Docket No. 16343.
Edgar W. Pugh, Esq., for the petitioner. A. J. Friedman, Esq., for the respondent.
1. The taxpayer filed a 1934 tax return for his corporation based on falsely kept books, and in 1942 was convicted of filing a fraudulent return and served a jail sentence. In 1938 the corporation transferred all assets to petitioner's wife without consideration and dissolved. By decision of this Court the wife was held liable as transferee for deficiencies in the corporation's 1934 tax and additions thereto in December 1946. She paid nothing on the amount assessed. By exercise of an option granted to her only in 1942, a five-year lease was procured in 1944 on premises which had been subject to prior leases successively by the corporation, by petitioner, and by her. In 1946 petitioner assigned this lease to another, receiving cash and the assignee's note. The Commissioner determined that petitioner was liable for the unpaid deficiencies and penalties of the corporation as transferee of the wife. The corporation's 1934 return, held, false and fraudulent and the determined deficiencies presumptively correct.
2. On the evidence, held, that the wife was sole owner of the lease and that petitioner was transferee in respect of it and proceeds of its assignment.
3. On the evidence, held, that the transfer was made with intent to hinder, delay and defraud the United States as a creditor for taxes, and was fraudulent.
4. The fraudulent transfer of the wife's property to defeat the collection of taxes assessed against her, held, to subject the property transferred to levy in the transferee's hands. Michigan State. Ann., Title 26, ch. 261, sec. 26.889. Edgar W. Pugh, Esq., for the petitioner. A. J. Friedman, Esq., for the respondent.
The Commissioner determined against petitioner liability for deficiencies of $8,690.02 and $3,139.74 in income and excess profits taxes for 1934, penalties of $4,345.01 and $1,569.87 for the filing of a false return, and interest on these amounts, as transferee of assets of Alice Wiener, transferee of assets of Stetson Shirt Shops, Inc. Petitioner resists the determination, contending that the income of Stetson Shirt Shops, Inc., for 1934 was not understated on its return, that Alice Wiener received from it by transfer assets not in excess of $1,400 value, and that no assets were transferred to him by Alice Wiener, his wife. The Commissioner, after a jeopardy assessment, levied on and collected part of the proceeds of a note payable to petitioner and received by him for assignment of a lease contract which respondent contends was the property of Alice Wiener.
FINDINGS OF FACT.
Petitioner, a resident of Miami Beach, Florida, formerly resided at Detroit, Michigan, and filed his income tax returns with the collector of internal revenue for the district of Michigan. On January 5, 1931, he organized Stetson Shirt Shops, Inc., as a Michigan corporation, with a capital stock of $5,000. It engaged in the retail sale of shirts and men's furnishings, beginning business with a merchandise inventory of at least $32,000. Petitioner, who was in active charge of the business, in 1933 employed Julius Gabe to keep the corporation's books and to take charge of one of its stores. Gabe's book entries were based on figures which petitioner furnished him each day and which Gabe accepted as correct. On petitioner's instructions Gabe also opened a second set of books, and throughout 1934 kept booth. In this second set he currently made entries, as directed by petitioner, showing a lesser amount of sales and a greater amount of purchases and expenses than was indicated in the first set. He was paid a salary of $17 a week, but signed a salary voucher for $35.
For preparation of the corporation's income tax return for 1934, petitioner employed an accountant to whom he turned over the second set of books. The accountant prepared a return on an accrual basis showing a net income $149.77 and no tax due. It was signed by petitioner's wife, Alice Wiener, as president of the corporation, and by petitioner as treasurer, and was filed with the collector of internal revenue for the district of Michigan on March 15, 1935. On this return gross sales were reported as $234,313.98; purchases at $156,980.55; salaries and wages at $29,124.50; rents paid at $24,750. Total income reported was $77,820.25; total deductions claimed, $77,670.48.
Thereafter a revenue agent examined the corporation's records and made an investigation of its income for 1934. He discovered the two sets of books and, for one store, a third set. He interviewed witnesses, including petitioner, and ascertained that on the return sales had been understated by $54,586.12 and purchases overstated by $6,698.83, and that there were other discrepancies. He discovered minutes of the meetings of stockholders and directors held on May 31, 1938, recording resolutions for dissolution of Stetson Shirt Shops, Inc., and of Stetson's Men's Wear, Inc., and the transfer of all assets to Alice Wiener; a bill of sale, signed by Stetson's Men's Wear, Inc., per Arnold E. Frank, president, and petitioner, secretary, conveying its stocks of merchandise to Alice Wiener, and an opening journal entry of July 1, 1938, reciting that:
On July 1, 1938, the Stetson Shirt Shops owned by Alice Wiener, the sole proprietor, started business having taken over all the assets of and assuming all the liabilities of the Stetson Shirt Shops, Inc., and the Stetson Men's Wear, Inc., both corporations having been dissolved.
Assets and liabilities were listed, and the excess of the assets, $25,729.50, was recorded as ‘Alice Wiener investment.‘ Alice Wiener paid nothing for the assets.
On January 16, 1941, petitioner was indicted by a grand jury for the eastern district of Michigan for the filing of a false and fraudulent tax return on which the corporation's 1934 income was understated for the purpose of evading income tax in the amount of $8,690.02 and excess profits tax in the amount of $3,139.74. He filed a plea of guilty on February 7, 1942, and on May 29, following, he was fined $1,000 and sentenced to eight months in jail, and thereafter he was incarcerated.
On April 15, 1945, the Commissioner advised Stetson Shirt Shops, Inc., by a 4 -day notice that he had determined against it deficiencies of $8,690.02 and $3,139.74 in income tax and excess profits tax, respectively, for 1934, together with penalties of $4,345.01 and $1,569.87 for the fraudulent understatement of income. On the same date he advised petitioner's wife, Alice Wiener, of his determination that she was liable for the deficiencies and penalties as transferee of the corporation's assets. Alice Wiener filed a petition with the Tax Court, Docket No. 8660; there was no appearance for her when the case was called for trial. This Court found on December 12, 1946, that the corporation's 1934 income and excess profits tax return was false; that the determined deficiencies were due to fraud, with intent to evade tax; that the corporation's assets had been transferred to Alice Wiener without consideration and were of a value at least equal to the amounts assessed against the transferor, which left the corporation insolvent, and a judgment was entered that she was liable for the deficiencies and penalties with interest. The deficiencies and penalties had been assessed against the corporation on July 20, 1945, and were assessed against the transferee on April 4, 1947. No payments were made by the corporation or by Alice Wiener.
One of the shirt shops, located at 100 Monroe Avenue, Detroit, was operated on premises which the corporation had leased on August 1, 1934, from St. Luke's Hospital, Church Home & Orphanage (hereinafter called St. Luke's), for a period of five years, under an agreement providing for a five-year extension at an increased rental. Parts of this property were subleased to other tenants. On June 17, 1937, St. Luke's assented in writing to an assignment of the lease to petitioner, and thereafter recognized him as lessee on receipts for rent paid and commercial statements. St. Luke's also give him an acknowledgement of the corporation's $1,500 deposit (plus $300 interest) made as a guaranty for performance of lease covenants. No lease appears among the assets listed as transferred by the corporation to Alice Wiener on July 1, 1938. On April 29, 1939, or prior to expiration of the original lease term, petitioner made with St. Luke's a renewal contract for extending the lease an additional five years at $550 a month for the first two years and at $600 a month for the last three. At petitioner's request St. Luke's reduced the rent, on February 18, 1941, to $500 a month. On June 1, 1942, or a few days after petitioner was sentenced to a jail term, St. Luke's made a contract with petitioner and his wife, agreeing not to terminate the lease as long as rent was paid and covenants performed on behalf of petitioner, and giving to Alice Wiener only ‘an option of a new lease for five (5) years, from August 1, 1944, to July 31, 1949, at the same rent‘ and on substantially the same conditions. In consideration of the continuance and of the option, Alice Wiener agreed to pay the rent during the remainder of the term.
In March 1944 petitioner requested St. Luke's to assign this option of his wife's to him, but the officers of St. Luke's refused because they were informed that Alice Wiener owned the stock of the shirt shop and that petitioner was not financially responsible. Nonetheless, petitioner had an attorney prepare an assignment of the option to him, and Alice Wiener signed it, but no date was inserted.
On April 8, 1944, St. Luke's made a contract with ‘William Wiener and Alice Wiener, parties of the second part,‘ leasing to them the property for five years beginning August 1, 1944, at $500 a month. Portions of the premises were subleased to Steve N. Manteris, William Winter, and Sahag Keremedjian by contracts dated in 1943 and in 1944 prior to August 1, and on these petitioner alone appeared as sublessor. On August 1, 1944, he alone made a contract subleasing a portion of the premises to James Phillips.
On an individual income tax return for 1943 petitioner reported a salary from ‘Stetson Shirt Shop‘ as his sole income. His wife reported as her income a net profit of $8,169.70 from the shop and claimed a $239.64 deduction for ‘Amortization Leasehold‘ and a $6,000 deduction for rent. In making an offer in compromise of the determined liability for 1934 taxes and penalties of the corporation, petitioner submitted to the technical staff of the collector's office an affidavit purporting to set forth all property owned by him. No lease was mentioned. On August 21, 1944, petitioner's representative was told that the offer would not be accepted and so advised petitioner. On August 25, 1944, petitioner wrote St. Luke's that he and his wife expected to move to Florida and requested St. Luke's:
* * * to make a new lease with me alone, for the remainder period, and upon the same terms as are in the present lease. Mrs. Wiener, of course knows of this and is agreeable to it, and will consent to the change * * * .
St Luke's refused to make the change.
On July 16, 1946, the lease was assigned and delivered by petitioner to Steve N. Manteris and wife, who had previously purchased fee title to the property from St. Luke's. In consideration for this assignment petitioner received Manteris' check for $4,000, payable to him only, and Manteris' note for $7,000, of which $3,500 was payable in one year and $3,500 in two years. The contract memorandum recites delivery of an ‘assignment from Alice Wiener to William Wiener and cancellation thereof by William Wiener.‘ Having cashed the check, which was endorsed by both petitioner and Alice Wiener, petitioner put the $4,000 in a vault in Florida, and in October 1946 requested Manteris to pay the notes immediately, but Manteris was unable to do so.
After learning of the sale of the lease, the Commissioner served on Manteris a notice of levy for the assessment against Alice Wiener, but was told that the note was payable to petitioner. He then entered against petitioner on July 1, 1947, a jeopardy assessment of the deficiencies, penalties, and interest on account of the corporation's income and excess profits taxes for 1934, and on August 7, 1947, sent to him a 90-day notice of determination of his liability therefor as transferee of the assets of Alice Wiener, transferee of the assets of Stetson Shirt Shops, Inc. A tax lien and notice of levy was served on Manteris for amounts owed by him to petitioner. The $3,500 due on the note was thus collected, and one-half, or $1,750, credited to the amount assessed against petitioner and the other half to the amount assessed against Alice Wiener.
The corporation filed a false and fraudulent income tax return for 1934, with intent to evade tax. Alice Wiener is liable as transferee for the amount of the corporation's deficiencies in income and excess profits taxes and additions thereto for 1934. Alice Wiener assigned to petitioner and petitioner received and disposed of a lease on the St. Luke's property, dated April 8, 1944, with intent to hinder, delay, and defraud the collection of taxes asserted and later assessed against Alice Wiener as transferee of assets of the corporation.
Petitioner assails the determination that he is liable as a transferee for deficiencies in taxes, penalties, and interest determined against the corporation for 1934. Although he pleaded guilty and was sentenced to jail for filing a false and fraudulent 1934 return for the corporation, he now contends that the return was not fraudulent, but correct. As proof he introduced the testimony of an accountant who claimed to have computed 1934 income on the basis of checks, receipts, invoices, and statements of manufacturers who supplied the corporation with merchandise. This witness presented no computation, but asserted his conviction that the reported-income of $149.77 was actually overstated. We find the testimony of petitioner's former bookkeeper and the revenue agent more persuasive. False records were kept and used in preparing the return, and the increase in income determined by respondent reflects receipts for which there was no accounting and the elimination of recorded purchases which could not be explained. Petitioner professed inability to remember any second set of books, and throughout his testimony declared ignorance of other matters of which we can not believe he was unaware. We hold that the corporation's 1934 return was false and fraudulent and that the presumption of correctness attaching to the Commissioner's determination of the deficiency in tax has not been overcome.
Petitioner assigns as a second error the determination of transferee liability against Alice Wiener. Under the view that the 1934 return was not fraudulent, he pleads that the statute of limitations bars assessment against the corporation and its transferee, and in the alternative that Alice Wiener's liability does not exceed $1,400 since, according to the accountant's testimony the net value of the assets received by her from Stetson Shirt Shops, Inc., in 1938 did not exceed that amount. He calls attention to the fact that Stetson's Men's Wear, Inc., also transferred assets to her. This Court has already decided in Docket No. 8660 that Alice Wiener is liable as transferee for the full amounts assessed against Stetson Shirt Shops, Inc., for 1934, and the proffered oral estimate of the amount received by her is unconvincing.
Petitioner's principal contention is that respondent has not met the burden placed on him of proving that petitioner is a transferee of any assets. Correctly stating that respondent's determination rests solely on petitioner's sale of the lease, petitioner reviews the sequence of contracts, negotiations, and transactions relating to the St. Luke's property, and would have us conclude that he ‘received an assignment of the lease here in question in 1937‘; that it was not among the assets which the corporation transferred to Alice Wiener in 1938; that she never assigned it to him, and hence the consideration which he received from Manteris for it was derived from property which he had held for years. He cites in substantiation the various subleases and other documents in which only his name appears as lessee or as sublessor.
In our findings we have set forth the shifts and contradictory positions taken by petitioner in respect of the lease property, and observe that these inconsistencies merely tend to prove a devious and crafty policy. But the officials of St. Luke's, in treating Alice Wiener as lessee and refusing petitioner's request to recognize an assignment to him, leave us in no doubt about the true owner. The lease which ended August 1, 1944, belonged to Alice Wiener, but, contrary to petitioner's assumption, no property rights in that contract are here involved. It expired on August 1, 1944, and a new lease began. That lease, signed on April 8, 1944, had its origin in the option which St. Luke's granted to Alice Wiener in June 1942 and which it affirmatively refused to grant to petitioner. All property right in it was the wife's, although petitioner's name was joined as lessee and Alice Wiener executed an undated document purporting to convey her interest in it to petitioner— a conveyance which Stl Luke's refused to recognize. When, therefore, petitioner assigned the lease to Manteris, he transferred his wife's property, and the proceeds of that assignment were the proceeds from a disposition of her property.
Over a year before petitioner contracted to make this assignment on July 16, 1946, the Commissioner had determined Alice Wiener's liability for the corporation's 1934 taxes and additions thereto, a determination which this Court sustained. Alice Wiener paid nothing, however, and the Commissioner found nothing on which to levy. Learning of the lease assignment, he first gave notice to Manteris of the assessment against Alice Wiener. When Manteris informed the agent that the note was payable to petitioner, not to her, assessment was made against petitioner, and petitioner was advised by the notice, on which this proceeding is based, that liability had been determined against him as a transferee of Alice Wiener.
We think it clear that petitioner was a transferee, and that his role of assignor in the transaction with Manteris was a fraudulent attempt by him and his wife to frustrate collection of the taxes and penalties here in controversy. Both were aware that the lease was property of the wife. This is manifest from petitioner's request that St. Luke's recognize assignment of the option to him; later, that it make the lease to him; from the undated assignment signed by the wife despite St. Luke's refusal of his requests; from recitation of the assignment in the contract with Manteris; and from the wife's endorsement on the check which Manteris had made payable to him. At the trial petitioner at first could not remember any check, saying that he had received the $4,000 in cash and placed it in a vault in Florida; he could not remember where the vault was located. Confronted with the check, he doubted that the wife's endorsement on it was her signature. In October 1946 he asked Manteris to pay off the notes immediately, but Manteris was unable to do so.
We perceive in this conduct a studied attempt to hinder, delay, and defraud the Commissioner in the collection of taxes. As a creditor, the United States is entitled to the same rights that a private citizen enjoys in pursuing property fraudulently conveyed, Zimmern v. United States, 87 Fed.(2d) 179; certiorari denied, 300 U.S. 671; United States v. Haar (C.C.A., 5th Cir.), 27 Fed.(2d) 250; United States v. Phillips (Dist. Ct. Ga.), 57 Fed.Supp. 1006, and section 311 of the Internal Revenue Code provides the Commissioner with a summary method of enforcing those rights as defined by existing laws. Phillips v. Commissioner, 283 U.S. 589; Commissioner v. Southern Bell Telephone & Telegraph Co. (C.C.A., 6th Cir.), 102 Fed.(2d) 397. The laws of Michigan, Title 26, chapter 261, Michigan Statutes Annotated, provided by section 26.887 that:
Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors.
And by section 26.889 that:
Where a conveyance or obligation is fraudulent as to a creditor, such creditor, when his claim has matured, may * * * :
(b) Disregard the conveyance and attach or levy execution upon the property conveyed.
While respondent here levied upon a note, that note represented a conversion of the property conveyed, and is equally subject to levy under section 26.891, which provides that:
In any case not provided for in this act, the rules of law and equity, including the law merchant, and in particular the rules relating to the law of principal and agent, and the effect of fraud, misrepresentation, duress or coercion, mistake, bankruptcy or other invalidating cause shall govern.
Petitioner argues that respondent has not shown the wife's insolvency after the transfer and that assessment of the corporation's liability had not been made against her when the transfer occurred. The record shows, however, that the wife had paid nothing and the respondent had found nothing on which to levy except the notes. But in any event we find the transfer fraudulent, and hence within the scope of section 26.889. Transactions between family members to the detriment of creditors invite special scrutiny, and nothing shown by petitioner would lead, under Michigan decisions, to any other conclusion than a fraudulent intent. Cf. Bentley v. Caille, 289 Mich. 74; 286 N.W. 163, and cases cited. The date of the assessment against the wife, which was after the transfer, lacks any decisive significance. Respondent's cause of action stems from the corporation's transfer of all assets to Alice Wiener in 1938, and, as said in Farrell v. Paulus, 309 Mich. 441; 15 N.W.(2D) 700:
* * * The status of creditor is determined as of the date when plaintiff's cause of action arose, not the date when judgment was obtained or entered. Hanna v. Hurley, 162 Mich. 601, 127 N.W. 710; Ashbaugh v. Sauer, 268 Mich. 467, 256 N.W. 486.
Reviewed by the Court.
Decision will be entered for the respondent.