In re Parr, 587.

• Decision Date: 31 May 1962
• Docket Number: No. 587.,587.
• Citation: 205 F. Supp. 492
• Parties: In the Matter of George B. PARR, Bankrupt.
• Court: U.S. District Court — Southern District of Texas

205 F. Supp. 492

In the Matter of George B. PARR, Bankrupt.

No. 587.

United States District Court S. D. Texas, Corpus Christi Division.

May 31, 1962.

Louis F. Oberdorfer and Homer R. Miller, Dept. of Justice, Washington, D. C., Woodrow Seals, U. S. Atty., and John H. Baumgarten, Asst. U. S. Atty., Houston, Tex., for petitioner, the United States.

Oscar Spitz, Corpus Christi, Tex., for George Clower, trustee in bankruptcy.

Wright Matthews, Dallas, Tex., for Mrs. Thelma Parr, creditor.

INGRAHAM, District Judge.

The case is before the court upon the petition of the United States of America for review of an order of the Referee in Bankruptcy disallowing claims of petitioner for Federal Income Tax.

The petitioner, the United States of America, will be hereinafter referred to as "United States", "petitioner" or "government". The bankrupt, George B. Parr, will be referred to as "Parr" or "bankrupt".

This court is bound to accept the referee's findings and conclusions unless they are clearly erroneous. Gen. Order 47, pursuant to 11 U.S.C.A. § 53. Adhering to the scheme used by the referee, this court will separate the government's claims into six categories, viz:

                   I.   1945 & 1947 Issues
                   II.  1949 Issue
                   III. 1950 Issue
                   IV.  XXXX-XX-XX BISD Issues
                   V.   1952 Issue, and
                   VI.  1953 Issue
                

and consider them serially.

I. 1945 & 1947 ISSUES.

The government claims that bankrupt received $500,000 in 1945, and $162,000 in 1947, which he fraudulently failed to report as income. The referee found that bankrupt received these sums as the proceeds of bona fide loans which he was unconditionally obligated to repay, and that, therefore, he committed no fraud in failing to report these items as taxable income.

The key issues are whether or not these sums, however obtained, were taxable; and if taxable, whether or not the government has presented clear and convincing proof that bankrupt committed fraud in failing to pay taxes on these sums. Although proof of fraud in a bankruptcy proceeding will not entitle the government to collect 50% fraud penalties (Simonson v. Granquist, 369 U.S. 38, 82 S.Ct. 537, 7 L.Ed.2d 557 (1962)), assessment was not made until 1954, and the claims are barred by the statute of limitation unless the government can prove that the monies were fraudulently omitted from bankrupt's return. Because this court is persuaded that under no interpretation of the facts and applicable law can the government establish a right to the assessed taxes, a full review of the referee's findings and conclusions, to which the government has issued challenge, will not be undertaken.

Clearly, if these sums represented loans, as found by the referee, no tax is owing. But this court is convinced with the government that the referee's findings were clearly erroneous, and that the monies were illegally obtained with no intention on the part of the bankrupt of ever repaying them. They were not bona fide, arm's length transactions.

Bankrupt received the $500,000, in 1945, and the $162,000, in 1947, from the Duval County Road and Bridge Fund. Most of the $500,000 was used to purchase the 56,000 acre Dobie Ranch, located in LaSalle and Webb Counties, and to make improvements thereon. The $162,000 was used to satisfy a tax obligation incurred prior to 1945. There is no question but that bankrupt wanted to create the impression that the sums were received as loans. After acquiring the $500,000, bankrupt had five first mortgage Bearer Bonds and a Deed of Trust prepared. The Bonds provided for 1% interest, and were due in three years. In 1948, renewal Bonds and Deed of Trust were executed, covering both amounts, at the same rate of interest and due in 10 years. In 1948, a $10,000 token payment of principal, along with a payment of $18,240 on accrued interest, was made to the County. But viewing the evidence in its entirety, these actions on the part of the bankrupt are revealed to be nothing more than diversion tactics to draw attention away from the true illegal nature of the transactions.

Nothing spread upon the public records of Duval County acknowledges that there were loans made to bankrupt in 1945 or 1947. The $500,000 was abstracted from the Road and Bridge Fund with two $250,000 warrants drawn to the Wilder Construction Company (a defunct proprietorship owned by the bankrupt), with the warrants reciting that they were paid in allowance of claims by that company. In fact, the company had no claims against the County at that time. Subsequently, bankrupt withdrew the money from the Wilder account and deposited it to his own name. This diversion was a part of the whole scheme to defraud. Two members of the County Commissioners Court at the time these transactions were alleged to have taken place testified that they had no knowledge of any loans being made by the County to bankrupt. Further, such a loan is clearly prohibited by Art. III, Sec. 52 of the Texas Constitution, Vernon's Ann.St., which forbids a political subdivision of the state to lend its credit or grant its public money or things of value to any individual, association or corporation. When the county brought suit against the bankrupt in state court to recover back these funds, they pursued their remedy on a theory of a trust ex maleficio, which is inconsistent with a finding that these were loan transactions.

Although there was testimony that the 1945 Deed of Trust and the 1947 renewal Deed of Trust were duly acknowledged by bankrupt and respectively delivered to the County Clerk and the County Auditor of Duval County, neither Deed was ever recorded, either in Duval County or in LaSalle or Webb County where the property was located. Nor does it appear that the original Bearer Bonds were ever outside the bankrupt's dominion and control. It was testified that the renewal Bonds were delivered to the Duval County Auditor, but to this day they remain unfound. Nothing in the bankrupt's financial records ever revealed that there was a debt owing to the County. Instead, the transactions were set up on bankrupt's books to show a mortgage payable obligation given to secure the purchase of the Dobie Ranch. After obtaining the funds, the bankrupt filed two financial statements with a bank, omitting entirely any reference to liability to Duval County or anyone else on account of these withdrawals. In short, bankrupt attempted to weave a tangled web of deception about these transactions, which is readily brushed aside to expose their inherent illegality. Parr, being in a position to do so, simply helped himself to the money.

Turning to the legal issues of taxability, Section 22(a) of the 1939 Code, 26 U.S.C.A. § 22(a), which is relevant to the years in question, defines gross income as including "gains * * * of whatever kind and in whatever form paid." There is no proviso that the gains must have been legally obtained, and indeed there has been no such limitation in our tax laws since the time of the 1916 amendment of Section II B, of the Income Tax Act of 1913, to allow the taxation of gains from unlawful as well as lawful businesses. Without other guide, it would appear that Congress intended to exercise fully its power under the Sixteenth Amendment to tax incomes, "from whatever source derived," and that the monies involved in the present dispute, not being valid loans, were taxable; and that fraud might now be shown to establish the validity of the 1954 assessment. But, by excising the "claim of right" doctrine from its original context as a test for determining when receipts constituted taxable income (See North American Oil Consolidated v. Burnet, 286 U.S. 417, 424, 52 S.Ct. 613, 76 L.Ed. 1197 (1932)), and applying it to determine whether receipts should be taxable as income, the Supreme Court, in Commissioner of Internal Revenue v. Wilcox, 327 U.S. 404, 66 S.Ct. 546, 90 L.Ed. 752 (1946), significantly limited the types of ill-gotten gains subject to taxation. In February 1946, before either of the returns in question were filed, the Court, in the Wilcox case, held "that a taxable gain is conditioned upon (1) the presence of a claim of right to the alleged gain and (2) the absence of a definite, unconditional obligation to repay or return that which would otherwise constitute a gain. Without some bona fide legal or equitable claim, even though it be contingent or contested in nature, the taxpayer cannot be said to have received any gain or profit within the reach of § 22(a)." Even before the Supreme Court's decision in Wilcox, the Fifth Circuit, in McKnight v. Commissioner, 127 F.2d 572 (1942), reached the same conclusion for substantially the same reasons. Although the facts in both the Wilcox and McKnight cases concerned embezzlement, the doctrine announced was patently applicable to various other forms of illegally received income. Thus, because bankrupt had no claim of right to the monies taken from Duval County, it could not be said that the funds were taxable so long as the rationale of Wilcox remained the law.

After the Wilcox decision, the lower courts almost immediately began to confine its rationale (See, e. g., Akers v. Scofield, 167 F.2d 718 (5th Cir. 1948)), and in 1952, the Supreme Court explicitly limited it to its facts by refusing to extend it to deny taxability of extorted funds. Rutkin v. United States, 343 U.S. 130, 72 S.Ct. 571, 96 L.Ed. 833. Implicitly, it would seem Rutkin rejected the Wilcox rationale in toto in that the absence of a "claim of right" was as much a part of Rutkin as of Wilcox. The test of taxability applied in Rutkin was that "an unlawful gain, as well as a lawful one, constitutes taxable income when its recipient has such control over it that, as a practical matter, he derives readily realizable economic value from it." Thus, at this point, the test of Rutkin would reach back to the years in question to make the monies received from Duval County taxable to bankrupt, since no argument can be made that...