Brown v. Commissioner ( 1955 )

Arlington F. Brown, Transferee, et al., ¹ Petitioners, v. Commissioner of Internal Revenue, Respondent

Brown v. Commissioner

Docket Nos. 45014, 45015, 45016, 45017

United States Tax Court

24 T.C. 256; 1955 U.S. Tax Ct. LEXIS 184; 24 T.C. No. 30;

May 24, 1955, Filed

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Decisions will be entered under Rule 50.

1. Charles R. Brown (Charles) and Elmer L. Lautenberger (Elmer) were liable for income tax deficiencies and penalties for 1942 through 1946. For 1942 through 1945 they each filed returns in their individual names only and they alone signed the returns. The returns included minor amounts of income and deductions (from real estate held as tenants by the entireties and joint bank accounts) attributable to their respective wives, petitioners Anna and Ida; claimed dependency exemptions for their wives; and stated that their wives were not filing (and they did not so file) separate returns. Petitioners Anna and Ida had nothing to do with the preparation of the returns or the subsequent negotiations with respondent and did not authorize their respective husbands to file joint returns. The returns were prepared by a tax specialist from memoranda supplied by Charles and Elmer. Held, the returns for 1942 through 1945 were not intended by petitioners or their husbands to be joint and were not in fact joint. Consequently, petitioners are not jointly and severally liable with their husbands for the deficiencies and penalties applicable to those years.

2. Charles allegedly transferred certain assets to his son, petitioner Arlington F. Brown (Arlington), on December 3 and 11, 1951. Both before and after those transfers Charles' assets consisted, inter alia, of a joint life interest with his wife in their residence. Respondent failed to prove the value of that interest at the time of the transfers. Held, respondent, by failing to prove the value of Charles' joint life interest in the residence (which interest could be reached by respondent to satisfy Charles' Federal tax liability), has not sustained his burden of proving that Charles was insolvent either before or immediately following the transfers to Arlington. Consequently, Arlington may not to any extent be held liable as transferee for Charles' 1942 through 1946 deficiencies and penalties.

3. Elmer, on August 9, 1950, gratuitously transferred a 25 per cent interest in his residence to his daughter, petitioner Lillian Gertrude Keizer (Lillian). On December 11, 1951, he received a check in payment for his and Ida's joint interest in a mortgage debt. He endorsed the check and gave it to Ida who, in turn, gave it to Lillian. Lillian, on December 14, 1951, deposited most of the check's proceeds in a bank account standing in trust for herself and Ida. Lillian gave no consideration for her interest in the deposited funds. Elmer was insolvent on August 9, 1950, and December 14, 1951. Held, Lillian was liable, as transferee, for Elmer's 1942 through 1946 deficiencies and penalties to the extent of (a) the fair market value on August 9, 1950, of the 25 per cent interest in the residence transferred to her by Elmer, which value is herein determined, and (b) half of the proceeds of the aforementioned check which Lillian deposited in her and Ida's joint bank account on December 14, 1951.

Joshua W. Miles, Esq., and D. Sylvan Friedman, Esq., for the petitioners.

George C. Lea, Esq., for the respondent.

Black, Judge.

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BLACK

The Commissioner has determined that petitioners Anna C. Brown and Ida M. Lautenberger are liable for the following income tax deficiencies and additions to tax for fraud as a result of the fact that they filed joint returns with their husbands for the years involved:

				50 per cent
Docket	Petitioner	Year	Deficiency	addition
No.				for fraud
45015	Anna C. Brown, wife of	1942	$ 1,215.94
	Charles R. Brown	1943	10,847.84	$ 5,119.94
		1944	9,617.96	4,808.98
		1945	2,529.96	1,264.98
45017	Ida M. Lautenberger, wife of	1942	1,149.05
	Elmer L. Lautenberger	1943	10,259.99	4,842.40
		1944	9,559.61	4,779.81
		1945	2,536.81	1,268.41

The aforementioned petitioners contest the Commissioner's determination that the tax returns, upon which their respective husbands' deficiencies and fraud penalties were based, were in fact joint returns and that they, therefore, are each jointly and severally liable with their respective husbands for those deficiencies and penalties. In addition they specifically assert that the Commissioner erred in determining that they are liable for fraud penalties for the years 1943 through 1945.

The Commissioner has determined that petitioners Arlington F. Brown and Lillian Gertrude Keizer are liable as transferees of their respective alleged transferors for the following deficiencies and additions to tax for fraud:

				50 per cent
Docket	Petitioner	Year	Deficiency	addition
No.				for fraud
45014	Arlington F. Brown, transferee of	1942	$ 1,215.94
	Charles R. Brown and	1943	10,847.84	$ 5,119.94
	Anna C. Brown.
		1944	9,617.96	4,808.98
		1945	2,529.96	1,264.98
		1946	1,474.73
45016	Lillian Gertrude Keizer, transferee	1942	1,149.05
	of Elmer L. Lautenberger and	1943	10,259.99	4,842.40
	Ida M. Lautenberger.	1944	9,559.61	4,779.81
		1945	2,536.81	1,268.41
		1946	1,278.14

Petitioner Arlington F. Brown does not contest the liability of his alleged transferor Charles R. Brown, but he does contest both the liability of his alleged transferor Anna C. Brown and his liability as transferee of Charles R. and Anna C. Brown. Similarly, petitioner Lillian Gertrude Keizer does not contest the liability of her alleged transferor Elmer L. Lautenberger, but she does contest both the liability of her alleged transferor Ida M. Lautenberger and her liability as transferee of Elmer L. and Ida M. Lautenberger.

FINDINGS OF FACT.

Most of the facts were stipulated, are found as stipulated, and the stipulation thereof is incorporated herein by reference.

All four petitioners are residents of the State of Maryland.

Petitioners Anna C. Brown (hereinafter sometimes referred to as Anna) and Arlington F. Brown (hereinafter sometimes referred to as Arlington) are the wife and son, respectively, of Charles R. Brown (hereinafter sometimes referred to as Charles). Deficiencies and 50 per cent fraud penalties were admitted by, and assessed against, Charles for the years 1942 through 1946 in amounts totaling $ 25,686.43 and $ 11,193.90, respectively. The amount of the deficiency and of the penalty for each such year is identical with the corresponding amount detailed in the foregoing preliminary statement of this case applicable to Docket No. 45014 (Arlington F. Brown). On October 10, 1947, Charles filed amended income tax returns applicable to the years 1944 through 1946 and paid $ 12,314.47 thereon, reducing the aforementioned deficiencies by that sum. No other payments have been made by him.

Petitioners Ida M. Lautenberger (hereinafter sometimes referred to as Ida) and Lillian Gertrude Keizer (hereinafter sometimes referred to as Lillian) are the wife and daughter, respectively, of Elmer L. Lautenberger (hereinafter sometimes referred to as Elmer). Deficiencies and 50 per cent fraud penalties were admitted by, and assessed against, Elmer for the years 1942 through 1946 in amounts totaling $ 24,783.60 and $ 10,890.62, respectively. The amount of the deficiency and of the penalty for each such year is identical with the corresponding amount detailed in the foregoing preliminary statement of this case applicable to Docket No. 45016 (Lillian Gertrude Keizer). On October 10, 1947, Elmer filed amended income tax returns applicable to the years 1944 through 1946 and paid $ 12,044.24 thereon, reducing the aforementioned deficiencies by that sum. No other payments have been made by him.

During 1942 through 1945, the years in issue in Docket Nos. 45015 (Anna) and 45017 (Ida), Charles and Anna resided together, and Elmer and Ida resided together. Charles and Elmer each filed original individual income tax returns for all of those years and filed amended returns for 1944 and 1945. All of the filings were on Forms 1040. Pertinent facts regarding these returns are as follows:

(a) At the top of the returns appears the instruction to print both the husband's and wife's name if the return is joint. Only the names of Charles and Elmer appear in the returns applicable to each; the names of their respective wives, Anna and Ida, were not inserted as taxpayers on any of the returns.

(b) In the space provided on the returns for the taxpayer's signature there is the instruction that both husband and wife must sign if the return is joint. The returns were signed, respectively, by Charles and Elmer only; Anna and Ida signed none of them.

(c) On the returns filed in their respective names Charles took dependency exemptions for Anna, and Elmer took dependency exemptions for Ida. The returns for 1944 and 1945 contained the following instruction in the section provided for the listing of such dependency exemptions: "List your own name. If married and your wife (or husband) had no income, or if this is a joint return of husband and wife, list name of your wife (or husband)."

(d) The returns had a space wherein the taxpayer was to indicate whether or not his wife was making a separate return for the particular year. Both Charles and Elmer indicated that Anna and Ida were not making separate returns and, in fact, they made no separate returns for any of the years in issue.

(e) The original returns for the years in issue were prepared by John A. Daniello, a former deputy collector of internal revenue, from memoranda submitted to him by Charles and Elmer, respectively. Daniello relied entirely on those memoranda and made no independent audit. Anna and Ida were not consulted and took no part in the preparation of the returns or of the memoranda submitted by Charles and Elmer to Daniello. Neither did they authorize their husbands to file joint returns including items of income and deductions attributable to them.

(f) For the tax years 1943 and 1944, both Charles and Elmer signed consents (Form 872) extending the period of limitations on assessment of their respective taxes for those years. Anna and Ida signed none of those consents.

(g) On March 12, 1951, Charles and Elmer admitted liability for the here-involved deficiencies and fraud penalties for 1942 through 1945 (as well as for 1946) and offered to execute consents to the assessment and collection thereof (Form 870). Neither Anna nor Ida was involved in, or consulted regarding, any of the negotiations between their husbands and the respondent's agents which led up to those admissions. The first time respondent asserted that the returns filed by Charles and Elmer for 1942 through 1945 were joint and that Anna and Ida were, therefore, jointly and severally liable with their husbands for the admitted deficiencies and penalties applicable to those years was on August 15, 1952, the date respondent mailed the deficiency notices in Docket Nos. 45015 (Anna) and 45017 (Ida).

Prior to June 19, 1937, Charles, Elmer, and Louis Boyd operated a machine shop as equal partners under the name L. Boyd & Company. The business was conducted on premises owned by the three partners at 707-709-711 Williams Street, Baltimore, Maryland (hereinafter sometimes referred to as the Williams St. property). On or about June 19, 1937, Louis Boyd sold out his interest in the business to Charles and Elmer who, thereafter and during the years here in issue, operated the machine shop as equal partners under the same firm name. Anna and Ida held no interest, and did not participate to any extent, in the operation of that business. On or about May 29, 1940, Louis Boyd (a widower), Charles and Anna, and Elmer and Ida -- all as grantors -- conveyed the Williams St. property to a straw man who in turn conveyed it to Charles and Anna, as tenants by the entirety, and Elmer and Ida, as tenants by the entirety.

During the years in issue, that part of the Williams St. property which was not used in the conduct of the partnership business was rented. The partnership filed returns in which the rentals were included in computing net income and Charles and Elmer each reported half of the partnership net income in his returns filed for 1942 through 1945. The amount of partnership net income reported by each of them, the gross rentals, deductions attributable to the property, and resulting net rentals included in computing each of their shares of such reported net partnership income, and the portion of the included net rentals ascribable to Anna or Ida, as the case may be, were as follows:

	A	B	C
			Total
		Gross	deductions for
Year	Net partnership	rentals	depreciation,
	income	included	ground rent
	reported	in	and real estate
	by each	computing	taxes included
		column A	in computing
			column A
1942	$ 11,275.09	$ 288.00	$ 327.47
1943	12,180.50	288.00	341.44
1944 (original return)	14,165.14	288.00	247.44
1944 (amended return)	29,483.47	379.50	206.55
1945 (original return)	5,659.84	288.00
1945 (amended return)	10,589.18	300.50

	D	E
		Portion of net
		included rentals
Year	Net rentals	ascribable to
	(column B	Anna or Ida
	less column	as tenants by
	C) included	the entireties
	in column A	(50% of
		column D)
1942	($ 39.47)	($ 19.74)
1943	(53.44)	(26.72)
1944 (original return)	40.56	20.23
1944 (amended return)	72.95	36.48
1945 (original return)		1
1945 (amended return)		1

During 1942 and part of 1943, Charles and Anna held title, as tenants by the entirety, to property located at 1719 Darley Avenue, Baltimore, Maryland. They sold the property in July 1943, reserving to themselves, as tenants by the entirety, payment of ground rent. In Charles' returns for 1942 and 1943 he took small depreciation deductions for that property and reported small amounts of net rental therefrom; in his returns for 1943 through 1945 he reported the ground rents received. Charles also deducted, in his returns filed for 1942 through 1945, relatively minor amounts of real estate taxes and, except in the 1946 return, ground rents on property located at 5215 Old Frederick Road, Catonsville, Maryland, which he and Anna owned as tenants by the entirety and occupied as their residence.

In his returns for 1942 through 1945, Charles reported the following interest income:

Year	Amount
1942	1
1943	$ 105.00
1944	347.34
1945	585.74

Such income was derived from (a) interest on savings bank deposits standing in the name of "Anna C. Brown in trust for self and Charles R. Brown and Arlington F. Brown, joint owners, subject to order of any one of them, balance at death of one first dying in trust for survivors, subject to order of either of them balance at death of either of said survivors to belong to ultimate survivor," ² and (b) interest on United States Government bonds held in the joint names of Charles and Anna. The funds deposited in those bank accounts and with which the Government bonds were purchased were derived entirely from Charles' earnings.

During the years 1942 through 1945, Elmer and Ida held title as tenants by the entirety, and occupied as a residence, property located at 4808 Coleherne Road, Catonsville, Maryland. Elmer deducted the relatively minor amounts of real estate taxes paid thereon in his returns filed for those years.

Elmer reported the following interest income in his returns for 1942 through 1945:

Year	Amount
1942	1
1943	$ 94.75
1944	430.00
1945	686.27

Such income was derived from (a) interest on savings bank deposits standing in the name of "Elmer L. Lautenberger in trust for self and Mrs. Ida Mae Lautenberger and Mrs. Lillian G. Keizer, joint owners, subject to order of any one of them, balance at death of one first dying in trust for survivors, subject to order of either of them balance at death of either of said survivors to belong to ultimate survivor," ³ and (b) interest on United States Government bonds held in the joint names of Elmer and Ida. The funds deposited in those bank accounts and with which the Government bonds were purchased were derived entirely from Elmer's earnings.

The returns filed by Charles and Elmer for 1942 through 1945 were their separate returns; they were not intended by any of the spouses to be, nor were they, joint returns with Anna and Ida, respectively.

On or about August 9, 1946, Charles and Anna, and Elmer and Ida sold the Williams St. property. The sale was made subject to a purchase money mortgage in the principal amount of $ 27,250, plus interest thereon, which mortgage ran in favor of the four vendors as mortgagees. There were subsequent defaults on the mortgage and, as of December 8, 1951, the mortgage debt (including interest) amounted to $ 26,576.06. To satisfy that debt the property was sold for $ 31,000 at a foreclosure sale to Anna and Arlington, who took title as joint tenants on December 11, 1951.

One-half of the $ 26,576.06 mortgage debt ($ 13,288.03) was, on December 11, 1951, credited against the $ 31,000 sales price payable by Anna and Arlington. Of the $ 13,288.03 credited against the sales price, $ 6,644.01 (i. e., one-half) represented Charles' interest in the mortgage debt. An additional $ 15,853.03 of the sales price had been previously paid on December 3, 1951, with a bank treasurer's check drawn that day to the order of the mortgage trustee and obtained by Anna with funds derived from the redemption of United States Government bonds which had been purchased with Charles' earnings. (A second bank treasurer's check for $ 3,693.08 was obtained on December 3 by Anna, payable to herself, with funds derived from the same Government bonds and, on December 11, $ 693.08 of the proceeds of that check was deposited in a joint checking account standing in the names of Anna and Arlington.) Arlington gave no consideration for his joint interest in the Williams St. property.

On both December 3 and December 11, 1951, Charles' liability for tax deficiencies and fraud penalties for 1942 through 1946 totaled $ 24,565.86 ($ 25,686.43 deficiencies plus $ 11,193.90 fraud penalties less $ 12,314.47 paid thereon). Immediately after the drawing by Anna of the two treasurer's checks on December 3, and use of the $ 15,853.03 check in payment of part of the purchase price on the Williams St. property, Charles' assets consisted of (a) 25 per cent interest in the mortgage debt on the Williams St. property, the value of which interest was not in excess of $ 6,644.01; (b) $ 116.11, representing a one-third interest in bank deposits held in trust for Charles, Anna, and Arlington, as joint tenants with right of survivorship, subject to order of each; and (c) a joint and several life estate with Anna (to terminate upon the death of the survivor) in their aforementioned residence at 5215 Old Frederick Road, ⁴ the value of which interest we are not able to determine from the record and which interest was held by Charles at the time respondent mailed the deficiency notice in Docket No. 45014 to Arlington. Immediately after Charles' interest in the mortgage debt was credited against the purchase price of the Williams St. property, on December 11, his assets were not in excess of those listed in parts (b) and (c) of the preceding sentence. Respondent, by failing to prove the value of Charles' joint life interest in the residence has not sustained his burden of proving that Charles was insolvent either before or immediately following the transfers to Arlington.

On August 9, 1950, Elmer and Ida, tenants by the entirety of their aforementioned residence at 4808 Coleherne Road, conveyed that residence to a straw man who reconveyed it as follows: Undivided one-half interest to Elmer and Ida, as tenants by the entirety, and the remaining undivided one-half interest to Lillian and between the parties as joint tenants and not as tenants in common. The interest thus given to Lillian was a gift, of which Elmer was donor of one-half. In 1952, a sale of that property had been negotiated for $ 20,100 but was prevented by the placing of a lien thereon by the Government. The assessed value of the property in 1953 was $ 9,180. The fair market value of the property on August 9, 1950, was $ 16,000 and the fair market value of the interest therein given Lillian by Elmer (one-half of an undivided one-half) was $ 4,000.

On December 11, 1951, Elmer received a check for $ 13,288.03 in payment of his and Ida's one-half interest in the aforementioned mortgage debt on the Williams St. property. He endorsed that check and gave it to Ida who, in turn, gave it to Lillian. Thereupon Lillian, on December 14, 1951, deposited $ 12,788.03 of that check in an account in the Royal Oak Perpetual Association of Baltimore City, which account stood in the name of "Lillian G. Keizer, in trust for self and Ida M. Lautenberger, joint owners, subject to order of either." Lillian gave no consideration for her interest in those deposited funds, which interest constituted a gift from Elmer.

On both August 9, 1950, and December 14, 1951, Elmer's liability for tax deficiencies and fraud penalties for 1942 through 1946 totaled $ 23,629.98 ($ 24,783.60 deficiencies plus $ 10,890.62 fraud penalties less $ 12,044.24 paid thereon). Immediately after conveyance of the one-half interest in 4808 Coleherne Road to Lillian on August 9, 1950, Elmer's assets consisted of (a) one-half of the retained half interest in 4808 Coleherne Road, which 25 per cent interest was of a value not in excess of $ 4,000; (b) a 25 per cent interest in the mortgage debt on the Williams St. property of a value not in excess of $ 6,644.01; and (c) $ 48.09, representing a one-third interest in bank deposits held in trust for Elmer, Ida, and Lillian, as joint tenants with right of survivorship, subject to order of each. Immediately after the December 14, 1951, deposit, in the joint account of Ida and Lillian, of part of the proceeds of the mortgage debt on the Williams St. property, Elmer's assets consisted of (a) the $ 4,000 interest in 4808 Coleherne Road; and (b) $ 54.78, representing a one-third interest in the bank deposits described in part (c) of the preceding sentence. Elmer was insolvent both immediately before and immediately after his August 9, 1950, and December 14, 1951, gifts to Lillian.

OPINION.

Our attention is first directed to determination of the joint return issues raised in Docket Nos. 45015 and 45017, to wit, whether the returns filed by Charles R. Brown and Elmer L. Lautenberger for 1942 through 1945 were, in fact, joint returns with their respective wives, Anna and Ida, thereby making the latter jointly and severally liable with their husbands for the deficiencies and fraud penalties admittedly due from Charles and Elmer for those years. The applicable provision of the Internal Revenue Code of 1939 is printed in the margin. ⁵

In their brief, petitioners Anna and Ida for the first time contend that, as regards them, the 3-year statute of limitations in section 275 (a) of the 1939 Code has run for 1942 through 1945. However, since they failed to raise that issue anywhere in the pleadings it need not be considered by us. R. G. Robinson, 12 T.C. 246">12 T. C. 246, affd. (C. A. 5) 181 F. 2d 17; United Business Corporation of America, 19 B. T. A. 809, 831, affd. (C. A. 2) 62 F. 2d 754, certiorari denied 290 U.S. 635">290 U.S. 635. On the other hand, petitioners properly pleaded, but did not press the point on brief, that in any event respondent erred in asserting them to be liable for the fraud penalties determined for 1943 through 1945. It is clear, however, that if those returns were in fact joint, the petitioners are jointly and severally liable with their husbands for the admitted fraud penalties applicable thereto, even though they personally may be innocent of any wrongdoing. Myrna S. Howell, 10 T.C. 859">10 T. C. 859, affirmed per curiam (C. A. 6) 175 F.2d 240">175 F. 2d 240.

We come now to the question in chief, whether the returns were separate or joint. This is a question of fact in the determination of which the intent of the spouses must be considered. Myrtle O. Calhoun, 23 T. C. 4. As we stated in Elsie S. Bour, 23 T. C. 237, "there must be a mutual intent to claim the benefits of a joint return before either spouse becomes jointly and severally liable." Respondent's determination that the returns were joint is prima facie correct and petitioners bear the burden of proving that respondent erred in that determination. Myrna S. Howell, supra.

After careful consideration of the entire record we hold that petitioners Anna and Ida have successfully borne their burden of proving that the returns filed by Charles and Elmer for 1942 through 1945 were separate returns and were neither intended to be, nor were in fact, joint returns with the respective petitioners. The facts pertaining to the filing of these returns have been fully stated in our Findings of Fact and on the strength of these facts we made an ultimate finding that "The returns filed by Charles and Elmer for 1942 through 1945 were their separate returns; they were not intended by any of the spouses to be, nor were they, joint returns with Anna and Ida, respectively." This finding has the effect to settle this issue in favor of petitioners and we deem it unnecessary to restate the facts upon which this holding is based.

The final issues for our consideration involve the transferee liability of petitioners Arlington (Docket No. 45014) and Lillian (Docket No. 45016) for the 1942 through 1946 deficiencies and fraud penalties of their respective fathers, Charles and Elmer. The applicable provisions of the 1939 Code are printed in the margin. ⁶

Arlington and Lillian argued that since the deficiency notices charging them with secondary liability as transferees are predicated upon the primary "joint liability" of Charles and Anna, and Elmer and Ida, respectively, they cannot be held liable as transferees to any extent unless respondent proves that Anna (as well as Charles) and Ida (as well as Elmer) are liable for the deficiencies and penalties involved. This argument is without merit. The deficiency notices predicate petitioners' transferee liability upon the joint and several liability of the alleged transferors, since the notices relate to deficiencies and penalties determined to be due from Charles and Anna, and Elmer and Ida, by reason of returns treated by respondent as their joint returns. Sec. 51 (b) of the 1939 Code. Consequently, the purport of those notices is that (a) since either Charles or Anna or both are primarily liable for the deficiencies and penalties involved in Docket No. 45014 and (b) since either Elmer or Ida or both are primarily liable for the deficiencies and penalties involved in Docket No. 45016, then Arlington and Lillian, respectively, are secondarily liable for those deficiencies and penalties to the extent that they are transferees (within the meaning of section 311 of the 1939 Code) of the ones primarily liable.

Petitioners Arlington and Lillian bear the burden of proving that respondent erred in determining that their alleged respective transferors are liable for the deficiencies and penalties involved. Sec. 1119 (a) of the 1939 Code; ⁷Rule 32, Tax Court Rules of Practice; Kizzie Gordon, 27 B. T. A. 377. They have, however, been relieved of that burden as regards Anna and Ida by respondent's abandonment, on brief, of his determinations that they are transferees of Anna and Ida. On the other hand, petitioners have not contested respondent's determinations of the deficiencies and penalties owed by their alleged transferors, Charles and Elmer, for 1942 through 1946. As a result respondent's determinations in that respect are accepted as correct. We need only decide, therefore, whether, and to what extent, Arlington and Lillian are transferees of Charles and Elmer, respectively.

The burden of proving transferee liability rests upon respondent. Sec. 1119 (a), supra. To discharge the burden he must show that there was a gratuitous transfer of assets from the transferor to the alleged transferee and that the transferor was either insolvent at the time of, or was rendered insolvent by, that transfer. J. Warren Leach, 21 T. C. 70; Leetonia Furnace Co., 23 B. T. A. 979; see Terrace Corporation, 37 B. T. A. 263, 269. In determining whether the transferor was insolvent his liability for Federal income taxes and penalties, even if unknown at the time of the transfer, must be taken into account, J. Warren Leach, supra, but his assets on hand at that time which respondent proves were of such a nature that they could not have been reached to satisfy transferor's tax liability are not to be included in the computation. George M. Newcomb, 23 T.C. 954">23 T. C. 954; see Flack's Annotated Code of Maryland, art. 39B, sec. 1; see also Louise Noell, 22 T.C. 1035">22 T. C. 1035, 1043.

Regarding the extent of the transferee's liability, he is retroactively liable for the unpaid taxes and penalties of his transferor for the year of transfer and prior years, even though the transferor's tax liability was unknown at the time of the transfer. However, his liability for such taxes and penalties does not exceed the lesser of (1) the assets received by him from the transferor; (2) the difference between transferor's liability and transferor's assets on hand at the time respondent resorts to the transferee for satisfaction of that liability (reduced by the amount of such assets which respondent proves could not be reached to satisfy transferor's liability). Healy v. Commissioner, 345 U.S. 278">345 U.S. 278, 283, 284, see footnote 16; Anne Gatto, 20 T. C. 830; Terrace Corporation, supra;George M. Newcomb, supra.

Respondent seeks to hold Arlington liable for a portion of Charles' deficiencies and penalties on the basis of certain alleged transfers of assets made by Charles on December 3 and December 11, 1951. Both before and immediately after the transactions of those dates Charles' assets included, among other things detailed in our findings, a joint and several life estate with Anna in their residence at 5215 Old Frederick Road, Catonsville, Maryland. Charles' joint interest in that life estate was subject to respondent's claims for deficiencies and penalties and respondent has provided us with no reasons for his failure to levy thereon. Cannon v. Nicholas, (C. A. 10) 80 F. 2d 934; Flack's Annotated Code of Maryland, art. 83, secs. 1, 12; Fladung v. Rose, 58 Md. 13">58 Md. 13; Eder v. Rothamel, 202 Md. 189">202 Md. 189, 95 A. 2d 860; 1 American Law of Property, sec. 2.17; see George M. Newcomb, supra.Yet there is no evidence in the record of these proceedings bearing upon the value of Charles' joint life interest and we are unable even to hazard estimation of that value. Cf. Alfred W. Barber, 19 T. C. 600, 604. Respondent, consequently, has failed to carry his burden of proving that Charles either was insolvent before, or was rendered insolvent by, the transfers in question. Terrace Corporation, supra.Under these circumstances Arlington may not be held liable as Charles' transferee. See Burnet v. Houston, 283 U.S. 223">283 U.S. 223. ⁸

Respondent seeks to hold Lillian liable for a portion of Elmer's deficiencies and penalties on the basis of certain alleged transfers of assets made on August 9, 1950, and December 14, 1951. On each of those dates Elmer's unpaid deficiencies and penalties totaled $ 23,629.98. Elmer was insolvent both immediately before and after the alleged transfers ⁹ and there is nothing in the record to rebut the presumption that such insolvency continued until respondent mailed the deficiency notice herein which asserted transferee liability against Lillian. Terrace Corporation, supra.

Elmer and Ida owned, as tenants by the entirety, their residence at 4808 Coleherne Road, Catonsville, Maryland. On August 9, 1950, they transferred to Lillian a one-half joint tenancy interest in that property. Lillian gave no consideration for her interest; it constituted a gift to her, one-half of which (i. e., 25 per cent of the total interest therein) was from Elmer. We have found that the value of the property on the date of transfer, R. E. Burdick, 24 B. T. A. 1297, was $ 16,000 and that the value of the 25 per cent interest therein which Elmer gave Lillian was, consequently, $ 4,000. Respondent offered no evidence directly indicating the property's value on the transfer date (August 9, 1950), but the record does contain evidence of a bona fide negotiated sales price for the property in 1952 ($ 20,100) and the property's assessed value in 1953 ($ 9,180). Exercising our best judgment, we have determined the property's value on the transfer date from that evidence, bearing heavily against respondent upon whom the burden rests to prove such value. See Camp Wolters Enterprises, Inc., 22 T. C. 737; Andrew P. Solt, 183">19 T. C. 183.

Elmer and Ida jointly owned a half interest in a mortgage debt on the Williams St. property, mentioned in our findings. On December 11, 1951, Elmer received a check for $ 13,288.03 in payment for his and Ida's interest therein; he endorsed the check and gave it to Ida; Ida gave it to Lillian; and, on December 14, 1951, Lillian deposited $ 12,788.03 of the check's proceeds in a bank account standing in trust for her and Ida as joint owners. One-half of that deposit, or $ 6,394.01, constituted funds belonging to Lillian, Milholland v. Whalen, 89 Md. 212">89 Md. 212, 43 Atl. 43; Fairfax v. Savings Bank of Baltimore, 175 Md. 136">175 Md. 136, 199 Atl. 872; Walter E. Dunham, 27 B. T. A. 1068, and for which Lillian gave no consideration. We think, after considering the relationship of the parties involved and the facts and surrounding circumstances of the case, that Elmer intended to make a present gift to Lillian of that $ 6,394.01 portion of his interest in the mortgage debt and that Ida (to whom he initially gave the check received in payment of both his and Ida's joint interests in the debt) merely served as a conduit, between Elmer and Lillian, of the $ 6,394.01. ¹⁰Blanche S. Ross, 28 B. T. A. 39; Berman v. Lechner, 193 Md. 177">193 Md. 177, 66 A. 2d 392; Curley v. Wolf, 173 Md. 393">173 Md. 393, 196 Atl. 285. Consequently, we have found that the $ 6,394.01 was a gift from Elmer to Lillian.

Lillian contends that Elmer gave the $ 6,394.01 to Ida in partial payment for various loans, totaling $ 12,000, which Ida made Elmer for use in his business. No written record was ever made of these alleged loans nor was interest paid thereon; the only evidence thereof was Elmer's testimony at the hearing. We are not convinced, on the basis of the record, that such loans were in fact ever made. However, even if Ida did advance $ 12,000 to Elmer the evidence reveals that such funds were accumulated from Elmer's earnings over which Ida was given custody. In other words, Elmer was merely using his own accumulated earnings in the business. Consequently, even should we hold that Elmer intended to give the $ 6,394.01 to Ida, and that Ida independently decided to give it to Lillian, Lillian would still be subject to transferee liability thereon since neither she nor Ida gave any consideration for that sum. United States Trust Co. of New York, 16 T.C. 671">16 T. C. 671, 676.

In view of the above we hold that Lillian is liable, as transferee, for Elmer's deficiencies and penalties to the extent of $ 10,394.01, which represents gifts to her from Elmer of (a) a $ 4,000 interest in the 4808 Coleherne Road property and (b) $ 6,394.01 of the proceeds derived from the aforementioned mortgage debt.

Decisions will be entered under Rule 50.

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Footnotes

• 1. The following proceedings are consolidated herewith: Anna C. Brown, Docket No. 45015; Lillian Gertrude Keizer, Transferee, Docket No. 45016; Ida M. Lautenberger, Docket No. 45017.↩

• 1. The amount of gross↩ rentals included by each husband, in computing net partnership income on his 1945 returns, which is attributable to Anna or Ida (as the case may be) is $ 144 on the original return and $ 150.25 on the amended return (50 per cent of column B).

• 1. Return not in evidence.↩

• 2. It was stipulated that the amounts of interest on those deposits for the years 1942 through 1945 were, respectively, 0, $ 98.52, $ 144.72, and $ 236.10. It is not clear, however, whether all or only a part of such interest was included in the interest income reported for each year.↩

• 1. Return not in evidence.↩

• 3. It was stipulated that the amounts of interest on those deposits for the years 1942 through 1945 were, respectively, $ 59.24, $ 54.90, $ 286.20, and $ 381.74. It is not clear, however, whether all or only a part of such interest was included in the interest income reported for each year.↩

• 4. On January 31, 1946, Charles and Anna had conveyed their residence to a straw man, who reconveyed the above-mentioned joint and several life estate to them with remainder over, in fee simple, to Arlington F. Brown and Ronald Charles Brown (their grandson) as tenants in common.↩

• 5. SEC. 51. INDIVIDUAL RETURNS.

  (b) Husband and Wife. -- A husband and wife may make a single return jointly. Such a return may be made even though one of the spouses has neither gross income nor deductions. If a joint return is made the tax shall be computed on the aggregate income and the liability with respect to the tax shall be joint and several. No joint return may be made if either the husband or wife is a nonresident alien or if the husband and wife have different taxable years. The status of individuals as husband and wife shall be determined as of the last day of the taxable year.

  [The above is the wording of the section as effective for the taxable years 1944 and 1945. For the taxable years 1942 and 1943 the section was, in substance, the same except that it did not contain the provisions appearing immediately after the word "alien" in the next to last sentence above, and did require that the husband and wife be living together.]↩

• 6. SEC. 311. TRANSFERRED ASSETS.

  (a) Method of Collection. -- The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this chapter (including the provisions in case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds):

  (1) Transferees. -- The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this chapter.

  * * * *

  Any such liability may be either as to the amount of tax shown on the return or as to any deficiency in tax.↩

• 7. SEC. 1119. PROVISIONS OF SPECIAL APPLICATION TO TRANSFEREES.

  (a) Burden of Proof. -- In proceedings before the Board the burden of proof shall be upon the Commissioner to show that a petitioner is liable as a transferee of property of a taxpayer, but not to show that the taxpayer was liable for the tax.↩

• 8. It is noted that respondent's failure to prove the value of Charles' aforementioned joint life interest would also render it impossible to determine the extent of transferee liability since Charles retained that interest up to the time respondent mailed the deficiency notice to Arlington in this case and a transferee's liability may not, as discussed above, exceed the difference between transferor's liability and transferor's vulnerable assets on hand at the time respondent resorts to the transferee. Healy v. Commissioner, 345 U.S. 278">345 U.S. 278, 283, 284, see footnote 16; Anne Gatto, 20 T. C. 830; Terrace Corporation, 37 B. T. A. 263, 269↩.

• 9. It is noted that on both transfer dates Elmer's assets included: an interest, as a tenant by the entirety with his wife, in 4808 Coleherne Road, Catonsville, Maryland; and a one-third interest in a bank account held in trust for him, Ida, and Lillian, see Milholland v. Whalen, 89 Md. 212">89 Md. 212, 43 Atl. 43; Fairfax v. Savings Bank of Baltimore, 175 Md. 136">175 Md. 136, 199 Atl. 872; Walter E. Dunham, 27 B. T. A. 1068. Under Maryland law the aforementioned do not constitute such interests in property as may be reached by Elmer's creditors to satisfy his separate debts, Schwarz v. United States, (C. A. 4) 191 F. 2d 618; Fairfax v. Savings Bank of Baltimore, supra; and, as a consequence, respondent could not resort to those interests in satisfaction of Elmer's Federal tax liability. Raffaele v. Granger, (C. A. 3) 196 F. 2d 620; United States v. Hutcherson, (C. A. 8) 188 F.2d 326">188 F. 2d 326. Therefore, those interests must be excluded in computing Elmer's financial condition as of the transfer dates. George M. Newcomb, 23 T. C. 954; Louise Noell, 22 T. C. 1035, 1043↩. Even, however, were they included in computing Elmer's financial condition it is clear that Elmer would still have been insolvent prior, as well as subsequent, to the transfer dates.

• 10. It was by no means unusual for Elmer to give Ida initial possession of the check in view of the fact that one-half of the check's proceeds represented payment to Ida for her↩ interest in the mortgage debt.