Hamilton v. Commissioner
| Decision Date | 23 January 1991 |
| Docket Number | Docket No. 48208-86. |
| Parties | Michael L. Hamilton, Transferee v. Commissioner. |
| Court | U.S. Tax Court |
Everett A. Bell, for the petitioner. Robert W. Kern and Susan Gray, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined, pursuant to section 6901, that petitioner is liable, as a transferee of property, for a deficiency in the 1982 Federal income tax of the transferor Mr. Marvin A. Rivers. (Except as otherwise indicated, all section references are to the Internal Revenue Code, as amended.) The issue for decision is whether, for purposes of section 6901, respondent has met his burden of proving that petitioner is Mr. Rivers' transferee under Ohio law.
Some of the facts have been stipulated, and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference.
In 1970, petitioner became acquainted with Mr. Rivers, the transferor, while attending school in Birmingham, Alabama. He became reacquainted with Mr. Rivers in 1974. Petitioner was living in Detroit, Michigan, at the time but occasionally traveled to Cleveland, Ohio, to attend social functions which Mr. Rivers also attended. In 1975, after petitioner moved to Cleveland, he and Mr. Rivers became roommates. By 1978, they were sufficiently close friends that they jointly purchased a house in Shaker Heights, Ohio. To finance the purchase, they borrowed $42,900 from the Ohio Savings Bank and gave a 30-year mortgage to the bank, secured by the house as collateral.
Petitioner and Mr. Rivers shared more than their living accommodations. They also purchased a 1977 Oldsmobile 98 in 1979, and they purchased a 1977 Cadillac Seville approximately one year later. The Cadillac was purchased for $7,795. Both cars were titled in their joint names. Additionally, in 1980 Mr. Rivers opened a joint checking account at the Euclid Som Center Branch of National City Bank. Both petitioner's name and Mr. Rivers' name appeared on the account and both of them had the authority to sign checks. Petitioner signed at least two checks drawn on the account between 1980 and 1982 in the approximate total amount of $89.22.
During the years 1982, 1983, and 1984, petitioner was employed as a school teacher by the Northeast Ohio Development Center. On his Federal income tax returns, he reported gross income consisting entirely of his teacher's salary, except he also reported a state tax refund of $59.05 in 1984. For 1982, 1983, and 1984, petitioner reported gross income of $16,295.80, $17,534.36, and $19,058.41, respectively. If such amounts are reduced by the cash deductions which petitioner reported, he was left with approximately $11,000 per year or approximately $200 per week.
In 1982 and 1983, Mr. Rivers was employed as an accountant for Dalton Industry, Inc. ("Dalton"), in Willoughby, Ohio. He embezzled $83,683.40 from Dalton in 1982. He deposited the entire sum into the National City Bank checking account. Mr. Rivers did not declare the embezzled funds for estimated tax purposes or report the money as income on his Federal income tax return for 1982 or any other year.
On November 1, 1982, Mr. Rivers gave petitioner a certified check in the amount of $28,000. It was drawn on the National City Bank account. Mr. Rivers was insolvent before and after he gave the money to petitioner. Petitioner used the $28,000 check to purchase a 1979 Mercedes Benz, Model 450SL, titled solely in his name. Petitioner used the car for his personal benefit and enjoyment.
Mr. Rivers left Dalton's employ in May 1983. By August 1983, it was evident that he was under investigation by the City of Willoughby, Ohio. In October 1983, the Willoughby police department arrested both Mr. Rivers and petitioner. At the time of their arrest, the police searched their house in Shaker Heights and seized personal papers of Mr. Rivers and petitioner. The police also seized a 1983 Buick Skylark which Mr. Rivers had purchased in March of 1983.
Petitioner and Mr. Rivers retained the same attorney, Ms. Pat Blackmon, to represent them in connection with the criminal charges arising from Mr. Rivers' embezzlement of funds and petitioner's receipt of stolen money. In April 1984, Mr. Rivers pled guilty to, and was convicted of, three felony counts of receiving stolen property. Petitioner pled no contest to and was found guilty of receiving stolen property. He was sentenced to 60 days in the Lake County Jail. Mr. Rivers was sentenced to a prison term in the Chillicothe Correctional Institution in Chillicothe, Ohio. He was imprisoned from approximately April through October of 1984. From October through February of 1985, he lived, under state jurisdiction, in other facilities which allowed him to be furloughed for work.
During the time Mr. Rivers was incarcerated, he received correspondence from the Internal Revenue Service which told him that the Internal Revenue Service considered the funds embezzled from Dalton to be includable in his gross income and subject to income tax. On November 27, 1984, Mr. Rivers transferred his interest in the 1977 Cadillac Seville to petitioner. The transfer was listed as a "gift" on the title records for the automobile.
On August 13, 1985, respondent sent petitioner a so-called 30-day letter proposing to assess against him "the amount of $28,000, plus interest As provided by law, constituting * * * liability as a transferee of the assets of Marvin A. Rivers * * * for income taxes due from taxable years [sic] ended December 31, 1982." Petitioner retained an attorney, Ms. Sandra Walker, to represent him before the Internal Revenue Service, and he filed an administrative appeal with respondent. In that connection, petitioner made an affidavit on September 9, 1985, which states that "he did not have a joint bank account" with Mr. Rivers and "he had no knowledge of the embezzled income," but that "he did receive a personal loan from Marvin A. Rivers in 1982 which enabled him to buy an automobile," and finally that "he has been paying Marvin A. Rivers [sic] past credit card debts instead of repaying the personal loan directly to him."
Mr. Rivers gave petitioner and his attorney an affidavit dated June 22, 1986, which states that Mr. Rivers made a personal loan to petitioner to purchase an automobile and further states that the loan was repaid "in part by paying off credit cards * * * in part by paying legal expenses * * * and in part by selling the car to pay other debts." Mr. Rivers' affidavit was attached to the petition but neither party sought its introduction into evidence.
On February 14, 1986, Mr. Rivers received a statutory notice of deficiency in which respondent determined deficiencies in and additions to his 1982 and 1983 Federal income taxes. On May 5, 1987, this Court entered its decision against Mr. Rivers in the following amounts:
Income Tax Additions to Tax, Sections
Year Deficiency 6653(b)(1) 6653(b)(2) 6661
1982 ........................ $17,782.37 $8,891.19 * $1,778.24
1983 ........................ 8,248.00 4,124.00 ** 824.80
* 50 percent of the statutory interest on $17,782.37
** 50 percent of the statutory interest on $8,248.00
The above deficiencies and additions to tax remain unpaid. At the time of trial, Mr. Rivers was unemployed and had no property from which the deficiencies and additions could be collected.
On September 24, 1986, respondent issued a statutory notice of liability to petitioner in which he determined that petitioner is liable as a transferee with respect to the deficiencies in Mr. Rivers' 1982 and 1983 income taxes. Petitioner filed a timely petition for redetermination in this Court. He resided in Shaker Heights, Ohio, at the time. Respondent conceded in his answer that petitioner is not liable as a transferee with respect to the deficiency in Mr. Rivers' 1983 income taxes.
OpinionSection 6901 prescribes a procedural mechanism by which the Commissioner of Internal Revenue can pursue a person who qualifies as a transferee of property to collect tax liabilities of the transferor. See, e.g., Phillips v. Commissioner [2 USTC ¶ 743], 283 U.S. 589 (1931), affg. [1930 CCH ¶ 9409] 42 F.2d 177 (2d Cir. 1930), affg. [Dec. 5021] 15 B.T.A. 1218 (1929). It provides that the liability, at law or in equity, of a transferee of property "shall * * * be assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred." Among the liabilities which may be collected in this manner, it specifically includes a transferee's liability for the income taxes due from the transferor. Sec. 6901(a)(1)(A)(i). A petitioner's liability as a transferee is limited to the fair market value of the property received from the transferor. See, e.g., C.D. Construction Corp. v. Commissioner [71-2 USTC ¶ 9772], 451 F.2d 470 (4th Cir. 1971), affg. [Dec. 30,388(M)] T.C. Memo. 1978-297.
In general, the existence and extent of a transferee's liability for the unpaid tax liability of the transferor is determined under state law. Commissioner v. Stern [58-2 USTC ¶ 9594], 357 U.S. 39, 45 (1958); John Ownbey Co. v. Commissioner [81-1 USTC ¶ 9309], 645 F.2d 540, 543 (6th Cir. 1981). Respondent bears the burden of proving in proceedings before this Court that a petitioner is liable as a transferee of property, but not of showing that the taxpayer is liable for the tax. Sec. 6902(a); Rule 142(d), Tax Court Rules of Practice and Procedure.
In this case, respondent seeks to assess and collect from petitioner the deficiency in Mr. Rivers' 1982 income tax which was brought about by Mr. Rivers' failure to report as gross income the funds which he embezzled from Dalton during the year. Petitioner and Mr. Rivers resided in the State of Ohio at the time of the...
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