Opinion
Docket No. 31487.
1952-04-28
SADIE D. LEARY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Francis J. Purcell, Esq., for the petitioner. Arthur L. Nims, Esq., for the respondent.
Petitioner contends she is not liable as a transferee for 1945 income taxes of her deceased husband, because the respondent failed to exhaust his remedies against the estate. Respondent duly presented his claim and relied upon petitioner's representations as executrix that funeral and administrative expenses left the estate without assets to pay taxes. To the extent that those representations were incorrect, petitioner benefited personally thereby as creditor and sole beneficiary. Held, that petitioner is liable as transferee. Francis J. Purcell, Esq., for the petitioner. Arthur L. Nims, Esq., for the respondent.
In a deficiency notice dated August 25, 1950, the Commissioner of Internal Revenue advised Sadie D. Leary as follows:
You are advised that there will be assessed against you the amount of $1,980.69, income tax, plus interest as provided by law, constituting your liability as transferee of assets of the estate of Timothy A. Leary, deceased, * * *
Petitioner does not contest that tax liability attributed to the estate of Timothy A. Leary, but contests only her liability as a transferee. In her petition, petitioner explained her position as follows:
* * * No objection was made to the Executrix's account, no claim was asserted against the assets of the Estate and thereafter the funds were disbursed in accordance with the decree of the Surrogate. There were sufficient assets in the Estate to satisfy the claim of the government in full, and the Respondent in failing to assert its claim against the assets of the Estate of Timothy A. Leary, deceased, cannot now proceed against the Petitioner.
FINDINGS OF FACT.
The facts have all been stipulated and are found accordingly.
The petitioner Sadie D. Leary was the duly qualified executrix and sole beneficiary of the will of her husband Timothy A. Leary, who died on April 19, 1946, a resident of New York, New York. The estate tax return was filed with the collector of internal revenue for the second district of New York. The tax in controversy is income tax due from Timothy A. Leary, the decedent, for the calendar year 1945 amounting to $1,980.69, plus interest, which tax remains due and unpaid.
Prior to his election as a justice of the Supreme Court of the State of New York, the decedent had been a justice of the Municipal Court of the City of New York for many years. He was, therefore, a member of both the New York City and New York State Retirement Systems. In connection with both, his wife, the petitioner herein, was named as beneficiary, and upon his death she received from these retirement systems without consideration a total of $57,141.84. It is based upon the receipt of this money by the petitioner that the respondent attempts to assert liability against the petitioner as transferee. The stipulation of facts contains the following provision:
10. Petitioner makes no contention that the moneys received by petitioner from the New York City and New York State Retirement Systems are of a nature not subject to transferee liability.
For approximately two months prior to his death, Timothy A. Leary was confined in the New York Post Graduate Hospital. During this time the petitioner paid his medical expenses from her own personal funds as follows:
+--------------------------------------------------------------+ ¦ ¦$2,155.89¦New York Post Graduate Hospital ¦ +-----------------+---------+----------------------------------¦ ¦March 29, 1946 ¦65.80 ¦Eileen Gavagan, Nurse ¦ +-----------------+---------+----------------------------------¦ ¦April 4, 1946 ¦100.00 ¦Dr. Peterson ¦ +-----------------+---------+----------------------------------¦ ¦April 9, 1946 ¦4.50 ¦Dr. Bastian ¦ +-----------------+---------+----------------------------------¦ ¦April 9, 1946 ¦10.00 ¦Dr. Frederickson ¦ +-----------------+---------+----------------------------------¦ ¦June 1946 ¦329.27 ¦Hyde Park Hotel—Rent for months of¦ +-----------------+---------+----------------------------------¦ ¦ ¦ ¦May and June for apartment leased ¦ +-----------------+---------+----------------------------------¦ ¦ ¦ ¦by the decedent. ¦ +-----------------+---------+----------------------------------¦ ¦July 1946 ¦1,035.00 ¦Dr. Pratt ¦ +-----------------+---------+----------------------------------¦ ¦September 6, 1946¦917.00 ¦The Abbey—payment of balance of ¦ +-----------------+---------+----------------------------------¦ ¦ ¦ ¦funeral bill and cemetery plot ¦ +-----------------+---------+----------------------------------¦ ¦Total ¦4,617.46 ¦ ¦ +--------------------------------------------------------------+
Petitioner was subsequently reimbursed for these expenditures to the extent of $2,067.67 out of funds which belonged to the estate.
After the death of Timothy A. Leary, his will was offered for probate in the Surrogate's Court, New York County, and letters testamentary were thereafter issued by that court to the petitioner. The net assets of the estate amounted to $4,308.49.
On June 7, 1949, the petitioner, as executrix, filed the account of her proceedings as such executrix in the Surrogate's Court, New York County. Schedule C itemized disbursements for ‘administration, funeral and other necessary expenses,‘ including the reimbursement of $2,067.67 advanced by the executrix.
The claim for the income tax in question here was duly filed and the collector of internal revenue for the second district of New York was listed as a creditor for unpaid 1945 income tax of $2,218.47. In connection with the accounting proceedings, a citation was issued by the Surrogate directed to, among others, the collector for the second district; and upon the return date thereof a representative of the collector entered an appearance in the Surrogate's Court. Schedule D listed the unpaid creditors as follows:
SCHEDULE D
AN ITEMIZED STATEMENT OF ALL CLAIMS OF CREDITORS PRESENTED TO EXECUTRIX OR WHICH HAVE COME TO HER KNOWLEDGE, TOGETHER WITH A STATEMENT WHETHER ANY RIGHT OF PREFERENCE EXISTS IN RESPECT OF SUCH CLAIMS AND THE CLAIMED BASIS OF SUCH RIGHT, IF ANY.
+--------------------------------------------------------------------+ ¦Creditors ¦ ¦ +-------------------------------------------------------+------------¦ ¦U.S. Collector of Internal Revenue for the 3rd District¦ ¦ +-------------------------------------------------------+------------¦ ¦of New York—Unpaid balance of 1944 Income Tax ¦ ¦ +-------------------------------------------------------+------------¦ ¦including interest through 1948 ¦$1,045.18 ¦ +-------------------------------------------------------+------------¦ ¦U.S. Collector of Internal Revenue for the 2nd District¦ ¦ +-------------------------------------------------------+------------¦ ¦of New York—Unpaid 1945 Income Tax, including ¦ ¦ +-------------------------------------------------------+------------¦ ¦interest through 1948 ¦2,218.47 ¦ +-------------------------------------------------------+------------¦ ¦People of the State of New York (Department of Taxation¦ ¦ +-------------------------------------------------------+------------¦ ¦and Finance, Income Tax Bureau)—Unpaid State Income ¦ ¦ +-------------------------------------------------------+------------¦ ¦Tax for 1945 including interest through 1948 ¦370.17 ¦ +-------------------------------------------------------+------------¦ ¦Counsel fees for services rendered through this ¦ ¦ +-------------------------------------------------------+------------¦ ¦accounting by Murphy, Strasburger & Purcell ¦1,500.00 ¦ +-------------------------------------------------------+------------¦ ¦Disbursements incurred by counsel ¦50.00 ¦ +-------------------------------------------------------+------------¦ ¦Balance due Executrix, for advances as set forth in ¦ ¦ +-------------------------------------------------------+------------¦ ¦Schedule D-2 ¦* 2,892.67¦ +-------------------------------------------------------+------------¦ ¦ ¦ ¦ +--------------------------------------------------------------------+ FN* That the advances made by Executrix for administration expenses set forth above, including counsel fees, are entitled to a preference. Your petitioner has been advised and verily believes that, as widow of the decedent, she is entitled to a preference as to the first $300 of the estate, and that as to the balance, if any, the United States has a preference over the State of New York.
(S) SADIE D. LEARY, Sadie D. Leary, Executrix.
In the accounting proceedings, in addition to the amounts set out in Schedule C, the executrix made a personal claim in Schedule D as an unpaid creditor of $2,892.67 for moneys expended by her for which she had not been reimbursed. Thereafter, by stipulation dated August 17, 1949, it was agreed that the petitioner, as executrix, would waive this additional claim and that the attorneys for the executrix would reduce the amount of their claim for disbursements and counsel fees to $536.49, as aforesaid. The Surrogate approved the final accounting as submitted by the executrix, and the final decree was signed on September 12, 1949. The assets of $4,308.49 were accounted for as follows:
+-----------------------------------------------------------------+ ¦“B-1” (Uncollectible property) ¦None ¦ +-------------------------------------------------------+---------¦ ¦“C” (Funeral and administration expenses actually paid)¦$3,772.00¦ +-------------------------------------------------------+---------¦ ¦“E” (Debts actually paid) ¦None ¦ +-------------------------------------------------------+---------¦ ¦“F” (Legacies or distributive shares actually paid) ¦None ¦ +-------------------------------------------------------+---------¦ ¦Leaving a balance in Executrix's hands of ¦536.49 ¦ +-----------------------------------------------------------------+
The $536.49 was duly paid over to the attorneys in accordance with the Surrogate's decree and the petitioner, as executrix, was discharged. No additional assets have come into the estate since the date of the final decree.
OPINION.
BLACK, Judge:
The only question in this proceeding is whether respondent failed to exhaust his remedies against the estate of Timothy A. Leary and is thereby prevented from asserting transferee liability against petitioner. Petitioner contends that respondent failed to assert the superior lien of the United States and the estate's assets were used to satisfy junior claims, which were primarily expenses of decedent's last illness. Assuming that petitioner's contentions as to what constitutes superior and junior liens are correct, we find, nevertheless, her defense without merit.
The respondent duly filed his claim in the New York Surrogate's Court for Federal income taxes due for the years 1944 and 1945. The Surrogate's final decree signed September 14, 1949, shows that the assets coming into the hands of the executrix were totally disbursed for funeral and administration expenses. The decree on its face shows that there were insufficient assets to pay the debts due, including taxes. It is there expressly stated that none of the decedent's debts as such were actually paid. Then, relying on the executrix's representation that the assets of the estate were exhausted in the payment of funeral and administration expenses, no objection was raised to the final decree closing the estate. Nevertheless, petitioner now insists that the expenses of decedent's last illness were improperly classified as funeral and administration expenses, and were ordinary debts subordinate to respondent's claim for taxes. Petitioner argues that respondent was required in the first instance to seek his remedy initially in the Surrogate's Court and then presumably through the entire appellate procedure of the State of New York before relying on the transferee remedy. Furthermore, in this case the executrix was petitioner. Moreover, the sum of $2,067.67 was paid by petitioner to herself as partial reimbursement for her advances. Of petitioner's advances, $917 were funeral expenses, $329.27 for rent after decedent's death under decedent's lease, and $3,471.19 for expenses of last illness.
Section 311 of the Internal Revenue Code provides the Commissioner with procedures for collecting the tax from transferees. This is an administrative remedy, it does not create or affect transferee's liability. Pearlman v. Commissioner, 153 F.2d 560, 562, affirming 4 T.C. 34. The concept of transferee liability here is a concept of equity law. Petitioner's defense that remedies must initially be exhausted against the transferor prior to holding the transferee liable is an equitable defense which has been recognized in transferee cases. Oswego Falls Corporation, 26 B.T.A. 60, 72-73, affd. 71 F.2d 673, and Wire Wheel Corporation of America, 16 B.T.A. 737, affirmed per curiam 46 F.2d 1013. In Samuel Wilcox, 16 T.C. 572, 576, affirmed per curiam 194 F.2d 102, the relation between equity law, section 311, and petitioner's defense here was summarized by this Court as follows:
The creditor of an impoverished debtor has long possessed the right to invoke the aid of equity in following and setting aside any subsequent transfer which is made by a debtor for insufficient consideration and leaves the debtor without sufficient property to discharge his existing obligations. Such transfers are characterized as being in fraud of existing creditors regardless of the debtor's actual intent, and the creditor, upon showing that he has exhausted his remedies at law against the debtor, may resort to equity and there attempt to have any such fraudulent transfers set aside. See American Jurisprudence, vol. 24, pars. 187-190, pp. 314-316, par. 213, pp. 330-331. The rights of the Commissioner as a creditor in the collection of Federal taxes are essentially the same and the principal purpose of section 311 was to provide the Commissioner with the same summary procedures for collection of the tax from transferees as he previously possessed in respect to the taxpayer. See Phillips v. Commissioner, 283 U.S. 589. * * *
Were we to be governed solely by considerations of equity law, petitioner would be barred from asserting her defense. Since petitioner was responsible as executrix for exhausting the estate improperly and benefited personally thereby, under general equitable principles of estoppel and unjust enrichment and the maxim of clean hands, her defense disappears. See Pomeroy, Equity Jurisprudence, 5th Edition, sections 801-821, section 1044, and sections 397-404.
Transferee cases have stated that the administration of the Federal income tax law is not subject to limitations of state laws. Pearlman v. Commissioner, supra, Christine D. Muller, 10 T.C. 678. Where the Commissioner might have enjoined rental payments to shareholders and applied them to taxes, in Samuel Wilcox, supra, p. 577, we held the following:
* * * However, where there is no tangible or intangible property in the hands of the taxpayer upon which the Commissioner can levy in satisfaction of the tax and there exists at best only a choice between two equitable remedies, we do not think that the Commissioner must first pursue an untried claim which the transferor may have against a third person, and thereby involve the Government in protracted litigation, as a condition precedent to his alternative recourse against the transferees. Cf. W. W. Cleveland, 28 B.T.A. 578, affd., 77 Fed.(2d) 184.
The possibility that timely litigation against the transferor might have been successful did not prevent transferee liability in Lehigh Valley Trust Co., Executor, 34 B.T.A. 528, 534, and United States v. Garfunkel, 52 F.2d 727.
Respondent duly presented his claim and relied upon petitioner's representations as executrix that funeral and administration expenses left the estate without assets to pay taxes. To the extent that those representations were incorrect, petitioner benefited personally thereby as creditor and sole beneficiary. Petitioner's defense against transferee liability on the grounds that the remedies against the estate have not been exhausted here is not valid under equitable principles nor Federal income tax law.
Decision will be entered for the respondent.