Opinion
Docket Nos. 5291-66 5292-66.
1969-07-31
RUTH MENDELSON, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTGERTRUDE ROSENTHAL, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Bernard M. Kaplan and Harold S. Lansing, for the petitioners. James F. Kennedy, for the respondent.
Bernard M. Kaplan and Harold S. Lansing, for the petitioners. James F. Kennedy, for the respondent.
The petitioner's husband died owing substantial taxes and additions to tax for the years 1947 and 1958. He was insolvent at all times relevant to this proceeding. The respondent asserted that the petitioner was liable as a transferee of certain of her husband's assets for the taxes and additions to tax owed by him. Held:
1. The petitioner is not liable as a transferee with respect to funds which she returned to her husband.
2. The petitioner is not liable as a transferee with respect to funds and property which she received in satisfaction of a bona fide claim against her husband. Under Illinois law, she is entitled to retain such funds and property without showing that her claim had priority over the respondent's
3. The petitioner is liable as a transferee with respect to funds which she received from her husband and allegedly used to pay his debts, because she failed to prove that such debts had priority over the respondent's claim.
SIMPSON, Judge:
The respondent determined that the petitioners were liable as transferees for deficiencies in income tax and additions to tax of Louis D Rosenthal for the following amounts, plus interest as provided by law:
+------------------------------------------+ ¦Docket No. ¦Petitioner ¦Amount ¦ +------------+------------------+----------¦ ¦5291-66 ¦Ruth Mendelson ¦$10,000.00¦ +------------+------------------+----------¦ ¦5292-66 ¦Gertrude Rosenthal¦28,429.08 ¦ +------------------------------------------+
After the trial of this case, the respondent conceded that Ruth Mendelson was not a transferee of any assets of Louis D. Rosenthal and is not liable for any part of the deficiencies in his income tax; accordingly, decision will be entered for the petitioner in docket No. 5291-66. Through a series of concessions on brief, the respondent now contends that Gertrude Rosenthal, the petitioner in docket No. 5292-66, is liable for the deficiencies of Louis D. Rosenthal as a transferee of his assets in the amount of $25,234.51 plus interest as provided by law. Since there is no dispute over the fact that Louis D. Rosenthal was liable for the deficiencies described in the statutory notice of liability sent to Gertrude Rosenthal, the question remaining is whether, and to what extent, Gertrude Rosenthal received and retained assets from Louis D. Rosenthal in such manner and under such circumstances as to render her liable, at law or in equity, for deficiencies in his income tax.
FINDINGS OF FACT
Some of the facts have been stipulated, and those facts are so found.
Background Facts
Gertrude Rosenthal is the widow of Louis D. Rosenthal and Ruth Mendelson is the daughter of Mr. and Mrs. Rosenthal. Mrs. Rosenthal and Mrs. Mendelson resided in Chicago, Ill., at the time their petitions were filed in this case. Mrs. Rosenthal will be referred to hereinafter as the petitioner.
The petitioner and Mr. Rosenthal, who died on February 23, 1963, had been married for more than 40 years at the time of his death. In 1948 or 1949, Mr. Rosenthal went into bankruptcy. After his bankruptcy, he was out of work until he went to work as a bookkeeper in 1950. His salary was $55 a week for several years after 1950. Then, at some time not disclosed by the record, he became a purchasing agent for the same company, and at the time of his death, he was earning a base salary of $200 a week.
On June 26, 1962, the respondent mailed to Mr. Rosenthal a timely statutory notice of deficiency in which he determined deficiencies in income tax, plus additions to tax, for the years 1947 and 1948 as follows:
+---+ ¦¦¦¦¦ +---+
Additions to Tax Year Deficiency Sec.291(a) Sec.293(a) I.R.C.1939 I.R.C.1939 1947 $45,747.21 $2,287.36 1948 30,802.84 $1,540.14 1,540.14
Mr. Rosenthal filed a timely petition for redetermination with this Court on September 21, 1962, but died before the case was calendared for trial. The respondent's motion to dismiss for lack of prosecution was granted and on July 8, 1964, this Court entered its decision in the case determining that deficiencies and additions to tax existed in the amounts asserted by the respondent in the deficiency notice. No appeal was taken from this decision and the taxes and additions to tax so determined were assessed on November 20, 1964. No payments have been made on such assessments. Mr. Rosenthal was insolvent from prior to January 1, 1961, to the date of his death.
After her marriage, the petitioner was gainfully employed for some period of time in the 1940's. After her husband's bankruptcy, she went to work again in 1950 as a saleswoman in a dress shop for a weekly salary of $65. From 1951 to 1955, the petitioner and Mr. Rosenthal lived at the home of their daughter, Ruth Mendelson, and son-in-law, paying $100 per month for room and board. In 1955, they moved to a three-room apartment, where their rent was $137 per month, and lived there until Mr. Rosenthal's death in 1963. Mr. Rosenthal's income was used for their living expenses. It was understood between them that their living expenses were to be paid for out of Mr. Rosenthal's earnings so that the petitioner's earnings, except for amounts spent for her personal needs, could be saved. Each week, the petitioner endorsed her paycheck and turned it over to her husband, believing that he would deposit this check in a joint savings account. Between the time she began working in 1950 and March 1958, the petitioner thus gave to her husband all of her paychecks, in the total amount of $21,116.01, after deduction of income and social security taxes. Mr. Rosenthal each week gave the petitioner an allowance of $20 or $25. The total amount given to Mr. Rosenthal for deposit in a savings account— i.e., the total amount of the paychecks she gave him less the cash allowance he gave her— was $12,453.51.
By March 1958, the petitioner became doubtful that her husband was depositing her paychecks in a savings account as agreed. On occasion she asked to see the savings account book, but he gave her some reason why it was unavailable, stating nevertheless that her money was being saved. Finally, suspecting that Mr. Rosenthal was using her earnings to invest in stocks, the petitioner in March 1958 ceased giving her paychecks to her husband. On March 27, 1958, the petitioner and her daughter, Ruth Mendelson, opened a joint savings account, No. 66003-5, at the Chicago Federal Savings & Loan Association (the Chicago Federal account). Thereafter, the petitioner, when she received her paycheck, cashed it, kept some money for her personal needs, and deposited the balance in the Chicago Federal account. She no longer gave any money to her husband.
Transfers from Mr. Rosenthal to the Petitioner
(1) In November 1962, the petitioner and Mr. Rosenthal discussed the sale of certain stock owned by him. Mr. Rosenthal told the petitioner that the stock represented money which she had given him in the past and which he owed her. He expressed his intention to sell the stock and give her the proceeds.
On November 23, 1962, Mr. Rosenthal received a check for $12,571.06 from Mitchell Hutchins & Co., a stock brokerage firm. Mr. Rosenthal had an account in his sole name with Mitchell Hutchins & Co., and the check constituted the proceeds of the sale of stock by Mr. Rosenthal through that firm.
The respondent objected to the introduction of testimony by the petitioner as to certain statements made by Mr. Rosenthal on the ground that they were inadmissible hearsay. In most instances, such statements were introduced to show what the petitioner— not Mr. Rosenthal— believed and, therefore, are not hearsay at all, inasmuch as their relevancy does not depend on Mr. Rosenthal's veracity. See McCormick, Evidence 460 (1954); 29 Am.Jur.2d, Evidence, sec. 497; 31A C.J.S.,Evidence, sec. 236. When the testimony was proffered to prove that Mr. Rosenthal believed he owed the petitioner money, it is nevertheless admissible as a declaration against pecuniary interest. German Ins. Co. v. Bartlett, 188 Ill. 165, 58 N.E. 1075 (1900); 29 Am.Jur.2d, Evidence, secs. 617-620; 31A C.J.S., Evidence, secs. 217-224; cf. Martin v. Savage Truck Line, 121 F.Supp. 417 (D.D.C. 1954).
The petitioner and Mr. Rosenthal had a joint checking account in the Mercantile National Bank of Chicago (the Mercantile account). On November 26, 1962, Mr. Rosenthal deposited the $12,571.06 check received from Mitchell Hutchins & Co. in the Mercantile account. On December 1, 1962, Mr. Rosenthal drew a check on the Mercantile account payable to the petitioner in the amount of $5,000, and on December 7, drew another check on that account for $5,000, also payable to the petitioner. The petitioner gave Mr. Rosenthal no contemporaneous consideration for these checks totaling $10,000, his stated reason for the transfers being his belief that he owed the petitioner the money by reason of her having given him her paychecks between 1950 and 1958.
The petitioner, Mr. Rosenthal, and Mrs. Mendelson had a joint savings account, No. 52261, in the Marshall Savings & Loan Association (the Marshall account). On December 1, 1962, the petitioner deposited the first $5,000 check received from Mr. Rosenthal, and, on December 8, 1962, the second check, in the Marshall account.
Mr. Rosenthal entered the hospital 3 or 4 weeks prior to his death. While in the hospital, he told the petitioner that he owed ‘quite a bit of money’ to other people. He asked the petitioner to return to him the $10,000 he had given her shortly before, so that he could pay these debts. On February 2, 1963, Mrs. Mendelson, acting on the petitioner's instruction, withdrew $10,000 from the Marshall account, closed the account, and on the same day delivered the $10,000 in cash to the petitioner. The petitioner, on the same day, delivered the cash to her husband in the hospital. The petitioner has no personal knowledge as to what happened to the money; she did not see or receive any part of the $10,000 after she gave it to Mr. Rosenthal.
(2) Since at least 1949, the petitioner and Mr. Rosenthal maintained a joint savings account, No. 7580-4, in the Home Federal Savings & Loan Association of Chicago (first Home Federal account). On August 23, 1960, there was a balance in this account of $100. Since 1959, the petitioner made no deposits in that account and no funds belonging to her were deposited in that account, except to the extent, if at all, that funds deposited by Mr. Rosenthal represented her funds by reason of her having given him her paychecks prior to April 1958. On December 7, 1962, the balance in this account was $10,000.
On December 7, 1962, the petitioner, Mr. Rosenthal, and Mrs. Mendelson opened a joint savings account, No. 278346-2, in the Home Federal Savings & Loan Association of Chicago (second Home Federal account). The $10,000 balance in the first Home Federal account was transferred to the second Home Federal account on the same day. No further transactions occurred in the second account until February 11, 1963, when the petitioner withdrew the $10,000 balance in cash. The record does not indicate what disposition the petitioner made of these funds.
(3) At the same time Mr. Rosenthal received the $12,571.06 check from Mitchell Hutchins & Co., he and the petitioner agreed that the $2,571.06 remaining from the stock sale proceeds, after he gave the two $5,000 checks to the petitioner, should be used to purchase an automobile. The automobile so purchased was the only asset in Mr. Rosenthal's estate at his death, at which time it had a fair market value of $2,450. On Mr. Rosenthal's death, the petitioner acquired the automobile and sold it to her son-in-law, Mr. Mendelson, for $2,450.
(4) On December 24, 1962, Mr. Rosenthal received a bonus check from one of his employers, the J. Manaster Co., in the amount of $4,100. Mr. Rosenthal endorsed this check and gave it to the petitioner so that she would have some money to meet bills, and she deposited it in the Chicago Federal account on December 28, 1962.
Immediately before this deposit, there was a balance of $3,033.63 in the Chicago Federal account. Between December 28, 1962, and February 25, 1963, interest and deposits, other than the $4,100 deposit, totaling $984.99, were credited to the account. On February 19, 1963, the petitioner withdrew $3,000 from the Chicago Federal account and used this amount to open a checking account at the First National Bank of Lincolnwood (the Lincolnwood account). On February 25, 1963, the petitioner closed the Chicago Federal account, withdrawing the remaining balance, $5,118.62. The record does not disclose what disposition the petitioner made of this amount. On March 15, 1963, the petitioner drew a check for $211.18 on the Mercantile account, reducing the balance in that account to zero. That amount was deposited in the Lincolnwood account.
The petitioner paid expenses on behalf of Mr. Rosenthal by means of checks drawn on the Lincolnwood account as follows:
+--------------------------------------------+ ¦Funeral expenses ¦$980.00 ¦ +-----------------------------------+--------¦ ¦Hospital, doctor, and nurses' bills¦552.50 ¦ +-----------------------------------+--------¦ ¦ ¦ ¦ +-----------------------------------+--------¦ ¦ ¦ ¦ +-----------------------------------+--------¦ ¦Total ¦1,532.50¦ +--------------------------------------------+
She also paid, by a check drawn on the same account, $1,215.49 to the Internal Revenue Service on account of her and Mr. Rosenthal's joint Federal income tax liability for the taxable year 1962.
On or prior to November 9, 1965, the petitioner agreed in writing to extend to June 30, 1966, the time for assessing against her any liability as transferee with respect to any income tax liabilities due from Mr. Rosenthal for the years 1947 and 1948. On June 23, 1966, the respondent mailed a notice of liability to the petitioner asserting that she was liable, as a transferee of assets of Mr. Rosenthal, to the extent of $28,429.08, plus interest as provided by law.
OPINION
The respondent, having determined and assessed deficiencies against Louis D. Rosenthal, now seeks, pursuant to the procedures provided in section 311(a) of the Internal Revenue Code of 1939,
to collect such deficiencies from the petitioner to the extent of certain transfers made to her by Mr. Rosenthal.
All statutory references are to the Internal Revenue Code of 1939, unless otherwise indicated.
In her petition and again in her brief, the petitioner asserts that the respondent's claim of transferee liability is barred by the statute of limitations because the respondent failed to mail her a timely statutory notice of liability. However, the petitioner has apparently abandoned this position since she has presented no arguments in support of it. Furthermore, it appears that there is no basis for such a position. In paragraph 7 of his answer, the respondent alleges that on November 9, 1965, i.e., less than 1 year after the assessment of the deficiencies against Mr. Rosenthal, the petitioner agreed in writing to an extension of the time for mailing a notice of liability to a date later than the date on which the notice in this case was actually mailed. If this allegation is true, then the notice was timely and the respondent's claim is not barred by the statute of limitations. Sec. 311(b)(4). The petitioner filed a reply to the respondent's answer, but that reply contained no mention whatsoever of paragraph 7 of the respondent's answer or the allegation contained therein. Rule 18(b) of the Tax Court Rules of Practice provides:
(b) Effect of reply.— Every material allegation of fact set out in the answer and not expressly admitted or denied in the reply, where a reply is filed, shall be deemed to be admitted. * * *
Pursuant to such rule, the respondent's allegation of a written extension of the statute of limitations is deemed to be true, and the petitioner's contention that the respondent's claim is barred by the statute of limitations is rejected.
Section 311(a) provides a procedure whereby ‘The liability, at law or in equity, of a transferee of property of a taxpayer’ in respect of unpaid taxes and additions thereto may be enforced; it does not purport to define or establish the elements of such liability as a matter of Federal law. ‘Accordingly * * * the existence and extent of liability should be determined by state law.'
Commissioner v. Stern, 357 U.S. 39, 45 (1958).
Inexplicably, the parties have failed to inform this Court of the applicable principles of Illinois law with respect to the right of a creditor of a transferor to proceed against and recover from a transferee of property. In the interests of judicial economy and the orderly disposition of matters before us, we have researched the Illinois law to the extent practicable, and, where questions remain, we have assumed such law to be in accordance with prior decisions of this Court.
Under the Illinois fraudulent conveyance statutes,
a transfer made to ‘disturb, delay, hinder or defraud creditors' is void as to such creditors. When the transfer is made without consideration or for a grossly inadequate consideration, and when the transfer is made while the debtor is insolvent or when it renders the debtor insolvent, actual fraud need not be proved; fraud in law is presumed, without regard to the debtor's intent. On the other hand, when consideration is given for the transfer, it will not be set aside unless there is actual fraud. Thompson v. Williams, 6 Ill.2d 208, 127 N.E.2d 457 (1955); Wilkey v. Wax, 82 Ill.App.2d 67, 225 N.E.2d 813 (1967). Under Illinois law, a transfer may not be avoided merely because it prefers one creditor over another: ‘A debtor may prefer one creditor to another, but such preference must be made in good faith with the intent to pay or secure the payment of a just indebtedness against him.’ Thompson v. Williams, supra at 212, 127 N.E.2d at 460. Even when the preferred creditor is the spouse of the debtor, the transfer may be unassailable by other creditors; however,
Sec. 4. Fraudulent conveyances, etc.Every gift, grant, conveyance, assignment or transfer of, or charge upon any estate, real or personal, or right or thing in action, or any rent or profit thereof, made with the intent to disturb, delay, hinder or defraud creditors or other persons, and every bond or other evidence of debt given, suit commenced, decree or judgment suffered, with like intent, shall be void as against such creditors, purchasers and other persons. * * *Sec. 5. Innocent purchaser.The foregoing section /1/ shall not affect the title of a purchaser for a valuable consideration, unless it appear that he had notice of the fraudulent intent of his immediate grantor, or of the fraud rendering void the title of such grantor. * * * (Footnote omitted. Ill. Ann. Stat. ch. 59, secs. 4, 5 (Smith-Hurd 1951).)
Where the conveyance constituting the preference is made by the debtor to his wife, this court has held (1) the proof should be clear and satisfactory that the wife has a valid, subsisting debt and (2) where the debtor is thereby rendered insolvent, the burden of dispelling the implication of fraud as against the pre-existing creditors is upon the debtor and his grantee. * * *
With these principles of Illinois law before us, we now turn to the transfers on which the respondent relies to assert transferee liability against the petitioner.
There is no indication in the record that the transfers in question were the product of, or resulted in, actual fraud, so our question is whether any of these transfers were tainted with fraud in law.
The respondent has conceded that the petitioner is not liable as a transferee with respect to household furnishings allegedly transferred to her and with respect to the balance in the Mercantile joint checking account as of the date of Mr. Rosenthal's death which allegedly passed to the petitioner at his death. We accept these concessions, and they will be reflected in the Rule 50 computation.
(1) We have found that the petitioner returned the $10,000 in the Marshall account to her husband at his request and that none of it was returned to her. This finding was based upon the testimony of the petitioner. The respondent has offered no evidence tending to contradict her statements, but he argues that her testimony in this respect should not be believed. He points out that the petitioner was unwilling, after March of 1958, to entrust her savings to her husband, and he questions whether she would be willing to do so in 1963, especially after she has succeeded in securing a repayment of them.
The respondent has not contended that there was a general plan to secrete the funds of Mr. Rosenthal in view of his impending death and the claim of the respondent for substantial tax deficiencies. Nor has he attempted to establish the existence of such a plan by offering evidence as to what happened to the other funds which the petitioner withdrew from the second Home Federal account and the Chicago Federal account, in excess of the amounts deposited in the Lincolnwood account. Therefore, we have not considered the possibility of the existence of such a plan in deciding whether to believe the petitioner's testimony that she returned the funds from the Marshall account to Mr. Rosenthal. Since there is no evidence tending to contradict her testimony, we are not disposed to disbelieve it solely on the basis suggested by the respondent. Moreover, Mrs. Rosenthal appeared to be a frank and honest witness at trial. Accordingly, we have concluded that her testimony is reliable and have found in accordance with that testimony.
This Court has frequently recognized that:
If a transferee reconveys the property to the transferor prior to the respondent's taking action to collect from the transferee, the transferee relieves himself of any liability, since the retransfer purges the fraud from the original transfer, the return of the property serving to leave the creditor in the same position he was in prior to the original transfer. * * * (Robert Ginsberg, 35 T.C. 1148, 1155-1156 (1961), affd. 305 F.2d 664 (C.A. 2, (1962).)
See Louise Noell, 22 T.C. 1035 (1954), modified by 24 T.C. 329 (1955); Fada Gobins, 18 T.C. 1159 (1952), affirmed per curiam 217 F.2d 952 (C.A. 9, 1954). In Fada Gobins, 18 T.C.at 1174, we said:
As to the retransfers, there was no preferring of any of (the transferor) Jelwan's creditors. Jelwan was not a general creditor, but the original owner of the property in question. The return of the property to him, to the extent of the property so returned, would, in logic at least, leave his creditors, including the United States, in the same position they were in prior to the transfer by him to the petitioner. It is, of course, possible that such a retransfer might be the result of collusion between the parties and made in such manner that it also would be in fraud of creditors. Such, however, was not the case in this instance. * * *
Although most of the cases in this Court dealing with the issue were decided prior to the Supreme Court's decision in Commissioner v. Stern, supra, they were not based on some Federal rule of transferee liability, but rather on an analysis of the law as developed in State court proceedings. Accordingly, they are consistent with Stern and retain their vitality following that decision. We have found no indication that Illinois law differs on this point from the law as developed in other states. Therefore, we hold, in accordance with our prior cases, that as to the funds in the Marshall account, the petitioner is not liable as a transferee.
(2) When the petitioner withdrew the $10,000 in the second Home Federal account, there was, in effect, a transfer to her of $9,900 by her husband. All but $100 of such account had been provided by Mr. Rosenthal. However, the petitioner counters the respondent's assertion that she is liable as a transferee with respect to the Home Federal account with the argument that this ‘transfer’ from Mr. Rosenthal to her was supported by full and adequate consideration.
We have found that between 1950 and 1958, the petitioner turned over to Mr. Rosenthal her weekly paycheck, part of which, pursuant to an understanding between them, he was to deposit in a savings account. The amounts so saved, the petitioner testified, were to be for the use of her and her husband ‘in later years.’ There is a dispute over whether Mr. Rosenthal was to save all of each check or only the difference between the amount of the check and the amount that he gave back to her. We have found that only the difference was to be saved by Mr. Rosenthal, since in subsequent years after she ceased giving her checks to her husband, the petitioner did not save all of her earnings but retained part of them, apparently for her personal needs. The evidence as to the amounts of her checks between 1950 and 1958 is not altogether clear, but on the basis of a reasonable estimate, we have found that the total amount of such checks was $21,116.01, and the amount to be saved was $12,453.51. So far as the record shows, however, Mr. Rosenthal did not save this money in accordance with the petitioner's understanding and desire, and there is no evidence that he used it for her benefit.
Our first question is whether the facts establish a bona fide debt owed by Mr. Rosenthal to the petitioner, and, if so, in what amount. The petitioner has the burden of proving the existence and amount of such debt. Powers Photo Engraving Co., 17 T.C. 393 (1951), remanded per curiam on other grounds 197 F.2d 704 (C.A. 2, 1952); Estate of L. E. McKnight, 8 T.C. 871 (1947); Thompson v. Williams, supra. On the basis of the whole record, we conclude that Mr. Rosenthal became indebted to the petitioner in the amount of $12,453.51. To hold otherwise, we would have to find that the petitioner made a gift of some or all of her earnings to Mr. Rosenthal. However, such an inference is inconsistent with her action in refusing to turn over her paycheck to her husband after she came to believe that he was not dealing with her money in accordance with her desires and understanding, and with her expressed belief that he owed her the money. The better interpretation of the facts is that she turned her money over to him, for him to manage in accordance with her— not his— wishes, that this arrangement gave rise to a debtor-creditor relationship, and that by reason of his failure to heed her directions, Mr. Rosenthal became liable as a constructive trustee for the amount of money entrusted to him. See and compare Scanlon v. Scanlon, 6 Ill.2d 224, 127 N.E.2d 435 (1955).
The next question is whether, when the petitioner withdrew the $10,000 from the second Home Federal account, she obtained such funds in satisfaction of her debt against Mr. Rosenthal. To answer this question, we must determine to what extent, if any, the petitioner's $12,453.51 claim against her husband was satisfied by the $10,000 in the Marshall account. At trial, the petitioner testified that Mr. Rosenthal's stated reason for giving her the funds in the Marshall account was that he owed her the money by reason of her having given him her paychecks in earlier years. Did her acceptance of this money result in a pro tanto satisfaction of her claim? In view of the circumstances surrounding her subsequent retransfer of the money to him not long thereafter, we believe that although she accepted and deposited the money, it remained, by reason of his influence over her, subject to the control and command of Mr. Rosenthal. Since we have found that the petitioner did have a valid and subsisting claim against her husband, which both of them recognized, we see no explanation why she would return the money to him, particularly in light of his vagueness in explaining to her why he wanted it, unless she received it with the understanding that it was still subject to his call. Accordingly, we cannot find that the petitioner's temporary custody of the $10,000 deposited in the Marshall account accomplished a partial repayment of her husband's debt to her. However, even if our conclusion were otherwise on this point, we would nonetheless conclude that the retransfer of the $10,000 to him established a new debt in that amount.
Since the petitioner's claim was not affected by the funds in the Marshall account, we must next determine whether the withdrawal of the $10,000 from the second Home Federal account was intended to and did satisfy accomplished a gratuitous transfer from Mr. Rosenthal to her. See Victor v. Swisky, 200 Ill. 257, 65 N.E. 625 (1902). We think the first interpretation of the evidence is the more satisfactory one. The petitioner clearly stated at trial that she considered the money in the second Home Federal account, the successor to the joint savings account owned by the petitioner and her husband for many years, to be hers. Her testimony was as follows:
Q. (By counsel for the petitioner) Whose money was that (the $10,000 in the second Home Federal account)?
A. This was supposedly my savings which I, this was my savings.
Q. Did you consider that balance in the Home Federal Savings your husband's money, both your money, or your money?
A. Well, to be honest I considered it my money because I had worked all the way through and I considered it my money.
Whether the money in the account on February 11, 1963, was actually the money the petitioner had given her husband in earlier years, which seems highly unlikely, or was money which he put in the account from his own funds, this testimony, we think, shows that the petitioner considered that she was entitled to it. Accordingly, when she withdrew it from the account, it seems fair to conclude that she did so under a claim of right— in satisfaction of her supposed and actual claim— and not as a gift. Under all the circumstances, the $10,000 withdrawn by the petitioner was either actually, or by reason of a constructive trust, her property, or money of her husband's taken by her in satisfaction of a bona fide debt. Her husband's consent to such application of the funds may be implied from the fact that he put the money in a joint account. The money thus received by the petitioner could not be reached by creditors under Illinois law (Thompson v. Williams, supra; Ramsey v. Nichols, 73 Ill.App. 643 (1898)) and is not subject to the respondent's claim. Elsie Januschke, 48 T.C. 496 (1967); Newman & Carey Subway Construction Co., 37 B.T.A. 1163 (1938).
The respondent does not deal with these authorities in his brief. However, he does contend that even a bona fide creditor who receives assets from an insolvent transferor in satisfaction of his claim may be held liable as a transferee unless the claim has priority over that of the Government. For this proposition, the respondent relies on two decisions of this Court. Margaret Wilson Baker, 30 B.T.A. 188 (1934), affd. 81 F.2d 741 (C.A. 3, 1936); and Powers Photo Engraving Co., supra, each contain dicta appearing to support this proposition. For two reasons, we are not persuaded by these authorities. First, as we stated at the outset, the controlling law on the issue of liability is that of Illinois, and we have found that under Illinois law a transferor may prefer one bona fide creditor without rendering the transfer fraudulent as to others; no affirmative showing of priority is required. Secondly, we believe that both cases relied on by the respondent are distinguishable on their facts from the case at bar. In Baker, the transfers were made in satisfaction of an alleged debt arising out of an agreement for future support; such agreements present a different question altogether from the type of debt presented in the present case, both under our decisions (see Fada Gobins, supra) and Illinois law. E.g., Davidson v. Burke, 143 Ill. 139, 32 N.E. 514 (1892). Furthermore, the transferee failed to prove the value of the services rendered and therefore the amount of the alleged debt. In Powers Photo Engraving, the transferor was the wholly owned subsidiary of the transferee, and this Court found that the alleged debts satisfied by the transferor were in fact contributions to capital. However, we went on to say that even if the advances were in fact bona fide debts, the result would be the same. Our reasoning was that if a gratuitous transferee may not absolve itself of transferee liability by paying debts of the transferor which are not of a ‘priority character’ (a proposition discussed more fully later), it should not be able to achieve a different result by paying an unsecured debt to itself. This reasoning was based on the parent-subsidiary relationship there involved and the control a parent has over a wholly owned subsidiary and did not purport to deal with a case like the one before us.
The respondent makes no mention of the Federal priority statute, 31 U.S.C.sec. 191, nor of its relevancy to a case involving transferee liability. Accordingly, we have no occasion to consider its applicability to this or any other issue presented in the present case.
(3) In determining whether the petitioner is liable as a transferee with respect to the automobile received by her on her husband's death, the question again is whether she received it in satisfaction of a bona fide claim. At the date of Mr. Rosenthal's death, the petitioner still had a claim against him for the difference between her original claim and the amount she withdrew from the second Home Federal account, i.e., $2,453.51. Under Illinois law, as we have previously outlined it, if the automobile was transferred to Mr. Rosenthal in satisfaction of this remaining bona fide indebtedness, then she is not subject to transferee liability with respect thereto. Neither the stipulation nor the evidence at trial cast much light on how the petitioner acquired the automobile— whether as a creditor, a donee, an heir, a surviving joint tenant, or otherwise. However, we know that the automobile was purchased out of funds which Mr. Rosenthal stated really were the petitioner's; the implication is that the automobile was to be used by the two of them but was to be considered in partial satisfaction of his liability to her. Moreover, in an Illinois decision, where a husband was indebted to his wife and transferred property to her or for her benefit, it was presumed, apparently in the absence of direct testimony concerning his intention, that such transfer was on account of that indebtedness rather than a gift, and accordingly, could not be set aside as a fraudulent conveyance. Ramsey v. Nichols, supra at 649. Applying the same presumption in the present case, we conclude that the petitioner received the automobile as a creditor, the consideration for the transfer being the satisfaction of the balance of her claim. Since the amount of this remaining balance equaled or exceeded the value of the automobile, the petitioner is not liable as a transferee for her husband's unpaid taxes with respect thereto.
(4) The petitioner apparently used part of the $4,100 bonus check received from her husband to pay his debts. We have frequently held that when a transferee receives property without consideration from an insolvent transferor and uses such funds to pay debts of such transferor, such payment does not absolve the transferee of liability for the transferor's taxes except to the extent that the debts so paid have priority over the Government's tax claim. E.g., Fada Gobins, supra; Estate of L. E. McKnight, supra; Margaret Wilson Baker, supra; C. A. Hutton, 21 B.T.A. 101 (1930), affd. 59 F.2d 66 (C.A. 9, 1932). So far as we can discover, Illinois law does not dictate a different result. The petitioner has made no attempt to show that any of Mr. Rosenthal's debts paid by her out of the $4,100 transferred to her and had priority over the respondent's claim for unpaid taxes.
Estate of L. E. McKnight, supra. However, the respondent has conceded that the petitioner is not liable for her husband's taxes as a transferee of the $4,100 to the extent of the amount paid by her, $1,215.49, on their joint income tax liability for 1962. As to the balance of the $4,100 transferred to her, we hold that the petitioner is liable as a transferee for Mr. Rosenthal's taxes.
We are aware of Ill. Ann. Stat. ch. 3, secs. 202, 205 (Smith-Hurd 1961), under which claim against a decedent's estate for funeral expenses have priority over claims for debts due the United States. However, the petitioner has failed to explain whether and how such provisions apply in the case of a transfer preceding the decedent's death.
Summarizing our conclusions, then, we hold that the petitioner, Gertrude Rosenthal, is liable as a transferee for Mr. Rosenthal's income tax deficiencies and additions to tax for 1947 and 1948 only to the extent of the difference between the $4,100 transferred to her on December 24, 1962, and the amount she paid on account of the joint income tax liability of her and her husband, plus interest on such amount as provided by law.
Decision will be entered for the petitioner in docket No. 5291-66. Decision will be entered under Rule 50 in docket No. 5292-66.