Scudder v. CIR

Decision Date08 May 1969
Docket NumberNo. 18041.,18041.
Citation405 F.2d 222
PartiesLouise M. SCUDDER, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtU.S. Court of Appeals — Sixth Circuit

John S. Hager, Owensboro, Ky., for petitioner, John S. Hager, Morton J. Holbrook, Sandidge, Holbrook, Craig & Hager, Owensboro, Ky., on brief.

Robert J. Campbell, Dept. of Justice, Washington, D. C., for respondent, Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, William A. Friedlander, Robert J. Campbell, Attys., Dept. of Justice, Washington, D. C., on brief.

Before O'SULLIVAN and McCREE, Circuit Judges, and CECIL, Senior Circuit Judge.

O'SULLIVAN, Circuit Judge.

This case presents the petition of Louise M. Scudder for review of a decision of the Tax CourtLouise M. Scudder, 48 T.C. 36 (1967) — whereby she was held liable for $155,500.17 in income tax deficiencies and $82,446.84 in fraud penalties thereon. This judgment was entered upon the claim that Louise's husband had fraudulently omitted from their joint tax returns for the years 1954-1958 the sum of $281,665.84 (and some smaller sums) which he had allegedly embezzled from her and her five sisters — partners, owning the Owensboro Liquor Company of Owensboro, Kentucky. The husband, Frank Scudder, was the manager of the partnership during the time involved, apparently without any definition of or limitation upon his authority as such.1 His unauthorized withdrawals from the partnership were as follows:

                1954 ................ $ 71,025.28
                1955 ................   83,768.70
                1956 ................   56,293.97
                1957 ................   33,514.65
                1958 ................   37,063.24
                                      ___________
                                      $281,665.84
                

Other items of income not reported in the joint returns were monies received by the husband from enterprises in which he had an interest, in the amount of $8,188.92, and withdrawals from the partnership of fictitious travel expenses in the amount of $22,100.

On April 13, 1962, the Commissioner issued a notice of deficiency against petitioner and her husband in the following amounts:

                Fraud
                Year Deficiency Penalty
                1954             $42,718.41         $21,359.21
                1955              52,842.54          26,421.27
                1956              23,868.98          16,631.23
                1957              20,390.83          10,195.42
                1958              15,679.41           7,839.71
                                                Total $237,946.23
                

Frank Scudder did not seek a redetermination of the Commissioner's assessments and is not an appellant. During the years in question a firm of accountants prepared the annual financial statements of the partnership, listing Frank's involved withdrawals as loans to him. These withdrawals had been so entered upon the partnership books. The accountants made copies of these financial statements for delivery to the sister-partners but left it to Frank to make such delivery. He did not do so, and brushed off one sister's request for a copy by telling her that extra copies cost $12.50 each. The same accountants prepared the partnership information returns, correctly reporting the partnership earnings from which Frank's withdrawals had been made. Louise's share of the partnership earnings was accurately shown as taxable income on the joint returns for the years involved. It may be assumed also that Louise's sisters correctly reported and paid income taxes upon their respective shares of the partnership earnings. Thus, except for Frank's taking of fictitious travel expenses and the lower brackets in which the individual partner's share of the earnings would be reported, it would appear that income taxes due were paid upon the monies embezzled or withdrawn by Frank.

In the fall of 1958, Frank's defalcations were discovered. Louise's brother, with the accountants' help, sought to make some repair without letting Louise know of the situation — her delicate health suggested keeping it from her. Frank gave a demand note to the partnership for the amount then calculated to be the total amount of his withdrawals, $268,733, payable on demand with interest at 5%. The note was secured by a mortgage and pledges of various items of real and personal property, which, except for the home of Louise and Frank, were described as being all of Frank's "assets of whatsoever nature, real, personal and mixed." These assets were forthwith transferred to the partnership, the Owensboro Liquor Company, at an agreed value of $135,470.45, and applied to Frank Scudder's debt to the partnership. While the record is silent on the subject, it may be inferred that Frank Scudder is not now at least, a source from which either his debt to the partnership can be collected or the government's tax claim can be settled. The record, in fact, does not reveal the present whereabouts of Frank.2 Thus an affirmance of the Tax Court would visit upon the innocent petitioner payment of $237,946 for taxes and fraud penalties, computed substantially upon money alleged to have been embezzled or taken without authority from her sisters and herself by her husband. This is so even though Frank's repayments have reduced his defalcations to approximately $146,000, an amount about $91,000 less than the tax bill which the Commissioner considered that he was required to extract wholly from one of the victims of the wrong.3 Of this, the Tax Court's opinion says:

"Although we have much sympathy for petitioner\'s unhappy situation and are appalled at the harshness of this result in the instant case, the inflexible statute leaves no room for amelioration." (Emphasis supplied.) 48 T.C. at 41.

and concluded that:

"We therefore, with considerable reluctance, uphold respondent\'s determination of deficiencies and additions to tax in their entirety." (Emphasis supplied.) 48 T.C. at 41.

We consider that the Tax Court was overly modest in measuring its own prerogatives and powers when it concluded that "the inflexible statute leaves no room for amelioration."

The bizarre facts before us make this case one of first impression. The Tax Court and the Commissioner apparently felt that the Internal Revenue Code, 26 U.S.C. § 6013(d) (3)4, required the action taken, notwithstanding the Tax Court's "considerable reluctance."

Answering appellant's position that the law should not tolerate the burdens visited upon her by the Commissioner, the government's brief says:

"The courts have consistently rejected this position for the same reason which governed the Tax Court decision below — such liability is clearly and unmistakably provided in the Internal Revenue Code and can be set aside only by Congress. See Howell v. Commissioner, 175 F.2d 240 (C.A. 6th 1949); Moore v. United States, 360 F.2d 353 (C.A. 4th 1965); Ginsberg\'s Estate v. Commissioner, 271 F.2d 511 (C.A. 5th 1959); Furnish v. Commissioner, 262 F.2d 727 (C.A. 9th 1958); Prokop v. Commissioner, 254 F.2d 544 (C.A. 7th 1958); Kann v. Commissioner, 210 F.2d 247 (C.A. 3d 1953), certiorari denied, 347 U.S. 967 74 S.Ct. 778, 98 L.Ed. 1109 (1954)."

and concludes that the taxpayer can cite no contrary authorities. We agree that the appellant did not, nor are we able to point to any authority which, on the facts of the cases cited above, announced a contrary rule. But we disagree with the government's further position that appellant does not "allege any circumstances not found in the above cases." We are aware that among the cases set out above can be found decisions holding that under 26 U.S.C. § 6013(a) (3), a wife's joint and several liability arising from a fraudulent joint return remains, including liability for fraud penalties, even though she had no knowledge of the fraud. The broad rule was succinctly stated by this Court in Howell v. Com'r, 175 F.2d 240 (6th Cir. 1949), where at page 241 we said:

"The fact that petitioner was not the moving spirit in the fraud is immaterial on the question of her liability."

But none of the cases relied on by the Tax Court contains the factual situation here; none holds that an innocent wife can be held liable for income taxes on monies allegedly embezzled from her by her husband. And none involves a situation where allegedly embezzled funds were shown as loans to the alleged embezzler on the books of the concern from which the withdrawals were made, and upon discovery the alleged embezzler formally recognized his indebtedness for the monies taken by giving his note for the sum taken, and forthwith repaid substantially half of the total debt by transferring to his creditors assets in the amount of $135,470.45; and all of this is accomplished before the Commissioner takes any cognizance of the matter.

The Tax Court appears to recognize that there can be situations where an innocent wife will escape the kind of injustice that the Commissioner appears to be inflicting. It cites Furnish v. Com'r, 262 F.2d 727 (9th Cir. 1958), which holds that if the joint and fraudulent return was signed by the wife only because such signing was the product of duress practiced upon her by her husband, she will not be liable for deficiencies and penalties assessed because of the fraudulent conduct of her husband. In that case, the wife claimed that she merely signed a blank form of return at the insistence of her domineering husband. In remanding the case to the Tax Court for a finding as to whether duress had in fact been practiced on the wife, the Ninth Circuit said:

"`Duress\' may exist not only when a gun is held to one\'s head while a signature is being subscribed to a document. * * * The actions of the husband in this particular case over a long period of time with all the other facts before the Court, lead us to the conclusion that here there could well have existed duress on the wife sufficient to destroy her free will." 262 F.2d at 733.

We should mention the case of Nadine I. Davenport, 48 T.C. 921 (1967), which purports to follow the Tax Court holding in the case at bar, saying:

"The facts in the instant
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