The opinion of the court was delivered by: ABRUZZO
The United States of America in this action is seeking to foreclose liens for federal income taxes against the defendants. The action against Henry E. Peelle involves the sum of $ 1,583,856.04 and covers the years 1944 through 1949. The action against Inez Beatty Peelle involves the amount of $ 757,514.98 with interest and penalties. Inez Beatty Peelle and Henry E. Peelle filed joint returns for the years 1948 and 1949. The plaintiff, in addition to the fixing of taxes against Inez Beatty Peelle for 1948 and 1949, due to the joint returns, seeks a judgment against her on the theory of transferee liability for the years 1944 through 1947.
Henry E. Peelle at the time of the commencement of this suit had been declared an incompetent by both a Florida court and this Court. The Probate Court, City of Westport, State of Connecticut, appointed Robert B. Peelle as Conservator of the Estate of Henry E. Peelle but as such Conservator no assets came into his hands. Inez Beatty Peelle was appointed Guardian of his person and property by a County Judge in Dade County, Florida, and she had as such committee possession of various parcels of income property for the conservation of which a Receiver was appointed by this Court. The Receiver is now in possession of all of that property, awaiting the outcome of the instant case.
The defendant, Quinta Company, Inc., is named as a party-defendant. The suit against it was not pressed by the plaintiff and, therefore, must be dismissed.
The defendant, Chase Manhattan Bank (named as Chase National Bank of New York), was made a party to this action due to the following facts, to wit: On December 23, 1935, Henry E. Peelle made two trust agreements; both for the benefit of Inez Beatty Peelle. The bank was named as trustee. These assets are still in the possession of The Chase Manhattan Bank and the plaintiff by this suit seeks to invade these two trusts.
During the trial, counsel for the respective parties were of great assistance to the Court in that many court days of trial were saved by a stipulation which counsel entered into (Exhibit 7B). There are eight pages in this exhibit; pages 1 and 2 recite the terms of the stipulation and 3 through 8 contain the figures which the Court must pass upon as to which are taxable. This stipulation covers all of the tax years in question.
United States v. Peelle Company, D.C., 137 F.Supp. 905, was the corporate tax case. Pages of testimony from that case record (R. 432-435) were offered in evidence upon the express understanding that the Court would accept portions of the testimony so offered that were relevant to the issues in the present case and reject those portions that were irrelevant (R. 425-429).
I. Henry E. Peelle's failure to report large recurring sums of income over a period of six years constitutes fraudulent tax evasion.
II. Moneys expended by the Peelle Company in payment of personal expenses of Henry E. Peelle constitute income to him.
III. The so-called 'secret' corporate bank accounts were used by Henry E. Peelle for his own personal use and are, therefore, taxable.
IV. The assessments are not barred by the statute of limitations.
V. Henry E. Peelle was not incompetent during the tax years in question.
VI. The defense of embezzlement made by the defendants is inapplicable.
VII. Double taxation as claimed by the defendants is not a defense.
I. The corporate funds embezzled or wrongfully appropriated do not constitute taxable income to the defendant, Henry E. Peelle.
II. The defendant, Henry E. Peelle, being incompetent, could have no intent to evade his taxes and, therefore, this action is barred by the statute of limitations.
III. The plaintiff has failed to prove any liability of the defendant, Inez Beatty Peelle, as a transferee.
The complex issues will be divided into three categories:
(1) The items on pages 3, 4, and 5 of Exhibit 7B are stipulated to be accurate and constitute additional income of Henry E. Peelle in the years 1944 through 1949, subject to the defense of incompetency.
(2) The items on pages 6, 7 and 8 of Exhibit 7B are stipulated to be accurate, but the defendants claim all of these items cannot be charged to Henry E. Peelle. These items are also subject to the defense of incompetency.
(3) The so-called 'secret' bank accounts which the defendants claim are moneys embezzled; the plaintiff claims these moneys are taxable; the defendants claim they are not.
Category (1) consists of numerous recurring items of cash income, interest, salary, rentals, director's fees and dividends from 1944 through 1949 and total $ 278,360.18. Outside of dividends amounting to $ 7,931.20, all of this sum is taxable as it was additional income to Henry E. Peelle which he was duty-bound to include in his tax returns.
As to category (2), the items have been studied carefully; some are taxable, some are not.
The Court makes the following findings:
Lockhart, Legal Expense, $ 829.25 -- taxable
Clinchy Weaver & Co., General Insurance, $ 370.38 -- taxable
Strathmore Lodge Club, $ 133.70 -- taxable
A. W. Parry & Company, $ 1,415.60, represents premium paid out of the corporate funds on the life insurance policy of Inez Peelle, wife of Henry E. Peelle, and is income to the defendant, Henry E. Peelle, and taxable
E. E. Brett, $ 475 -- taxable
John Connell, $ 1,421.55 -- the Government concedes that this item is not taxable
Wilson & Toomer Fertilizer Company, $ 1,034.79 -- the Government concedes that this item is not taxable
F. L. Haines, $ 2,500 -- income to Henry E. Peelle -- taxable
E. A. Bell & Co., $ 60 -- taxable
Dorothy S. Heywood, $ 650 -- this represents an outlay of corporate funds for the purchase of ten shares of Peelle Company stock from Dorothy S. Heywood. This particular certificate was subsequently transferred by the company to Marilyn Rath, Henry E. Peelle's daughter. It was given to her as a gift by Henry E. Peelle and, therefore, it is ruled as income to him and taxable.
Marmon Florist, $ 374 -- taxable
Plant City Growers Association, $ 138.25 -- the Government concedes that this item is not taxable
Thomson & Nicholson, $ 147 -- the Government concedes that this item is not taxable
Bill Batcock, $ 800 -- taxable
Burdine's Department Store, $ 227.34 -- taxable
Town of Surfside, $ 6.57 -- taxable
Southern Bell Telephone Company, $ 9,08 -- taxable
Clinchy Weaver, General Insurance, $ 284.75 -- taxable
A. W. Parry & Co., $ 1,415.60 -- taxable
A. W. Parry & Co., $ 797 -- this item represents income to Henry E. Peelle, Jr., as payment for his own personal insurance. As the Government is re-examining the tax returns of Henry E. Peelle, Jr., this is an item that properly is taxable to him and, therefore, is not taxable to Henry E. Peelle.
John Connell, $ 316.15 -- the Government concedes that this item is not taxable
Wilson & Toomer Fertilizer Company, $ 742.63 -- the Government concedes that this item is not taxable
Burdine's Department Store, $ 243.39 -- taxable
Asbury Park, Miami Beach and Manhasset telephone calls, $ 270.63 -- taxable
A. E. Debevoise, $ 15 -- the Government concedes that this item is not taxable
Clinchy Weaver & Co., $ 48.40 -- taxable
Commissioner of Motor Vehicles, $ 69 -- the Government concedes that $ 35 of that amount is not taxable. The balance of $ 34 was for the benefit for the benefit of John W. Peelle and is taxable to him and not to Henry E. Peelle
$ 2,192.40 is a miscellaneous credit. The company books indicate that this amount was credited to Henry E. Peelle's account in return for an automobile that he turned over to the company and is not taxable
Richmond Fireproof Door Company Credit, $ 5,004 -- the checks of Richmond, a subsidiary of the Peelle Company, controlled by Henry E. Peelle, indicate that checks in that amount were made to the names of two persons now deceased. The names of the deceased were altered so that the checks were made payable to Henry E. Peelle. This item is income to him and is, therefore, taxable
Exhibit 34 shows the following items:
Opening balance January 1, 1946, $ 2,900
Credits at the end of 1946, $ 10,976.68 In 1948 there were five further credits, to wit: $ 5,300; $ 10,000; $ 15,000; $ 1,300; and $ 363.08
In 1949 there was a credit of $ 103.37 The total credits of this exhibit show an amount of $ 43,043.13. The testimony indicates that Henry E. Peelle was not entitled to any of these credits. However, Henry E. Peelle withdrew as a result of the credits in Exhibit 34 the following amounts: $ 7,500; $ 7,500; $ 5,757; $ 3,000; $ 200, and $ 1,000, making a total of $ 24,957 for which Henry E. Peelle is taxable.
The balance of this over-all account under Exhibit 34, to wit, $ 18,086.13, as of December 31, 1949, is not taxable. Henry E. Peelle was not entitled to any of the moneys included in this exhibit and, while there is still a credit balance due Henry E. Peelle in the sum of $ 18,086.13, Richmond has a clear legal defense to this amount and, therefore, it is rules that that particular credit is not taxable.
Richmond Fireproof Door Company notes, $ 15,587.50 -- these notes it appears were given by Richmond to Henry E. Peelle without any semblance of consideration. The books so show and there is no dispute as to that. There is an involved transaction between the Peelle Company and the Richmond Company out of which these notes flow. Nevertheless, as it is impossible for Henry E. Peelle to collect on these notes, this sum of $ 15,587.50 is clearly not taxable. The Court might state that these notes are very old notes, have not been presented for payment, nor have they as yet been paid.
Shepard Broad, Legal Expense, $ 375 -- taxable
Chase Federal & Loan, $ 170 -- taxable
Clinchy Weaver & Co., $ 9.92 -- ...