The opinion of the court was delivered by: ABRUZZO
A complaint was filed against these defendants for these sums and subsequent to the filing of the complaint this Court appointed a temporary receiver in equity for the defendant, The Peelle Company, as provided in Section 7403(d), Internal Revenue Code of 1954.
After the appointment of the temporary receiver, he appointed by order of this Court his own attorney and proceeded to take charge of the assets of this corporation and administer its business. He found upon entering his duties that most of the stock of The Peelle Company was owned by the Peelle family and that The Peelle Company owned practically all of the stock of the Richmond Fireproof Door Company. As yet, the receiver has not obtained control of the Richmond Fireproof Door Company which is a separate and distinct corporation in Indiana and, therefore, the assets of the Richmond Fireproof Door Company are not within the control of the temporary receiver.
The complaint and the affidavits which requested the appointment of a temporary receiver alleged that the Internal Revenue Department had made a jeopardy assessment under Section 6861(a), Internal Revenue Code of 1954, against The Peelle Company. This jeopardy assessment has the force of a judgment. Bull v. United States, 295 U.S. 247, 55 S. Ct. 695, 79 L. Ed. 1421; Citizens Nat. Trust & Savings Bank of Los Angeles v. United States, 9 Cir., 135 F.2d 527, 528.
The Peelle Company has not executed and filed a bond to stay the collection of these taxes so assessed, nor has it paid them. Many affidavits have been filed by both sides and the question to be determined, based upon the complaint, the affidavits and the assessment, is whether or not this temporary receiver should be made permanent.
At the outset, it is pertinent for the Court to state that all parties were afforded an opportunity to file any affidavits germane to the issue, together with answering affidavits, up to and including March 8, 1955. This time was necessarily extended because of the fact that John W. Peelle, one of the defendants and a stockholder controlling the vote of 42 per cent of The Peelle Company, was in jail serving a sentence for tax fraud and he was given until March 14, 1955, to file affidavits. He was released from prison either the 13th or 14th of March.
The Peelle Company is the owner of a plant and equipment located in Brooklyn, within the jurisdiction of this Court, and owns all of the stock of the Richmond Fireproof Door Company and probably all the stock of Multiscope, Inc., and Quinta Company, Inc., Richmond, Indiana, other defendants named but not as yet served. The complaint alleges and the affidavits in support of the motion for a temporary receiver set forth that it was necessary to appoint a receiver to prevent The Peelle Company from wasting, dissipating, selling, marketing or otherwise disposing of or removing its property and assets so as to prevent the United States from enforcing its liens, and to conserve and preserve its properties for the benefit of the stockholders. The complaint and affidavits presented in support of the appointment of a temporary receiver alleged that the properties of The Peelle Company have been wasted and dissipated and transferred without consideration, and that the business of The Peelle Company would continue to be operated at a loss under the present management. This would result in a loss of the plaintiff's lien. At the time the temporary receiver was appointed, an order was issued directing the defendant, The Peelle Company, to show cause why the temporary receiver should not be made permanent.
A certificate of the Commissioner provided for in Section 7403(a), Internal Revenue Code of 1954, was duly filed before the temporary receiver was appointed and stated in effect that it was in the public interest that a receiver be appointed with all the powers of a receiver in equity. Subsequent to the appointment of the temporary receiver, The Peelle Company filed a petition with the Circuit Court of Appeals for the Second Circuit for a stay which was denied by that Court from the bench.
In support of this motion for a permanent receiver, many affidavits were filed by the plaintiff. It is my province to attempt to evaluate these affidavits. In opposition to this motion there were many affidavits filed by the defendants. I will attempt to summarize the salient facts in these affidavits. Counsel for both sides were requested to submit briefs. Both sides have done so.
The following are some of the facts alleged in the affidavits in support of the motion for a permanent receiver.
Robert H. Shelly, as Special Agent of the Bureau of Internal Revenue, was assigned to investigate the tax returns of The Peelle Company, Henry E. Peelle, Inez Beatty Peelle and the Richmond Fireproof Door Company. In his investigation he discovered that Henry E. Peelle maintained three bank accounts in the name of The Peelle Company, none of these accounts being reflected on the corporate books. From 1945 to 1949 he deposited in these three corporate accounts approximately $ 687,000. He withdrew this money from these corporate bank accounts as his personal needs dictated. In these same years, The Peelle Company leased to the Hilo Varnish Corporation property located at No. 42 Stewart Avenue, Brooklyn, New York. Checks amounting to $ 130,000 in payment of rent and taxes for this property were deposited in these three secret bank accounts and not reflected as income on the corporate books. There were many items of personal expenses of Henry E. Pelle carried on the corporate books as 'national sales expense.' Under this heading personal insurance premiums of Henry E. Peelle, Jr., were paid out. From 1945 to 1949, John W. Peelle, treasurer, charged and paid for improvements of private property in the amount of $ 2,500 which was carried on the books as 'erection expenses.' In the years 1948 and 1949 The Peelle Company devaluated by 50 per cent a $ 333,000 physical material inventory and reported for corporate tax purposes the devalued inventory figure of $ 166,500.
In his affidavit, Daniel J. Maher, Special Agent of the Intelligence Division, Internal Revenue Service, alleges that The Peelle Company in 1949 bought all of the stock of Multiscope, Inc., a Kansas corporation, at a price of $ 568 per share, totaling $ 650,000, of which $ 115,000 was paid as the initial payment. He further discovered that many checks were drawn by Henry E. Peelle to the order of fictitious organizations, ostensibly creditors of The Peelle Company. At some later time these checks were destroyed and a single check in an amount equal to the aggregate of the destroyed checks was issued to Henry E. Peelle and deposited by him in one of the secret bank accounts related in Special Agent Shelly's affidavit. Some of this money found its way in the Boulevard Bank of Forest Hills, New York, of which he was a director. The amount of this aggregate check was then charged off as an expense on The Peelle Company's books.
Maher sets forth in his affidavit that an indictment was found by a Grand Jury in this District against Henry E. Peelle for an evaded tax liability exceeding $ 850,000. The indictment was based upon the diversions of corporate income by Henry E. Peelle, the charging as expense corporate funds applied to the personal use and benefit of Henry E. Peelle, arbitrary devaluation of corporate inventory, and the charging as corporate expense the purchase of the stock of Multiscope, Inc. Henry E. Peelle is now confined in a mental institution in the State of Florida.
John W. Peelle was also indicted for tax evasion, pleaded guilty and was sentenced to a term in prison.
Henry E. Peelle, the incompetent, at some time, but it does not appear precisely when, transferred his majority stockholdings in The Peelle Company equally to his two sons, Robert B. Peelle and Henry E. Peelle, Jr. In 1950 Henry E. Peelle resigned as president and his two sons, Henry E. Peelle, Jr., then at the age of 28, and Robert B. Peelle, 33, assumed the control and management of The Peelle Company as president and vice president, respectively. The Peelle Company owns practically all of the stock of the Richmond Fireproof Door Company in Indiana and Henry E. Peelle, Jr., and Robert B. Peelle, through their stock control of The Peelle Company, in turn fully control the Richmond Company. The Government has filed and there now is in existence a jeopardy assessment against the Richmond Company in the amount of $ 333,960.91.
Sidney A. Kaplan, a Certified Public Accountant, immediately after the temporary receiver was appointed, examined the books and records of both the Richmond Fireproof Door Company and The Peelle Company. As of January 31, 1955, he found the books of The Peelle Company in disorder, not having been posted since September 30, 1954. From this disorganized system of bookkeeping he was able to make a calculated balance sheet. This balance sheet indicates that the Peelle Company does not have sufficient liquid assets at this time to pay the tax lien. The company would not be able to do so for a long time.
From an examination of the Richmond Company books he made the discovery that from approximately November 1, 1946, to December 31, 1954, promissory notes were issued to the Peelle family in the amount of $ 340,928.76. The books reflected no consideration for their issuance. The Richmond Company obtained a tax refund of $ 62,416.53 with ...