New v. Comm'r of Internal Revenue, Docket No. 4709-64.
| Decision Date | 09 August 1967 |
| Docket Number | Docket No. 4709-64. |
| Citation | 48 T.C. 671 |
| Parties | LEROY K. NEW, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
John J. Rochford, for the petitioner.
Dennis J. Fox and George P. Adinamis, for the respondent.
Held, an administrator of a decedent's estate, chargeable with notice of contingent tax liabilities, conducts a unilateral inquiry or investigation at his peril under sec. 6901(a)(1)(B), I.R.C. 1954, and Rev. Stat. sec. 3467 (31 U.S.C. sec. 192).
The respondent has determined deficiencies in the income tax of William J. Cunningham, deceased, as follows:
Under section 6901(a)(1)(B) of the Internal Revenue Code of 1954, 1 and section 3467 of the Revised Statutes (31 U.S.C. sec. 192), respondent has determined that such deficiencies are the personal liability of the petitioner, as fiduciary of the Estate of William J. Cunningham, deceased, and that they are to be assessed against petitioner.
Respondent has now conceded the net liability remaining for 1948, consequently only the years 1956, 1957, and 1958 remain for our consideration.
Petitioner denies that any taxes are owed by the estate and further denies personal liability for any unpaid taxes.
An orally stipulated fact is so found. The petitioner, Leroy K. New (Leroy), is an attorney who has practiced law and had his residence in and near Indianapolis, Inc., at all relevant times. He holds himself out as an expert on Indiana probate practices, has had considerable experience in the handling of probate administration and has handled a number of estates in which Federal taxes were involved. At the time of trial he was the chief trial deputy of the Marion County, Ind., prosecuting attorney.
Leroy's brother, Edward F. New, Jr. (Edward), has practiced law since 1947 and is also experienced in the handling and administration of estates. At the time of trial he was judge of the Hamilton County Circuit Court in Indiana.
On or about August 27, 1961, William J. Cunningham died intestate and on or about August 29, 1961, the Probate Court of Marion County, Ind., appointed the Merchants National Bank & Trust Co. of Indianapolis, Ind. (hereinafter called the bank), administrator of Cunningham's estate. Neither Leroy nor Edward had ever known Cunningham.
During the month of September 1961, Roma Boyd Cunningham, claiming to be the common-law wife of the deceased, retained Leroy and Edward to represent her interests in connection with his estate. Considerable litigation took place and on about January 18, 1962, the bank was, by order of said Probate Court, replaced by Leroy as substituted administrator. Leroy then retained Edward as attorney for the estate, and Edward continued to serve as the attorney for Roma Boyd Cunningham.
Less than 60 days later a settlement was reached among the claimants to the estate, and pursuant to a decree of the said Probate Court, Leroy distributed assets valued at $18,220 to Roma Boyd Cunningham on March 12, 1962, and an equal amount to Helen Foley Cockrum, decedent's niece, on March 8, 1962. The entire remainder of the estate was used to satisfy administration charges, including attorney and administrator's fees and debts, leaving the estate unable to pay Federal income taxes due and owing by the decedent.
A total of $48,482.74 was distributed, and on May 7, 1962, after all the estate assets were distributed, Leroy submitted his final account, and prayed for and received his full and final discharge from such Probate Court.
During the period of probate no formal claim was filed in the Cunningham estate for Federal income taxes; however, Leroy knew that the 6-month period allowed for the filing of claims in a decedent's estate by the Indiana statutes did not apply to claims of the United States. In handling other estates it had been Leroy's practice to advise with the surviving spouse as to whether any Federal taxes were owing, and his experience included cases in which he had then contacted the Internal Revenue Service, the office of which was 2 blocks from his office, to ‘find out just what their records showed, agree on what he (decedent) owed and pay it.’
Paul E. Rawley was the trust officer of the bank who was personally in charge of the administration of the Cunningham estate until the bank was removed as administrator on January 18, 1962, and in addition he had known William J. Cunningham during his lifetime since Cunningham had been a beneficiary of two trusts administered by the bank. Rawley advised both Leroy and Edward that decedent had not filed Federal income tax returns for the last 5 years of his life, and that the bank had made rough tax computations, using one exemption, and believed that the Cunningham estate owed Federal income taxes for the years 1957 through 1960 of about $4,000 or $5,000.
Leroy and Edward began having conferences with representatives of the bank as soon as they had been employed by Roma Boyd Cunningham. there were many such meetings both before and after Leroy was appointed administrator and the bank was removed from that office on about January 18, 1962. The men usually representing the bank at such meetings and conferences were: Paul E. Rawley, the trust officer; Russell J. Ryan, Jr., and Patrick J. Smith, attorneys for the bank; and Ron Baker, an assistant trust officer of the bank. These employees and attorneys for the bank told Leroy and Edward at each such conference that in their opinion the Cunningham estate owed Federal income taxes for a good many years preceding Cunningham's death in 1961 in the amount of $4,000 to $5,000, and the years 1957 through 1960 were specifically mentioned. As put by Edward: ‘I think they repeated it each time there was a meeting until the last and final meeting, * * * .’
Charles D. Babcock was the Indianapolis attorney who represented Helen Foley Cockrum as the principal claimant to Cunningham's estate, opposed to Roma Boyd Cunningham. He was so employed near the end of January 1962, and thereafter told one or both of the News that the only way he would allow his client to settle her claim would be upon a dismissal of her motion for a new trial, which had been filed to resist the removal of the bank as administrator. He told the News that he took this position because of the possible contingent Federal income tax liability of the Cunningham estate and so that his client could get her money ‘free and clear of these liens and encumbrances and taxes.’
Ted B. Lewis, a partner of Charles D. Babcock and also representing Helen Foley Cockrum at the above-described conferences with Leroy and/or Edward, confirmed that at such meetings the possible contingent liability of the Cunningham estate for Federal income taxes of approximately $4,000 was discussed.
During William J. Cunningham's life the bank kept records of all properties and investments which it handled for him or for his benefit and these records were preserved during all relevant times. The bank, however, neither kept nor was aware of any records made by or for William J. Cunningham pertaining to income or receipts by him of anything coming to him from property held in his own name or from any source other than the bank.
At about the time of the distributions of $18,220 each to Roma Boyd Cunningham and to Helen Foley Cockrum, or very shortly thereafter, Leroy and Edward examined all of the records at the bank pertaining to William J. Cunningham and there examined, inter alia, a canceled voucher for about $26,300 payable to and indorsed by him, and dated in 1957 or 1958. Also, Edward admitted while testifying that the bank's records during the late 1950's showed income paid to William J. Cunningham of about $700 for 1 year and of about $1,100 for another year and that his brother, Leroy, also saw all these records.
Russell J. Ryan, Jr., was one of the attorneys who had represented Helen Foley Cockrum before the bank was removed as administrator on about January 18, 1962. He represented the bank thereafter in connection with the settlement negotiations conducted on behalf of Roma Boyd Cunningham by Leroy and Edward. In March 1962 and shortly before the March 12, 1962, date on which Leroy distributed assets valued at $18,220 to Roma Boyd Cunningham, either Leroy or Edward handed Ryan an undated and unsigned instrument reading in pertinent part as follows:
STATE OF INDIANA
COUNTY OF MARION) SS. IN THE MARION PROBATE COURT
OF WILLIAM J. CUNNINGHAM, deceased.) Estate Docket E61-113
Comes now Leroy K. New, Administrator herein, and respectfully petitions for instructions of this Court to your Administrator with respect to a certain ‘Settlement Agreement’ proposed and presented to this Court in the above captioned cause * * * for this Court's approval and authorization to your Administrator to execute the same.
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