Bertoli v. Comm'r of Internal Revenue

• Citation: 103 T.C. No. 29,103 T.C. 501
• Decision Date: 24 October 1994
• Docket Number: No. 13648–92.,13648–92.
• Parties: John E. BERTOLI and Frances Bertoli, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Tax Court

103 T.C. 501

103 T.C. No. 29

John E. BERTOLI and Frances Bertoli, Petitioners,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 13648–92.

United States Tax Court.

Oct. 24, 1994.

P is the sole general partner of RCC. P's brother, RB, in an attempt to defraud creditors, caused the transfer of both personal and corporate assets to RCC. As alleged consideration for the transfers, P issued a note and RCC and/or P assumed outstanding debentures of DOC, the transferor corporation. The asset transfers were held to be fraudulent conveyances by the Trial Division of the New Jersey Superior Court and RCC's assets were placed into a receivership. As a result, P wrote down the book value of RCC's assets to zero and claimed substantial losses. R has moved for partial summary judgment based upon issues decided by the Superior Court.

1. Held: A State court adjudication may, in appropriate circumstances, bind the parties in a Federal action. In re Bertoli, 58 Bankr. 992, 995 (D.N.J.1986), aff.d 812 F.2d 136 (3d Cir.1987).

2. Held, further, P is collaterally estopped from denying that he was a party in the State court action.

3. Held, further, P is not collaterally estopped from asserting that RCC was a partnership for Federal tax purposes. At a trial on the merits, P will be given the opportunity to establish any business activity on the part of RCC; P is collaterally estopped from asserting that RCC was created for a business purpose.

4. Held, further, P is collaterally estopped from asserting that the alleged debenture assumption by RCC and/or P represented genuine indebtedness of either RCC or P; P is not collaterally estopped from asserting that a note issued by P and assumed by RCC represented genuine indebtedness.

5. Held, further, P is not collaterally estopped from asserting that P owned an interest in RCC.

6. Held, further, P is collaterally estopped from asserting that the transfer of DOC's assets was in its ordinary course of business or that the transfers were supported by adequate consideration. Frank J. Crupe, Livingston, NJ, for petitioners.

Susan G. Lewis, Brendan G. King, and Guy G. Lavignera, Newark, NJ, for respondent.

OPINION

NIMS, Judge:

Respondent determined deficiencies in petitioners' Federal income taxes for the taxable years 1986 and 1987 in the amounts of $195,221 and $9,041, respectively. Respondent further determined additions to tax for 1986 and 1987 under sections 6661, 6653(a)(1)(A) and (B). Additionally, respondent determined an addition to tax for 1986 under section 6651(a)(1).

Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.

Pursuant to Rule 121 respondent has filed Respondent's Motion for Partial Summary Judgment (motion) seeking “partial summary judgment in respondent's favor, with respect to facts established under the doctrine of collateral estoppel.” Rule 121(b) provides in pertinent part that:

A decision shall thereafter be rendered if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law. A partial summary adjudication may be made which does not dispose of all the issues in the case.

The additions to tax determined by respondent are not the subject of respondent's motion.

In her motion, respondent asks that petitioners be collaterally estopped from litigating the following factual determinations made by the Trial Division of the New Jersey Superior Court (trial court):

(1) John E. Bertoli was a party to the trial court action;

(2) Rutherford Construction Company (RCC) was a “sham” created for the purpose of defrauding creditors;

(3) the alleged promissory note for $112,037 and the alleged assumption of Door Openings Corporation's (DOC) liability on the convertible debentures were not bona fide debts;

(4) John E. Bertoli was not the true owner of any interest in RCC; and (5) the transfer of DOC's assets to RCC was not in the ordinary course of business and was made for inadequate consideration.

Petitioners are John E. Bertoli and Frances Bertoli, husband and wife (hereinafter references to petitioner in the singular are to John E. Bertoli). Petitioners resided in North Bergen, New Jersey, at the time their petition was filed. The events underlying this case are not new to litigation—two New Jersey State courts and four Federal courts have previously addressed various aspects of these events. Therefore, before addressing the appropriateness of respondent's motion, a detailed description of the events is required.

Background

Petitioner and his brother, Richard O. Bertoli (Richard), were principal shareholders in SYS Industries, Inc., a Bertoli family holding company. SYS Industries held a majority interest in DOC, a publicly held New Jersey corporation. DOC owned real property and a subcontracting business engaged in the installation of doors and door frames. Petitioner managed DOC's operating business.

Prior to the events in question, Richard was president of Executive Securities Corporation (ESC), a securities brokerage firm. While president of ESC, Richard apparently committed fraudulent acts involving the misuse of clients' funds which ultimately led to ESC's financial demise. As a consequence, on February 14, 1975, the United States District Court for the Southern District of New York placed ESC in liquidation and appointed Cameron F. MacRae, III (MacRae) trustee. After MacRae was appointed trustee, he brought suit on behalf of ESC alleging that three months after the company shut down, Richard fraudulently transferred personal and corporate assets in an effort to put them beyond the reach of creditors, whose claims exceeded $2,000,000. The principal defendants originally named in that action were Richard Bertoli, SYS Industries, DOC, and John Bertoli, who was named as defendant in three capacities: individually, as custodian under New Jersey law for Richard's three minor children, and as the sole general partner of RCC, a New Jersey limited partnership. Prior to trial, a settlement was reached in which petitioner, in his individual capacity only, and DOC were released as defendants. Petitioner remained before the court, however, in his capacity as the general partner of RCC and as custodian for Richard's children.

After a lengthy trial in which petitioner testified, the trial court found that Richard had transferred both personal assets and DOC's assets to RCC in order to defraud ESC's creditors and shareholders. DOC's operating business was transferred to Door Openings Corporation of New Jersey (DOC/NJ), a newly formed corporation in which RCC was the sole shareholder. The trial court's accompanying opinion described in detail the numerous and intricate indirect transfers used by the defendants Richard and petitioner that “systematically stripped a number of entities in which Richard had a substantial direct or indirect interest of all their valuable assets.” Executive Sec. Corp. v. Bertoli, No. C–5088–79 (N.J.Super.Ct., Feb. 23, 1983) (slip op. at 4). The opinion noted further that all of the assets were effectively conveyed to one transferee, RCC, “formed at the time of the transfers and obviously for the express purpose of being the transferee.” Id. at 5. RCC was made up of petitioner, the general partner, and Richard's three minor children, the limited partners.

Devoting an entire section of the opinion to petitioner's participation and entitling it “John's Fraud”, the trial court proceeded to explain that the systematic nature of the transfer plan established “that John was an informed participant in his brother's plan,” and thus that “the fraud was equally attributable to the debtor, Richard, and to the transferee, John.” Id. at 9–10. In an attempt to justify the transfers, petitioner and Richard asserted that the transfers were supported by adequate consideration. In return for assets conservatively valued by the trial court at over one million dollars, Richard and petitioner asserted that petitioner issued a promissory note in the amount of $112,037 payable to DOC. Thereafter, RCC assumed the note issued by petitioner to DOC. Richard and petitioner asserted that to furnish additional consideration RCC and/or petitioner assumed $412,200 of outstanding convertible debentures issued by DOC plus accrued interest in the amount of $26,002.

The trial court held that RCC and/or petitioner never had any intention of honoring the debenture assumption; thus, it did not represent a genuine debt. Additionally, the trial court held that the alleged consideration was “woefully inadequate”. Id. at 11. Finally, the trial court explicitly addressed, and rejected, the Bertolis' attempts to justify the transactions as being in good faith, commenting that the various facets of their story were “a fiction”, “absurd”, “unconvincing”, and “immeasurably complicated by the numerous gaps and contradictions in the Bertolis' account of the disputed transaction”. Id. at 13, 15.

Based on the above, the trial court entered judgment:

(a) retraining [sic] John Bertoli individually and as custodian of Richard's minor children from disposing of any property of RCC or DOC/NJ, and

(b) appointing a receiver for all of the property of RCC and DOC/NJ with authority to convey to the plaintiff [ESC's trustee] any or all of the said property to the extent necessary to satisfy the claims of ESC, its shareholders, customers and creditors once those claims have matured. [ Id. at 17.]

Subsequently, petitioner appealed to the Appellate Division of the Superior Court and petitioned for certification to the Supreme Court of New Jersey (which was denied), claiming that the trial court's judgment against him was void because it bound him in his individual...