a balance of $20,772.25 for
feed furnished Schroeder cattle feeding operation; for mechanical
equipment in the sum of $1,056.50; and for taxes and expenses advanced
by the Kilpatricks for farms in the names of Harry Paul Kilpatrick and
Mark A. Kilpatrick in the amount of $3,181.75. A part of the claim is
$25,075.76 for 84 head of cattle consisting of a note to the Omaha
National Bank which Paul and Barbara Kilpatrick paid on March 24, 1961,
in the amount of $13,723.00 which included interest on the original note
dated May 11, 1960, in the principal amount of $13,031.27.
That heretofore the
mechanical equipment for which Paul and Barbara Kilpatrick claim the sum
of $1,056.50 has been returned to the possession of Paul and Barbara
Kilpatrick, and the United States of America and the receiver make no
further claim as to such property.
That in order to avoid
litigation and for the best interests of the parties the sum of
$20,000.00 shall be paid from the assets of the receivership to Paul and
Barbara Kilpatrick in full settlement of all claims asserted by them
against the receivership and/or Harry and Amanda Schroeder and/or
Schroeder Packing Company.
In further consideration of
this settlement it is agreed that United States of America and the
receiver in this cause will make no further claim against Paul and
Barbara Kilpatrick for matters arising out of the dealings of said
parties with the receiver, Harry and Amanda Schroeder, and Schroeder
Packing Company, including any claim for trucking against the said Paul
and Barbara Kilpatrick.
In further consideration of
the settlement herein it is agreed and stipulated that Paul and Barbara
Kilpatrick will make no further claim against the United States of
America and the receiver above named for any matters arising out of the
receivership of Harry Schroeder, Amanda Schroeder, and Schroeder Packing
Company.
Harry Milloff and Simon Milloff, Appellants v.
United States of America and Abraham Goldkind, Appellees
(CA-DC),
U. S. Court of Appeals, District of Columbia Circuit, No. 16864, 306 F2d
783, 6/14/62, Affirming an unreported District Court decision
[1954 Code Sec. 6323]
Tax lien: Priority: Transfers without consideration.--
There was sufficient evidence for the district court to find that a deed
of trust on certain realty and a note to the appellant from his brother,
a delinquent taxpayer, were without consideration, had been executed in
fraud of creditors and were null and void. The district court properly
ordered the sale of the realty with the proceeds to be used to satisfy
the government's tax lien first and a judgment lien against the
appellant second, with any balance to be paid to the appellant.
Herman Miller, 421 4th St.,
N. W., Washington 25, D. C., for appellants. Alan D. Pekelner, John B.
Jones, Jr., First Assistant to the Assistant Attorney General, Nathan J.
Paulson, Assistant United States Attorney, Department of Justice,
Washington 25, D. C. (Louis F. Oberdorfer, Assistant Attorney General,
David C. Acheson, United States Attorney, Lee A. Jackson, Joseph Kovner,
Alan D. Pekelner, Department of Justice, Washington 25, D. C., on
brief), for United States. Mark P. Friedlander, 1210 Shoreham Bldg., 806
15th St., N. W., Washington 25, D. C. (Mark P. Friedlander, Jr., Blaine
P. Friedlander, 1210 Shoreham Bldg., 806 15th St., N. W., Washington 25,
D. C., on brief), for Goldkind.
Before FAHY, WASHINGTON and
WRIGHT, Circuit Judges.
FAHY, Circuit Judge:
The United States sued in
the District Court to foreclose a tax lien on property of David Milloff
and his wife Florence, for unpaid federal income taxes for the years
1945, 1946 and 1947.
David and his brother Simon
had become co-owners of property in the District of Columbia described
as Lot 834 in Square 424. On October 27, 1948, David, his wife Florence,
and Simon, recorded a deed of trust on the property to secure a note in
the sum of $13,000 payable to another brother, Harry Milloff.
Notice of the tax lien was
filed by the United States on September 1, 1949. On the same day but
shortly after the notice was filed David and Florence attempted to
convey their interest in the property to Simon. Thereafter, on May 14,
1956, appellee Goldkind, who was a defendant in the District Court,
obtained a judgment against Simon in the District Court.
The District Court held
that the deed of trust and the note to Harry secured thereby were
without consideration, had been executed in fraud of creditors, and were
null and void. The court also held that the United States was entitled
to recover from David and Florence $12,847.21, with interest and costs,
that the property in question was titled in fee simple in Simon but was
subject to sale under the tax lien and under the judgment lien of
Goldkind, the latter amounting to $8,637.00.
The District Court
appointed a trustee to sell the property and distribute the proceeds in
accordance with the above rulings, any balance which might remain to be
paid to the attorney for Simon Milloff. These provisions of the judgment
are not independently contested on the appeal.
The only dispute for
decision by this court is over the adequacy of the evidence to support
the findings of the District Court, particularly that the note and deed
of trust in favor of Harry Milloff, recorded on October 27, 1948, were
without consideration and in fraud of creditors. 1
There was substantial evidence to support the findings. They are not
clearly erroneous. 2
And since the judgment rendered followed from the findings it is
Affirmed.
1
12 D. C. Code §401 (1961) provides that whether a transfer of property
has been made with the intent to defraud creditors or other persons
having just claims shall be deemed a question of fact and not of law.
2
Fed. R. Civ. P. 52(a).
United States of America v. Joseph Anderson
Schofield, 3rd, W. Bradley Ward, Administrator D. B. N. C. T. A. of the
Estate of Lemuel B. Schofield, Deceased, Liberty Real Estate Bank and
Trust Company, a Pennsylvania corporation, and Marvin Comisky, Guardian
of Joseph Anderson Schofield, 3rd, and Premises in Schuylkill Township,
Chester County, Pennsylvania, commonly known as the Anderson Farm,
consisting of 131.452 acres
U.
S. District Court, East. Dist. Pa., Civil Action No. 20977, 9/13/60
[1954 Code Sec. 6321]
Lien for taxes: Government's suit to impress lien: Life tenant's
expenditures in fraud of creditors.--Decedent life tenant owed
substantial income taxes at his death. The improvements he made on the
farm during his lifetime and while he was insolvent amounted to a
fraudulent conveyance under the Uniform Fraudulent Conveyance Act and
entitled the Government to a lien for taxes. The court computed the lien
to be $2,000 based on the cost of the improvements.
Walter E. Alessandroni,
United States Attorney, 4042 United States Court House, Philadelphia 7,
Pa., for plaintiff. Richard K. Stevens, Lewis M. Stevens, Stradley,
Ronon, Stevens & Young, 1222 Western Saving Fund Bldg., Philadelphia
7, Pa., Arlin Adams, 1719 Packard Bldg., Philadelphia 2, Pa., for
defendant.
Sur
Pleadings and Proof
VAN DUSEN, District Judge:
On April 17, 1934, Lemuel
B. Schofield became the legal life tenant of "Anderson Place,"
a farm located in Schuylkill Township, Chester County, Pennsylvania,
under the Will and Codicils of Sarah P. Anderson, Deceased. His son,
Joseph Anderson Schofield, 3rd, who was legally incompetent at all times
relevant to this proceeding, was the remainderman and acquired absolute
title to "Anderson Place" upon the death of his father on July
3, 1955. From 1947 until his death, Lemuel Schofield spent substantial
sums of money on permanent capital improvements to "Anderson
Place." At the times he was expending these sums, he neglected to
file federal income tax returns and pay his income taxes to the United
States. Joseph Anderson Schofield, 3rd, did not pay any part of the cost
of these improvements or reimburse his father for any of the money he
spent on them.
The Government does not
seek to establish or recover its entire tax claim against the decedent
taxpayer in this suit, which Exhibit A to Document No. 51 indicates may
be as much as $957,902.47 as of his death, but to preserve its rights in
"Anderson Place" as a source from which it can recover this
claim once it is established. The United States contends that Lemuel
Schofield made these permanent capital improvements to property in which
he only possessed a life estate while he was insolvent. It also asserts
that he made them with actual intent to defraud. Since the remainderman,
Joseph, paid no consideration for these improvements, the Government
claims that it is entitled to a lien on "Anderson Place" under
the Uniform Fraudulent Conveyance Act (39 P. S. §351 et seq.). The
United States also contends that Lemuel Schofield had a claim against
the remainderman for equitable apportionment of the costs of the
improvements and that it, as a creditor, may now assert that claim.
Prior to the trial of this
matter, this court ruled that, assuming the Government proves its claims
under the Uniform Fraudulent Conveyance Act,
A. it is
entitled to a lien on the land now held by the remainderman 1
to the extent of the lesser of (1) the amount paid by Lemuel Schofield
for the relevant improvements, or (2) the amount of the excess, if any,
of the value of the land with the relevant improvements at the time of
Lemuel's death over the value it would have had at that time if they had
not been made, 2
B. the
Pennsylvania Statute of Repose, 12 P. S. §83, is a bar to recovery for
any conveyance made prior to July 2, 1951, 3
and
C. the
date of a conveyance in violation of the Uniform Fraudulent Conveyance
Act would be the date the life tenant paid for the improvement, thereby
depleting his assets, unless he had approved the work and, in all
respects, made himself personally liable for the improvement prior to
such payment. 4
Section 4 of the Uniform
Fraudulent Conveyance Act (39 P. S. §354) provides:
"Every
conveyance made . . . by a person who is or will be thereby rendered
insolvent, is fraudulent as to creditors, without regard to his actual
intent, if the conveyance is made . . . without a fair
consideration."
When Lemuel Schofield made
permanent capital improvements to property in which he only held a life
estate, a conveyance, within the meaning of the above-quoted statute,
was effected. It is not disputed that his son, the remainderman, paid no
consideration for these improvements. Nor is it disputed that at the
time these conveyances were made, Lemuel Schofield was indebted to the
United States, although the parties are not in agreement as to the
amount of this indebtedness. Under these circumstances, the law of
Pennsylvania, which this court must follow, places the burden of proving
solvency upon the son. Meehan v. Shrevept-Eldorado P. L. Co., 107
Pa. Super. 580 (1933); cf. Q.-F. B. & L. Assn. v. Burstein,
310 Pa. 219 (1933) (conveyance by husband to wife and child challenged
under §7 of the Uniform Fraudulent Conveyance Act [39 P. S. §357]
requiring proof of actual intent to defraud); Federal Reserve Bank of
Philadelphia v. Roulston, 102 F. 2d 784 (3rd Cir. 1939) (conveyance
by husband to wife); People Sav. & Dime Bk. & T. Co. v.
Scott, 303 Pa. 294 (1931) (conveyance by husband to wife); Berger
v. Kraisman, 376 Pa. 127 (1955) (conveyance by parent to child;
insolvency admitted; child had burden of proving fair consideration).
The defendants called an accountant who testified as to Lemuel
Schofield's financial condition. On cross-examination, it was brought
out that he had not included certain debts in his calculations because
he assumed that there were unlisted assets which would compensate for
them. This and other weaknesses in the factual basis for this
accountant's opinion lead the court to conclude that the defendant's
evidence on the issue of solvency was not of sufficient quality under
the Pennsylvania cases. Thus, the Government is entitled to recover
under this section of the Uniform Fraudulent Conveyance Act. 5
The record establishes that
the following work was done on "Anderson Place" between July
2, 1951, and July 3, 1955:
(1) a
rude sheep fold was built,
(2)
alterations were made to old existing hog pens to make room for heifer
pens,
(3) an
8' x 4' incinerator was built,
(4) a
concrete mat was placed in the barnyard to enable the cattle to feed
while staying out of the mud,
(5) a
30' x 30' open implement shed was built,
(6) part
of the main barn floor was concreted (the rest had been done before July
2, 1951), calf pens set in, and the drainage improved,
(7)
windows in the barn were added or changed,
(8) a
bell tower was built,
(9) a
room 8' x 10' for refrigeration of milk produced on the farm was built,
(10) a
rude shelter was added to the front of the springhouse,
(11) a
corn crib was built,
(12) a
second story was added to the loafing barn,
(13)
walks were put in about the farm,
(14)
fences were built,
(15)
some landscaping was done, and
(16) a
portion of the barn roof destroyed by a hurricance in 1954 was replaced.
The Government's expert
witness testified that these improvements 6
enhanced the value of "Anderson Place" by $10,000 at the time
of Lemuel Schofield's death. He did not consider each improvement
separately, however, so that it is impossible to determine what portion
of that amount, if any, was contributed by each particular improvement
in his estimation. The defendant's expert testified that none of these
improvements were necessary to the operation of the farm, but were made
to satisfy the personal whims and desires of the life tenant and that
they added nothing to the value of "Anderson Place" because
they were superfluous.
Upon consideration of the
oral testimony and the photographs of "Anderson Place"
received in evidence (Exhibit P-32), the court finds itself in agreement
with the defendant's expert witness on the question of enhancement with
respect to all of the improvements except the work done to the interior
of the main barn (No. (6) above), and the addition of the second story
to the loafing barn (No. (12) above). 7
Since the Government's expert witness did not reject any of the
improvements as failing to enhance the value of the farm in arriving at
his single figure of $10,000, it follows that the value he would assign
to these two projects alone would be less than that amount. It is
apparent from the descriptions and photographs in the record, however,
that he could not reasonably have assigned too great a portion of that
amount to the other improvements. It is the finding of the court that
the second-story addition to the loafing barn enhanced the value of
"Anderson Place" by more than $1,500 at the time of Lemuel
Schofield's death and that the work done to the interior of the main
barn increased its value by $500 at that time.
The Government is only
entitled to the lesser of cost and enhancement, however. The work on
these two projects was done by C. R. Davis. The only amount which the
record reveals was paid for the work on the loafing barn is $1,500.
(Exhibit D-8.) Therefore, the Government is limited to that amount with
respect to this improvement. The Government has shown that $2,000 more
was paid to Davis between July 1952 and February 1953 (before work was
started on the loafing barn) when the work was done to the interior of
the main barn. However, the record establishes that Davis also built the
corn crib and part of the concrete feeding apron between these dates.
The Government's evidence shows that $562.85 of this $2,000 should be
allocated to the corn crib. This leaves $1,437.15. There is no evidence
in the record indicating how much of this remaining sum should be
attributed to the barn as opposed to the concrete feeding apron, but the
work on the latter was done subsequent to the work inside the barn and
so it is reasonable to infer that at least $500 of this amount is
allocable to the barn work, which certainly cost more than that. Thus,
the Government is entitled to recover $2,000. 8
The Government also
contends that Lemuel Schofield had a cause of action against his son for
the cost of the capital improvements which it can now assert as his
creditor. The court is of the opinion that Lemuel Schofield had no such
cause of action against the remainderman. There is nothing in the record
which indicates that Lemuel Scholfield made these improvements with the
expectation of being reimbursed, in whole or in part, by the
remainderman. Indeed, the most reasonable inference which can be drawn
from the facts is to the contrary. Not only was the apparent
remainderman his son, but he was an incompetent whose maintenance was
costly and who was dependent upon others for funds. The court is
compelled to conclude that Lemuel Schofield intended to contribute these
improvements to the subsequent owners of "Anderson Place"
subject to his life interest and that the delivery required for a valid
gift was accomplished when these improvements were attached to the land
or other structures on it. Under these circumstances, the creditor's
remedy lies under the Uniform Fraudulent Conveyance Act. None of the
Pennsylvania cases relied on by the Government and cited at pp. 28-31 of
its brief (see Document No. 56) contain facts which so strongly indicate
a lack of expectation of payment and two of them [Hoyt's Estate,
236 Pa. 443 (1912), and Uhl's Estate, 23 Pa. Dist. Rep. 386
(1914)] seem to indicate the contrary was the case. Therefore, they are
distinguishable. The court finds it unnecessary to consider defendants'
contentions that this cause of action was not covered by the pleadings
or timely raised, that a creditor cannot bring the action under the
circumstances of this case, and that the right is derivative and,
consequently, the Government is bound by the statute of limitations
which would apply if the life tenant brought the action.
The record in this case is
free of any evidence to support a claim for relief against the defendant
W. Bradley Ward, Administrator d. b. n. c. t. a. of the Estate of Lemuel
B. Schofield, deceased, for which judgment may be entered in this
proceeding. Therefore, this action shall be dismissed as to him. 9
Conclusions
of Law
1. This court has
jurisdiction over the parties and the subject matter of this action.
2. The plaintiff is
entitled to recover $2,000 from the proceeds of the sale of
"Anderson Place."
3. The record does not
support any claim for relief against the defendant, W. Bradley Ward,
Administrator d. b. n. c. t. a. of the Estate of Lemuel B. Schofield,
deceased, and the action is dismissed as to him. 10
Counsel shall submit an
appropriate order for the entry of judgment in accordance with the
foregoing.
1
"Anderson Place" was sold by the guardian for the remainderman
with the understanding that the proceeds would be held subject to the
outcome of this litigation.
2
Opinion of June 21, 1957, reported at 152 F. Supp. 529, 534 [57-2 USTC
¶9795].
3
Opinion of December 4, 1959, reported at 179 F. Supp. 332 [60-1 USTC ¶9123].
4
Footnote 4 of Opinion of December 4, 1959, reported at 179 F. Supp. 332,
333 [60-1 USTC ¶9123].
5
In view of this conclusion, it is unnecessary for the court to express
an opinion as to the causes of action asserted under §§ 6 and 7 of the
Uniform Fraudulent Conveyance Act (39 P. S. §§ 356, 357).
6
The record indicates that the Government's expert considered one
structure (garden house) as to which there was no evidence that it was
built subsequent to July 2, 1951.
7
In reaching this conclusion, the court assumed that all of the projects
which, in its opinion, did not enhance the value of the farm constituted
permanent capital improvements, except the replacement of the destroyed
barn roof (No. (16) above), which it dismissed as constituting repairs.
8
It is clear that Lemuel Schofield was indebted to the United States in
an amount greater than $2,000. Although it may be argued with
considerable merit that the evidence is not sufficiently specific to
justify a fact-finder doing other than accepting the position of
plaintiff's expert or defendants' expert, such a ruling would have to
result in a finding that plaintiff had not sustained its burden of
persuading the factfinder that the post July 2, 1951 improvements had
added any value to the farm as of July 3, 1955, so that plaintiff would
be entitled to nominal damages of $1.00.
9
The facts stated in this opinion constitute the court's findings in this
matter. With respect to Plaintiff's Requests for Findings of Fact
(Document No. 51), it is noted that Nos. 1-3, 7, 9, 16 and 17 are
consistent with this opinion and are affirmed, No. 11 is denied, and the
court expresses no opinion as to Nos. 4-6, 8, 10, 12-15 and 18-20. With
respect to Defendants' Requests for Findings of Fact (Document No. 53),
it is noted that Nos. 1-4, 11-15, 17-19, 21-23 (only insofar as 11-15,
17-19, and 21-23 refer to enhancement at the time of Lemuel Schofield's
death), 25 (except the word "primarily" should be substituted
for the word "solely"), and the second sentence of 26 are
consistent with this opinion and are affirmed, Nos. 7, 10, 16, 20 and 24
are denied, and the court expresses no opinion as to Nos. 5, 6, 8, 9 and
27-29.
10
Plaintiff's Request for Conclusions of Law (Document No. 52) Nos. 1, 2
and 7 (insofar as it refers to improvements made after July 2, 1951) are
affirmed, Nos. 4-6, 10-12 and 15 are denied, and the court expresses no
opinion as to Nos. 3, 8, 9, 13 and 14. Defendants' Requests for
Conclusions of Law (Document No. 54) Nos. 3, 4, 6, 7, 8, 13, 16 and 17
are affirmed, Nos. 1, 5, 9, 11, 12, 14, 15, 24 and 25 are denied, and
the court expresses no opinion as to Nos. 2, 10 and 18-20. Defendant
Administrator's Requests for Conclusions of Law (Document No. 55) Nos. 2
and 3 are affirmed and the court expresses no opinion as to No. 1.
All briefs, memoranda and
letters concerning the trial of this matter have been placed in an
envelope in the Clerk's file marked Document No. 56.
United States of America, Plaintiff v. Harry Kaplan
and Annie Kaplan, Defendants
In
the United States District Court for the Southern District of New York,
Civil 39-60, June 30, 1953
Liens: Conveyance by taxpayer: New York State Creditor and Debtor
Law.--Taxpayer conveyed several properties to his wife. When he
conveyed the last one in October 1945 he was insolvent. The Commissioner
did not file against taxpayer until 1946, but taxpayer was indebted to
the Commissioner at the time of the last conveyance. The District Court
held that under New York State law the last conveyance was fraudulent as
against creditors, and therefore taxpayer's wife was held accountable
for the profits accruing from taxpayer's share of the conveyed property.
Myles J. Lane, United
States Attorney for the Southern District of New York (Henry L. Glenn,
Assistant United States Attorney, of counsel), for plaintiff. Louis
Schifrin, 37 Wall Street, New York, N. Y., for defendants.
BURKE, District Judge:
The issues in the second
cause of action herein came on for trial before the undersigned, without
a jury, at a trial term held on the 14th day of November and the 17th
day of November, 1952. The plaintiff having appeared by Myles J. Lane,
United States Attorney for the Southern District of New York; Henry L.
Glenn, Assistant United States Attorney, of counsel; and the defendants
having appeared by Louis Schifrin, their attorney, I do hereby find and
decide as follows:
Findings
of Fact
1. On January 14, 1938, an
indictment was filed charging the defendant Harry Kaplan and others with
membership in a conspiracy to erect a still on the Cannon Farm at
Fallsburg, New York, and to manufacture distilled spirits with intent to
defraud the Government of taxes on the spirits distilled. Kaplan and
some thirty others, including his son, Louis Kaplan, and his son-in-law,
Max Hoffenberg, pleaded guilty to the indictment. Harry Kaplan pleaded
guilty December 12, 1941.
2. On February 24, 1945,
the Commissioner of Internal Revenue assessed distilled spirit taxes
against the defendant Harry Kaplan and others, in respect to the spirits
produced at the still, in the amount of $21,509.80 and the Collector
made a demand on Harry Kaplan for payment on March 2nd, 1945.
3. By deed recorded July
26, 1919, Harry Kaplan acquired from Minnie Weller premises on Tuttle
Avenue, Fallsburg, New York, more fully described in a deed to Harry
Kaplan from Minnie Weller dated June 20, 1919 and recorded in the County
Clerk's office of Sullivan County on July 26, 1919. By deed dated and
acknowledged on September 27, 1944 and delivered on that date, and
recorded on March 12, 1945, Harry Kaplan for a consideration of One and
more dollars, conveyed the said Tuttle Avenue property to the defendant
Annie Kaplan. The consideration for said conveyance was monies
theretofore loaned by Annie Kaplan to Harry Kaplan.
4. By deed recorded in the
County Clerk's office of Sullivan County, February 10, 1939, the
defendant Harry Kaplan acquired premises in Fallsburg, New York, known
as the Mountaindale Farm, more fully described in a deed dated February
9, 1939, from Abe Laskowitz. By deed dated and acknowledged September
27, 1944, and delivered on that date, and recorded March 12, 1945, Harry
Kaplan for a consideration of One and more dollars conveyed to the
defendant Annie Kaplan, the said premises known as the Mountaindale
Farm. The consideration for the said conveyance was monies theretofore
loaned by Annie Kaplan to Harry Kaplan.
5. By deed recorded in the
County Clerk's office of Sullivan County in Book 373 at page 530 on
January 2, 1945, Harry Kaplan and Annie Kaplan, his wife, as tenants by
the entirety, acquired property known as the Brenner property, more
particularly described in a deed dated, acknowledged and delivered
December 18, 1944, from Julia Brenner to Harry Kaplan and Annie Kaplan,
his wife, as tenants by the entirety. By deed dated, acknowledged and
delivered on December 18, 1944, and recorded March 12, 1945, Harry
Kaplan, for a consideration of One and more dollars, conveyed to the
defendant Annie Kaplan, all his interest in the Brenner property. The
consideration for said conveyance to Annie Kaplan by Harry Kaplan of his
interest in the said property was monies theretofore loaned by Annie
Kaplan to Harry Kaplan.
6. At the time of the
conveyance by Harry Kaplan to Annie Kaplan of the Tuttle Avenue property
on September 27, 1944, of the Mountaindale Farm property on September
27, 1944, and of his interest in the Brenner property on December 18,
1944, Harry Kaplan was not indebted to the United States. By said
conveyances he did not become insolvent. The said conveyances were not
made with the intent to hinder, delay or defraud creditors.
7. By deed dated,
acknowledged and delivered on October 10, 1945, from Janet Cohen Deutsch
and Joseph Cohen, grantors, to Harry Kaplan and Annie Kaplan, his wife,
as tenants by the entirety, and recorded in the County Clerk's office of
Sullivan County on October 16, 1945, the said Harry Kaplan and Annie
Kaplan, as tenants by the entirety, acquired the property known as the
Synagogue property, more particularly described in the deed above
referred to. By deed dated, and purportedly acknowledged on October 15,
1945, and recorded on November 16, 1945, Harry Kaplan, for a
consideration of One Dollar and other valuable consideration, conveyed
his interest in the Synagogue property to Annie Kaplan. On October 15,
1945 and on November 16, 1945 he was indebted to the United States for
taxes assessed on distilled spirits. On July 17, 1945, he submitted to
the Collector of Internal Revenue an offer of $200 in compromise as full
satisfaction of his liability for the distilled spirits taxes
theretofore assessed against him, amounting to $21,509.80, plus an
unassessed penalty of $1075.59. The offer was made on the ground that he
had no assets and was incapable of self-support. At the time of the
conveyance by him to Annie Kaplan of his interest in the Synagogue
property he was insolvent.
8. Harry Kaplan and Annie
Kaplan executed a purchase money mortgage for $1000 to the grantors of
the Synagogue property, dated and acknowledged October 10, 1945, and
recorded October 16, 1945. A portion of the mortgage premises was
released from the lien of the mortgage by release dated and acknowledge
October 12, 1945 and recorded October 31, 1945.
9. On March 26, 1946 the
Collector of Internal Revenue filed in the office of the County Clerk of
Sullivan County a notice of tax lien for $21,509.80, plus interest and
penalty, amounting to a total of $23,914.60.
10. In March, 1946, the
Collector made a supplemental assessment of taxes against the defendant
Harry Kaplan and others of $7,930.40, increasing the total assessment to
$29,440.20. The Collector made demand on defendant Harry Kaplan for the
payment of the additional sum on or about May 3, 1946.
11. On October 3, 1950, the
defendant Harry Kaplan submitted to the Collector a second offer of
comprise offering $1000 in full settlement of distilled spirit taxes in
the sum of $29,440.20, on the ground that he was destitute and had no
assets other than a Ford truck worth $100.
12. The plaintiff is now a
creditor of the defendant Harry Kaplan in the amount of $29,440.20, plus
a five per cent penalty in the amount of $1,472.01, plus interest at six
per cent per annum from March 2, 1945, on the sum of $21,509.80, and
from May 3, 1946, on the sum of $7,930.40.
13. The conveyance by Harry
Kaplan to Annie Kaplan of his interest in the Synagogue property was
made at a time when he was insolvent. The consideration for said
conveyance was not a fair consideration. The defendant Annie Kaplan, at
the time of the conveyance to her by Harry Kaplan of Harry Kaplan's
interest in the Synagogue property had knowledge of Harry Haplan's
insolvency and was not an innocent transferee for value of Harry
Kaplan's interest in the Synagogue property.
Conclusions
of Law
1. The conveyances by Harry
Kaplan to Annie Kaplan of the Tuttle Avenue property, the Mountaindale
Farm property and of his interest in the Brenner property were not
fraudulent as against creditors under either Section 273 or Section 276
of the New York Debtor and Creditor Law.
2. The conveyance by Harry
Kaplan to Annie Kaplan of his interest in the Synagogue property was
fraudulent as against creditors under Section 273 of the New York Debtor
and Creditor Law.
3. The plaintiff is
entitled to a decree setting aside the deed of the Synagogue property
which conveyed the interest of Harry Kaplan to Annie Kaplan, which deed
was dated October 15, 1945, and was recorded on November 16, 1945 in the
office of the County Clerk of Sullivan County.
4. Upon setting aside the
said deed, Harry Kaplan and Annie Kaplan hold the Synagogue property as
tenants by the entirety, and as such are tenants in common or joint
tenants of the use, each being entitled to one-half of the rents and
profits during their joint lives.
5. The Government has a
valid lien for taxes in the amount of $29,440.20, plus a five per cent
penalty in the amount of $1472.01, plus interest at six per cent per
year from March 2, 1945 on the sum of $21,509.80, and from May 3, 1946
on the sum of $7930.40, which lien attaches to the interest of Harry
Kaplan in the Synagogue property, more particularly described in the
deed dated October 10, 1945 to Harry Kaplan and Annie Kaplan as tenants
by the entirety, and recorded in the County Clerk's office of Sullivan
County on October 16, 1945.
6. By virtue of such lien
attaching to the interest of Harry Kaplan in the Synagogue property, the
plaintiff is entitled to a decree directing Annie Kaplan to account to
the plaintiff for Harry Kaplan's interest in the rents and profits of
the Synagogue property heretofore received by Annie Kaplan, his interest
being one-half of the rents and profits thereof during the joint lives
of Harry Kaplan and Annie Kaplan, and for a judgment in favor of the
plaintiff against Annie Kaplan for the amount to be determined on such
accounting of Harry Kaplan's interest in the rents and profits of the
Synagogue property up to the date of the settlement of the accounting.
United States of America, Plaintiff v. Elizabeth F.
Shoemaker, Yellow Cab Company, Inc., et al., Defendants
In
the United States District Court for the Eastern District of Arkansas,
Western Division, Nos. 2334, 2406, 110 FSupp 898, January 16, 1953
Lien for taxes: Validity against mortgagees and pledgees.--A
chattel mortgage executed by corporate debtors and a pledge of stock
certificates made by a sister were declared fraudulent and void as
against the United States and the latter's tax liens were held to be
prior to the right of the mortgagee and pledgee, where corporate debtors
maintained no bank account and kept their funds in lock boxes, the
creditor and her sister maintained joint lock boxes and joint bank
accounts, and both the corporations and the sister had been insolvent.
Gerland P. Patten, R. D.
Smith, Jr., Assistant United States Attorneys, Federal Building, Little
Rock, Ark., for plaintiff. U. A. Gentry, Pyramid Building, Little Rock,
Ark., for Elizabeth F. Shoemaker and Yellow Cab Company, et al. and E.
M. Arnold, Union Life Building, Little Rock, Ark., for Audria Hart.
TRIMBLE, District Judge:
This cause came on for
trial and the Court, having heard the evidence and considered the
stipulation of the parties, finds the facts and states the conclusions
of law as follows:
Findings
of Fact
1. This is an action by the
United States of America against Elizabeth F. Shoemaker and Audria Hart,
citizens of Arkansas, and Checker Cab & Baggage Company, Yellow Cab
Company, Inc., and Yellow Cab Building Company, Inc., corporations, to
collect delinquent income and excess profits taxes adjudged to be due by
the Tax Court of the United States.
2. The parties on December
15, 1952, entered into and filed with the Court stipulation of facts,
which is now a part of the record in this case. The Court now adopts and
makes this stipulation and the facts set out therein a part of this
finding of facts.
3. The Court makes the
exhibits to the stipulation of facts a part of the finding of facts.
[Money
Placed in Lock Boxes]
4. From the stipulation of
facts and the testimony of witnesses ore tenus before the Court, it is a
fact that the defendant, Audria Hart, and Elizabeth F. Shoemaker, her
sister, and the corporate defendants herein,
(a) Had
no regular bank account through which the funds coming into the business
were deposited as is usual in operations as extensive as were being
conducted here.
(b) Had
no adequate records through which the transactions of the businesses
were set up so that they might be examined by proper authorities, or
from which adequate reports could be made in keeping with usual and
ordinary business practices.
(c) Did
their business in an unusual manner, through the use of lock boxes in
which money was placed without making any record thereof, and from which
money was withdrawn, without a record of when, how and for what purpose
it was done.
(d)
Elizabeth F. Shoemaker and Audria Hart, her sister, maintained joint
bank accounts on which both or either of them could draw, and maintained
joint lock boxes to which either or both had access.
5. Audria Hart, when a
witness in her own behalf, could not or did not explain when, whence or
from whom she got the stock certificates which allegedly secured her
loans, nor could she tell when or how the mortgage came into her
possession. She did not have the mortgage recorded and could not explain
why the notation on the mortgage required it to be returned to her
sister, Mrs. Shoemaker, after recordation.
[Inherited
Money in a Lock Box]
6. Her account of the
source or sources from which she claims to have secured the moneys for
these loans is not credible. She testified that her husband was a
bookkeeper residing in Pine Bluff, Arkansas, and that he died in 1927.
She testified that there was a will which was probated, and that this
will left her the major part of the estate. She also testified that her
husband had a very considerable sum of money in a lock box which she
received, and that "When everything was sold," she was able to
leave Pine Bluff, Arkansas, for Tulsa, Oklahoma, with about $80,000.00,
"Plus Pullman tickets for herself and her mother." She also
testified that she did not file an inventory of this money in the
probate proceedings. That there were some other assets about which she
was indefinite, but that there was a home on which there was a mortgage;
that she did not make any further payments on this home but left town
with the money in a handbag. She says that since 1927 she has kept this
money in lock boxes in different towns where she has lived. None of this
testimony is supported by record or parole evidence.
[Loans
Not Proved]
7. The court finds that
Audria Hart has not brought in any credible evidence to support her
contention that she made these large loans to her sister, Mrs.
Shoemaker, and the corporate defendants.
8. Her claim that she
placed a mortgage on her home for money is supported by some
corroborating testimony, but that she loaned this money to her sister
and the corporate defendants is unsupported by credible evidence.
[Alleged
Debtors Insolvent]
9. The Court finds that the
defendants, Elizabeth F. Shoemaker, Yellow Cab Company, Inc., and
Checker Cab & Baggage Company, are now insolvent and were insolvent
upon the date of the execution of the mortgage to the defendant, Audria
Hart, and the delivery to her, if any, of the certificates of stocks by
her sister, Mrs. Elizabeth F. Shoemaker.
10. From all the facts in
the case, the Court finds that the mortgage executed by the corporate
defendants and Elizabeth F. Shoemaker, to her sister, defendant Audria
Hart, and the delivery to Audria Hart of the certificates of stock, if
any such delivery took place, was fraudulent and void as to existing
creditors, and that the United States of America was an existing
creditor at that time.
Memorandum
The defendants in their
brief state the issue here to be: "The only remaining question for
determination by the Court is whether there was consideration for the
note, mortgage and pledge executed as set out in the stipulation. This
is the only issue covered, or which properly should have been covered by
the oral testimony." With this statement of the issue the Court
quite agrees.
The validity of the
mortgage as between the defendant, Audria Hart, and the plaintiff,
United States of America, in this proceeding, is controlled by the
statutes of Arkansas and the decisions of the Supreme Court of Arkansas.
[Burden
of Proof on Defendants]
It having been alleged that
the mortgage was in fraud of creditors, the burden in the first instance
is upon the plaintiff to show that the execution and delivery of this
mortgage was attended by highly suspicious circumstances, and that the
course of dealings between the parties to the mortgage was unusual and
were not such as to be expected in bona fide transactions between
ordinary businessmen, and that it is quite likely that the mortgage was
executed for the fraudulent purposes of hindering and delaying
creditors. This is particularly true where the dealing is between close
kin and the relationship as close as the defendant, Audria Hart,
testifies, and when such circumstances are shown the burden of proof is
then upon the defendants to prove the transaction was based upon a valid
consideration, and they must prove the bona fides of the entire
transaction.
[Arkansas
Law]
In the case of Wilks v.
Vaughan, 73 Ark. 174, 179, the Supreme Court of Arkansas, had before
it a case in point. There it is said:
"The conveyances were
all made after the debt was incurred to the bank, and only a short time
before judgment thereon--some a few days, and the farthest less than
three months. Wilks was practically denuded of all his property after
they were made. Were they fraudulent as to the bank, and through it to
these appellees? It must be said, in fairness to Wilks, that plausible,
and in some instances, almost convincing, explanations of these
transfers were made. It is thoroughly settled in equity jurisprudence
that conveyances made to members of the household and near relatives of
an embarrassed debtor are looked upon with suspicion and scrutinized
with care; and when they are voluntary, they are prima facie fraudulent,
and when the embarrassment of the debtor proceeds to financial wreck,
they are presumed conclusively to be fraudulent as to existing
creditors." Citing cases.
A case in point in the
Arkansas Reports, is that of Crill v. Trites, 186 Ark. 354, 358.
Here the Supreme Court said:
"The questions here
are, was Trites insolvent at the time the deed was made? And was it made
with a fraudulent intent? A voluntary transfer of property to near
relatives is presumptively fraudulent as to existing creditors, and, if
the debtor is insolvent at the time, it necessarily hinders, delays and
defrauds his existing creditors, and such conveyances to near relatives
by a debtor who at the time is embarrassed, are looked upon with
suspicion and scrutinized with care. Fluke v. Sharum, 118 Ark.
229; Wilks v. Vaughan, 73 Ark. 174; Mente & Co., Inc. v.
Westbrook, 181 Ark. 96.
"The law as to
fraudulent conveyances is well settled by the decisions of this court.
It would serve no purpose to review all the decisions here. All of our
decisions are to the effect that courts should carefully scrutinize all
cases of alleged fraud against creditors where transfers have been made
to members of the debtor's family. A gift of property to one's child by
one indebted at the time is presumptively fraudulent as to existing
creditors, and, when it is shown that a gift of property was made by the
father to the child, that the father was largely indebted at the time,
the burden of proof is on the father to show that his intentions were
innocent, and that he had at the time ample means to pay all his debts.
On the other hand, however, if the evidence shows that one has ample
means to pay all his debts, the conveyance to his child of property of
small value, together with other facts tending to show good faith, would
be sufficient to justify the conclusion that the transfer was not
fraudulent." Mente & Co., Inc. v. Westbrook, supra.
Plaintiff has cited and
quoted from the case of Koening v. Oswald, et al., 82 Fed. (2d)
85 (8 C. C. A.), Judge Woodrough speaking for the court, was passing
upon a case of alleged fraudulent conveyance, where the applicable
statute was that of Missouri. He noted that under the Missouri law that
it was settled that an insolvent debtor has the right to prefer one of
his creditors, though such payment exhausts his resources and leaves him
without means to pay the others. The Court then said:
"A father may give a
valid preference to a son, but the relationship of the parties to the
transfer which defeats the just claims of other creditors is a
circumstance to be considered and given due weight in determining the
good faith of the transaction. Such a transaction must be closely
scrutinized by the Court, where fraud is charged by defeated creditors. There
must be clear and satisfactory proof that there was a valid and
subsisting debt. IF ANY PART OF THE DEBT RELIED ON AS CONSIDERATION
FOR THE TRANSFER IS FRAUDULENT OR FICTITIOUS, IT WILL TAINT THE WHOLE
TRANSACTION AND AVOID THE SALE IN FAVOR OF THE CREDITORS."
In the case of Martin v.
Manning, et al., 124 Ark. 74, the court had before it a case of
alleged fraudulent conveyance to defeat creditors in the collection of
their debt. The court cited with approval and quoted from the case of Simon
v. Reynolds-Davis Grocery Company, 108 Ark. 164-9; "While the
burden of proof is upon the plaintiff who alleges fraud to show it, yet
that burden has been discharged where, as in this case, he shows that an
embarrassed debtor, pending a suit against him by his creditors, has
made conveyances of all the lands he owned. * * * to his sons for a
consideration which upon the face of the conveyance appears to be a
grossly inadequate one. Such circumstances are sufficient to raise a
suspicion of fraud and to cast a doubt upon the legality of the
transaction, and the burden is then on the one holding the deed to
show a consideration." [Italics supplied.]
[Good
Faith of Transactions Doubted]
The mortgage and pledge
here are to a member of the family, a sister; the debtors are left
insolvent and they were insolvent when the mortgage and pledge were
executed and delivered, if they were; the circumstances by which it is
claimed Elizabeth F. Shoemaker and the corporate defendants became
indebted to Audria Hart are very unusual, at no point were their alleged
transactions or methods of doing business in keeping with the usual and
ordinary, good business practices. The very fact that these large sums
of money are claimed to have been kept in lock boxes, and particularly
where it is alleged that both sisters had free access to the lock boxes
and the money therein, that no record was ever made of withdrawals or
the deposit of these moneys in the lock boxes, or the making of the
loans, casts a doubt on the good faith of all of the alleged
transactions to which Audria Hart has testified occurred between the
sisters. If one chooses to conduct their business affairs in such a
suspicious manner, especially where the final result is financial
wreckage, then they must accept the burden of proving the bona fides of
their conduct and free themselves from the charge of committing fraud on
their creditors.
In
this case in order to sustain the bona fides of this mortgage and this
pledge, the testimony of Audria Hart must be relied on, and it appearing
to the court that under that evidence it clearly appears that some part
of the alleged debt for which this mortgage and pledge was given was
fraudulent, the whole transaction is tainted and the mortgage and pledge
void.
