DocketNumber: Docket No. 217-81.
Filed Date: 12/3/1987
Status: Non-Precedential
Modified Date: 11/20/2020
From 1967 to 1978, petitioner advanced to her son and his wholly owned corporation sums of money which were used in part to purchase business real property. Petitioner hoped to be repaid according to her so's ability to do so. Prior to receiving a notice of termination assessment, petitioner's son and his corporation conveyed property to petitioner purportedly as repayment.
MEMORANDUM FINDINGS OF FACT AND OPINION
WHITAKER,
Additions to Tax | ||||
Section | Section | Section | ||
Year | Amount | 6651(a)(1) 2 | 6653(a) | 6654 |
1976 | $ 25,401 | $ 6,350 | $ 1,270 | $ 948 |
1977 | 138,401 | 34,600 | 6,920 | 4,930 |
1978 | 103,453 | -- | 5,173 | -- |
1979 | 146,901 | -- | -- | -- |
TOTAL | $ 414,156 | $ 40,950 | $ 13,363 | $ 5,878 |
The issues for decision are:
(1) Whether petitioner is liable under
(2) Whether the transfer of a parcel of real property by Captains Club International, Inc. (CCI) constitutes a transfer by Ruth for purposes of
(3) the date from which any interest will be assessed against petitioner.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation and attached exhibits are incorporated herein by this reference. At the time she filed her petition, *597 petitioner resided at 135 East Seminole Drive, Venice, Florida.
On March 25, 1980, a notice of termination assessment was issued to Ruth for the year 1979 in the amount of $ 269,775. This amount was reduced to $ 146,901 by notice dated May 22, 1980. On October 7, 1980, a notice of jeopardy assessment was issued to Ruth for the years 1976 through 1978. A notice of transferee jeopardy assessment for the amounts determined against Ruth for his 1976 through 1979 years was issued to petitioner on that same date. On December 4, 1980, a statutory notice of deficiency was issued to Ruth for the years 1976 through 1978. On December 17, 1980, a statutory notice of deficiency was issued to Ruth for 1979.
On May 19, 1985, decisions were entered in this Court establishing Ruth's liability for Federal income tax and additions to tax as follows:
Additions to Tax | ||||
Section | Section | Section | ||
Year | Tax | 6651(a)(1) | 6653(a) | 6654 |
1976 | $ 22,152.00 | $ 5,538 | $ 1,108 | $ 824 |
1977 | 96,451.00 | 24,113 | 4,823 | 3,432 |
1978 | 29,555.75 | -- | 1,478 | -- |
1979 | 10,466.00 | -- | 523 | -- |
TOTAL | $ 158,624.75 | $ 29,651 | $ 7,932 | $ 4,256 |
Ruth's outstanding tax liability was later reduced by $ 32,702 upon the seizure and October 28, 1982, sale of his 32-foot Excalibur boat. *598
From March 23, 1977, until January 2, 1979, Ruth was involved in the purchase of several parcels of real property in Sarasota, Chadwick, and Charlotte Counties, Florida. Among these parcels were:
Date | Parcel | Purchase Price |
3/23/77 | Lot 827, Englewood Gardens | $ 64,000 |
Unit #4 (lot 827) | ||
4/8/77 | Lot 828, Englewood Gardens | 35,000 |
Unit #4 (lot 828) | ||
11/14/77 | Lot 792, Englewood Gardens | 15,000 |
Unit #3 (lot 792) | ||
3/1/78 | All or part of each of Lots 10-13, | 218,000 |
block 9, in Charlotte County, | ||
Florida (CCI property) | ||
3/29/78 | Lot 25, Block 9, Chadwich Beach | 20,000 |
Charlotte County, Florida | ||
(Chadwich Beach property) | ||
1/2/79 | Lots 12-18, Block 9, Chadwich | 200,000 |
Subdivision, Charlotte County, | ||
Florida (Leisure Inn property) |
The CCI and Chadwick Beach properties were purchases subject to outstanding mortgages in the amounts of $ 123,000 and $ 6,948, respectively. Ruth purchased the Leisure Inn property utilizing a purchase money mortgage of $ 145,000. Lots 827, 828, and 792, which were unencumbered, were titled in the names of Stephen L. Ruth and Eileen Borg, as joint tenants with right of survivorship, although Ruth furnished the entire consideration for their purchase.
Ruth's involvement with the purchase of the CCI property *599 was in his capacity as sole shareholder of CCI, which operated a restaurant and employed approximately 45 persons, including a full-time manager. Ruth ate sole meals at CCI and had CCI employees run some personal errands for him. Although CCI lost money, it operated for more than 1 year until the property was transferred by quitclaim deed to petitioner on March 28, 1979. On that same date, Ruth transferred the Chadwick Beach and Leisure Inn properties by quitclaim deed to petitioner. Petitioner recorded all three deeds on April 11, 1980.
Petitioner gave Ruth sums of money from time to time between 1967 and 1978. The sums given him during the first few years of this period were for his college education and were not intended to be repaid. Neither did petitioner intend to be repaid money sent to Ruth through the Swiss embassy while he was imprisoned in Cuba. Petitioner hoped that Ruth would repay the sums which she later gave him when he was able to do so although she would never have taken him to court seeking repayment.
The only records of the sums forwarded to Ruth by petitioner were notations in petitioner's savings account passbook designating which withdrawals were advanced *600 to him. The notations did not designate these advances as loans, nor was any distinction in petitioner's passbook made between advances for which petitioner desired to be repaid and those for which she did not. 3 Ruth intended the transfer of the Chadwick Beach and Leisure Inn properties to petitioner to be in partial payment of these advancements. He also repaid approximately $ 3,000 shortly after the transfer of the two properties. Neither petitioner nor Ruth knew the exact amount petitioner had advanced to him, although the total was in excess of the net equity of the property transferred.
Immediately before the transfer, Ruth owned assets and owed debts as follows:
Fair Market | Encumbrances | |
Asset | Value | (including taxes) |
Chadwick Beach | $ 20,000 | $ 6,948.00 |
Leisure Inn | 200,000 | 145,000.00 |
Lockheed N403T | 65,896 | -- |
Excalibur boat | 32,702 | -- |
50% interest | ||
Lot 792 | 7,500 | -- |
50% interest | ||
Lot 827 | 32,500 | -- |
50% interest | ||
Lot 828 | 17,500 | -- |
1976 taxes 4*601 | -- | 29,622.00 |
1977 taxes | -- | 128,819.00 |
1978 taxes | -- | 31,033.75 |
1979 taxes 5 | -- | 10,989.00 |
Total 6 | $ 375,598 | $ 352,411.75 |
The transfer of the Chadwick Beach and Leisure Inn properties to petitioner reduced the fair market value of Ruth's assets to *602 $ 155,598, while the total of Ruth's liabilities, consisting solely of Federal income tax liability, was reduced to $ 200,463,75. Although the transfer left Ruth insolvent, he continues to express his desire to someday repay all his mother's advances.
OPINION
Petitioner concedes that the transferor, her son Steven L. Ruth, is liable for income taxes and additions to ax for the years 1976 through 1979. Petitioner's primary defense is that the conveyance of Ruth's interest in these parcels of real property to her was in satisfaction of an antecedent debt. Petitioner further claims that liability may not be imposed upon her under
For respondent to prevail, he must show a transfer of property,
The parties agree that the first three elements are present: Ruth transferred the Chadwick Beach and Leisure Inn properties to petitioner on March 28, 1979, the net equities 9 of the parcels were $ 13,052 and $ 55,000, respectively, and that Ruth's tax liability for the years 1976 through 1979, as finally determined, including additions to tax, but not including any accrued interest, is $ 200,463,75. The *606 remaining issues to be resolved are whether Ruth was insolvent and whether the transfer from Ruth to petitioner was for adequate consideration.
In determining whether a transferor is insolvent, we once again look to state law. See
The final requirement is the adequacy of consideration. A transfer of adequate consideration leaves a transferor (and therefore his creditors) in the same position from a standpoint of solvency as before the exchange; such a transfer is therefore not fraudulent. Adequacy of consideration is also a question of State law. Cf.
In
it appears that [the debt] was not recognized or acknowledged as a legal indebtedness or obligation by the parties, until the grantor was threatened with financial troubles or became insolvent * * *. But the debt which constitutes the consideration must be an obligation for which the debtor is legally liable and which he could be compelled to pay by action. See also
The testimony of petitioner and Ruth does not convince us that any advance which petitioner might have made to Ruth created an unconditional obligation on Ruth to repay the sum on a date certain. 14 Petitioner testified that those advances which she made to Ruth while he was attending college were not expected to be repaid. Petitioner characterized money that she sent to Cuba for her son as "not exactly a loan but I hoped that he would pay me back." Neither petitioner nor Ruth knew how much petitioner had advanced to Ruth, and at one point petitioner testified that she kept an account (such as it was) of the amounts she advanced to Ruth only to show him how much she had spent on him since he left home. Petitioner testified that she would never have taken Ruth to court in order to have the loans repaid. Petitioner has failed to show what amount, *611 if any, of these advances constituted loans. Respondent having made a prima facie case against petitioner, the burden of going forward with the evidence falls upon her. She has failed in her attempt to sustain this burden.
Respondent also contends that we should disregard CCI as a corporate entity and find that its transfer of the CCI property to petitioner was in reality a transfer by Ruth. However, *612 the doctrine of corporate entity, while not inviolate, is entitled to more deference than respondent would afford it. As the Supreme Court has said:
Whether the purpose [of the corporate entity doctrine] be to gain an advantage under the law of the state of incorporation or to avoid or to comply with the demands of creditors or serve the creator's personal or undisclosed convenience, so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity. * * * [
Once again, since the precise issue is not the validity of CCI for Federal income tax purposes, but whether there was a fraudulent conveyance, we look to state law. Respondent calls to our attention the fact that Ruth made personal use of some corporate assets, was the only corporate officer, 15 and made all major corporate decisions. Respondent concludes that the transfer of the CCI property at a time when CCI was losing money perpetrated a fraud upon Ruth's creditors, and on the creditors of CCI. 16 It is necessary to decide whether *613 or not the transfer was a fraud on the creditors of CCI, since CCI had no outstanding tax liability and we find it inappropriate to disregard it as a corporate entity.
The Florida courts have held that to justify the piercing of the corporate veil:
there should be a preliminary showing that the corporation is in actuality the alter ego of the stockholders and that it was organized after organization was employed by the stockholders *614 for fraudulent or misleading purposes, or in some fashion that corporate property was converted or the corporate assets depleted for the personal benefit of the individual stockholders, or that the corporate structure was not bona fidely established or, in general, that property belonging to the corporation can be traced into the hands of the stockholders. [
See also
While respondent has shown that Ruth took advantage of his position as sole officer and shareholder of CCI, we do not find that his behavior as regards the corporation rises to that level of improper conduct contemplated by the Florida courts. The CCI property was purchased in March 1978 in the name of CCI, and although petitioner was not sure whether the money was disbursed went to Ruth or CCI, the purpose to which the money *615 was to be put is clear: to purchase the CCI property. Further, CCI was clearly not a sham corporation. Although it lost money, it carried on business for more than 1 year with a full time manager and as many as 45 employees. The fact that Ruth ate some meals at CCI and its employees ran personal errands for him is hardly a purpose for corporate existence so improper as to justify piercing the veil.
The parties are also in dispute as to the point at which interest begins on any liability finally redetermined. In
where the amount of the transferred assets is less than the amount of the creditor's claim, and where, in order to make the creditor whole, it may be necessary to find some liability against the transferee
We considered this precise question under Florida law in
However, interest as a matter of state law runs only from the time of the transfer until the time respondent's statutory notice was issued. This distinction was recognized in
The Fifth Circuit recently faced this very question in
Reinforced by [
Therefore, interest accruing after the issuance of the statutory notice of liability is a matter of Federal law, to be determined in accordance with the provisions of the Internal Revenue Code.
Having so decided,
1. Includes assessed interest accrued up to the date the statutory notice as issued in the aggregate amount of $ 46,249.38. ↩
2. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue and all Rule references are to the Tax Court Rules of Practice and Procedure. ↩
3. We cannot on this record determine which of the advances item by item or in the aggregate fell into the category which petitioner hoped Ruth would repay. ↩
4. Tax liabilities for 1976 through 1979 represent Federal income taxes and additions to tax.
5. A transferee is retroactively liable for the transferor's taxes in the year of transfer and prior years.
6. Neither of the parties focused on the fact that at the time of the transfer Ruth owned all the stock of CCI and Vida Corporation which would have been subject to the claims of Ruth's creditors. Indeed, CCI's Federal income tax return for the fiscal year ending February 28, 1979, reveals stockholder's equity of almost $ 69,000. However, the parties' stipulation of Ruth's assets included stock in neither corporation. Because neither party raised the issue, we need not consider the question or the effect its resolution would have on the outcome of this case. In any event, we have no way of determining the fair market value of the stock in either corporation. ↩
7.
Every feoffment, gift, grant, alienation, bargain, sale, conveyance, transfer and assignment of lands, tenements, hereditaments, and of goods and chattels, or any of them, or any lease, rent, use, common or other profit, benefit or charge whatever, out of lands, tenements, hereditaments or goods and chattels, or any of them, by writing or otherwise, and every bond, note, contract, suit, judgment and execution which shall at any time hereafter be had, made or executed, contrived or devised of fraud, covin, collusion or guile, to the end, purpose of intent to delay, hinder of defraud creditors or others of their just and lawful actions, suits, debts, accounts, damages, demands, penalties or forfeitures, shall be from henceforth as against the person or persons, or bodies politic or corporate, his, her or their successors, executors, administrators and assigns, and every one of them so intended to be delayed, hindered or defrauded, deemed, held, adjudged and taken to be utterly void, frustrate and of none effect, any pretense, color, feigned consideration, expressing of use or any other matter or thing to the contrary notwithstanding; provided, that this section, or anything therein contained, shall not extend to any estate or interest in lands, tenements, hereditaments, leases, rents, uses, commons, profits, goods or chattels which shall be had, made, conveyed or assured if such estate shall be, upon good consideration and bona fide, lawfully conveyed or assured to any person or persons, or body politic or corporate, not having at the time of such conveyance or assurance to them made any manner of notice or knowledge of such covin, fraud or collusion as aforesaid, anything in this section to the contrary notwithstanding.
8. Respondent has filed notices of jeopardy and termination assessments against Ruth and numerous tax liens against Ruth individually and as nominee of certain corporations in which he was the sole shareholder. None of these efforts have met with success. Petitioner has not shown that any such efforts would have met with success; she did not address the matter on brief. We therefore find that respondent has proven this requirement to be satisfied. ↩
9. In computing the value of the assets transferred, encumbrances are substracted from the fair market value of the property.
10. See
11. Petitioner argues that her interest in the joint properties should be included in Ruth's assets for the purpose of determining his solvency. This argument assumes that a joint tenancy may not be partitioned except by voluntary act of the parties to the cotenancy; it further assumes that petitioner's interest may be reached by Ruth's creditors. We think that the Florida courts would hold that a "joint tenancy may * * * be severed involuntarily, as by an execution sale of any interest that is subject thereto * * *." 12 Fla. Jur. 2d Cotenancy and Partition section 8 (1979), as quoted in
The parties have stipulated that at the time of the transfer, Ruth owned a 50-percent joint tenancy interest with petitioner in three different parcels of real property. Only Ruth's interest in such property may be considered as an asset in applying the bankruptcy insolvency test since his creditors could not reach petitioner's interest in those properties.
12. See n. 6,
13. Our determination of insolvency makes it unnecessary to determine if Ruth's transfer was made with the intent to defraud the Government. See
14. Even if such advances could be characterized as loans, they are at most loans payable only when Ruth was able to do so. Under the majority view, which had been adopted by two divisions of the Florida Court of Appeals, such a debt is enforceable, but only upon proof of the debtor's ability to repay.
15.
(1) The officers of a corporation shall consist of a president, a secretary, and a treasurer, * * *.
(3) Any two or more offices may be held by the same person. ↩
16. Respondent has not argued that the transfer of the CCI property perpetrated a fraud upon Ruth's creditors by reducing the value of Ruth's CCI stock. Rather, respondent argued only that CCI's corporate veil should be pierced, an argument which we reject. While certain inferences may be drawn concerning the value of Ruth's CCI stock (see n. 6
17. The 12-percent rate is equally applicable to prejudgment interest.
Commissioner v. Stern ( 1958 )
george-d-patterson-district-director-of-internal-revenue-for-district-of ( 1960 )
Town of Longboat Key v. Carl E. Widell & Son ( 1978 )
Bergen Brunswig Corp. v. STATE, ETC. ( 1982 )
Taylor v. New Hampshire Ins. Co. of Manchester ( 1986 )
Advertects, Inc. v. Sawyer Industries ( 1955 )
Sidney Kreps v. Commissioner of Internal Revenue ( 1965 )
James P. Neill v. Robert L. Phinney, District Director of ... ( 1957 )
Aztec Motel, Inc. v. State Ex Rel. Faircloth ( 1971 )
Moline Properties, Inc. v. Commissioner ( 1943 )
Dania Jai-Alai Palace, Inc. v. Sykes ( 1984 )