The opinion of the court was delivered by: ABRUZZO
The United States of America instituted this suit in equity to foreclose a lien for unpaid income taxes, penalties, and interest of one, John M. Phillips, deceased, upon certain jewelry contained in a safe deposit box of the defendant Corn Exchange Bank Safe Deposit Company (improperly named Corn Exchange Bank Trust Company in the bill of complaint).
The theory of the government's bill of complaint was that the jewelry was owned by John M. Phillips, deceased, at the time of his death and that it now forms part of his estate. The bill further contended that because Phillips died owing large sums for income taxes, penalties, and interest the government was entitled to a judgment which would decree that the jewelry did in fact belong to John M. Phillips, deceased, at the time of his death, and that the court should direct that it be sold and the proceeds applied to the payment of taxes which he owed.
On the trial of the action, the government adopted a new theory; to wit, that Phillips, during his lifetime and while insolvent, had transferred and given the jewelry either to his wife or to his daughter as a gift. The government sought to have this transfer set aside on the theory that they were a judgment creditor. The government elected to stand on this latter theory.
At the end of the trial, the government asked the court for leave to go back to its original cause of action as alleged in the bill of complaint and further requested the court to consider the matter on either aspect of the case. The court granted this motion and has considered the case on both theories as advanced by the government.
The Revenue Act of 1926, c. 27, 44 Stat. 9 and Revenue Act of 1928, c. 852, 45 Stat. 791 are cited by the government in support of its contention.
The government in support of its first theory proved that its judgment was filed on July 16, 1934, against the Bank of Rockville Centre Trust Company, administrator cum testamento annexo of the estate of John M. Phillips, deceased, in the sum of $2,412,455.41. The assessment against John M. Phillips was made in March, 1928, for approximately $1,370,000, this assessment being for taxes owed from 1917 to 1928, inclusive. As the gift of this jewelry was made in 1927, the indebtedness of the deceased at the time thereof would be somewhat less than $1,370,000. No claim was made that Phillips owed other debts at that time. Included in the judgment of July 16, 1934, is this amount of $1,370,000, plus penalties and interest. The government produced no other proof with reference to the transfer in 1927, excepting that it did file its lien against the jewelry while it was in a safe deposit vault in the Corn Exchange Bank Safe Deposit Company (improperly named Corn Exchange Bank Trust Company in the bill of complaint) on June 27, 1929. The jewelry was in the name of the defendant Helen Phillips Haran, the daughter of the deceased, and William B. Welsh, her general guardian. The government further established that no part of the judgment for taxes upon the estate had been paid, excepting a small amount.
The question to be determined first is whether the jewelry was the property of the deceased, John M. Phillips, at the time of his death; and secondly, if he had made a transfer of the said jewelry, whether it was in fraud of his creditor, the plaintiff. There is ample proof from which the court can make a determination that a transfer of this jewelry was made to either the wife, Marian M. Cassidy, or to the daughter, Helen Phillips Haran, in 1927. The government offered no proof to contradict this testimony. The government's contention that the jewelry was the property of John M. Phillips at the time of his death must therefore be overruled. It remains to consider the government's alternative theory.
In 1927, when the transfer was made, the uncontradicted and undisputed proof is that the deceased had been assessed less than $1,370,000 for taxes, which as will be seen was later reduced to judgment in 1934 for over $2,400,000.The court is assuming that in 1927 John M. Phillips, deceased, owed to the government almost $1,370,000 and that the government was a creditor of the deceased for that amount, even though it was not reduced to judgment at that time.
The government contended that in view of the fact that the judgment in 1934 could not be collected, there is a presumption that the transfer made in 1927 was fraudulent and made to defeat the claim of the government for taxes due. The government cites as its authority Ga Nun v. Palmer, 216 N.Y. 603, 111 N.E. 223, 226, which states as follows:
"* * * that a transfer without consideration by one who is then a debtor raises a presumption of fraud. The creditor may stand upon that presumption until it is repelled."
The plaintiff also gives as an authority the case of McDonald v. Dewey, 202 U.S. 510, 26 S. Ct. 731, 50 L. Ed. 1128, 6 Ann.Cas. 419.
However, contrary to the government's theory the facts indicate that the net income of the deceased, John M. Phillips, for the several years 1917 to 1928 was very large. He had control of a monopoly on a lock joint pipe enterprise that was immensely profitable. Apart from this, however, in the latter part of 1926 or the early part of 1927, he was possessed of and owned New York City bonds valued at $1,350,000. In that same period, the deceased was also the owner of and possessed of at least $200,000 in cash. A judgment obtained at that time may have uncovered other assets as there was some evidence that he was engaged in a real estate transaction in which he had made a deposit of a large sum of money. There was also proof that at the time of his death there was a great deal of material on hand in connection with his business, the value of which was not clearly disclosed, but which amounted to quite an amount. Needless to say, the plaintiff was in a better position to collect its assessment of taxes had it done so in 1927 rather than in 1934.
The facts are clear and uncontroverted that the deceased was solvent at the time the transfer was made. The presumption that the transfer was made in fraud of a creditor is overcome by the defendants' proof. Therefore, the court must necessarily find upon the evidence adduced at the trial ...