23 T.C. 954 (1955), 44938, Newcomb v. C. I. R.

Docket Nº:44938.
Citation:23 T.C. 954
Opinion Judge:LEMIRE, Judge:
Party Name:GEORGE M. NEWCOMB, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Attorney:Edward L. Weber, Esq., for the petitioner. Peter K. Nevitt, Esq., for the respondent.
Case Date:March 10, 1955
Court:United States Tax Court
 
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Page 954

23 T.C. 954 (1955)

GEORGE M. NEWCOMB, PETITIONER,

v.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

No. 44938.

United States Tax Court.

March 10, 1955

Edward L. Weber, Esq., for the petitioner.

Peter K. Nevitt, Esq., for the respondent.

Respondent determined liability against petitioner as transferee for income taxes and penalties determined against Lila G. Husted for the years 1944 to 1946, inclusive. On November 30, 1947, Lila G. Husted died in Canada, where she had resided since 1944. During the year 1947 decedent transferred to petitioner all of her interest in a retail shoe store which she operated in Detroit, Michigan, during the taxable years involved, as a sole proprietorship. Petitioner concedes the liabilities of the transferor but challenges his liability as transferee, alleging that the transfers did not render the transferor insolvent and that full consideration was paid for the assets transferred. At the time of decedent's death her assets in the United States were insufficient to discharge her Federal tax liabilities. Held:

1. Petitioner has failed to show the amount of consideration paid for the assets transferred to him by decedent.

2. The assets transferred by decedent to petitioner rendered her insolvent.

3. Respondent was not required to pursue the decedent's assets in a foreign jurisdiction before imposing liability against petitioner as transferee.

4. The value of the assets transferred to petitioner determined.

The respondent has determined liability for income tax and additions to tax against petitioner, as transferee, for the years and in the amounts as follows:

Penalty

Year Deficiency (25 per cent)

1944 $4,312.19 $1,078.05

1945 1,446.14 701.83

1946 7,505.89 1,876.47

1947 (Jan. 1-Nov. 30) 1,794.26

Page 955 The single issue presented is whether petitioner is liable as transferee of Lila G. Husted, who died November 30, 1947, or as transferee of the estate of Lila G. Husted, deceased, and, if so, to what extent. FINDINGS OF FACT. The stipulated facts are found accordingly. Petitioner is an individual and resident of Detroit, Michigan. Lila G. Husted, a citizen of the United States, died testate November 30, 1947, at the age of 84 years, at Morpeth, Ontario Province, Canada, where she had resided since 1944. She filed no Federal income tax returns for the taxable years 1944, 1945, and 1946, nor for the period January 1, 1947, until her death in that year. Prior to 1944 she resided in Detroit, Michigan. Upon the death of her husband in April 1942, Lila G. Husted, sometimes hereinafter referred to as the decedent, acquired sole ownership of a retail shoestore in downtown Detroit, Michigan, known as the Health Spot Shoe Shop. At that time the decedent was 79 years of age and had taken a relatively inactive interest in the business. In August 1942 the decedent appointed petitioner, a man of some 40 years' experience in the shoe business, as manager of the shoestore. This relationship between the decedent as proprietor and petitioner as manager continued through June 10, 1947. The Health Spot Shoe Shop sold only corrective shoes manufactured by the Health Spot Shoe Company under an exclusive franchise granted by the latter. The franchise for the exclusive right to sell the shoes in downtown Detroit was terminable upon 30 days' notice by either party. The Health Spot Shoe Company did all of the accounting, bookkeeping, and banking for Health Spot Shoe Shop. In the early part of 1947 petitioner became dissatisfied with his position as manager of the business and was considering seeking other employment because he felt that his job offered no future security. The decedent, who had moved to Canada in 1944 and had visited the business infrequently thereafter, had been well satisfied with petitioner's management and was concerned over the possibility of petitioner's leaving the business. The decedent had been advised by George E. Musebeck, president of Health Spot Shoe Company, which had some 1,500 other franchises, that because of the excellent location of the business in downtown Detroit it would be advantageous to Page 956 continue operation of the business. In view of the decedent's advanced years Musebeck encouraged the decedent to keep petitioner as manager and to make him a part owner of the business. On June 11, 1947, the decedent and petitioner entered into a written agreement. Recited therein as the motivating factors causing its execution were that Lila G. Husted, owner of Health Spot Shoe Shop, being of advanced age and no longer able to engage actively in the business, desired to enter into an arrangement which would provide an income for her remaining years and that the petitioner was desirous of insuring his future by obtaining an interest in the business. The parties agreed to form a co-partnership to be known as ‘ Health Spot Shoe Shop’ which was to continue until the death of the decedent. Each party was to contribute $1,000 cash as capital for carrying on the business. The agreement also provided that in consideration of the decedent's assigning all of her right, title, and interest in and to the stock, furniture, and fixtures, and other personal property of the shoe business owned by her to the partnership, petitioner assumed and agreed to pay one-half of the indebtedness then outstanding to the shoe manufacturer, Health Spot Shoe Company, which was stated to be the sum of $7,500, and all other accounts payable owed by the decedent in connection with the business. All the net profits thereof were to be divided equally between the decedent and petitioner with the provision that the decedent's withdrawals were to be limited to $100 weekly, the balance to be paid to a trustee to be used for discharging all debts and obligations incurred by decedent prior to the date of the agreement. It was further agreed that petitioner should have full charge and complete management of the affairs of the shoestore and that the only interest of the decedent was to share in the profits. Upon the death of the decedent her interest in the partnership would cease and all property thereof would be the sole property of the petitioner as survivor. On July 6, 1947, petitioner and decedent received a letter from Health Spot Shoe Company which provided in pertinent part as follows:

We wish to acknowledge the receipt of your partnership agreement dated the 11th day of June, 1947. We note from the agreement that each of you is to have an undivided one-half interest in the business as long as Mrs. Husted lives and that the present indebtedness to the Health Spot Shoe Shop is to be your joint obligation.

In August 1947 petitioner deposited $4,000 of his own funds with Health Spot Shoe Company in order to secure a 5 per cent discount on purchases of shoes for the partnership business. This sum was not carried on the partnership books as an asset or credited to petitioner's capital account until 1948, after the death of the decedent. Page 957 From June 11, 1947, until the decedent's death on November 30, 1947, petitioner managed the business and shares its profits with her pursuant to their agreement. The net work of Health Spot Shoe Shop on June 30, 1947, was $8,919.40. Although the books of account reflected assets of $19,279.21, of which $13,128 represented inventory for shoes, the inventory was overvalued in the amount of $3,500. The liabilities were $6,859.81. The net worth of Health Spot Shoe Shop on November 30, 1947, was $11,769.57. Although the books reflected assets of $23,254.70, of which $19,142.64 represented inventory for shoes, the inventory was overvalued by the amount of $3,500. The liabilities were $7,985.13. For the years 1939 to 1947, inclusive, the net sales and net profit for Health Spot Shoe Shop were as follows:

Year Net sales Net profit

1939 $51,028.46 $5,381.95

1940 50,742.74 9,841.62

1941 65,276.32 7,951.98

1942 87,516.50 10,732.77

1943 94,913.17 17,561.05

1944 80,143.99 13,836.60

1945 91,796.18 12,072.02

1946 108,626.23 22,844.89

1947 80,756.63 [1]10,141.49

Apart from her interest in Health Spot Shoe Shop, Lila G. Husted owned assets in both the United States and Canada. On November 30, 1947, the date of her death, the decedent owned the following assets:

Assets located in the United States:

Promissory note (face value of principal and interest) $2,307.92

Savings bond 20.25

Life insurance 10,000.00 $12,328.17

Assets located in Canada:

Real estate in Howard Township 4,000.00

Household goods and furniture 1,000.00
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