CIR v. Estate of Leyman

Decision Date29 March 1965
Docket NumberNo. 15653 and 15732.,15653 and 15732.
Citation344 F.2d 763
PartiesCOMMISSIONER OF INTERNAL REVENUE, Petitioner, v. ESTATE of Harry Stoll LEYMAN, Deceased, Harry S. Leyman, Jr., Executor, Respondent. ESTATE of Harry Stoll LEYMAN, Deceased, Harry S. Leyman, Jr., Executor, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtU.S. Court of Appeals — Sixth Circuit

Argued by Norman Sepenuk, Dept. of Justice, Washington, D. C., John B. Jones, Jr., Acting Asst. Atty. Gen., Lee A. Jackson, Joseph M. Howard, Attys., Dept. of Justice, Washington, D. C., on the brief, for Commissioner of Internal Revenue.

Argued by William R. Seaman, Cincinnati, Ohio, Sherman E. Unger, Ronald E. Heinlen, Cincinnati, Ohio, on the brief, Frost & Jacobs, Cincinnati, Ohio, of counsel, for estate of Harry Stoll Leyman, etc.

Before PHILLIPS and EDWARDS, Circuit Judges, and PRETTYMAN, Senior Circuit Judge.*

PRETTYMAN, Senior Circuit Judge.

These are petitions to review a decision of the Tax Court of the United States, which held fraud in an estate tax case and adjudged additional taxes and fraud penalties to be due. Decedent was a business man of wide interests. His executor is his son. The estate tax return was timely filed and showed a tax due in the sum of $2,046,158.28, which was paid in full. As the result of a mathematical error on the return, an additional tax of $10,313.63 was paid by the estate a month after the return was filed. The Tax Court found deficiencies in tax of $1,240,242.15 and additions to tax (i. e., penalties) of $620,121.08. Both the Commissioner of Internal Revenue and the executor of the estate filed petitions for review in this court. They are consolidated for purposes of argument and decision.

In brief, the executor contends (1) that the Commissioner failed to establish fraud by clear and convincing evidence, (2) that the Tax Court erred in admitting in evidence proof of the fact that the executor was convicted of fraud in this matter upon a plea of nolo contendere, and (3) that the Tax Court erred in including in the gross estate a certain $15,000 in municipal bonds. The Commissioner contends the opposite to each of the foregoing points and further contends that the Tax Court erred in fixing the fraud penalty at 50 per cent of the deficiency in tax instead of at 50 per cent of the total estate tax.

I

The first problem is whether the Tax Court was clearly erroneous in its conclusion in respect to $613,314.52 cash. It found the Commissioner had established by clear and convincing evidence that the executor knowingly and willfully omitted these funds from the estate tax return, intending thereby to evade an estate tax due. We have little difficulty in agreeing with the Tax Court.

Decedent died on May 24, 1954, being then 82 years of age. He and his family of one son and three daughters owned, inter alia, the outstanding stock in a corporation known as Leyman Corporation, which in turn owned a portfolio of securities, extensive real estate, and certain subsidiaries which operated automobile sales agencies. The family had other business interests. The son was forty years old at the time of his father's death. For many years he had been an active participant in the family's affairs, having been second in line of command in many of them. When the father died, the son became the operating head of these companies. His father's private secretary became his private secretary. He had been in constant touch with his father for several years prior to the latter's death, had power to sign checks on his personal account, went often with him on financial errands, etc.

The Leyman Corporation had a safe deposit box on rent in a bank. It was a large combination box, behind one door of which were five separate drawers, one of which was substantially filled with currency, totaling $613,314.52. The decedent's son, the executor, first saw currency in this box in 1943 or 1944, some ten years before his father's death. In December, 1953, some months before his death, decedent took some bonds (about $120,000) from a box in his room at home, gave them to his son, and told him to sell them and put a certain part of the proceeds in this corporate safe deposit box. Upon the trial of this case it was stipulated that the cash in the box belonged to decedent.

The executor did not include any of the cash in the box in the estate tax return. He said he thought the cash belonged to the corporation. In response to this claim the Commissioner pointed out (1) that the executor, as a director and officer of the corporation, saw its balance sheets and other financial statements and knew that no such item of cash appeared in them, and (2) that the corporation several times borrowed cash from banks for corporate purposes, which needs could easily have been met by recourse to the sums in the lock box.

When the Internal Revenue examination of the estate tax return got under way and the examining agent had proceeded with some phases of his inquiry, the executor advised his accountant and his attorney of the existence of the cash in the box and instructed them to inform the agent.

The record contains quantities of detail concerning this cash and the safe deposit box. It leaves little doubt that the executor knew of this cash, knew it had been his father's, and knowingly failed to include it in the return.

II

The second issue is whether the Commissioner had the burden of proving that some $15,000 in municipal bonds were not reported on the estate tax return or included in the $613,314.52 in cash not reported on the return. The Commissioner's deficiency notice set forth a list of $54,000 in bonds as having been omitted from the estate tax return. Later he conceded error as to all but $15,000 of these bonds. It is the taxpayer's contention that, since there was error in some of the items in the original determination by the Commissioner, the presumption of validity which originally attached to the other items no longer applies. The contention is not tenable. The burden shifts to the Commissioner if the record shows that his original determination was arbitrary and excessive.1 But the record in this case does not indicate that the Commissioner's determination as to these bonds was arbitrary or excessive. It is undisputed that they belonged to the decedent at his death. The only issue is whether the proceeds from the redemption of these bonds was included in the $613,314.52 of cash not reported on the return. The Tax Court correctly held there was insufficient evidence to trace the proceeds of these bonds to the safe deposit box cash. Under these circumstances the Commissioner's determination that the bonds should have been reported on the return is still presumptively correct.

III

Upon the trial the Government offered in evidence a certified copy of a judgment of conviction entered by a United States District Court against this executor in a criminal case based upon the falsity of this estate tax return. The judgment recited that it was "upon his plea of Nolo Contendere." The Tax Court admitted the document "for the purpose of credibility both of the witness and the return and as part of the general background of the case * * *." The executor says the admission of this evidence was reversible error. We think it was not.

This was not a jury case but was trial by a judge, not likely to be confused as to the purport of these judicial proceedings. The judge pointed out she was not treating this evidence as "in the nature of a judicial admission". She did not refer to it in her discussion of the fraud issue. She relied entirely upon evidence apart from the criminal plea, as she should have done, but the plea and conviction were certainly part of the background material in this complicated set of facts.2 The executor himself testified in the Tax Court, and the admission of his plea in the criminal case for purposes of impeachment is not disputed. The debate concerns only the additional purpose — as "background" — recited by the trial court in its ruling.

IV

The more difficult question in the case concerns the amount of the civil penalty for fraud. Is it one-half the total tax payable on the estate? Or is it one-half the deficiency in the tax as stated on the return? The difference in dollars in this case is great.

The question divides into parts. The first part is: Which statute governs — the so-called 1939 code or the 1954 code? Congress reenacted the Internal Revenue Code in 1954. The new code clearly provided that the penalty for fraud in estate tax cases should be 50 per cent of the "underpayment".3 It was enacted August 16, 1954. Decedent in the case now at bar died May 24, 1954. The effective date of the new law was fragmented among subtitles, chapters, sections, subsections, paragraphs and subparagraphs. However the general affirmations of the new code are that it applied to estates of decedents dying after the date of the new enactment.4 An analysis in minute detail confirms that impression in respect to the estate tax fraud penalty, which is the only matter here involved. The Tax Court thought the correct view to be that the law in existence when this decedent died, i. e., the 1939 code, was applicable here,5 and we agree. We pause to detail in a footnote the intricacies of this examination.6

We come then to consider what the 1939 code provided in respect to civil penalties for fraud in estate tax cases. The provision is in Section 3612(d) (2) of that Code.7 The Tax Court, agreeing with the executor, was of the view that the penalty thus provided was 50 per cent of the understatement in tax. The Government disagrees. It is earnest in insisting that the penalty is 50 per cent of the total tax imposed by the statute upon the estate; i. e., that which is shown on the return plus that which is not thus shown. Thus it is obvious that a problem is posed on the point. We agree with the Government's position.

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