United States v. Peelle Company
| Decision Date | 20 January 1956 |
| Docket Number | Civ. A. No. 15192. |
| Citation | 137 F. Supp. 905 |
| Parties | UNITED STATES of America, Plaintiff, v. The PEELLE COMPANY et al., Defendants. |
| Court | U.S. District Court — Eastern District of New York |
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Leonard P. Moore, U. S. Atty., Brooklyn, N. Y., for plaintiff, Richard C. Packard, Brooklyn, N. Y., and Robert J. Grimmig, E. Rockaway, N. Y., of counsel.
John R. Bartels, New York City, for receiver.
Parker, Chapin & Flattau, New York City, for Henry E. Peelle, Jr., and Robert B. Peelle, Russell S. Knapp, New York City, of counsel.
This action is brought by the United States of America against the Peelle Company under Section 7403 of the Internal Revenue Code of 1954 to foreclose federal income tax liens assessed under Title 26, United States Code, § 3670 (). The complaint was filed in the Office of the Clerk of this Court on January 28, 1955. On that date a temporary Receiver of the Peelle Company was appointed pursuant to subdivision (d) of Section 7403 of the Internal Revenue Code of 1954. An order was subsequently made directing the temporary Receiver be made permanent. D.C., 131 F.Supp. 341. An appeal was taken to the Circuit Court of Appeals for the Second Circuit, 224 F.2d 667, and the order appointing the permanent Receiver was affirmed.
The Receiver has been operating the Peelle Company and, in spite of all the misgivings with respect to the damaging effect which a receiver might have on the business of this company (arguments strenuously advanced on the appeal), the various reports made to this Court from time to time indicate that the business has prospered, the morale of the employees is excellent and its financial position better than before the appointment of this Receiver.
The case was tried before this Court on various dates in June, September and October of this year. Final briefs reached the Court the latter part of November. It will be noted that there are various defendants but the only one properly served was the Peelle Company, the corporation, and, therefore, for the purpose of brevity it will be natural to refer to the United States of America as the plaintiff and the Peelle Company as the defendant.
The Receiver, after his appointment, requested that John R. Bartels, former Judge of the Supreme Court, Kings County, be appointed as his attorney. Such an order was made.
The Peelle Company was represented at the time of the beginning of the trial in June of this year by Blaisdell and Dunne. The firm of Parker, Chapin & Flattau represented the two main stockholders, Henry E. Peelle, Jr., and Robert B. Peelle, sons of Henry E. Peelle, Sr. These two controlled approximately 52 per cent of the stock of the corporation, and a brother of Henry E. Peelle, Sr., John W. Peelle, owned or controlled a minority stockholding of approximately 48 per cent. John W. Peelle was represented by the firm of Leve, Hecht, Hadfield & McAlpin. During the trial John W. Peelle discharged his attorney. He is not represented by an attorney at this time. The firm of Parker, Chapin & Flattau was substituted in the middle of the trial in place of Blaisdell and Dunne. The case on behalf of the defendant was tried by Judge Bartels, and at the conclusion of the trial he submitted both a main brief and a reply brief. The firm of Parker, Chapin & Flattau which appeared for the two officers and main stockholders as aforesaid through Mr. Russell S. Knapp, of counsel, requested that Judge Bartels try the case on behalf of the Peelle Company, and Judge Bartels complied with that request. The firm of Leve, Hecht, Hadfield & McAlpin made a similar request. Judge Bartels was assisted by Mr. Knapp and Mr. William D. Dunne of Blaisdell and Dunne.
The amounts of the liens and the years involved are as follows:
Amount including
Year Nature of Tax fraud penalty
1945 Income and excess profits ................... $ 227,533.55
1947 Income ...................................... 173,736.78
1948 Income ...................................... 377,040.34
1949 Income ...................................... 351,795.87
_____________
Total Assessment and Liens $1,130,106.54
The Peelle Company is a New York corporation, engaged in the manufacture of fireproof doors and the sale thereof and the manufacture of moving stairs and the sale thereof. The defendant has a subsidiary, the Richmond Fireproof Door Company, Richmond, Indiana, acquired in 1919, and the Receiver has been in complete control of this subsidiary.
From 1945 to 1949, the officers according to the minute book of the defendant (Govt. Ex. 35) were as follows:
Henry E. Peelle ................................ President & General Manager
Arthur A. Allen ................................ Vice President & General
Superintendent
James F. Peelle ................................ Vice President
Paul R. Saurer ................................. Vice President (1946 to 1949)
Robert B. Peelle ............................... Vice President (1946 to 1949)
John W. Peelle ................................. Secretary & Treasurer
Margaret F. Smith .............................. Assistant Secretary
Henry E. Peelle, Jr. ........................... Assistant Treasurer (1948-1949)
When the trial of the issues commenced it was very apparent that it would be a difficult task requiring many court days to try the issue of the increase in taxable net income for the years 1945, 1947, 1948 and 1949. A great number of items were in dispute. At the Court's suggestion both the plaintiff and the defendant agreed that the accountants for both the plaintiff and the defendant would explore the figures with a view to making some stipulation which would avoid the tedious task of going into each and every item for these taxable years. Pursuant to that request a stipulation was eventually entered into by both the plaintiff and the defendant (Govt. Ex. 29(b)). It was stipulated that there were to be increases in taxable net income for the four years in question as follows:
Amount of Increase in
Year Taxable Net Income
1945 ................... $ 103,056.14
1947 ................... 227,310.08
1948 ................... 480,135.36
1949 ................... 473,438.71
_____________
Total $1,283,940.29
Many of these conferences were held before the Court, and a great many of the debatable items were weighed and yielded by the plaintiff which resulted in the eventual stipulation (Govt. Ex. 29 (b)). Both sides are to be commended for the spirit of give and take and helpfulness in arriving at these figures. There is no doubt that the statute of limitations has run against the assessment of any tax for these taxable years and, unless the plaintiff is able to prove fraud in the income tax returns for the years 1945, 1947, 1948 and 1949, plaintiff must be non-suited. The plaintiff concedes this. The plaintiff further concedes that the burden of proving fraud is upon it.
The defendant filed federal income tax returns for the years 1945, 1946, 1947, 1948 and 1949 in Brooklyn, New York (Govt. Exs. 5, 6, 7, 8 and 9). The returns for each of these five years were made on an accrual basis. The net taxable income reported by the defendant and the tax reported due for each of these years 1945-1949 pursuant to these income tax returns are as follows:
Net Taxable Income Tax
Income
Year Reported Reported Due
1945 $ 613.73 $ 153.43
1946* (- 114,799.66) -0-
1947 (- 9,755.55) -0-
1948 222,026.45 84,370.05
1949 14,988.15 3,347.27
The 1945, 1946 and 1947 returns were signed by Henry E. Peelle, as president, and John W. Peelle, his brother, as treasurer; 1948 and 1949 by Henry E. Peelle, as president, and Henry E. Peelle, Jr., his son, as assistant treasurer.
The plaintiff sets forth six categories of fraud as follows:
1. Unreported receipt of income
2. Unidentified deposits in bank accounts showing inactive balances on the company's books
3. Personal expenses of officers charged to company expense
4. Fictitious expenditures
5. Devaluation of inventory
6. Investment improperly charged to expense
These six categories contain the items of extra income which resulted in the stipulation (Govt. Ex. 29). There are upwards of 1,200 pages of testimony. Of necessity, therefore, only a few of these items can be reviewed.
The defendant claims there was no fraud. Its defense might be summarized as follows:
1. None of the officers knew what Henry E. Peelle, Sr., was doing.
2. Henry E. Peelle, Sr., was incompetent.
3. Henry E. Peelle, Sr., was guilty of embezzlement.
4. None of the co-officers of Henry E. Peelle, Sr., was negligent.
5. Even if they were negligent this is not fraud, for as a basis of fraud there must be an intent.
The defendant maintained four checking accounts in the Bank of the Manhattan Company, divided as follows: a general fund account, a special account, a payroll account, and an account for employees' taxes. These deposits admittedly were recorded on the company books. Three other bank accounts were maintained by the defendant: at Boulevard Bank (known after May, 1948, as the Sterling National Bank & Trust Company); at Pennsylvania Exchange Bank; and at Corn Exchange Bank Trust Company. The Boulevard Bank account was opened pursuant to a resolution of the defendant company dated November 12, 1929. Prior to May, 1948, Henry E. Peelle, Sr., was a director of...
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