Quinn v. Comm'r of Internal Revenue

• Decision Date: 15 May 1974
• Docket Number: Docket No. 4390-68.
• Citation: 62 T.C. 223
• Parties: HOWARD B. QUINN AND CHARLOTTE J. QUINN, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

62 T.C. 223

HOWARD B. QUINN AND CHARLOTTE J. QUINN, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 4390-68.

United States Tax Court

Filed May 15, 1974.

Lawrence A. Chez and Samuel E. Hirsch, for the petitioners.

Nelson E. Shafer, for the respondent.

Howard B. Quinn, chairman of the board of directors of a savings and loan association, in 1963 caused the association to pay him $553,166.66, purportedly as advance rent on a building which he had leased to the association. The board of directors insisted that he restore the money. He repaid $53,166.66 but gave a note for the balance of $500,000 during the tax year. He and Mrs. Quinn filed a joint return for 1963 which did not report the $500,000 as income but mentioned it in an attached statement. It is held:

1. The facts in this case are distinguishable from those in Wilbur Buff, 58 T.C. 224 (1972), revd. 496 F.2d 847 (C.A. 2, 1974);

2. Mrs. Quinn does not qualify for relief under sec. 6013(e), I.R.C. 1954, from liability for the tax on the $500,000; and

3. The provisions of sec. 6013(e)(1)(A) and (B), I.R.C. 1954, making relief from liability for such tax dependent upon the amount of the omission in relation to the reported gross income and upon the spouse's knowledge of the omission, do not violate the guarantees of the 5th and 14th amendments to the United States Constitution. FEATHERSTON, Judge:

Respondent determined deficiencies in petitioners' income taxes as follows:

+---------------------+
                ¦Year  ¦Amount        ¦
                +------+--------------¦
                ¦1961  ¦$1,488,314.34 ¦
                +------+--------------¦
                ¦1962  ¦67,795.04     ¦
                +------+--------------¦
                ¦1963  ¦389,294.97    ¦
                +------+--------------¦
                ¦Total ¦1,945,404.35  ¦
                +---------------------+
                

The parties have settled numerous issues raised by the assignment-of-error paragraphs of the petition and amendment to petition. The only issues remaining for decision are as follows:

(1) Whether petitioner Howard B. Quinn's signing of a promissory note in 1963 for the repayment of $500,000 withdrawn without authority during that year from a savings and loan association converted the withdrawal into a nontaxable receipt;

(2) Whether petitioner Charlotte J. Quinn, under section 6013(e),¹ is relieved of liability for income tax on the $500,000 withdrawn by petitioner Howard B. Quinn from the savings and loan association; and

(3) If section 6013(e) does not relieve petitioner Charlotte J. Quinn of income tax on the $500,000, whether the section denies her the guarantees of the 5th and 14th amendments to the United States Constitution.

FINDINGS OF FACT

Petitioners Howard B. and Charlotte J. Quinn, husband and wife, were legal residents of Chicago, Ill., at the time the petition was filed. They filed their joint Federal income tax return for 1963 with the district director of internal revenue, Chicago, Ill., employing the cash receipts and disbursements method of accounting.

All all times material to this proceeding through October 25, 1963, Howard B. Quinn (hereinafter Quinn) and Charlotte J. Quinn (sometimes hereinafter Mrs. Quinn) were the owners of not less than two-thirds of the permanent reserve shares of Beverly Savings & Loan Association (hereinafter Beverly), a corporation organized and operating under the Illinois Savings and Loan Act (Ill. Ann. Stat. ch. 32, secs. 701 through 944 (Smith-hurd 1970). Both Quinn and his wife were members of the board of directors, and they were chairman of the board of directors and senior vice president, respectively.

During June of 1962, Everly took possession of and used as its place of business the first three floors and basement of a then recently constructed seven-story building and parking lot situated at 8001 South Western Avenue in Chicago under a least dated February 6, 1962, with LaSalle National Bank (LaSalle Bank) as trustee. The building was the only asset of the trust, and Quinn was the trust's sole beneficiary.

The minutes of a special meeting of the Beverly board of directors, held on March 28, 1963, included the following: ‘Mr. Howard B. Quinn, Chairman of the Board, discussed the possibility of advanced payment of rent by the Association in order to realize a five (5%) percent discount.’ No resolution on the subject was adopted at that meeting. Mrs. Quinn signed the call and waiver of notice of the meeting, attended the meeting, and, according to the minute, made or seconded motions on several matters.

On April 3, 1963, a check requisition for Beverly check No. 2174 in the amount of $553,166.66 payable to Quinn Management Co. was prepared for the ‘Prepayment of Rent Expense. See Board of Directors Approval of 3/28/63.’ Check No. 2174 was issued in the amount of $553,166.66 and made payable to Quinn Management Co.² The voucher copy of the check reflects the following:

+------------------------------------------------------------------------+
                ¦Prepayment of rental expense. See board of directors approval of 3/28/63¦
                +------------------------------------------------------------------------¦
                ¦                                                          ¦             ¦
                +----------------------------------------------------------+-------------¦
                ¦Prepayment of 4 years' rent ($150,000 per annum)          ¦$600,000.00  ¦
                +----------------------------------------------------------+-------------¦
                ¦Less: 6% discount of                                      ¦36,000.00    ¦
                +------------------------------------------------------------------------+
                

                        564,000.00
                Less: Payment on 4/1/63 10,833.34
                This payment            553,166.66
                

Beverly check No. 2174 was deposited to the Quinn Management checking account at Pullman Trust & Savings Bank in Chicago. The check was posted to the account on April 3, 1963. Both Quinn and his wife were authorized to sign checks on this account. on or about March 30, 1963, Mrs. Quinn had signed a check on the account in the amount of $236,585 payable to Beverly to cover the purchase of Beverly shares for Quinn and petitioner's children. Without the $553,166.66 deposit of the Beverly check, this account would not have had sufficient funds to cover the check for those shares.

A special meeting of the Beverly board of directors was held on April 5, 1963. Mrs. Quinn signed a waiver of the notice of the meeting which indicates that the purpose of the meeting was to consider ‘the repayment to the Association of rental monies advanced to Quinn Management Company.’ The minutes of this meeting contain the following:

Mr. Quinn, Chairman of the Board, acted as Chairman of the meeting, and Mr. Culbertson recorded the minutes. The meeting was called primarily to reconsider the advisability of the Association advancing rent to Quinn Management Company in the sum of $564,000.00 at 6% discount on four years base rent at $150,000.00 per year. This action had been originally discussed in the March 28, 1963 Board of Directors meeting. The matter was thoroughly discussed and it was the consensus of the meeting that this action was not advisable and not in the best interests of the Association, notwithstanding the 6% discount allowed. It was, thereupon, volunteered by Mr. Quinn that the Association would be reimbursed the $564,000.00. Thereupon, on motion duly made and seconded, the following resolution was unanimously adopted:

RESOLVED: That Quinn Management Co. or Howard Quinn repay to the Association the $564,000.00 advanced as rentals as aforesaid on or before April 22, 1963.

On or about April 23, 1963, Quinn restored $53,166.66 to Beverly. No other amount was restored during 1963.

The question of Quinn's repayment of the $500,000 was discussed at the Beverly board of directors annual meeting on April 23, 1963, special meeting of May 28, 1963, and regular meeting of June 20, 1963, which was recessed to July 5, 1963, and then to July 18, 1963 (which was a joint recessed regular June 1963 meeting and the regular July 1963 meeting). Mrs. Quinn attended and participated in all these meetings. At each of the meetings, Quinn was urged to restore the money. At none of the meetings did the board agree to treat the transaction as a loan. At the meeting of July 18, 1963, the board of directors received a report from a law firm which recommended (1) that Beverly request and obtain from Quinn a note in the amount of $500,000, and (2) that Quinn pledge his permanent reserve shares in Beverly, subject to an existing lien held by American National Bank & Trust Co. of Chicago (hereinafter bank). This recommendation, in substance, was adopted, and on July 18, 1963, Quinn executed his note to Beverly for $500,000 secured by his Beverly shares.³

The minutes of a regular meeting of Beverly's board of directors, held on August 15, 1963, reflect that the following transpired:

Allan Douglass moved that the Association make demand on Howard Quinn for the payment of his entire indebtedness to the Association by 5:00 P.M., August 21, 1963 and that if such payment is not made, the Association proceed to notify the bonding company on the fidelity bond and proceed to sell or otherwise dispose of all collateral held by the Association to secure such debt. Mr. Waxman seconded the motion. Upon a vote being taken, Messrs. Douglass and Waxman voted in favor of the motion and Mr. Steuber and Charlotte Quinn voted against the motion.

Counsel for the Association advised that Charlotte Quinn should be disqualified from voting because she is an interested party. Charlotte Quinn stated that she had not signed the $500,000 note. The Chairman ruled the motion had failed of adoption.

On December 12, 1963, Quinn was indicted in the United States District Court, Northern District of Illinois, Eastern Division. Count I of a four-count indictment was as follows:

The SEPTEMBER 1963 GRAND JURY charges:

That on or about April 3, 1963, at Chicago, in the Northern District of Illinois, Eastern Division,

HOWARD B. QUINN,

defendant herein, being a Director of the Beverly...