US v. Bushlow

• Decision Date: 08 September 1993
• Docket Number: No. 88 CV 4020.,88 CV 4020.
• Citation: 832 F. Supp. 574
• Parties: UNITED STATES of America, Plaintiff, v. Bessie BUSHLOW a/k/a Bessie Bock, Theodore W. Bushlow, and Greenpoint Savings Bank, Defendants.
• Court: U.S. District Court — Eastern District of New York

832 F. Supp. 574

UNITED STATES of America, Plaintiff, v. Bessie BUSHLOW a/k/a Bessie Bock, Theodore W. Bushlow, and Greenpoint Savings Bank, Defendants.

No. 88 CV 4020.

United States District Court, E.D. New York.

September 8, 1993.

COPYRIGHT MATERIAL OMITTED

Zachary W. Carter, U.S. Atty. (Jody Kasten, of counsel), Brooklyn, NY, Dept. of Justice, Tax Div. (Charles M. Greene, Peter Sklarew, Andrew Plepler), Washington, DC, for plaintiff.

Daniel F. Hayes, Garden City, NY, for defendant Bessie Bushlow.

Solleder & Solleder (George J. Solleder, of counsel), Mineola, NY, for defendant Theodore W. Bushlow.

Cullen & Dykman (James G. Ryan, of counsel), Garden City, NY, for defendant Greenpoint Sav. Bank.

MEMORANDUM AND ORDER

NICKERSON, District Judge:

Plaintiff, the United States of America (the government), brought this action against defendants — a widow, her son, and a bank — seeking to collect on tax liabilities of the widow and her deceased husband.

Plaintiff moves for summary judgment. Defendants cross-move for summary judgment.

I.

The following background facts are not disputed.

At all relevant times until his death Irving Bushlow was self-employed as an attorney in New York. Bessie has not been employed outside the home since her marriage to Irving in 1939 other than by her husband in the 1980s, when he paid her $100 per week.

In 1973 and 1974 Irving and his wife, Bessie, filed joint tax returns. They reported their income for 1973 as $25,000 and for 1974 as $28,000. Both of their signatures appear on the returns.

In 1976 an Internal Revenue Service (IRS) criminal investigator met with Irving Bushlow at his home to discuss civil cases in which Irving had allegedly made false claims on behalf of longshoremen and his failure to report certain fees as income. Bessie was present at two of these meetings.

When Irving was first called before a grand jury in December 1976 regarding the criminal investigation of George Fortunato, another individual involved in the longshoremen scheme, he asserted his Fifth Amendment privilege. After receiving a grant of immunity Irving testified before the grand jury in March and April 1977.

In June 1977 Irving and Bessie transferred their home on E. 66th Street in Brooklyn to their son, defendant Theodore Bushlow, for "consideration of ten dollars and other valuable consideration." Bessie and Theodore now say the valuable consideration was Theodore's promise to return from California to New York and take over his father's law practice. They say that Bessie and Irving were planning to leave New York for California and that Theodore would remit to them part of the legal fees from Irving's law practice.

Bessie and Irving did not move to California. Theodore did not take over Irving's practice or remit fees, but he did move to New York and work for his father for a salary. Bessie and Irving did not move out of E. 66th Street, and Theodore has not resided there since title was transferred to him. Until 1988 Irving continued to make all mortgage payments.

From December 1983 to April 1985, IRS assessed Irving individually for unpaid taxes for 1975 to 1982 amounting to $300,000, excluding penalties and interest.

In May 1985 the IRS sent a notice of deficiency to Irving and Bessie informing them that they jointly owed taxes for unreported income of approximately $210,000 in 1973 and $230,000 in 1974.

An attachment to the Notice stated that 26 U.S.C. § 6013, the "innocent spouse" provision, does "not relieve either spouse of liability." The IRS therefore assessed both Bessie and Irving for additional taxes of $104,554 for 1973 and $112,587 for 1974. Although IRS assessed fraud penalties under 26 U.S.C. § 6653(b) against Irving, the attachment stated that "since no part of the underpayment is due to fraud on the part of Mrs. Bessie Bushlow, the fraud penalty ... does not apply to her." In September 1985 the IRS filed tax liens as to the Bushlows' tax liabilities.

In November 1986 a check in the amount of $45,000 from the account of "Bessie Bock," Bessie's maiden name, was endorsed by Bessie Bock to Theodore. Theodore then endorsed that check to the seller of a cooperative apartment on Remsen Street in Brooklyn (the Remsen coop) as a down payment towards purchase.

In September 1987 Irving took out a life insurance policy for $200,000 designating Bessie as beneficiary.

In June 1988 Theodore took out a $200,000 mortgage on the E. 66th property from defendant Greenpoint Savings Bank (Greenpoint). He says he used most of the proceeds to improve the Remsen coop.

In December 1988 the government initiated this action. Although Irving Bushlow was named as a defendant, he died in 1989 before he was served. The government later dismissed him from the case without prejudice since he appeared to have no assets in his name on his death.

In March 1993 IRS levied on and seized approximately $175,000, reflecting the balance of the life insurance proceeds Bessie received on Irving's policy.

II.

The government moves for summary judgment (a) finding Bessie liable for the taxes due for 1973 and 1974, (b) setting aside the conveyance of the E. 66th property to Theodore as fraudulent and foreclosing the tax liens against it, (c) finding that Theodore's equity in his Remsen coop is traceable to funds from Irving and subject to federal tax liens, and (d) denying Bessie's counterclaim to recover the life insurance proceeds.

Defendants cross-move for summary judgment finding (a) Bessie an "innocent spouse" not responsible for her husband's tax liabilities, (b) that the statute of limitations has run on Irving and Bessie's tax liabilities for 1973 and 1974, (c) the conveyance of the E. 66th Street property was not fraudulent and that it is beyond the reach of IRS's tax liens, and (d) that Bessie is entitled to recover the $175,000 in life insurance proceeds that IRS levied.

A. Liability of Bessie Bushlow for 1973 and 1974 taxes

The government submits copies of the Bushlows' 1973 and 1974 tax returns containing both their signatures. Defendants now question the authenticity of Bessie's signatures.

Bessie stated at her 1991 deposition "it might be, but I don't really know" about the 1973 return and denied that the signature on the 1974 return was hers. In fact she testified at her deposition that she never signed anything during the entire time she was married. In response to a government request for an admission under Fed.R.Civ.P. 36 Bessie denied "upon information and belief" that the 1974 return signature was genuine.

The government produces expert testimony that positively identifies the signatures of Bessie Bushlow on both the 1973 and 1974 returns as authentic. Furthermore, Irving testified before the grand jury on March 31, 1977 that Bessie signed their 1973 tax return. This court finds no issue of fact as to the validity of those signatures. See 26 U.S.C. § 6064 (signature on tax return is presumed authentic).

Defendants also assert that Bessie is an "innocent spouse" not liable for her husband's misrepresentations on their joint tax returns. Although the IRS explicitly stated in 1984 that it did not consider either Bessie or Irving an innocent spouse, Bessie did not challenge that decision until her answer filed in this action in 1989.

Section 6013 of Title 26 of the United States Code states in relevant part:

(e) Spouse relieved of liability in certain cases —

(1) ... if

(A) a joint return has been made under this section for a taxable year,

(B) on such return there is a substantial understatement of tax attributable to grossly erroneous items of one spouse,

(C) the other spouse establishes that in signing the return he or she did not know, and had no reason to know, that there was such substantial understatement, and

(D) taking into account all the facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such substantial understatement,

then the other spouse shall be relieved of liability for tax ... for such taxable year to the extent such liability is attributable to such substantial understatement.

The taxpayer bears the burden of proving that she or he is an innocent spouse. Clevenger v. Commissioner, 826 F.2d 1379, 1382 (4th Cir.1987). The taxpayer must prove that each of the requirements under § 6013(e) has been met. Shea v. Commissioner, 780 F.2d 561, 565 (6th Cir.1986).

The government concedes that § 6013(e)(1)(A) and (B) have been met since the tax liabilities stem from Irving's substantial understatement of income from his law practice. They dispute that (a) Bessie was unaware of the understatement and that (b) it would be inequitable to hold her liable.

The evidence shows that the Bushlows reported a total income of $25,000 for 1973 and of $28,000 for 1974. It also shows that the Bushlows lived in a private house, owned a Cadillac at some time in the 1970s, and supported their son Theodore in college and law school. The Bushlows' accountant testified that he never discussed the tax returns in question with Bessie and that he had not observed that she was involved in Irving's law practice in any way. Bessie testified that her husband paid all the bills and that she never discussed finances with him.

The test for knowledge under § 6013 as to omitted income is "whether a taxpayer knew or should have known of an income-producing transaction that his or her spouse has not reported on the joint return." Erdahl v. Commissioner, 930 F.2d 585, 589 (8th Cir. 1991) (citing Quinn v. Commissioner, 524 F.2d 617, 622 (7th Cir.1975)).

The defendants have presented enough to raise a question of fact as to Bessie's knowledge of Irving's understatement of his income.

Whether it is inequitable to hold an unknowing spouse liable depends on the benefit the spouse derived from the unpaid taxes. When a spouse receives "a considerable amount of property purchased with funds ... not reported as income,"...