DocketNumber: Docket Nos. 30402-84, 30420-84
Judges: Korner,Chabot,Nims,Whitaker,Shields,Hamblen,Cohen,Jacobs,Wright,Parr,Williams,Wells,Simpson,Swift,Gerber
Filed Date: 10/26/1987
Status: Precedential
Modified Date: 10/19/2024
*151 M operated NCEA as a membership organization. M accepted deposits from members, acquired precious metals with such funds, and paid such members' bills in cash. M died in 1983. At his death, H, a coin dealer, and PL, a bank, were in possession of precious metals and cash held for M or for his clients. PL was subsequently appointed administrator of M's estate in Indiana. Members of NCEA filed claims against the estate, seeking return of the precious metals purchased by M on their behalf, and N, a bank in Colorado, commenced an action in a Federal court in Indiana seeking to determine the ownership of the funds. The Commissioner made jeopardy assessments against H and PL, as possessors of cash under
*897 In these consolidated cases, the Commissioner determined that petitioner Peoples Loan & Trust Co., as possessor of certain cash, had a deficiency in Federal income tax of $ 113,250 for 1983, and that petitioner Leon E. Hendrickson, as possessor of certain cash, had a deficiency in Federal income tax of $ 1,834,500.25 for 1983. The issue for our decision is whether petitioners are liable for such deficiencies under
*153 FINDINGS OF FACT
Some of the facts were stipulated, and those facts are so found.
At the time the petitions were filed in this case, petitioner Peoples Loan & Trust Co. (Peoples Loan) was a corporation whose principal place of business was in Winchester, Indiana, and petitioner Leon E. Hendrickson resided in Winchester, Indiana.
Peoples Loan is a financial institution regulated by the State of Indiana and the Federal Deposit Insurance Corporation. It has been in operation since 1901.
*898 During 1983, Mr. Hendrickson was a trader of gold and silver coins and bullion. He operated such business as a sole proprietorship under the name "Silver Towne." He became involved in the coin business part time in 1949. The coin business grew, and in 1967, he began working in such business full time. He operated the coin business from the basement of his home until 1982, when he moved into a new building next to his home. The new building was extremely secure and contained two vaults, which were equipped with heat- and motion-sensitive alarm systems.
Silver Towne had a numismatic coin department, which dealt in coins of interest to collectors, and a bullion department, which traded items*154 having value because of their precious metal content. The bullion department bought and sold silver bars, gold coins, and bags of silver and clad coins. In the coin business, a silver coin is considered to be a dime, quarter, or half-dollar minted by the United States before 1965 and having a silver content of 90 percent. A clad coin is a half-dollar minted between 1965 and 1970, with a 40-percent silver content. Each bag of coins sold by Silver Towne contained coins with a total face value of $ 1,000.
In March 1980, Larry Dale Martin took over the management of an organization known as the National Commodity Exchange (NCE). NCE was a membership organization designed to serve as a "warehouse bank" for its members. Members deposited funds with NCE and received receipts for such deposits. NCE purchased gold and silver and other precious metals with the funds obtained from its members. NCE maintained an account for each member, which contained the amount of such gold and silver with a value at the time of purchase equal to the member's deposits. All the reserves of NCE were invested in precious metals.
NCE also offered a bill-paying service to its members. Under such service, *155 members directed NCE to sell gold and silver held in their accounts in exchange for Federal Reserve notes and to use such notes to pay the bills of the members.
NCE described its primary purpose to be "protection. Protecting your wealth from the ravages of inflation and Federal Reserve System bank failures and protecting your privacy in your financial dealings." It claimed that its *899 bill-paying service allowed members to "pay * * * creditors without generating a paper trail in the Federal Reserve System which is traceable back to you."
In early 1983, Mr. Martin received a subpoena directing him to furnish certain records of NCE to a Federal District Court investigating the financial affairs of such organization. He refused to do so, contending that such records were personal and covered by his claim of a
In an effort to better preserve the privacy of the records, *156 Mr. Martin founded the National Commodities Exchange Association (NCEA) in April 1983 as a sole proprietorship. NCEA had the same purpose and offered the same services as did NCE. NCEA members entered into agreements with Mr. Martin, naming him as their agent for the purpose of buying and selling gold and silver. Such agreements, according to their terms, provided Mr. Martin with no ownership interest in the gold and silver, but only possession of funds entrusted to him by NCEA members. For its services, NCEA charged an annual membership fee and a transaction fee of $ 1 for each check written, deposit accepted, or amount paid out on behalf of its members.
In 1981, Mr. Martin met Mr. Hendrickson and began doing business with him, first through NCE and later through NCEA. In such dealings, Mr. Martin bought from and sold to Mr. Hendrickson silver and gold bullion, South African Krugerrands, bags of silver and clad coins, and other precious metals. Commodities sold to Mr. Martin were handled in three different ways. Sometimes, items sold to Mr. Martin were held at Silver Towne in his name and subject to his later instructions as to their disposition. Other such items were shipped*157 directly to Mr. Martin. Finally, some items sold to Mr. Martin were shipped to other persons designated by Mr. Martin. The last of these practices is known as "drop-shipping" and is a regular practice in the coin-trading business. Throughout Silver *900 Towne's dealings with Mr. Martin, it maintained separate ledger books to record the activity in his account.
On August 16, 1983, Mr. Martin executed a promissory note to Peoples Loan and obtained a loan of $ 150,000. To secure such loan, he gave Peoples Loan a security interest in 25 bags of silver coins.
On October 12, 1983, Mr. Martin died. He was a resident of Englewood, Colorado, when he died. At the time of his death, Peoples Loan held on behalf of Mr. Martin 25 bags of silver coins and $ 59,843.12 in cash, and Mr. Hendrickson held on behalf of Mr. Martin 435.48 bags of silver coins, 29.87 bags of clad coins, 54 Krugerrands, and $ 68,000.50 in cash.
On October 24, 1983, Peoples Loan filed papers in Randolph Circuit Court in Indiana requesting that it be appointed administrator of the estate of Mr. Martin. On October 27, 1983, a complaint was filed by Donna Mehring and Michael R. Storeim, as representatives of NCEA, *158 in Randolph Circuit Court. The complaint alleged that NCEA was an unincorporated association based in Englewood, Colorado. It further alleged that the assets held by Peoples Loan and Mr. Hendrickson on behalf of Mr. Martin were the property of the NCEA to which they should be transferred. The complaint was dismissed by the Randolph Circuit Court on April 11, 1984, after a finding that NCEA was "a mere alter ego or sole proprietorship of * * * Martin," and not a separate entity.
On November 14, 1983, a complaint was filed in Federal District Court in Indianapolis, Indiana, by the Exchange National Bank of Colorado (Exchange) against Peoples Loan, Mr. Hendrickson, and others. Exchange is the Colorado-appointed administrator of the Estate of Roy Dickson, a deceased NCEA member. The complaint sought seizure of the assets held by Peoples Loan and Mr. Hendrickson on Mr. Martin's behalf and appointment of a receiver to take custody of these assets until an accounting could be had and the assets distributed appropriately. On April 19, 1984, the United States as party defendant was joined as party to the proceedings. A motion of the United States to intervene and its complaint in intervention*159 in the same cause of action were filed on June 21, 1984. The *901 motion to intervene was granted by the court on June 17, 1985, at which time the United States was released as defendant and permitted to file its complaint in intervention. This Court has not been advised as to the disposition of this proceeding.
On November 16, 1983, the Randolph Circuit Court entered an order appointing Peoples Loan as the administrator of the Estate of Larry Dale Martin (the estate) in Indiana. Such order granted Peoples Loan limited authority to "take charge of and to preserve * * * [the property of the estate] until such time as the questions as to ownership may be judicially determined." During the course of the administration of the estate, approximately 400 NCEA members have filed claims against the estate seeking the return of assets held by Mr. Martin in their NCEA accounts. In addition, various actions have been filed during 1984 against Peoples Loan as administrator of the estate, claiming an interest in the NCEA accounts held by Mr. Martin at the time of his death.
On November 29, 1983, Peoples Loan, as administrator of the estate, took possession from Mr. Hendrickson of 0.48 *160 bags of silver coins, 54 Krugerrands, and one check in the amount of $ 68,000.50. Because Peoples Loan lacked the facilities to store the remaining assets of the estate, such assets were kept in Silver Towne's vaults.
On December 8, 1983, Mr. Hendrickson and Peoples Loan entered into a "storage contract" in which Mr. Hendrickson agreed to store property of the estate, including 460.48 bags of silver coins and 29.87 bags of clad coins. Such contract was approved by the Randolph Circuit Court on January 6, 1984. On December 16, 1983, an employee of Mr. Hendrickson signed a receipt for the assets of the estate being held at Silver Towne under such storage contract. Such receipt indicated that Mr. Hendrickson held 435 bags of silver coins and 29.87 bags of clad coins. On May 7, 1984, Peoples Loan filed a petition in Randolph Circuit Court, seeking to amend the storage contract to show that Mr. Hendrickson held only 435 bags of silver coins, and not 460.48 bags as indicated in the original storage contract. On January 13, 1984, an agent of Mr. Hendrickson purchased *902 insurance coverage in the amount of $ 3,600,000 in order to insure the coins held by him.
On December 19, 1983, *161 Peoples Loan, acting as administrator of the estate, filed an inventory listing the property of the estate. Such property included $ 68,000.50 in cash due Mr. Martin from Silver Towne, $ 59,843.12 in an NCEA checking account maintained at Peoples Loan, 54 Krugerrands with a total value of $ 22,233.96, 460.48 bags of silver coins worth $ 3,453,600, and 29.87 bags of clad coins with a total value of $ 89,610.
On April 13, 1984, the Internal Revenue Service made an assessment against Peoples Loan with respect to its tax year ended December 31, 1983, and sent it a notice and demand for payment of $ 113,250 as Federal income taxes. In a notice of jeopardy assessment and right of appeal, the IRS determined that under
On April 13, 1984, respondent also made an assessment against Mr. Hendrickson with respect to his 1983 tax year and sent him a notice and demand for payment of $ 1,834,500 as Federal income taxes. In a notice of jeopardy assessment and right of appeal, respondent determined that under
*903 On April 23, 1984, Mr. Hendrickson and Peoples Loan filed. separate requests for administrative review with respondent of the jeopardy assessments made against them. On May 24, 1984, the associate chief*163 of respondent's Appeals Office in Indianapolis, Indiana, notified petitioners that a review had found such assessments to be "reasonable under the circumstances."
On June 8, 1984, petitioners jointly filed an action with the Federal District Court for the Southern District of Indiana seeking review of respondent's jeopardy assessment under
On June 12, 1984, the Commissioner issued separate notices of deficiency to Mr. Hendrickson and to Peoples Loan, as possessors of certain cash. He determined a deficiency of $ 1,834,500.25 in Mr. Hendrickson's Federal income tax for 1983 as a possessor of certain cash, and he also determined a deficiency of $ 113,250 in Peoples Loan's Federal income tax for 1983 as a possessor of certain cash.
OPINION
The principal issue for our decision is whether petitioners are liable for deficiencies under
*164
For many years, there was no right to judicial review of whether the Commissioner had acted properly in making a jeopardy assessment.
As noted, even when an assessment is made under
To alleviate this problem of the Commissioner,
(1) as his, or (2) as belonging to another person whose identity the Secretary can readily ascertain and who acknowledges ownership of such cash,
(b) Rules for Assessing. -- In the case of any assessment resulting from the application of subsection (a) -- (1) the entire amount of the cash shall be treated as taxable income for the taxable year in which the possession occurs, (2) such income shall be treated as taxable at a 50-percent rate, and (3) except as provided in subsection (c), the possessor of the cash shall be treated (solely with respect to such cash) as the taxpayer for purposes of chapters 63 and 64 and
Although this Court has no authority to review jeopardy assessments (
Petitioners argue that
The Commissioner, on the other hand, argues that the readily identifiable person who acknowledges ownership of the cash must in fact be its
Contrary to respondent's position here, we have held that, in a proceeding which is properly before us under
Respondent further misconstrues the statute in holding that it requires the possessor to establish that the person who acknowledges ownership of the cash is in fact its
The identity of the person or persons by whom the cash is claimed in this case was readily ascertainable by the Commissioner. In our view, the phrase "readily ascertain" means that the Secretary can readily determine the identity of the person so as to be able to determine the existence and the amount of any tax deficiency as to him. The record establishes that the identity of the estate was readily ascertainable. Letters of administration were granted in the Martin estate in November 1983, five months before the assessments in this case. All*172 of the information relative to the creation of the estate and its handling of Martin's assets is a matter of public record in Randolph District Court. The estate has applied for and been assigned a taxpayer identification number by respondent, thus placing respondent on notice of its existence.
The fact that petitioners may be mistaken in their claims that the estate owns the cash is irrelevant. It seems beyond dispute that if petitioners had claimed ownership of the cash, themselves, the Commissioner could not have proceeded under
*173
In the case before us, unlike in
*909 Simpson,
Congress considered the jeopardy assessment procedures not well suited to situations in which the Commissioner has reason to believe that a tax is owing with respect to property but cannot determine the owner of such property. In such cases, the Commissioner is unable to associate such property with any particular person and therefore cannot determine the existence or amount of deficiency for an identifiable person. H. Rept. 97-760 (Conf.) (1982),
The petitioners argue that
In my view,
Moreover,
Under these circumstances, it is clear that the Commissioner cannot readily ascertain the owner of the cash. If the cash were transferred to Peoples Loan, and if the Commissioner made an assessment against it as administrator, he would encounter the risk that the Exchange National Bank or the alleged investors in NCEA would claim that the cash belonged to them and was not to be used to pay any deficiency claimed against Mr. Martin or his estate. The Commissioner does not know against whom to make a jeopardy assessment or to whom to issue a notice of deficiency. He cannot ascertain the true owner of the cash until the completion of protracted litigation, and Congress provided that the procedures of
1. George F. Daly and William G. Daly signed the petitions and briefs in this case, but they are not listed as counsel because they are not admitted to practice before this Court.↩
2. All statutory references are to the Internal Revenue Code of 1954 as in effect during the year in issue.↩
3. All references to cash herein also include, as cash equivalents, the gold and silver coins and bullion held by petitioners. After the briefs were filed in this case, the Commissioner adopted a temporary regulation which includes coins and precious metals within the definition of cash equivalents for purposes of
4. As noted in our findings of fact, prior to the assessments herein, certain persons, formerly clients of Mr. Martin, had come forward and asserted claims against the funds here in question, and it appears that more such former clients have made claims in the Martin administration proceedings since that time. The least we can say is that at the time of the assessments herein, there were a number of persons who were clearly identifiable on the public record and who were asserting claims to the funds. Petitioners obviously did not agree with such claims, but the statute does not require that they do so.↩
5. Although the notice of deficiency was subsequently determined to be invalid in