United States v. 58th Street Plaza Theatre, Inc.
| Decision Date | 31 May 1968 |
| Docket Number | No. 61 Civ. 3312.,61 Civ. 3312. |
| Citation | 287 F. Supp. 475 |
| Parties | UNITED STATES of America, Plaintiff, v. 58TH STREET PLAZA THEATRE, INC., Leo Brecher, Walter Brecher, Vivian Pack and Leo Brecher and Walter Brecher, as Executors of the Estate of Jeannette Brecher, Deceased, Defendants. |
| Court | U.S. District Court — Southern District of New York |
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Robert M. Morgenthau, U. S. Atty., Southern District of New York, for plaintiff; Alan G. Blumberg, Asst. U. S. Atty., of counsel.
Shearman & Sterling, New York City, for defendants; Paul R. Russell, New York City, of counsel.
OPINION, FINDINGS OF FACT and CONCLUSIONS OF LAW.
In this action the United States of America seeks collection of corporate income taxes allegedly due from the defendant 58th Street Plaza Theatre, Inc. ("Plaza") for the period 1943 through 1949. The United States also asks judgment against Leo Brecher ("Leo"), Walter Brecher ("Walter"), Vivian Pack ("Vivian"), and Leo and Walter Brecher as Executors of the Estate of Jeannette Brecher ("Jeannette"1), alleged transferees of the corporate defendant while the corporation was insolvent.
The answer to the amended complaint consists of (1) certain denials, (2) allegations that certain tax deficiencies are barred by the statute of limitations, and (3) claims that, contingent upon a holding that individual defendants were transferees for the corporation, defendants are entitled to certain offsets and recoupments.
The action was tried to the court without a jury.
After hearing the testimony of the parties, examining the exhibits, the pleadings and the proposed findings of fact and conclusions of law submitted by counsel, this court makes the following Findings of Fact and Conclusions of Law:
FINDINGS OF FACT
1. Defendant Plaza, a domestic corporation with its principal place of business in the Borough of Manhattan, City and State of New York, was incorporated on January 13, 1930 under the laws of the State of New York with an authorized capital stock consisting of 2,000 shares without par value. (Stip., ¶ 32).
2. The stockholders of Plaza were Leo, his wife Jeannette, and their children, Walter and Vivian. Their stockholdings at the dates relevant to this action were:
Leo Jeannette Walter Vivian
6/21/39 to 2/28/42 1550 425 0 0
3/28/42 to 1/4/43 1050 425 250 250
1/4/43 to 10/1/53 1050 25 450 450
400 of 425 shares owned by Jeannette were a gift from Leo. All of the shares owned by Walter and Vivian were acquired as gifts from their parents, Leo and Jeannette. (Stip., ¶¶ 9, 16, 17, 20)
3. At all times relevant herein (i. e., from 6/21/39 to 10/5/53), the directors of Plaza were Leo, Jeannette and Frank Schiffman. (Ex. 60) Mr. Schiffman, an officer but not a stockholder of Plaza, was an associate of Leo in various other enterprises. (60-63)3
4. Leo was responsible for the formation of Plaza and at all times relevant herein he was Plaza's principal and controlling stockholder, officer and director. Leo was primarily responsible for operation and management of Plaza and he made all important decisions. He was fully familiar with all its affairs. (7-9)
5. On June 21, 1939, Leo leased from Walter Reade certain premises on 58th Street near Madison Avenue, New York City, which were occupied by a motion picture theatre known as the Plaza Theatre. The lease, for a period of 20 years commencing September 1, 1939, provided for an annual rental of $30,000 per year plus 15% of annual box office receipts in excess of $225,000 plus all taxes and fire insurance premiums on the property in excess of $7,500 per year. (Ex. 3; Stip., ¶¶ 11-12)
6. Pursuant to the provisions of said Reade-Brecher lease, Leo paid Reade a security deposit of $40,000 in cash, plus an additional $10,000 by means of twenty-four promissory notes, making a total security deposit of $50,000. Such security deposit was recoverable by subsequent deductions from the rent. (Ex. 3, ¶ 13; 101)
7. During the period from September 1, 1939 to February 28, 1942, Plaza occupied and operated the theatre for Leo and paid rent to Reade, as well as those of the aforesaid notes made by Leo to Reade for security deposit which became due during said period. (Stip., ¶ 14; 11-12) Leo, as the principal officer of Plaza, personally managed the theatre operations. (15) During this period Plaza also reimbursed Leo for the $40,000 security deposit which he had given to Reade. (99, 101-102)
8. On February 28, 1942, Leo, with the approval of Plaza's board of directors (Ex. 60; 62-64), sold the Reade-Brecher lease to Plaza for $200,000, payable $1,200 per month without interest. (Stip., ¶ 15; Ex. 4; 14) Plaza operated the theatre. As original lessee, Leo remained personally liable on the Reade-Brecher lease. (78)
9. Leo received $1,200 per month from Plaza as installment payments on the sale of the lease, and he claimed that these payments were taxable at capital gain rates. Plaza claimed the right to amortize the $200,000 cost of the leasehold over its remaining term, from February 28, 1942 to September 1, 1959, at the rate of $11,428.56 per annum. (Stip., ¶ 30)
10. On December 29, 1942, Plaza subleased the theatre to Leo's wife, Jeannette, for a term of five years commencing January 1, 1943. Under the terms of the sublease, Jeannette was to pay a fixed rental of $40,000 per year, plus 15% of the amount by which the box office receipts exceeded $225,000 in each year, plus $15,000 per annum out of the profits from the operation of the theatre (if earned) and all taxes and fire insurance premiums on the property in excess of $7,500 per year. (Ex. 5; Stip., ¶ 18; 16)
11. The sublease from Plaza to Jeannette was in effect from January 1, 1943 to November 15, 1945. During that period, Jeannette paid the sublease rentals to Plaza; Plaza paid the lease rentals to Reade and paid the $1,200 monthly installment to Leo.
12. During the period January 1, 1943 to November 15, 1945, corporate earnings were taxable at war-time excess profits tax rates. (Exs. 9, 10, 11) Individual earnings were not subject to excess profits although they were subject to graduated surtaxes.
13. During the period January 1, 1943 to November 15, 1945, Leo remained personally liable on the Reade-Brecher lease. (78) He continued to manage the theatre operations as he had done from September 1, 1939 to December 31, 1942. During the above period, however, he managed as an employee of his wife, Jeannette, for which she paid him a salary of $6,000 per annum. (Stip., ¶ 21) Leo was still president of Plaza.
14. During the entire period of its existence, the Jeannette sublease served no business purpose of Plaza but was merely a family arrangement (a) to provide Jeannette with increased income; (b) to avoid the payment of high taxes by Plaza; and (c) to divert corporate assets from Plaza.
15. On November 16, 1945, the sublease to Jeannette was terminated, and the theatre was subleased to a partnership known as "58th St. Plaza Theatre Co." The new partnership was composed of Jeannette, Leo, Walter and Vivian as equal 25% partners under a written partnership agreement. (Ex. 12) The partners each contributed $6,250 (totalling $25,000), which was paid by the partnership to Plaza as a security deposit. (38-39) The partnership paid the theatre rental to Plaza and Plaza paid it to Reade. This sublease to the partnership was in effect from November 16, 1945 through December 31, 1948, but no written assignment of the existing sublease to the partnership or written cancellation of the existing sublease or a new sublease was produced at the trial. (32-37)
16. The amount of theatre earnings received by the four stockholders during the period of the partnership, less credit for the book value as of January 1, 1949, of theatre fixtures purchased by the partnership and surrendered to Plaza on January 1, 1949, is as follows (Ex. 15):
YEAR JEANNETTE LEO WALTER VIVIAN
1943 40,096.64 -- -- --
1944 37,372.31 -- -- --
1945 37,146.90 -- -- --
10/31/46 9,275.18 9,275.18 9,275.18 9,275.18
10/31/47 1,324.03 1,324.03 1,324.03 1,324.03
10/31/48 1,987.81 1,987.81 1,987.81 1,987.81
12/31/48 447.28 447.28 447.28 447.28
(credit for fixture
values) (3,174.46) (3,174.46) (3,174.46) (3,174.46)
----------- ---------- ---------- ----------
124,475.69 9,859.84 9,859.84 9,859.84
17. During this partnership period, Plaza's operating profits, after rent to Reade and operating expenses, were as follows:
YEAR AMOUNT
1946 $24,858.07
1947 24,523.10
1948 20,534.78
----------
$69,915.95 (Ex. 14)
18. During this partnership period, Leo remained personally liable under the Reade-Brecher lease (58) and he personally managed the theatre as an employee of the partnership. Leo's son, Walter, handled the advertising, wrote the programs, prepared displays, booked the shorts, hired and fired the help, purchased the equipment and attended to maintenance, all under Leo's direction. (211, 212) At that time, Leo also operated other theatres (45) and appears to have been largely a consultant and troubleshooter, although he said he was the "boss." (46) Neither Jeannette nor Vivian made any material contributions to the...
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