In re Diversified Brokers Company, Inc., 69 B 569.
| Decision Date | 14 February 1973 |
| Docket Number | No. 69 B 569.,69 B 569. |
| Parties | In the Matter of DIVERSIFIED BROKERS COMPANY, INC., Bankrupt. |
| Court | U.S. District Court — Eastern District of Missouri |
John A. Nooney, Trustee, Clayton, Mo., Stuart Symington, Jr., and Sanford S. Neuman, St. Louis, Mo., for John A. Nooney.
John J. McCarthy, Chief, General Litigation Section, Tax Div., Washington, D. C., and Daniel Bartlett, Jr., U. S. Atty., St. Louis, Mo., for claimant.
William McNamara, Office of Chief Counsel, Internal Revenue Service, St. Louis, Mo.
The United States has filed a tax claim against the bankrupt estate for income taxes of the corporation for the years 1965, 1966, 1967, and 1968, plus interest at the rate of six percent. The total amount of the claim, plus interest, amounts to approximately $2,000,000.00. The trustee filed objections to the claim and after hearings conducted by the Referee in Bankruptcy, the claim was denied and the objections of the trustee were upheld on September 19, 1972.
The United States has filed its petition for review and the Referee has filed his certificate.
The question for determination is the correctness of the Referee's order of September 19, 1972, denying petitioner's claim No. 6, manifesting his conclusion that the bankrupt's receipt of monies from its lenders, where the bankrupt was utilized as a borrower by its officers in a Ponzi-type scheme, does not constitute taxable income within the meaning of section 61(a) of the Internal Revenue Code.
This Court affirms the decision of the Referee in Bankruptcy, and further adopts the well-reasoned and detailed memorandum opinion of the Referee in Bankruptcy, dated September 19, 1972, as the opinion of this Court.
MEMORANDUM OPINIONPending for determination is the trustee's Objections To Claim, filed April 27, 1970, to Claim No. 6, filed April 16, 1970, as a tax (income) priority claim, by the United States of America. On September 19, 1970, the trustee filed his Supplemental Objection To Claim. Hearing was had upon the objections, and upon the claim, in September, 1970, the matters in issue having been finally heard and submitted on September 16, 1970, with leave to file briefs and other matters thereafter.
The trustee does not, in either of his pleadings to Claim No. 6, object to its allowance on the ground that the claim was not timely filed. Nevertheless, in part I of his post-hearing brief, he argues such. The Government, in its reply brief, meets the argument, without complaint that the objections did not challenge the claim for that reason. Further, hearing upon the objections and upon said claim proceeded as though the claim had been challenged on such basis.
As stated, Claim No. 6 was filed on April 16, 1970. It is denominated "Amended Supplemental No. 1 to Proof of Claim dated May 2, 1969".1 Claim No. 6 describes, as the alleged tax liability of the bankrupt:
"Corporation Income—Year Ending
12-31-65 5,259.69
Interest to 3/28/69 957.98
Corporation Income—Year Ending
12-31-66 146,126.31
Interest to 3/28/69 17,847.43
Corporation Income—Year Ending
12-31-67 519,711.25
Interest to 3/28/69 39,293.27
Corporation Income—Year Ending
12-31-68 1,158,189.06
Interest to 3/28/69 2,475.07"
The bankrupt was adjudicated a bankrupt by order of this District Court entered on April 22, 1969. The first meeting of creditors was held on June 6, 1969. The last day for the filing of claims under Section 57n of the Bankruptcy Act, Sec. 93(n), Title 11 U.S.C., was December 6, 1969, unless, as permitted by the provisions of that Section, the time for the filing of claims by the United States was extended. Prior thereto, and on November 28, 1969, an order was entered extending the time, for the filing of tax claims by the United States, to and including February 4, 1970.
On January 29, 1970, within such extended time, the United States filed its Claim No. 5, denominated "Supplemental No. 1 to Proof of Claim dated May 2, 1969". This claim describes, as the alleged tax liability of the bankrupt:
"Corp. Income F-9-30-66 137,270.46
Interest to 3/28/69 18,824.99
Corp. Income F-0-30-67 455,522.26
Interest to 3/28/69 35,137.79
Corp. Income F-930-68 941,094.40
Interest to 3/28/69 16,127.52"
Aside from the obvious difference in the claims—Claim 6 embracing income taxes, allegedly due, calculated on a calendar year basis and Claim 5 embracing income taxes, allegedly due, on a fiscal year basis—the method of arriving at a taxable income figure for the respective years differs with the claims. Claim 5 is primarily based upon a determination that bankrupt's "loans payable" account was to be used as evidence of its gross income; whereas, Claim 6 is based upon a determination that bankrupt's deposits, into the North County Bank, reflecting its receipts of money, was to be used as evidence of its gross income. (See, & compare, U. S. Exhibits JJ & R, with U. S. Exhibit KK). This difference is of no substantive consequence, in my judgment, in respect of the trustee's timeliness objection.
The theory of the Government's imposition of income tax liability in each instance is the same: that is, that the money received by the bankrupt, pursuant to its scheme,2 is to be considered income for income tax purposes. Only the method of determining the amount of money received differs.
Amendments, of claims, which are filed after the expiration of the statutory period provided for by the Act are not barred so long as such amendments do not seek to assert an entirely new, different, separate and distinct claim to that which was timely asserted. Hutchinson v. Otis (1903) 190 U.S. 552, 23 S.Ct. 778, 47 L.Ed. 1179, In re Faulkner (8 Cir., 1908) 161 F. 900. Such amendments which merely increase the amount of the claim are not barred. Menick v. Hoffman (9 Cir., 1953) 205 F.2d 365; Continental Motors Corp. v. Morris (10 Cir., 1948) 169 F.2d 315; Industrial Commissioner of New York v. Schneider (2 Cir., 1947) 162 F.2d 847; In re Parchem (D.C.Minn., 1958); Nordbye, J.) 166 F.Supp. 724; In re Morgen Drug Co. (D.C.N.Y., 1941) 42 F.Supp. 345.
In Menick v. Hoffman, supra, the Court permitted the Government to file and prove an amended claim, not timely filed, where the amended claim included income taxes which had not been previously asserted, and where the claim timely filed embraced only withholding and social security taxes, saying the amendment did not change the basic ground for recovery set out in the earlier claim, and by it an entirely new, different, separate and distinct claim was not being asserted.
The trustee cites only In re Buckeye Die Tool Co. (Ref.Opinion, 1952, E.D. Mo.) 52-2 U.S.T.C. para. 9450. There, Referee O'Herin of this District disallowed an amended claim for taxes where the amount of the (withholding) taxes timely asserted was sought to be increased. It is clear that Referee O'Herin disallowed the amended claim, as it sought to increase the taxes timely asserted, only because of the local Bankruptcy Rule, Rule XIV(b), then in existence, which precluded amendments to claims where the amendments were not filed within the time fixed for the filing of claims and where the amendments sought to increase the amount of the claim. Such Rule no longer exists, and Buckeye no longer serves as a useful precedent.
I do not perceive that Claim 6 asserts such an entirely new, different, separate and distinct claim from that asserted by Claim 5 so as to be barred by Section 53n, supra. Each asserts a claim for unpaid income taxes, albeit different tax periods are embraced and a different method is used in determining the amount of gross taxable income realized by the bankrupt. This contention is ruled against the trustee.
. . . . .
The Government contends that Claim No. 6 is to be sustained on the theory that the bankrupt engaged, by the acts of its officers and employees, in a scheme to receive money, in the form of loans, from unsuspecting persons, upon misrepresentations to them as to its activity and as to its ability to pay the borrowed monies and exorbitant rates of interest and upon the promise to pay exorbitant rates of interest; that throughout the period of the scheme the bankrupt could not repay the monies received; that, thereby, it could not and did not intend to repay those monies; and that, thus, the receipt of those monies constitute the receipt of gross income.
The trustee contends that the receipts of money, by the bankrupt, upon which Claim No. 6 is based, were merely monies received as loans from such unsuspecting lenders, and that such loan-receipts do not constitute taxable income.
The bankrupt was incorporated, as a Missouri corporation, on November 12, 1965. The incorporators were Donald Smallwood, Betty Smallwood, his wife, and Roy Lay. These incorporators were its only directors3 and stockholders, Donald Smallwood owning 29 shares of its stock; Betty Smallwood, 1 share; and Roy Lay, 20 shares. Each share has a stated par value of $10. Fifty of such shares were authorized to be issued prior to the commencement of business, and were issued in the numbers and to the shareholders as stated. Throughout its existence, Donald Smallwood, was its president, and Roy Lay its vice-president, and one Harold F. Conell its treasurer. Betty Smallwood was its secretary until November 17, 1967; Roy Lay served as such thereafter. The salaries of such officers was to be such as fixed from time to time by the Board of Directors.
The bankrupt was formed as a general business corporation, to buy and sell, lease, and deal in all types of property and to engage in and perform services,...
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