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23 T.C. 954 George M. Newcomb,
Petitioner, v. Commissioner of Internal Revenue, Respondent. United States Tax Court Docket No.
44938. March 10, 1955. [*954] COUNSEL: Edward L. Weber, Esq., for the
petitioner. SYLLABUS:
Respondent determined
liability against petitioner as transferee for income taxes and penalties
determined against Lila G. Husted for the years 1944 to 1946, inclusive. On
November 30, 1947, Lila G. Husted died in Canada, where she had resided since
1944. During the year 1947 decedent transferred to petitioner all of her
interest in a retail shoe store which she operated in Detroit, Michigan, during
the taxable years involved, as a sole proprietorship. Petitioner concedes the
liabilities of the transferor but challenges his liability as transferee,
alleging that the transfers did not render the transferor insolvent and that
full consideration was paid for the assets transferred. At the time of
decedent’s death her assets in the United States were insufficient to
discharge her Federal tax liabilities. Held: 1. Petitioner
has failed to show the amount of consideration paid for the assets transferred
to him by decedent. 2. The assets
transferred by decedent to petitioner rendered her insolvent. 3. Respondent
was not required to pursue the decedent’s assets in a foreign
jurisdiction before imposing liability against petitioner as transferee. 4. The value of
the assets transferred to petitioner determined. The respondent
has determined liability for income tax and additions to tax against
petitioner, as transferee, for the years and in the amounts as follows: --------------------------------------------------
Penalty
Year
Deficiency (25 per cent) --------------------------------------------------
1944
.................... $4,312.19 $1,078.05 1945
..................... 1,446.14
701.83 1946
..................... 7,505.89 1,876.47 1947 (Jan. 1-Nov.
30) .... 1,794.26 ------------- --------------------------------------------------
[*955] The single issue presented is
whether petitioner is liable as transferee of Lila G. Husted, who died November
30, 1947, or as transferee of the estate of Lila G. Husted, deceased, and, if
so, to what extent. FINDINGS OF
FACT. The stipulated
facts are found accordingly. Petitioner is
an individual and resident of Detroit, Michigan. Lila G. Husted,
a citizen of the United States, died testate November 30, 1947, at the age of
84 years, at Morpeth, Ontario Province, Canada, where she had resided since
1944. She filed no Federal income tax returns for the taxable years 1944, 1945,
and 1946, nor for the period January 1, 1947, until her death in that year.
Prior to 1944 she resided in Detroit, Michigan. Upon the death
of her husband in April 1942, Lila G. Husted, sometimes hereinafter referred to
as the decedent, acquired sole ownership of a retail shoestore in downtown
Detroit, Michigan, known as the Health Spot Shoe Shop. At that time the
decedent was 79 years of age and had taken a relatively inactive interest in
the business. In August 1942 the decedent appointed petitioner, a man of some
40 years’ experience in the shoe business, as manager of the shoestore.
This relationship between the decedent as proprietor and petitioner as manager
continued through June 10, 1947. The Health Spot
Shoe Shop sold only corrective shoes manufactured by the Health Spot Shoe
Company under an exclusive franchise granted by the latter. The franchise for
the exclusive right to sell the shoes in downtown Detroit was terminable upon
30 days’ notice by either party. The Health Spot Shoe Company did all
of the accounting, bookkeeping, and banking for Health Spot Shoe Shop. In the early
part of 1947 petitioner became dissatisfied with his position as manager of the
business and was considering seeking other employment because he felt that his
job offered no future security. The decedent, who had moved to Canada in 1944
and had visited the business infrequently thereafter, had been well satisfied
with petitioner’s management and was concerned over the possibility of
petitioner’s leaving the business. The decedent had been advised by
George E. Musebeck, president of Health Spot Shoe Company, which had some 1,500
other franchises, that because of the excellent location of the business in
downtown Detroit it would be advantageous to [*956]
continue operation of the business. In view of the decedent’s advanced
years Musebeck encouraged the decedent to keep petitioner as manager and to
make him a part owner of the business. On June 11,
1947, the decedent and petitioner entered into a written agreement. Recited
therein as the motivating factors causing its execution were that Lila G.
Husted, owner of Health Spot Shoe Shop, being of advanced age and no longer
able to engage actively in the business, desired to enter into an arrangement
which would provide an income for her remaining years and that the petitioner
was desirous of insuring his future by obtaining an interest in the business.
The parties agreed to form a co-partnership to be known as 'Health Spot Shoe
Shop' which was to continue until the death of the decedent. Each party was to
contribute $1,000 cash as capital for carrying on the business. The agreement
also provided that in consideration of the decedent’s assigning all of
her right, title, and interest in and to the stock, furniture, and fixtures,
and other personal property of the shoe business owned by her to the
partnership, petitioner assumed and agreed to pay one-half of the indebtedness
then outstanding to the shoe manufacturer, Health Spot Shoe Company, which was
stated to be the sum of $7,500, and all other accounts payable owed by the
decedent in connection with the business. All the net profits thereof were to
be divided equally between the decedent and petitioner with the provision that
the decedent’s withdrawals were to be limited to $100 weekly, the
balance to be paid to a trustee to be used for discharging all debts and
obligations incurred by decedent prior to the date of the agreement. It was
further agreed that petitioner should have full charge and complete management
of the affairs of the shoestore and that the only interest of the decedent was
to share in the profits. Upon the death of the decedent her interest in the
partnership would cease and all property thereof would be the sole property of
the petitioner as survivor. On July 6,
1947, petitioner and decedent received a letter from Health Spot Shoe Company
which provided in pertinent part as follows: We wish to acknowledge the receipt of your
partnership agreement dated the 11th day of June, 1947. We note from the
agreement that each of you is to have an undivided one-half interest in the
business as long as Mrs. Husted lives and that the present indebtedness to the
Health Spot Shoe Shop is to be your joint obligation. In August 1947
petitioner deposited $4,000 of his own funds with Health Spot Shoe Company in
order to secure a 5 per cent discount on purchases of shoes for the partnership
business. This sum was not carried on the partnership books as an asset or
credited to petitioner’s capital account until 1948, after the death
of the decedent. [*957] From June 11, 1947, until the
decedent’s death on November 30, 1947, petitioner managed the business
and shares its profits with her pursuant to their agreement. The net work of
Health Spot Shoe Shop on June 30, 1947, was $8,919.40. Although the books of
account reflected assets of $19,279.21, of which $13,128 represented inventory
for shoes, the inventory was overvalued in the amount of $3,500. The
liabilities were $6,859.81. The net worth
of Health Spot Shoe Shop on November 30, 1947, was $11,769.57. Although the books
reflected assets of $23,254.70, of which $19,142.64 represented inventory for
shoes, the inventory was overvalued by the amount of $3,500. The liabilities
were $7,985.13. For the years
1939 to 1947, inclusive, the net sales and net profit for Health Spot Shoe Shop
were as follows: --------------------------------------------------------------------------- Year Net sales Net profit --------------------------------------------------------------------------- 1939 .................................. $51,028.46 $5,381.95 1940 ................................... 50,742.74 9,841.62 1941 ................................... 65,276.32 7,951.98 1942 ................................... 87,516.50 10,732.77 1943 ................................... 94,913.17 17,561.05 1944 ................................... 80,143.99 13,836.60 1945 ................................... 91,796.18 12,072.02 1946 .................................. 108,626.23 22,844.89 1947 ................................... 80,756.63 1 10,141.49 --------------------------------------------------------------------------- FN1 After
$3,500 loss resulting from write-off of overvalued inventory. Apart from her
interest in Health Spot Shoe Shop, Lila G. Husted owned assets in both the
United States and Canada. On November 30, 1947, the date of her death, the
decedent owned the following assets: Assets located in the United States: Promissory note (face value of principal and interest) $2,307.92 Savings bond .............................................. 20.25 Life insurance ........................................ 10,000.00 $12,328.17 --------- Assets located in Canada: Real estate in Howard Township ......................... 4,000.00 Household goods and furniture .......................... 1,000.00 Farm implements, produce and stock ....................... 200.00 Automobile, 1947 Buick ................................. 3,000.00 Jewelry and miscellaneous personal property .............. 400.00 Cash ..................................................... 334.37 Promissory note .......................................... 100.00 9,034.37 --------------------- $21,362.54 The insurance
was a group life insurance contract with the Travelers Insurance Company,
Hartford, Connecticut, proceeds of which were payable to the decedent’s
death. The policy had no cash surrender value. Following decedent’s
death the proceeds were paid to the executors of her Canadian estate. [*958] Lila G. Husted owned substantially the same
property on June 11, 1947, with the exception of a summer cottage located at
Rondeau Park, Ontario Province, Canada, which she owned on that date but which
was sold later during the summer of 1947 for approximately $6,000. The
promissory note, face value and interest, was worth $2,266.29. On November 30,
1947, the estate of Lila G. Husted, deceased, was liable for Federal income
tax, additions to tax for failure to file returns under section 291(a),
Internal Revenue Code of 1939, and interest, as follows: --------------------------------------------------------------------- Year Deficiency Additions Interest Total --------------------------------------------------------------------- 1944 .................... $4,312.19 $1,078.05 $700.56 $6,090.80 1945 ..................... 2,807.32 701.83 287.64 3,796.79 1946 ..................... 7,505.89 1,876.47 318.70 9,701.06 1947 (Jan. 1-Nov. 30) .... 1,794.26 --------- --------- 1,794.26 -------------------------------------------- $16,419.66 $3,656.35 $1,306.90 $21,382.91 --------------------------------------------------------------------- Petitioner was
appointed the special administrator of Lila G. Husted’s Michigan
estate and filed Federal income tax returns on her behalf on September 24,
1948, for the taxable years 1944, 1945, and 1946. Petitioner was later
appointed executor of her Michigan estate and filed a final Federal income tax
return on November 30, 1948, for the period January 1, 1947, to November 30,
1947. All returns were filed with the collector of internal revenue for the
district of Michigan, at Detroit. Petitioner, as
executor of decedent’s Michigan estate, paid respondent the sum of
$1,361.18, representing the value of the assets of that estate after payment of
administration expenses of approximately $966.99. On September
27, 1948, respondent filed a claim with the executors of the Canadian estate of
Lila G. Husted, deceased, for unpaid United States individual income taxes,
additions to the tax, and interest, in the total amount of $20,417.02. On May
11, 1949, the Canadian executors contested respondent’s claim and
respondent did not thereafter pursue his claim further. No part of the
liability of Lila G. Husted, deceased, for unpaid income taxes for the taxable
years 1944, 1945, 1946, and for the period commencing January 1, 1947, and
ending November 30, 1947, together with additions to tax and interest, has ever
been paid, with the exception of the sum of $1,361.18 paid by her Michigan
estate which reduced the 1945 income tax liability from $2,807.32 to $1,446.14. On June 11,
1947, and November 30, 1947, Lila G. Husted transferred certain interests in
Health Spot Shoe Shop to petitioner for which the latter paid no consideration. [*959] By reason of such transfers to
petitioner of interests in the business, Health Spot Shoe Shop, Lila G. Husted,
on June 11, 1947, and November 30, 1947, became insolvent and without
sufficient assets to satisfy her outstanding Federal tax liabilities. OPINION. OPINION
BY: LEMIRE,
Judge: The issue presented
is whether petitioner is liable as transferee of the assets of Lila G. Husted,
deceased, for unpaid deficiencies in income tax, additions to tax, and
interest, as set forth in our Findings of Fact. The extent of liability, if any
exists, is limited to the value of the interest in the Health Spot Shoe Shop
transferred to petitioner. J. Warren Leach, 21 T.C. 70; Scott v. Commissioner, 117 F.2d 36; Lillian Burke, 21 B.T.A. 45. Petitioner concedes the
liabilities of the transferor, but he denies that as a result of such transfers
either the decedent or her estate was thereby rendered insolvent, an essential
element of transferee liability. J. Warren Leach, supra; Ruth Halle Rowen, 18 T.C. 871, 881, reversed on other
grounds, 215 F.2d 641. The burden of proof of such insolvency is on the
respondent. Terrace Corporation, 37 B.T.A. 263; sec. 1119(a), I.R.C. 1939. Respondent
contends that the date of the transfer of the business to petitioner was
November 30, 1947, the date of the decedent’s death. On that date er
total Federal tax liability was $21,392.91. Petitioner, on the other hand,
contends that the date of transfer was June 11, 1947, the date of the agreement
between himself and the decedent. On that date the latter’s Federal
tax liability for 1944, 1945, and 1946 was $19,588.65. We think it clear from
the agreement of June 11, 1947, and the acknowledgement thereof by Health Spot
Shoe Company, that the transfer was effectuated partially on June 11, 1947, and
partially on November 30, 1947. The question of the decedent’s
solvency must be viewed therefore as of both dates. On each of the
dates under consideration, Lila G. Husted, the decedent and transferor, owned
assets located in both the United States and Canada. Petitioner contends that
in order to determine the decedent’s solvency all assets, regardless
of location, must be considered. We do not agree. With the exception of the
life insurance policy, which had no cash surrender value, all of the
decedent’s assets in the United States were located in Michigan.
Respondent, in support of his position of insolvency, relies upon the Michigan
Uniform Fraudulent Conveyances Act (Mich. Stat. Ann., Title 26, ch. 261) [FN1]
and the [*960] Bankruptcy Act (11
U.S.C.sec. 107 (1946 ed.)). [FN2] In both acts it is provided that property
exempt from execution is not to be considered in determining solvency in cases
involving conveyances implied to be fraudulent. We have found
that as of June 30, 1947, the net worth of the business was $8,919.40.
Therefore, the total assets owned by the decedent in the United States
consisted of an undivided one-half interest in the business, Health Spot Shoe
Shop, with a value of $4,459.70, and, in addition, a promissory note with
interest of a value of $2,266.29, and a savings bond with a value of $20.25.
These assets aggregated the sum of $6,746.24, which amount is clearly
insufficient to meet the decedent’s Federal tax liability at that time
of $19,588.65. On November 30,
1947, the decedent’s United States assets consisted of the same
promissory note with interest of a value of $2,307.92 and the savings bond of
$20.25, plus the proceeds of the insurance policy in the amount of $10,000.
These assets aggregated the sum of $12,328.17, a sum clearly insufficient to
meet the decedent’s Federal tax liability at that date of $21,382.91. The petitioner
further argues that since transferee liability in equity is a secondary
liability, and all reasonable possible remedies against the transferor must be
first exhausted, the respondent has failed to do so by not pursuing his claim
filed against the Canadian assets. The record
establishes that the respondent on September 27, 1948, filed a claim with the
executors of the decedent’s Canadian estate, which they contested, and
no further action was taken by respondent. It is our opinion that the
respondent is not required to pursue remedies, if any, in a foreign
jurisdiction in order to have exhausted all remedies against the transferor in
order to be permitted to impose transferee liability. It is generally
recognized that courts as a matter of policy decline to enforce the penal or
revenue laws of a foreign jurisdiction. See Moore v. Mitchell, 30 F.2d 600, 603, affirmed on other
grounds 281 U.S. 18; United
States v. Fairall, 16
F.2d 328; City of Regina v. McVey, 23 Ont.W.N. 32; Canada v. Schulze, 9 Scots L.T. 4. The tax
treaty between the United States and Canada does not contain any provision
recognizing the right of either country to enforce its tax liabilities within
the jurisdiction of the other country. [*961] We do not think that if
respondent had attempted to pursue any remedies in the Canadian courts he would
have met with any success. The courts do not require one to do a useless act.
In the absence of any authority to the contrary, we hold that the respondent
has sufficiently pursued all possible remedies against the transferor so as to
enable him to proceed against this petitioner as transferee. The respondent
having established a prima facie case of transferee liability, the burden of
going forward shifted to the petitioner to show affirmatively why he should not
be held liable. Robinett v. Commissioner, 139 F.2d 285, certiorari denied 322 U.S. 745,
rehearing denied 322 U.S. 772; Commissioner v. Renyx, 66 F.2d 260; Fada Gobins, 18 T.C.
1159, affirmed per curiam 217 F.2d 952. Petitioner
contends that he paid a fair consideration for the interest in the Health Spot
Shoe Shop which decedent transferred to him. In support thereof petitioner
petitioner argues that his contributions of $1,000 and $4,000, his assumption
of the debts of the business, and his contribution of services represent a fair
and reasonable consideration paid. The record does not establish the payment of
$1,000. It appears that the sum of $4,000 was deposited by petitioner in August
1947 in order to secure the benefit of purchase discounts. Obviously, that item
cannot be treated as consideration paid to the decedent. Furthermore, the
$4,000 was not carried on the partnership books as an asset nor credited to
petitioner’s capital account until 1948. Since the tangible assets of
the business on June 30 and on November 30, 1947, greatly exceeded the
liabilities owing on those dates, it seems clear that the assumption of the
debts did not constitute any consideration paid to the decedent. We are not
impressed with petitioner’s contention that his services as manager of
the partnership constituted part of the consideration for the transfer of the
assets by the decedent. The agreement of June 11, 1947, contains a provision to
the effect that the decedent recognizes the deep obligation owed to the
petitioner for past services and as a further consideration for the petitioner
entering into the partnership agreement the decedent agreed to make a will
leaving all of her real and personal estate with certain specified exceptions
to the petitioner, and in default of so doing the petitioner was to receive
additional compensation for services rendered of $2,000. For his services
rendered to the partnership he was to receive 50 per cent of the profits and
the decedent’s remaining undivided half interest in the partnership
business upon her death. Assuming that it was the intent of the parties that
petitioner’s services were to be considered as part consideration for
the transfers, since the petitioner has offered no proof showing the value of
such services, he has failed to meet his burden on that point. Cf. Margaret
Wilson Baker, 30 B.T.A.
188; Fada [*962] Gobins, supra. Accordingly, we hold and have found as
a fact that the transfers were without consideration. Finally, we
consider the respondent’s contention that the Health Spot Shoe Shop
had a going concern goodwill value of $13,936.22 based upon the formula set
forth in A.R.M. 34, 2 C.B. 31. The valuation
of goodwill presents a question of fact peculiar to each individual case. The
decisions demonstrate that there is no fixed formula for valuation to be
applied because a business has earnings in excess of a fair return upon the
value of tangible assets. The petitioner
contends that the business has no goodwill. The business was a retail store
conducted in the name of the Health Spot Shoe Shop under a limited franchise
granted by the Health Spot Shoe Company, the manufacturer. The contract right
was terminable by either party upon 30 days’ notice. The earnings were
dependent not only upon the terminable franchise but the personal
qualifications of the individuals managing the business. The value of a
contract right of limited duration and the qualifications of one or more
individuals are no part of goodwill in the ordinary sense of the term. Maurice
A. Mittelman, 7 T.C.
1162. No good will has ever been carried on the balance sheet as an asset of
the business. Furthermore, George E. Museback, president of the Health Spot
Shoe Company which manufactured the shoes sold by the partnership, expressed
the opinion that the business had no goodwill value. On the basis of this
record we are convinced that the business in question had no goodwill value and
have given no consideration to that item in evaluating the assets transferred. Based upon all
of the facts, we have found that the assets transferred to the petitioner
consisted of one-half of the business on June 30, 1947, valued at $4,459.70,
and the remaining one-half transferred on November 30, 1947, valued at
$5,884.78, which aggregate the sum of $10,344.48. We hold that petitioner is
liable as transferee to the extent of $10,344.48. Decision will
be entered under Rule 50. FN1. Sec. 26.881 Definition of terms. Section 1. In
this act 'assets’ of a debtor means property not exempt from liability
for his debts. To the extent that any property is liable for any debts of the
debtor, such property shall be included in his assets. * * * Sec. 26.882 Insolvency. Sec. 2. (1) A person is
insolvent when the present fair salable value of his assets is less than the
amount that will be required to pay his probable liability on his existing
debts as they become absolute and matured. FN2. Sec. 107. Liens and fraudulent transfers. (d)(1) For the purposes of, and exclusively
applicable to, this subdivision (d): (a) 'Property' of a debtor shall include
only his nonexempt property; (b) 'debt' is any legal liability, whether matured
or unmatured, liquidated or unliquidated, absolute, fixed, or contingent; (c)
'creditor' is a person in whose favor a debt exists; (d) a person is
'insolvent' when the present fair salable value of his property is less than
the amount required to pay his debts; * * * |