Estate of DeNiro v. C.I.R.

• Decision Date: 17 October 1984
• Docket Number: No. 83-1100,83-1100
• Citation: 746 F.2d 327
• Parties: 84-2 USTC P 9862 ESTATE of Vincent DeNIRO, Deceased, Helen M. Papalie and Joanne F. DeNicholas, Administratrices, Louis R. DeNiro, Transferee, Frank DeNiro, Transferee, and Michael DeNiro, Transferee, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 327

746 F.2d 327

84-2 USTC P 9862

ESTATE of Vincent DeNIRO, Deceased, Helen M. Papalie and

Joanne F. DeNicholas, Administratrices, Louis R. DeNiro, Transferee, Frank DeNiro, Transferee, and Michael DeNiro, Transferee, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 83-1100.

United States Court of Appeals, Sixth Circuit.

Argued Jan. 17, 1984.

Decided Oct. 17, 1984.

James C. Herndon, William T. Walker, Robert W. Malone (argued), Buckingham, Doolittle & Burroughs, Akron, Ohio, for petitioners-appellants.

Kenneth W. Gideon, Chief Counsel Internal Revenue Service, Glenn L. Archer, Jr., Michael L. Paup, Jonathan S. Cohen, Stephen Gray (argued), Tax Division, Dept. of Justice, Washington, D.C., for respondent-appellee.

Before KEITH, MERRITT and WELLFORD, Circuit Judges.

WELLFORD, Circuit Judge.

The estate of Vincent DeNiro appeals from the tax court's determination that the payment of the estate's tax liability in 1969 by two corporations constituted income to the estate in the form of a constructive dividend. The estate further disputes the penalty imposed upon the estate for failing to file a tax return for 1969. We affirm in part and remand for further proceedings.

I.

The parties to this controversy have been litigating tax matters for many years following the death of Vincent DeNiro under mysterious circumstances in the Cleveland area in 1961. ¹ This court first considered matters relating to the DeNiro estate in a review of the convictions of Frank, Louis, and Michael DeNiro, brothers of the deceased, for conspiracy and wilfully attempting to evade federal estate taxes due from Vincent DeNiro's estate. The convictions were affirmed. See United States v. DeNiro, 392 F.2d 753 (6th Cir.), cert. denied, 393 U.S. 826, 89 S.Ct. 89, 21 L.Ed.2d 97 (1968). The court observed that the deceased, known as Vince, "had accumulated wealth in the numbers business in Youngstown, Ohio." Id. at 754. While the gross estate was found to exceed $311,000, no estate tax return had ever been filed. The court also found that Vince was "careful to keep record title of his property in the names of others." Id. at 755. Although during the IRS investigation concerning estate taxes the brothers denied that Vince left any estate, the court found that Vince entirely owned the stock in both Valley Land, Inc. (VLC), a duplex-rental operation, and Cicero's, a restaurant and bar, and owned a majority interest in National Cigarette Service, Inc. (NCS), a vending service corporation. Id. at 754-55 n. 1. The trial judge in the criminal case found that the DeNiro brothers agreed "to gather together and secure permanent possession of these and all other properties which had belonged to their deceased brother to the exclusion of his rightful heirs," ² the brothers' nieces. Id. at 756. In short, the DeNiro brothers appropriated VLC and NCS and all the assets represented by these corporations after Vince DeNiro's death. The district judge also found that, to cover their conspiracy and the appropriation of their nieces' properties, the DeNiro brothers lied to IRS investigators and forged ownership papers. For reasons not discernible, however, the district judge imposed as punishment only a relatively modest fine and probation. ³ Not until September 1977 were decedent's daughters appointed co-administratrices of decedent's estate by the Mahoning County, Ohio, Probate Court. That action followed another opinion by this court dealing with another aspect of the affairs of the estate. See DeNiro v. United States, 561 F.2d 653 (6th Cir.1977).

This appeal involves income taxes allegedly due from the estate, represented by the official representatives and by the DeNiro brothers as transferees. The tax court upheld assessments of income tax against the estate for the year 1969 and additions to the tax for failure to file a return in that year. See Estate of DeNiro v. Commissioner, 44 T.C.M. (CCH) 981 (1982). It found as follows:

During 1969, petitioner owned 65 percent of the stock of NCS and 100 percent of the stock of VLC. At all times relevant hereto, however, the DeNiro brothers controlled the operations of both NCS and VLC .... Frank DeNiro, Jr., was the president of both NCS and VLC, and Louis DeNiro was secretary-treasurer of NCS. NCS was in the business of operating vending machines, and VLC was in the business of owning and operating rental apartments.

On or about April 9, 1969, respondent made jeopardy assessments for estate tax, addition to tax, and interest of $1,188,000 against petitioner and the DeNiro brothers, as transferees of the estate. Respondent also filed and recorded Federal tax liens against petitioner, the DeNiro brothers, as transferees of the estate, and Cicero's, Inc., NCS, and VLC, as nominees of the estate. No assessments were made against the corporations.

On or about May 9, 1969, Frank DeNiro, Jr., Louis DeNiro, Michael DeNiro, Samuel Karam, their attorney, Jack Marmagin, the accountant for NCS, and Anthony Davanzo, the accountant for VLC, attended a meeting with two Internal Revenue Service attorneys, Bernard Friedlander (now deceased) and Michael Ruggieri. At this meeting, the DeNiro brothers signed a Form 890 (Estate Tax Waiver of Restriction on Assessment and Collection of Deficiency and Acceptancy of Overassessment) consenting to the assessment and collection of an estate tax deficiency of $81,000, plus interest thereon. Subsequently, respondent made a partial abatement of the original jeopardy assessments and the amount of the assessment remaining after abatement, $104,577.04, was paid by NCS and VLC in 1969.

NCS and VLC paid $89,257.04 and $15,320, respectively, of the assessment. The payment made by VLC represented proceeds of an insurance claim filed by VLC with respect to fire damage to one of its apartment units, while NCS borrowed $69,757.04 of the amount it paid. After NCS and VLC paid the assessment, respondent released the Federal tax liens he had filed against petitioner, the DeNiro brothers, Cicero's, Inc., NCS, and VLC.

Id. at 982.

NCS filed a refund claim in 1972 based on its position that it should be entitled to a deduction for the $89,257 payment. The tax dispute arising out of this claim was finally settled in 1979. VLC filed a similar claim for a $15,320 deduction, but this was denied. These corporations together with the DeNiro brothers filed a refund suit in the district court in 1974 claiming that the $104,577.04 payment by the corporations was an overpayment of estate taxes. NCS and VLC were dismissed as plaintiffs, and a jury found in 1975 that the DeNiro brothers were entitled to a $57,155.73 refund. See DeNiro v. United States, 36 A.F.T.R.2d p 148,028 (N.D.Ohio 1975), modified, 561 F.2d 653 (6th Cir.1977). According to the unchallenged tax court finding, "[t]his judgment was later amended to provide for a refund of $61,613" to take into account a deduction for attorney's fees. 44 T.C.M. (CCH) at 983. An appeal was taken from that amended judgment, and this court allowed the refund, ⁴ observing, "The [district] court reasoned that the persons on whose behalf the payments were made were 'taxpayers' who were entitled to sue for refund." 561 F.2d at 656. This court found, moreover, that "the evidence in the present case is consistent with" prior findings that the DeNiros conspired to and did appropriate unto themselves "all the assets of Vince DeNiro's estate." Id. It was stipulated that this included 100% of VLC and at least 65% of NCS. Although neither corporation had appealed the district court's dismissal of it as a party, this court stated that the corporations would have had standing to challenge the payments because they were made to avoid the liens and were therefore involuntary. This court held, however, that the DeNiros had standing individually as de facto "executors" of the estate to pursue the refund of the overpaid estate taxes because the payments from the corporations constituted constructive dividends to the estate, giving the estate standing to sue for any tax overpayment. See id. at 657. The government's argument in this case that the payments constituted constructive dividends to the estate is therefore consistent with this court's 1977 decision.

II.

Petitioners argue that the tax court erred in characterizing the payments at issue here as constructive dividends to the estate. They urge alternatively that the payments were loans or were made for business purposes. They also argue that NLS had insufficient earnings and profits to pay a dividend of $89,257.

Receipt of a dividend constitutes gross income under I.R.C. Sec. 61(a)(7); and a dividend is defined under id. Sec. 316(a) as "any distribution of property made by a corporation to its shareholders" out of certain funds. Although VLC and NCS may not have intended that the tax payments be considered a dividend, and did not treat these payments as dividends on their books, this does not prevent the payment from being considered a constructive dividend. See Loftin & Woodard, Inc., v. United States, 577 F.2d 1206, 1214 (5th Cir.1978); Sachs v. Commissioner, 277 F.2d 879, 882-83 (8th Cir.), cert. denied, 364 U.S. 833, 81 S.Ct. 63, 5 L.Ed.2d 59 (1960). We agree with the tax court that "the corporation's payment of the estate tax conferred an economic benefit" upon the estate, and "[t]he estate tax was petitioner's and not the corporations' liability," since no assessment was made against the corporations. 44 T.C.M. (CCH) at 984.

Whether a payment is a loan as opposed to a dividend is a factual question, and the tax court's judgment is entitled to deference. See Wilkof v. Commissioner, 636 F.2d 1139, 1140 (6th Cir.1981) (per curiam). While the DeNiro brothers testified that the payment of VLC was intended as a loan, the tax court completely discredited their testimony. Questions of intent involve factual determinations to be made by the tax court, and the tax court judge...