Merlino v. Commissioner
| Decision Date | 16 May 1995 |
| Docket Number | Docket No. 2642-93. |
| Parties | Maria Merlino v. Commissioner. |
| Court | U.S. Tax Court |
Mark E. Cedrone, for the petitioners. David A. Breen, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined that petitioner, as the transferee of assets of Joseph Merlino, is liable for unpaid Federal income taxes of Joseph Merlino for the taxable year 1987, in the amount of $139,964, plus 50 percent of the interest due on $77,5871, plus interest as provided by law.
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable year before the Court, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The issue for decision is whether petitioner is liable as the transferee of assets of Joseph Merlino under Pennsylvania State law and section 6901, and, if so, the amount of such liability.
Some of the facts have been stipulated and are so found. The first and second stipulations of facts and the exhibits attached thereto are incorporated herein by this reference.
Maria Merlino (petitioner) resided in Philadelphia, Pennsylvania, at the time she filed her petition in this case. Petitioner and Joseph Merlino (Joseph) are sister and brother.
The property at issue in this case is a single-family dwelling located at 1917 Hartranft Street in Philadelphia, Pennsylvania (the Hartranft residence). The Hartranft residence became the home of petitioner, Joseph, their mother, Rita Merlino (Rita), and their younger sister, Natalie Merlino (Natalie), on July 30, 1986. Prior to that date, the family resided in a house belonging to petitioner's grandmother at 927 Jackson Street, Philadelphia, Pennsylvania.2
The purchase of the Hartranft residence was pursuant to an Agreement for the Sale of Real Estate, dated May 5, 1986, and signed by petitioner and Joseph, as buyers, and by Raymond and Carmella DiPrimio, as sellers. At that time, petitioner was unemployed and had a bad credit rating; thus, she was unable to secure a mortgage to purchase the property. Joseph was able to qualify for a mortgage, provided the property was titled in his name.
As a result, on July 30, 1986, Carmella DiPrimio, individually, conveyed title to the residence to Joseph in exchange for the sum of $125,000, which consisted of a $100,000 cash downpayment and the proceeds of a $25,000 mortgage from Capitol Mortgage Company (Capitol). Rita provided $91,900 of the cash downpayment.3
Following the purchase of the Hartranft residence, petitioner, concerned about the ramifications of having the property titled solely in Joseph's name, sought legal counsel. In a letter dated April 21, 1987, Fred Levin (Levin), an attorney at the firm of Stradley, Ronon, Stevens & Young, wrote to petitioner regarding the transfer of title to the residence, the money used for the downpayment, and a trust agreement among the siblings. He advised that transferring the title to the residence from Joseph to the three siblings would trigger the due-on-sale clause of the mortgage. To minimize the chances of triggering the clause, he suggested transferring the title from Joseph to his mother and then to "Joseph Merlino, Trustee", a minor change that likely would go unnoticed. He proposed a trust document which would place the residence into the trust, name Joseph as trustee, and provide for payment of the mortgage and other house-related expenses. Levin warned, however, that if the deed or trust were not recorded, the interests of petitioner and Natalie would not be protected against Joseph's creditors.
Levin thought that Salvatore, petitioner's father, had provided the $91,900 for the purchase of the residence. Levin proposed treating the "funds advanced by your father for the purchase of the house" as loans of $30,000 to each of the three children, which the father could forgive at the rate of $10,000 per child per year and avoid any gift tax liability. Levin also warned petitioner, however, that the loan notes would be subject to the claims of Salvatore's creditors.
On May 19, 1987, Levin wrote another letter to petitioner, enclosing several documents for signature. These documents included: (1) A deed conveying the Hartranft residence from Joseph to Rita; (2) a deed conveying the Hartranft residence from Rita and Salvatore to Joseph, petitioner, and petitioner as custodian for Natalie, as joint tenants; (3) transfer affidavits for the deeds to be used in recording the deeds; (4) three promissory notes, one from each of the Merlino children to their mother; and (5) a declaration of trust among Joseph, petitioner, and Natalie. Levin cautioned that recording the deeds and affidavits technically would trigger the due-on-sale clause of the Jefferson Bank mortgage (the assignee of Capitol), should the bank become aware of the transfer. Yet, at the same time, Levin again warned of the limited protection for petitioner if the deeds and/or trust remained unrecorded, and recommended that the mortgage be refinanced and the title transferred to all three Merlino children at settlement.
On June 10, 1987, the deeds, transfer affidavits, promissory notes, and declaration of trust were executed. As a result, Joseph conveyed title to the residence to his mother, Rita Merlino; the deed stated the consideration as $1. Rita then transferred title to the residence to Joseph, petitioner, and petitioner as custodian under the Pennsylvania Gift to Minors Act for the benefit of Natalie, as joint tenants with a right of survivorship; again, the stated consideration was $1. Neither the deeds nor the trust documents were recorded. Although the stated consideration was $1, Joseph, petitioner for herself, and petitioner for Natalie each executed a promissory note to Rita as payee in the principal amount of $30,000 with an annual interest rate of 7 percent. The notes provided for an annual payment of $10,000 on July 1 of the years 1987, 1988, and 1989; any remaining indebtedness was due on July 1, 1990. Rita had the option in each year of the term of the note to waive her right to that year's payment. The children did not make any payments on the notes to their mother.
Joseph, as trustee for the above joint tenants, signed the declaration of trust. The declaration of trust placed the responsibility for the payment of any taxes, water and sewer charges, municipal assessments, and any other expenses, including repairs of the premises, on Joseph but provided that the ultimate cost of any such payments was to be borne by the three siblings in such proportion as they deemed appropriate. The record does not disclose whether and, if so, how the siblings actually shared these expenses. Under the declaration of trust, Joseph, petitioner, and Natalie did not have the right to collect any rent from each other, absent the prior written consent of all three.
On September 23, 1987, Joseph, Stephen Rinaldi (Rinaldi), and Richard Barone (Barone) stole $352,150 from a Federal Armored Express Company, Inc., armored car. On December 30, 1988, over a year after the theft, Joseph conveyed title to the Hartranft residence to petitioner, the deed listing the consideration as $1. The fair market value of the entire house in fee simple on December 30, 1988, was $130,000. The deed was recorded on January 13, 1989.
According to a letter from Jefferson Bank, dated December 19, 1988, the payoff amount of the mortgage on the residence, calculated as of December 31, 1988, was $22,466.25. On December 30, 1988, Fidelity Bank issued a cashier's check in the amount of $22,988 to Jefferson Bank. This was the same day that petitioner's grandmother, Mary Merlino (Mary), withdrew $10,000 from her checking account and redeemed two certificates, one for $9,829.64 and another for $4,185.53, all on deposit at Fidelity Bank. Jefferson Bank certified satisfaction of the mortgage on January 9, 1989.
Petitioner signed a mortgage dated December 1988 and a mortgage note dated December 30, 1988, to Mary, in the amount of $23,000. The mortgage and note were not recorded until July 5, 1991. As of the time of the trial in this case, petitioner had made no payments on this mortgage.
On January 12, 1990, Joseph was found guilty of the following charges arising from the September 23, 1987, armored car theft: (1) Conspiracy to commit an offense against the United States (count 1); (2) theft from an interstate shipment (count 2); (3) receipt of money taken from an interstate shipment (count 3); and (4) aiding and abetting with respect to counts 2 and 3. As a result of his conviction, Joseph was sentenced to prison for a period of 4 years and, upon release, probation for 5 years, including 6 months in a community treatment center. In addition, Joseph and his conspirators, Rinaldi and Barone, were ordered to make restitution of the entire proceeds of the armored car theft. As of the date of the trial in this case, however, restitution had not been made, and none of the $352,150 in cash stolen from the armored car had been recovered.
On April 29, 1991, petitioner signed a mortgage note securing a home equity line of credit from Fidelity Bank on the Hartranft residence in the amount of $20,000. On June 25, 1991, petitioner encumbered the Hartranft residence with a $33,000 mortgage from Michael Baldino, Sr., Anna Baldino, and Michael Baldino, Jr.; this mortgage was recorded on July 5, 1991. On July 22, 1992, petitioner signed a mortgage note, secured by the Hartranft residence, promising to pay the amount of $91,962.10 to George and Clementine Durkin, trustees for Natalie, the mortgagee. The stated purpose of this purported mortgage note was to secure for Natalie an interest in the Hartranft residence to the extent of that $91,962.10 amount. As of the time of the trial, petitioner had made no payments on any of these mortgages. The real estate taxes on the Hartranft residence have been...
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