United States v. Diamond

• Decision Date: 11 June 1956
• Parties: UNITED STATES of America, Plaintiff, v. Lawrence DIAMOND and Robert L. Gilman and Hattie Gilman, doing business as Republic Textile Equipment Company, Defendants.
• Court: U.S. District Court — Southern District of New York

142 F. Supp. 441

UNITED STATES of America, Plaintiff, v. Lawrence DIAMOND and Robert L. Gilman and Hattie Gilman, doing business as Republic Textile Equipment Company, Defendants.

United States District Court S. D. New York.

June 11, 1956.

Paul W. Williams, U. S. Atty., for the S. D. of New York, New York City, for plaintiff. Arthur B. Kramer, Asst. U. S. Atty., New York City, of counsel.

Greenman, Shea & Zimet, New York City, for defendants. Philip Zimet, Robert H. Haines, Bernard Bressler, New York City, of counsel.

DIMOCK, District Judge.

By this action the United States seeks to collect income taxes payable by Edgewater Dyeing and Finishing Company (hereinafter referred to as "Edgewater") a Pennsylvania corporation. The action is brought against alleged transferees of Edgewater's assets. Edgewater is not named as a defendant.

The matter now before me is a motion by the transferees to dismiss the amended complaint on the ground that it shows on its face that the claim is time barred.

The complaint alleges that the transferees did not pay full consideration for the transferred assets, that the deficiency exceeded the amount of the income tax due and that the transfer rendered Edgewater insolvent. It is further alleged that the transfers were made with the intent of hindering, delaying and defrauding the United States in the collection of the income taxes and that the transferees knew of the indebtedness therefor.

There are three theories on which the United States might succeed in the absence of a time bar:

1. The transferees might be held personally liable for Edgewater's income taxes to the extent that the value of the transferred assets exceeded the consideration paid. Phillips v. Commissioner, 283 U.S. 589, 592, 51 S.Ct. 608, 75 L.Ed. 1289, citing United States v. McHatton, D.C.D.Mont., 266 F. 602.

2. A trust might be impressed upon the assets insofar as gratuitously transferred, or their proceeds, for the payment of Edgewater's income taxes. United States v. Updike, 281 U.S. 489, 50 S.Ct. 367, 74 L.Ed. 984.

3. The transferees might be declared to hold the transferred assets subject to a lien in the amount of Edgewater's income taxes. United States v. Spreckels, D.C.N.D.Cal.S.D., 50 F.Supp. 789.

The chronology is as follows:

                     June 14, 1946      Edgewater filed its return
                     August 16, 1946    Assessment against Edgewater
                     August 19, 1946    Collector received assessment list
                     August 22, 1946    Demand for payment made
                     February 20, 1947  Notice of tax lien filed in the United States
                                        District Court
                     February 24, 1947  Notice of tax lien filed in County Court.
                     November 7, 1947   Additional assessment against Edgewater.
                     November 10, 1947  Collector received assessment list.
                     November 14, 1947  Demand for payment made.
                     May 28, 1948       Notice of tax lien filed in United States
                                        District Court.
                     May 28, 1948       Notice of tax lien filed in County Court.
                     August 15, 1952    Action begun against Edgewater in United
                                        States District Court for Eastern District
                                        of Pennsylvania.
                     December 2, 1955   This action begun.
                

Section 311(a) of the Internal Revenue Code of 1939, here applicable, provides that "The amounts of the following liabilities including the `liability at law or in equity, of a transferee of property of a taxpayer, in respect of the tax * * * imposed upon the taxpayer' shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this chapter * * *."

The limitations in the case of deficiencies in taxes, as distinguished from the limitations in the case of liabilities of transferees, are set forth in section 275. The general rule is contained in subdivision (a) to the effect that income taxes "shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period."

Thus an assessment or suit against a taxpayer for the collection of income taxes must be made or begun within three years after the return was filed. Accordingly such an assessment or suit against a transferee must be made or begun within a like period unless there is a different provision made in the remainder of section 311. That section, in subdivision (b), does, however, make a different provision for assessments against transferees. They must be made, as respects an initial transferee, "within one year after the expiration of the period of limitation for assessment against the taxpayer". Thus an assessment must be made against a transferee within four years after the filing of the return. This leaves open the question whether a suit against a transferee to recover the tax must be brought within three years or within four years but that is immaterial here since this suit was not brought within four years. It is thus plain that a suit, under the first theory, upon the personal liability of the transferees for Edgewater's income tax would be barred.

I now pass to the second theory upon...