Rowen v. Commissioner

Ruth Halle Rowen, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ethel F. Halle, Petitioner, v. Commissioner of Internal Revenue, Respondent. Edward Halle, Petitioner, v. Commissioner of Internal Revenue, Respondent Rowen v. Commissioner Docket Nos. 31666, 31667, 31668 United States Tax Court 18 T.C. 874; 1952 U.S. Tax Ct. LEXIS 122; August 18, 1952, Promulgated *122 1. The transferor was held to have filed fraudulent tax returns, Louis Halle, 7 T. C. 245. This decision became final after certiorari was denied by the Supreme Court on February 6, 1950. Held, notice of transferee liability mailed to petitioner on September 14, 1950, was timely, section 311 (b) and (d) of the Code. 2. Louis Halle died insolvent in 1949 owing income taxes in substantial amounts. Proceeds from decedent's life insurance were received by petitioners. Held, petitioners are liable as transferees to the extent of life insurance proceeds received by them. Christine D. Muller, 10 T. C. 678, followed. 3. Evidence tended to indicate that Louis Halle made some transfers between 1929 and 1938 to his wife, the transferee. Even though it was established that Louis Halle died insolvent in January 1949, it was not established that Louis Halle was insolvent during the 10-year period in question when the alleged transfers were made. Held, the burden of proof in equitable transferee proceedings is upon the Commissioner and when, as in this proceeding, he fails to satisfy that burden, there is no transferee*123 liability as to any transfers made between 1929 and 1938, inclusive. Section 1119 (a) of the Code. Edward Halle, Esq., pro se and for the petitioners. Robert Margolis, Esq., for the respondent. Black, Judge. BLACK *875 These proceedings which have been consolidated arise from the respondent's determination that the petitioners, as transferees, are liable for the income tax deficiencies and penalties of Louis Halle. It was determined by this Court, Louis Halle, 7 T. C. 245, that for the years 1929 to 1938, inclusive, Louis Halle owed income taxes in the amount of*124 $ 184,943.96 and 50 per cent penalties in the amount of $ 92,482.10. Our decision in that proceeding was entered August 22, 1946. It is the respondent's contention that petitioners are liable for the above income tax and penalties, including interest thereon, to the extent of assets transferred to each of them by Louis Halle. The decision of the Tax Court in Louis Halle, supra, was appealed and affirmed by the Court of Appeals for the Second Circuit on June 1, 1949, 175 F. 2d 500, and certiorari was denied by the United States Supreme Court on February 6, 1950, 338 U.S. 949. Louis Halle died on January 4, 1949, insolvent. In Docket No. 31667, Ethel F. Halle petitioner, the deficiency notice states: * * * $ 156,696.66 of the amount of the income tax deficiency and $ 34,899.30 of the deficiency in penalty, plus interest as provided by law, will be assessed against you as transferee of assets of said Louis Halle, Deceased. The statement attached to the deficiency notice states, among other things, as follows: Inasmuch as the assets received by you in the form of cash and securities total $ 178,320.34, *125 and life insurance upon the life of Louis Halle, Deceased, totals $ 13,275.62, amounting in full to $ 191,595.96, your liability as transferee is limited to that amount * * * At the hearing respondent amended his answer to allege that the insurance proceeds received by Ethel F. Halle were $ 14,073.60, instead of $ 13,275.62, and that Ethel F. Halle's liability as transferee be increased accordingly. In Docket No. 31666, Ruth Halle Rowen petitioner, the deficiency notice states: * * * $ 2,271.12 of the amount of the income tax deficiency and $ 3,162.27 of the deficiency in penalty, plus interest as provided by law, will be assessed against you as transferee of assets of said Louis Halle, Deceased. *876 The statement attached to the deficiency notice says: Inasmuch as the assets received by you in the form of life insurance upon the life of Louis Halle, Deceased, amounted to $ 5,433.39, your liability as transferee is limited to that amount * * * At the hearing respondent amended his answer to allege that the insurance proceeds received by Ruth Halle Rowen were $ 5,632.89, instead of $ 5,433.39, and that Ruth Halle Rowen's liability as transferee be increased accordingly. *126 In Docket No. 31668, Edward Halle petitioner, the deficiency notice states: * * * $ 2,271.12 of the amount of the income tax deficiency and $ 3,162.27 of the deficiency in penalty, plus interest as provided by law, will be assessed against you as transferee of assets of said Louis Halle, Deceased. The statement attached to the deficiency notice includes the following language: Inasmuch as the assets received by you in the form of life insurance upon the life of Louis Halle, Deceased, amounted to $ 5,433.39, your liability as transferee is limited to that amount * * * At the hearing respondent amended his answer to allege that the insurance proceeds received by Edward Halle were $ 5,632.88, instead of $ 5,433.39, and that Edward Halle's liability as transferee be increased accordingly. The notices of deficiency asserting transferee liability in each of the proceedings were sent to each petitioner September 14, 1950. Three questions are presented by the pleadings in these proceedings: 1. Are the assessments of transferee liability against petitioners barred by the statute of limitations? 2. Are the petitioners liable as transferees to the extent of the proceeds paid to them under*127 the life insurance policies of Louis Halle, deceased? 3. Is the petitioner Ethel F. Halle liable as transferee to the extent of certain alleged transfers made to her by Louis Halle during the period January 1, 1929, to December 31, 1938? FINDINGS OF FACT. Petitioners reside in New York City. Ethel F. Halle is the widow of Louis Halle, deceased, and Edward Halle his son and Ruth Halle Rowen his daughter. Louis Halle, the alleged transferor, died insolvent January 4, 1949, leaving an estate containing assets of $ 25 and liabilities in income tax, interest, and penalties in the amount of $ 401,507.56. *877 Statute of Limitations. In the proceeding Louis Halle, Petitioner, v. Commissioner of Internal Revenue, Respondent, Docket No. 3705, supra, the Tax Court made a finding of fact as follows: "Each return filed by the petitioner or by the petitioner and his wife for the years 1929 to 1938, inclusive, was false and fraudulent with intent to evade tax." The statute of limitations does not bar the assessment of transferee liability against Ruth Halle Rowen, Ethel F. Halle, and Edward Halle. Insurance Policies. The decedent maintained several policies of life insurance which, *128 by their terms, upon his death became payable to petitioners as the designated beneficiaries. Petitioners received as beneficiaries sums from insurance companies as follows: Name of transferee Sum received Ethel F. Halle $ 14,073.60 Ruth Halle Rowen 5,632.89 Edward Halle 5,632.88 Insurance policies of the decedent with Equitable Life Assurance Society and New York Life Insurance Company were presented as exhibits at the hearing. Under the terms of each of the policies the insured, Louis Halle, reserved the right to change the beneficiary. The decedent, in fact, changed the beneficiaries in life insurance policies No. 7,954,942 (Equitable) and No. 6,854,767 (New York Life) during his lifetime. The decedent's insurance policy with Metropolitan Life Insurance Company from which Ethel F. Halle received $ 259.14 as beneficiary was not in evidence. Ethel F. Halle, Ruth Halle Rowen, and Edward Halle are liable as transferees of the assets of Louis Halle to the extent of the insurance proceeds received by them in the amounts of $ 14,073.60, $ 5,632.89, and $ 5,632.88, respectively. Other Alleged Transfers From Louis Halle To Ethel F. Halle. Louis Halle's net income for*129 the years 1929 through 1938 was as follows: Year Net income [1929] $ 78,151.43 [1930] 173,606.84 [1931] 201,033.69 [1932] 118,483.98 [1933] 58,040.10 [1934] 59,124.61 [1935] 68,699.34 [1936] 57,985.60 [1937] 45,320.85 [1938] 44,870.40 The alleged net worth of Louis Halle, deceased, at the end of the taxable years 1929 to 1938, inclusive, as computed by petitioners' witness Joseph L. Weiss, a certified public accountant, was as follows: *878 Year Net worth [1929] $ 35,571.50 [1930] 73,228.67 [1931] 145,826.57 [1932] 165,041.56 [1933] 176,604.31 [1934] 168,414.84 [1935] 163,612.13 [1936] 147,334.81 [1937] 121,508.70 [1938] 118,010.94 The net worth statement of Louis Halle as prepared by petitioners' witness Weiss commences with an opening asset of all income attributable to Louis Halle in each of the years 1929 to 1938, inclusive, deducts taxes paid, living expenses of $ 25,000 each year and alleged transfers to Ethel F. Halle, adds cash surrender value of life insurance and arrives at total assets. Louis Halle's liabilities are listed as the tax deficiencies and interest as found by the Tax Court in its decision in Louis Halle, supra,*130 and the net result is what Weiss terms "net worth" as shown above. The alleged net worth of Louis Halle, deceased, at the end of the taxable years 1929 to 1938, inclusive, as computed by respondent's witness Abraham Feinberg, an internal revenue agent attached to the upper New York division of the Internal Revenue Bureau in New York City, was as follows: Year Net worth [1929] ($ 5,237.52) [1930] (39,946.83) [1931] (77,623.29) [1932] (124,936.31) [1933] (141,819.33) [1934] (164,204.00) [1935] (187,779.29) [1936] (209,603.79) [1937] (226,919.05) [1938] (243,821.86) Feinberg's method of determining net worth at the end of the years 1929 to 1938 inclusive, was to include on the asset side certain bank deposits to the then credit of Louis Halle which he was able to locate in New York City after the lapse of many years, and then to add to these bank deposits the cash surrender value of the life insurance policies on the life of Louis Halle. The sum of these totals represented, according to the computation made by Feinberg, all the assets that Louis Halle owned at the end of each of the respective years. Against the value of those assets, he set up the liabilities of Louis *131 Halle for taxes, penalties, and interest and reached the conclusion that Louis Halle was insolvent in each of the years 1929 to 1938, inclusive, to the extent above stated. The respondent failed to prove insolvency of Louis Halle for the period January 1, 1929, to December 31, 1938, inclusive, and as to any transfers which might have been made by Louis Halle to Ethel F. Halle during this period the petitioner Ethel F. Halle is not liable as transferee. The Commissioner did not sustain his burden of proving that Louis Halle was insolvent at any time during 1929 through 1938. *879 OPINION. Three issues are presented in these proceedings. We shall consider each issue in the order set forth in our preliminary statement. The first two issues are questions of law, and the third issue is primarily one of fact. Issue 1. As to the first issue, petitioners contend that the statute of limitations bars any assessment of tax against them as transferees. The applicable provision of the Code, section 311, reads as follows: SEC. 311. TRANSFERRED ASSETS. * * * * (b) Period of Limitation. -- The period of limitation for assessment of any such liability of a transferee or fiduciary shall*132 be as follows: (1) In the case of the liability of an initial transferee of the property of the taxpayer, -- within one year after the expiration of the period of limitation for assessment against the taxpayer; In their petitions the petitioners allege that the statute of limitations bars this proceeding and the single fact alleged by them in support of their contention was that a jeopardy assessment was made against the transferor on September 23, 1944. Their allegations of error as to the statute of limitations is couched in the following language: The Commissioner's failure to note the Statute of Limitations has run against assessment of petitioner since no assessment was made against petitioner within one year from on or about September 23, 1944, the date of jeopardy assessment against Louis Halle, Deceased, for the taxes and penalties in dispute herein. The Commissioner's failure to proceed to collect the alleged taxes in dispute from Louis Halle, Deceased, or to proceed against his assets from the date of the said jeopardy assessment until his death on January 4, 1949, which constituted Laches, barring assessment and/or collection against petitioner, especially in view*133 of the fact that Commissioner's first notice to petitioner was mailed on September 14, 1950, more than a year and a half after the death of said Louis Halle, Deceased. Petitioners made no effort at the hearing to establish the facts with reference to any jeopardy assessment made against Louis Halle on September 23, 1944, nor did they rely on that fact in their brief. Since the petitioners are before us in these proceedings as transferees, the starting point in deciding any statute of limitations question is, of course, section 311 of the Code, supra. Applying that section to the facts here, we find that assessment may be made against petitioners only within one year after the expiration of the period of limitation for assessment against Louis Halle, the transferor, and in deciding this question we must, therefore, look to the transferor and determine when assessment against him was barred by the statute of limitations. In the proceeding of Louis Halle, supra, before the Tax Court, which decision as we have already pointed out has long *880 since become final, we made a finding of fact which read as follows: "Each return filed by the petitioner*134 or by the petitioner and his wife for the years 1929 to 1938, inclusive, was false and fraudulent with intent to evade tax." Section 276 (a) of the Internal Revenue Code provides: SEC. 276. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION -- EXCEPTIONS. -- (a) False Return or No Return. -- In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment at any time. Thus, it will be seen that there is no statute of limitations which runs against the assessment of taxes and penalties where the taxpayer's returns were false and fraudulent with intent to evade tax. In such a case, the statute provides that the Commissioner may assess the tax at "any time." Therefore, it seems clear that no statute of limitations has barred assessment against the transferor Louis Halle and it naturally follows that if assessment is not barred against the transferor, it likewise is not barred against the transferees. Cf. Marie Minor Sanborn, 39 B. T. A. 721. In the Sanborn case, supra, we held that the filing*135 of returns by an executor or administrator after final settlement and discharge was an unauthorized act and did not start the running of the statute of limitations. In deciding against the taxpayer in that case on the issue of the statute of limitations, we said: * * * We are thus driven to conclude that no return was filed by the estate, and if no return was filed the statute of limitations never began to run. Revenue Act of 1928, sec. 276 (a). It thus becomes completely immaterial whether anything was effective to toll the statute, and the Commissioner's assessment and any proceedings to collect would have been valid at any time. Amalgamated Sugar Co., 24 B. T. A. 149; Will T. Caswell, 36 B. T. A. 816, 827. [Emphasis added.] Section 276 (a) of which we spoke in the Sanborn case, supra, is the same section which is applicable here. It provides that the statute of limitations does not run where the taxpayer files no return or where the return which he does file is fraudulent with intent to evade tax. As we have already stated, clearly the statute of limitations had not run in favor of Louis Halle or his estate*136 because the returns which Louis Halle filed were false and fraudulent. The petitioners also argue that the decision in Louis Halle, supra, was invalid, contending the statute of limitations barred that proceeding. The limitations plea was considered as having been raised in Louis Halle, supra, and in holding that the proceeding was not barred, our Court obviously relied on section 276 (a) of the Code. It was clearly applicable. On this issue of the statute of limitations, we hold for respondent. *881 Issue 2. We now consider the second issue relating to the liability of petitioners as transferees on account of the insurance policies. The pertinent facts, concisely stated, are these: The decedent died insolvent, the estate assets consisting of no more than $ 25 and, among its liabilities, Federal income taxes and additions thereto totaling $ 401,507.56; the decedent had insurance on his life and from these policies the petitioners, as named beneficiaries, received more than $ 25,000 upon the death of Louis Halle; the decedent had the right to change the beneficiaries in these policies at the time of his death. *137 These facts, we think, contain the elements essential to transferee liability as provided for under section 311 of the Code. The liability of petitioners herein is an equitable one just as in Christine D. Muller, 10 T. C. 678. Petitioners are unable to distinguish Christine D. Muller and we have, in effect, been asked to overrule our decision there. We are not so inclined; that case and the authorities cited therein dispose of this issue. Cf. Sadie D. Leary, 18 T. C. 139. The petitioners are liable as transferees of Louis Halle to the extent of the proceeds of life insurance received by them, the amount of which we have set out in our Findings of Fact, together with interest thereon as provided by law. Issue 3. The third issue relates only to one petitioner, Ethel F. Halle. As we have heretofore stated, the respondent asserts liability against petitioners as transferees in equity. It is a well settled principle of law that an essential element of transferee liability in equity is that a transfer made without adequate consideration must leave the taxpayer insolvent and unable to meet his tax liability. Samuel Keller, 21 B. T. A. 84,*138 affd. 59 F. 2d 499. Respondent seeks to hold Ethel F. Halle as transferee of Louis Halle for transfers alleged to have been made during the period January 1, 1929, to December 31, 1938, and alleged to amount to $ 178,320.34. The facts here do not represent the usual transferee situation where as of one certain date a transfer is made. The alleged transfers which we are here concerned with are quite numerous and are in varying sums of money and were made during a full 10-year period. Entered as exhibits at the hearing were transcripts of the bank accounts and brokerage accounts of Louis Halle and his wife, Ethel F. Halle, during the period 1929 to 1938, inclusive. During this period Louis Halle maintained bank accounts at the Pennsylvania Exchange Bank and Sterling National Bank and Ethel F. Halle maintained accounts at the following institutions: Empire City Savings Bank, Citizens Savings Bank, Corn Exchange Trust Company, *882 East River Savings Bank, Central Savings Bank, Pennsylvania Exchange Bank, J. R. Williston & Co., Kidder, Peabody & Co., and G. M. P. Murphy & Co. Respondent, through an expert witness, analyzed and summarized the various*139 entries, and contends that transfers totaling over $ 263,000 were made from the accounts of Louis Halle to Ethel F. Halle. This total was arrived at by means of matching deposits of Ethel F. Halle to withdrawals of Louis Halle. That some such transfers were made was found as a fact in Louis Halle, supra.There was no direct testimony in the instant case that Louis Halle made transfers to his wife Ethel, but assuming without deciding, that Louis Halle made the transfers to Ethel in the amounts which respondent alleges that would not within itself establish transferee liability against Ethel. The respondent would have to go further and prove that these alleged transfers were either made when Louis was insolvent or that such transfers rendered Louis insolvent. This latter essential element we hold that respondent has failed to prove. It is the respondent's theory that there was a continuing insolvency of Louis Halle during the period from January 1, 1929, to December 31, 1938. We agree that if this be true, then there would be no necessity for respondent to prove insolvency of Louis Halle on each and every day that transfers were made. Both respondent*140 and the petitioners have presented exhibits which purport to set forth as of December 31 of each year during the period the net worth of the deceased. As will be seen by an examination of our Findings of Fact petitioners and respondent each made a separate "net worth" computation. Since the burden of proof in respect to the insolvency of the taxpayer is upon the respondent his failure to establish that the transferor was insolvent at the time the alleged transfers were made or resulted in making him insolvent means that he has failed to establish his case as to Ethel F. Halle with respect to these alleged transfers. The facts establish clearly that Louis Halle during each of the years 1929 to 1938, inclusive, had large amounts of net income. The very fact that he had large sums of net income in the years 1929 to 1938, inclusive, which he did not report on his returns was the basis for our decision determining deficiencies and fraud penalties against him for those years. Yet respondent would now have us make a finding of fact that notwithstanding these large amounts of income which Louis Halle unquestionably had in each of those years, he was insolvent at the end of each year. *141 Of course, it is possible that this could *883 be so but in view of the fact that he had large amounts of net income in each of the years 1929 to 1938, inclusive, we think it is very unlikely that he was insolvent during those years. Certainly respondent has not proved insolvency of Louis Halle for this period and we cannot make any finding of fact that he has done so. Under these circumstances we hold that Ethel F. Halle is not liable as transferee in respect to such transfers as might have been made to her by Louis Halle during the period 1929 through 1938. On that part of his determination respondent is reversed. It is, therefore, determined that petitioners are liable as transferees to the following extent, together with interest as provided by law: Docket Transferee Name of petitioner No. liability Ruth Halle Rowen 31666 $ 5,632.89 Ethel F. Halle 31667 14,073.60 Edward Halle 31668 5,632.88 Decisions will be entered accordingly.