Estate of Schneider v. Comm'r , 29 T.C. 940 ( 1958 )

Estate of Harry Schneider, Deceased, Molly Schneider, Administratrix, and Molly Schneider, et al., ¹ Petitioners, v. Commissioner of Internal Revenue, Respondent ²

Estate of Schneider v. Comm'r

Docket Nos. 54289, 54290, 54291, 54292, 54293, 54294, 54295, 54296

United States Tax Court

29 T.C. 940; 1958 U.S. Tax Ct. LEXIS 251;

February 25, 1958, Filed

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Decisions in Docket Nos. 54289, 54292, 54294, 54295, 54296 will be entered under Rule 50.

1. Held, the returns of Harry Schneider were false and fraudulent and a part of each deficiency was due to fraud with intent to evade tax for each of the years 1944 through 1950.

2. Held, beneficiaries of various "Totten trusts" are liable as transferees, to the extent of trust assets individually received, for deficiencies and additions to tax determined against decedent for years 1944 through 1950.

3. Held, transferees of assets of decedent are liable to the extent of assets received for deficiencies and additions to tax determined against decedent for years 1944 through 1950.

Solomon M. Lowenbraun, Esq., and Philip Leavitt, Esq., for the petitioners.

Charles M. Greenspan, Esq., and John A. Dunkel, Esq., for the respondent.

Van Fossan, Judge.

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VAN FOSSAN

Respondent determined deficiencies in income tax and additions to tax under section 293 (b), I. R. C. 1939, in the joint returns of Harry Schneider and Molly Schneider for the taxable years 1948, 1949, and 1950.

In Docket No. 54289, the following deficiencies and additions to tax originally determined by the respondent against the Estate of Harry Schneider, deceased, Molly Schneider, administratrix, and Molly Schneider, petitioners, were put in issue:

Year	Deficiency	Addition to
		tax
1948	$ 749.02	$ 374.51
1949	4,388.74	2,194.37
1950	624.66	312.33

In an amended answer the respondent recomputed the deficiencies and additions to tax in Docket No. 54289 with the following result:

Year	Deficiency	Addition to
		tax
1948	$ 7,544.90	$ 3,722.45
1949	9,613.58	3,756.79
1950	482.36	241.18

Each of the following-named petitioners was determined by the respondent to be liable to the extent shown as a transferee of the assets of Harry Schneider. Respondent levied a jeopardy assessment against each of the alleged transferees.

Docket No.	Petitioner	Transferee
		liability
54290	Molly Schneider	$ 36,930.71
54291	Katherine Schneider	20,051.06
54292	Ruth Schneider	18,196.35
54293	Manny Schneider	24,406.09
54294	Leo Schneider	23,943.18
54295	Jules Schneider	20,455.37
54296	Catherine Smith	46,704.97

Incidental to determining the transferee liability of the individual petitioners, respondent determined deficiencies and additions to tax for the years 1944 through 1947 in the individual returns of decedent in the following amounts:

Year	Deficiency	Addition to
		tax
1944	$ 11,753.54	$ 5,876.77
1945	21,160.29	12,102.18
1946	26,505.71	13,988.34
1947	28,985.20	15,856.16

There are three issues involved. First, whether Harry Schneider filed false and fraudulent income tax returns with intent to evade tax for each of the taxable years 1944 through 1950.

Second, whether the respondent correctly determined deficiencies in the individual income tax returns of Harry Schneider for the years 1944 through 1947, and in the joint returns of Harry Schneider and Molly Schneider for the years 1948, 1949, and 1950.

Third, whether petitioners Molly Schneider, Katherine Schneider, Ruth Schneider, Manny Schneider, Leo Schneider, Jules Schneider, and Catherine Smith are liable as transferees of the assets of Harry Schneider.

FINDINGS OF FACT.

Some of the facts were stipulated and are incorporated herein by this reference.

Harry Schneider (hereinafter referred to as decedent) graduated from Boston University School of Medicine in 1922 and was licensed to practice in that year. He married Mary (Molly) Gray (hereinafter referred to as Molly Schneider) on December 27, 1928. From 1934 until his death decedent maintained his personal residence at 200 East 16th Street, New York, New York. He died intestate April 20, 1951. Returns for the tax years in question were filed with the collector of internal revenue for the second New York district.

From 1922 until 1929 decedent was a general practitioner. In 1929 he began to specialize in obstetrics. By 1942 he had limited his practice to the specialities of obstetrics, gynecology, and related surgery.

From 1939 until 1951 Catherine Smith was employed by decedent as a nurse and secretary. During this period decedent never took a vacation. He maintained office hours Monday through Thursday, but frequently emergencies forced him to be in the office on Friday and Saturday. Decedent visited the clinic at Beth Israel Hospital three times a week, usually in the morning. Sometimes he was at the hospital 6 or 7 nights a week, at times all night long. Throughout the years 1944 to 1951, inclusive, there were four other doctors who substituted for decedent in case of illness or emergency.

It was usual procedure in the decedent's office to make out a patient card for each new patient who came in for obstetrical care. The patient's name, address, and other pertinent information were recorded on the face of the card (hereinafter sometimes called obstetrical card). The cards were filed alphabetically and segregated by years. There were approximately 200 such cards for each of the years 1945 and 1946. There were 205, 451, 422, and 278 cards for the years 1947, 1948, 1949, and 1950, respectively.

The fee charged was usually entered on the reverse side of the card in the upper lefthand corner, either by the decedent or Catherine Smith. The fees recorded on the cards during 1945 and 1946 varied from $ 75 to $ 100.

The records of United Medical Service, a prepayment medical care plan, indicate that in the years 1949 and 1950 payment was made to the decedent for 27 claims. In 17 of these claims the decedent's fee, as filed with the Medical Service, exceeded that recorded on decedent's patient cards. In some instances the differential was $ 25; in others, $ 50.

In addition to the obstetrical cards decedent maintained a file of gynecological cards for 1935 through 1951. These gynecological cards indicate that during the years 1944, 1945, 1946, 1947, 1948, 1949, and 1950 decedent received respectively 252, 222, 271, 301, 243, 235, and 153 visits from gynecological patients. Fees for gynecological consultation varied from $ 3 to $ 5, except in the case of an operation. One gynecological card indicates a fee of $ 1,000 for a Caesarian section. Other cards, reflecting various surgical procedures, show fees of $ 100, $ 75, and $ 50.

Decedent was associated only with the Beth Israel Hospital. The admissions register of the hospital shows every admission and every patient of every doctor. The admissions register, in conjunction with microfilmed patient records, establishes that approximately 644 individuals were admitted to the hospital in 1946 as patients of decedent. In 1947 there were 607 of decedent's patients admitted. There are no patient cards in his file for 430 of these 1947 cases. In both 1948 and 1949, 456 of decedent's patients were admitted. These figures do not include charity cases.

A large majority of the admissions were for pregnancy and delivery of a child; some were for legal abortions, gynecological operations, or other reasons. There were instances in which patients were admitted to the hospital for labor more than once during a given 30-day period.

On May 8, 1926, decedent opened savings bank account No. X,XXX,575 in his own name with the Bowery Savings Bank, New York, New York. On December 7, 1945, the name of this account was changed to "Harry Schneider, in trust for Catherine M. Smith, friend."

On December 28, 1942, he opened savings bank account No. XXX,704 in his own name with the Union Square Savings Bank, New York, New York. On December 7, 1945, the name of this account was changed to "Harry Schneider, in trust for Catherine Marie Smith."

On January 25, 1943, he opened in his own name account No. X,XXX,228 with the Bank for Savings, New York, New York. On December 7, 1945, the name of this account was changed to "Harry Schneider, in trust for Catherine M. Smith."

During 1944 and thereafter decedent opened numerous savings bank accounts in trust for various persons. In 1944 he deposited a total of $ 6,345 in these savings acounts; in 1945, $ 24,638; in 1946, $ 41,378; and in 1947, $ 42,817. These trust accounts were what are known in New York as "Totten trusts."

At the time of his death there were in existence 37 such accounts in 37 different savings banks, distributed in the following manner:

	Number of
	accounts in	Balance of
	trust for	accounts as
Name	named	of Apr. 20,
	individual as	1951
	of Apr. 20,
	1951
Catherine Smith	11	$ 46,652.59
Leo Schneider	6	23,904.69
Emanuel (Manny)
Schneider	5	21,372.14
Jules Schneider	6	20,455.37
Ruth Schneider	5	18,196.35
Samuel Schneider	1	$ 2,666.50
Nathan Schneider	1	838.03
Madeline Schneider	1	755.42
Jeffrey Schneider	1	746.62
		$ 135,587.71

These accounts accumulated interest, as follows:

Year	Amount
1944	$ 128.76
1945	295.12
1946	729.23
1947	1,549.57
1948	$ 2,070.38
1949	2,517.90
1950	2,623.70

After each of the 11 accounts in trust for Catherine Smith was established, she was given possession of the passbook and she retained general possession of the books until after decedent's death, when she surrendered them to her attorney. She personally made no withdrawals from these accounts.

In October 1950 decedent turned over 26 savings bank passbooks to his brother Jules Schneider, instructing him that he should keep possession of the books and that Molly Schneider should not get possession of them. Jules retained possession of the books until after decedent's death, at which time he gave them to his attorney.

As a matter of banking practice in the State of New York, the beneficiary of a Totten trust cannot make withdrawals from the account during the lifetime of the settlor.

Between January 1, 1944, and April 20, 1951, decedent made 11 withdrawals totaling $ 13,767.66 from various of the trust accounts. Two of the withdrawals -- $ 1,000 on November 12, 1948, from the Bank for Savings, and $ 3,600 on January 14, 1949, from the West Side Savings Bank -- were made from accounts in trust for Catherine Smith. These withdrawals were noted in the bank books.

Following the death of Harry Schneider the balances of all accounts were withdrawn by the respective beneficiaries.

At the time of decedent's death there were six policies of insurance on his life, as follows:

		Cash	Amount
Policy	Beneficiary	surrender	paid at
		value Apr.	death
		20, 1951
New York Life Ins. Co.,	Katherine Schneider	$ 2,476.11	$ 4,064.85
#8922872, issued Dec. 1, 1925;
annual premium $ 147.84.
The Prudential Ins. Co. of	Katherine Schneider	1,667.55	5,211.17
America, #5848871, issued
May 26, 1927; annual
premium $ 112.
Equitable Life Assurance	Katherine Schneider	2,009.07	5,294.94
Society of the United States,
#4,693,567, issued Mar. 10,
1928; annual premium $ 138.85.
Penn Mutual Life Ins. Co.	Emanuel Schneider	1,850.31	3,018.66
of Philadelphia, #1370835,
issued Oct. 29, 1928; annual
premium $ 120.60.
Massachusetts Mutual Life Ins.	Molly Schneider	1 13,159.13	10,205.07
Co., #1057255, issued	Katherine Schneider		3,401.69
Apr. 18, 1932; annual
premium $ 713.50.
Massachusetts Mutual Life Ins.	Molly Schneider	1 7,895.48	6,087.05
Co., #1057256, issued	Katherine Schneider		2,029.01
Apr. 18, 1932; annual
premium $ 401.55.

During the years 1939 through 1942 decedent borrowed a total of $ 10,266 against these various life insurance policies. All the loans were repaid as of November 27, 1944.

When decedent died he held in coownership with Molly Schneider United States savings bonds having a total redemption value of $ 11,578.70. Some of these bonds were originally purchased by decedent in his name alone during 1943, 1944, and 1945 and were so held until February 1951. On February 6, 1951, they were put in coownership form in the names of Harry Schneider and Mary (Molly) Schneider, and were so held without change to the date of decedent's death; their redemption value at that time was $ 7,578.75.

Decedent and Molly Schneider had no children. Throughout the tax years in question they resided in a 3-room apartment. The apartment rental was $ 100 a month until 1947, and $ 115 a month thereafter. A maid was employed on a part-time basis. Decedent gave Molly Schneider $ 50 to $ 55 a week for household expenses. They did not own an automobile. Decedent claimed his mother, Katherine Schneider, as a dependent on each of his returns for 1944 through 1950.

Katherine Schneider lived with Manny Schneider and Ruth Schneider at 8240 Pettit Avenue, Elmhurst, Long Island, in a house purchased by decedent for the sum of $ 13,500 on October 30, 1947. Title to the house was taken by decedent and Molly Schneider as tenants by the entirety. It was purchased subject to a $ 7,000 mortgage.

Decedent filed individual Federal income tax returns for the taxable years 1944, 1945, 1946, and 1947. He filed joint returns with Molly Schneider for the years 1948, 1949, and 1950. Income was reported as follows:

Year	Professional	Interest	Total
	income	income
1944	$ 6,141.17	$ 56.00	$ 6,197.17
1945	7,177.70	62.00	7,239.70
1946	9,782.33	67.00	9,849.33
1947	8,356.20	114.00	8,470.20
1948	24,022.92	0	24,022.92
1949	20,471.41	0	20,471.41
1950	15,390.34	1 1,133.50	2 15,523.84

Investigation of the decedent's income tax liability for the years 1945, 1946, and 1947 made during his lifetime and covered by an agent's report made in August 1950 resulted in the following additions to income:

	Estimated	Increase due
	amount to	to adjustment	Net
Year	cover	of	adjustment
	personal	errors in
	expenditures	bookkeeping
1945	$ 5,000	$ 2,931.00	$ 7,931.00
1946	3,000	1,000.00	4,000.00
1947	3,000	4,523.78	7,523.78

A 5 per cent negligence penalty was imposed for the year 1945 for failure to keep proper records.

Additional taxes were paid by the decedent as a result of the investigations and were taken into consideration when deficiencies in the case at bar were determined. During these prior investigations conducted between 1948 and 1950 decedent repeatedly informed internal revenue agents that he had no bank account other than a checking account at the Corn Exchange Bank and Trust Company, and that this account represented all his taxable income. The agents never learned of the falsity of these statements during the course of their audit.

A similar investigation of decedent's tax liability for the years 1948 and 1949 conducted after his death resulted in a "no change" report.

An investigation of decedent's income tax liability for the year 1950 was begun in the spring of 1953. The Federal estate tax return filed for decedent's estate was made available to the examining agent. The estate tax return disclosed the existence and ownership of savings bonds, savings bank accounts, and insurance policies not theretofore revealed. Thereupon, internal revenue agents began a detailed investigation of decedent's income tax liability for all preceding years. During the course of this investigation they circularized banks, examined the admissions records of Beth Israel Hospital, examined the decedent's patient cards, and made a net worth determination for 1944 and subsequent years. Statutory notices of deficiencies, additions to tax, and transferees' liability were issued under date of May 27, 1954.

Eighty-three of the 84 deposit slips used by decedent for making deposits in his checking account at the Corn Exchange Bank and Trust Company for the period January 4, 1947, through December 26, 1947, were found to show deposits of checks only. During the same period 71 deposits were made in various savings accounts. Four of these deposits contained checks. All other deposits were of currency.

At the trial respondent introduced a computation of decedent's net worth for the years 1944 through 1950, exclusive of deficiencies and additions to tax, as shown on the following page.

	Year ended Dec. 31
	1943	1944	1945
Assets
Cash in savings banks	$ 6,004.51	$ 11,698.27	$ 34,231.39
Cash in Corn Exchange Bank and
Trust Co. checking account	810.42	1,015.27	1,314.94
United States savings bonds -- Series
E and F (at cost)	7,870.00	13,549.00	17,744.00
One-family house: 82-40 Pettit Ave.,
Elmhurst, N. Y. (at cost)
Loans receivable		400.00	2,900.00
Cash surrender values of life
insurance policies	16,215.90	17,610.59	19,108.96
Dividend and interest accumulations
on insurance policies	129.05	177.75	232.22
Office furniture and equipment
(at cost)	2,738.08	2,738.08	2,738.08
Total assets	33,767.96	47,188.96	78,269.59
Liabilities
Loans payable to life insurance
companies	3,339.00
Mortgage payable on house
Reserve for depreciation -- office
furniture and equipment	1,280.45	1,554.26	1,828.07
Total liabilities	4,619.45	1,554.26	1,828.07
Net worth	29,148.51	45,634.70	76,441.52

	Year ended Dec. 31
	1946	1947	1948
Assets
Cash in savings banks	$ 76,338.62	$ 120,017.53	$ 132,035.43
Cash in Corn Exchange Bank and
Trust Co. checking account	2,061.19	1,784.13	3,013.60
United States savings bonds -- Series
E and F (at cost)	17,744.00	17,744.00	17,744.00
One-family house: 82-40 Pettit Ave.,
Elmhurst, N. Y. (at cost)		13,500.00	13,500.00
Loans receivable	2,900.00	2,900.00	2,900.00
Cash surrender values of life
insurance policies	20,662.68	22,271.64	23,927.81
Dividend and interest accumulations
on insurance policies	284.50	337.24	401.88
Office furniture and equipment
(at cost)	2,738.08	2,738.08	2,738.08
Total assets	122,729.07	181,292.62	196,260.80
Liabilities
Loans payable to life insurance
companies
Mortgage payable on house		7,000.00	6,879.88
Reserve for depreciation -- office
furniture and equipment	2,101.88	2,375.69	2,649.50
Total liabilities	2,101.88	9,375.69	9,529.38
Net worth	120,627.19	171,916.93	186,731.42

	Year ended Dec. 31		Just prior
			to death
			on Apr.
	1949	1950	20, 1951
Assets
Cash in savings banks	$ 132,043.33	$ 135,322.03	$ 135,587.71
Cash in Corn Exchange Bank and
Trust Co. checking account	3,721.63	3,451.94	3,475.24
United States savings bonds -- Series
E and F (at cost)	17,744.00	10,249.00	10,249.00
One-family house: 82-40 Pettit Ave.,
Elmhurst, N. Y. (at cost)	13,500.00	13,500.00	13,500.00
Loans receivable
Cash surrender values of life
insurance policies	25,584.59	27,310.22	28,468.77
Dividend and interest accumulations
on insurance policies	459.80	519.81	711.44
Office furniture and equipment
(at cost)	2,738.08	2,738.08	2,738.08
Total assets	195,791.43	193,091.08	194,730.24
Liabilities
Loans payable to life insurance
companies
Mortgage payable on house	6,759.76	6,639.66	6,639.66
Reserve for depreciation -- office
furniture and equipment	2,738.08	2,738.08	2,738.08
Total liabilities	9,479.84	9,377.74	9,377.74
Net worth	186,293.59	183,713.34	185,352.50

All of the figures used in the net worth calculation were stipulated, with the exception of the opening and closing figures of the checking account in the Corn Exchange Bank and Trust Company. The opening figure for December 31, 1943, was unavailable. The balance of the account on July 29, 1944, was substituted as an estimate based on the experience of the account for the remainder of 1944. The closing figure for December 31, 1950, was arrived at by resort to working papers showing a reconciliation of opening and closing balances.

Using net worth increases plus personal expenses, the respondent determined decedent's unreported income from profession for 1944 through 1947 as follows:

	1944	1945
Net worth at Dec. 31 of each year	$ 45,634.70	$ 76,441.52
Net worth at Jan. 1 of each year	29,148.51	45,634.70
Increase in net worth	16,486.19	30,806.82
Add --
Deductible and nondeductible expenditures:
Income tax payments made	936.30	1,156.80
Life, health, and accident insurance premiums	1,571.40	1,571.40
Support of mother	2,000.00	2,000.00
Food, clothing, traveling, entertaining, and
miscellaneous out-of-pocket expenses	3,000.00	3,000.00
Rent	1,200.00	1,200.00
Contributions	345.00	535.00
Interest on life insurance loans	180.00
Interest on mortgage
New York State income taxes paid	51.05	76.41
Gross medical expenses	150.00	1,365.95
Gross income to be accounted for	25,919.94	41,712.38
Less --
Gross income reported and nontaxable income
received:
Interest income	56.00	62.00
Net profit from profession	6,141.17	7,177.70
Depreciation of office furniture and equipment	273.81	273.81
Annual increases in cash surrender values of
life insurance	1,394.69	1,498.37
Dividend and interest accumulations on policies	48.70	44.47
Portion of gross income accounted for	7,914.37	9,056.35
Unexplained increase in net worth	18,005.57	32,656.03
Less --
Portion representing unreported interest income	72.76	233.12
Unreported income from profession	17,932.81	32,422.91

	1946	1947
Net worth at Dec. 31 of each year	$ 120,627.19	$ 171,916.93
Net worth at Jan. 1 of each year	76,441.52	120,627.19
Increase in net worth	44,185.67	51,289.74
Add --
Deductible and nondeductible expenditures:
Income tax payments made	1,298.55	2,048.72
Life, health, and accident insurance premiums	1,571.40	1,472.90
Support of mother	2,000.00	2,000.00
Food, clothing, traveling, entertaining, and
miscellaneous out-of-pocket expenses	3,300.00	3,300.00
Rent	1,200.00	1,245.00
Contributions	1,100.00	905.00
Interest on life insurance loans
Interest on mortgage		67.00
New York State income taxes paid	50.75	125.61
Gross medical expenses	150.00	150.00
Gross income to be accounted for	54,856.37	62,603.97
Less --
Gross income reported and nontaxable income
received:
Interest income	67.00	114.00
Net profit from profession	9,782.33	8,356.20
Depreciation of office furniture and equipment	273.81	273.81
Annual increases in cash surrender values of
life insurance	1,553.72	1,608.96
Dividend and interest accumulations on policies	52.28	52.74
Portion of gross income accounted for	11,729.14	10,405.71
Unexplained increase in net worth	43,127.23	52,198.26
Less --
Portion representing unreported interest income	662.23	1,435.57
Unreported income from profession	42,465.00	50,762.69

Amounts for the support of decedent's mother, for food, clothing, traveling, entertaining, and miscellaneous out-of-pocket expenditures were estimated by respondent for 1944 through 1947. Medical expenses were estimated for the years 1944, 1946, and 1947. Other amounts were determined from the stipulation or exhibits in evidence. Estimates of personal living expenses used in respondent's net worth computation covered all such expenses.

Transcripts of decedent's tax payments for the years 1922 through 1943 reveal that he filed taxable returns in only 3 years prior to 1944. These transcripts, tabulated in conjunction with the maximum net income commensurate with his reporting, are as follows:

Year	Liability	Maximum
	per return	net income
1922	1	$ 1,000
1923	1	1,000
1924	1	1,000
1925	1	1,500
1926	1	1,500
1927	1	1,500
1928	1	3,500
1929	1	3,500
1930	1	3,500
1931	1	3,500
1932	$ 9.68	2,742
1933	2	$ 2,500
1934	1	2,500
1935	2	2,500
1936	1	2,500
1937	2	2,500
1938	2	2,500
1939	2	2,500
1940	2	2,600
1941	$ 180.34	3,500
1942	307.88	3,200
1943	860.66	5,398

For the taxable years 1948, 1949, and 1950 respondent, in recomputing decedent's income, added interest income and increased professional income where omitted.

Respondent recalculated decedent's professional income for 1949 and 1950 on the basis of an estimated average fee of $ 100 per hospital patient and $ 10 per gynecological consultation. No additional professional income was included in the redetermination for 1950.

The Federal estate tax return for the Estate of Harry Schneider was filed July 11, 1952. The parties stipulated that the sum of $ 12,785.56 in assets passed to his estate and that the estate's liabilities, exclusive of income tax, totaled $ 32,545.60. This return revealed the existence of the savings bank trust accounts.

At the time of his death and prior to the transfer of the trust accounts totaling $ 135,587.71, decedent's adjusted net worth was $ 185,352.50, exclusive of back taxes. Simultaneously, considering only the years 1944, 1945, 1946, and 1947, he owed deficiencies and additions to tax totaling $ 114,479.79.

In the course of determining the liability of the several alleged transferees respondent determined deficiencies and additions to tax in decedent's returns as follows:

Year	Deficiency	Addition
		to tax
1944	$ 11,753.54	$ 5,876.77
1945	21,160.29	12,102.18
1946	26,505.71	13,988.34
1947	28,985.20	15,856.16
1948	$ 749.02	$ 374.51
1949	4,388.74	2,194.37
1950	624.66	312.33

By amended answer respondent altered the deficiencies determined and additions to tax for the years 1948, 1949, and 1950, in Docket No. 54289. These changes are set forth in the opening statement above.

On brief the respondent recomputed deficiencies and additions to tax as follows:

Year	Deficiency	Addition to
		tax
1944	$ 8,263.68	$ 4,131.84
1945	15,487.34	9,265.71
1946	22,766.89	12,118.93
1947	27,387.89	15,057.51

On brief the respondent reduced transferee liability asserted in Docket Nos. 54290 to 54296, inclusive, to the following amounts:

Docket	Petitioner	Transferee
No.		liability
54290	Molly Schneider	1 $ 16,292.12
54291	Katherine Schneider	20,001.66
54292	Ruth Schneider	18,196.35
54293	Manny Schneider	24,390.80
54294	Leo Schneider	$ 23,904.69
54295	Jules Schneider	20,455.37
54296	Catherine Smith	46,652.59

Decedent, Harry Schneider, filed false and fraudulent income tax returns for each of the years 1944, 1945, 1946, 1947, 1948, 1949, and 1950 with intent to defraud the Government of taxes due. Some part of the deficiency for each of such years is due to fraud with intent to evade tax.

The statute of limitations does not bar the assessment and collection of any amounts found to be due in accordance with these findings and opinion.

OPINION.

The first issue is that of fraud. Respondent urges that the decedent filed a false and fraudulent return for each of the years 1944 through 1950. The establishment of fraud in each particular year is essential to further consideration of the case for that year. If there was no fraud, the statute of limitations has run against any deficiency which may exist. ³

To establish fraud by direct proof of intention is seldom possible. Usually it must be gleaned from the several transactions in question and the conduct of the taxpayer relative thereto. M. Rea Gano, 19 B. T. A. 518, 532.

Respondent reconstructed decedent's income for the years in question by the net worth method. A net worth statement introduced and supported by the respondent at the trial differed from the statement attached to the notice of deficiency. We accept the later computation as superseding the original determination.

All items in the respondent's present calculation were stipulated or determined from exhibits in evidence, with the exception of the opening and closing balances of decedent's checking account and several personal expenditures. The opening balance was estimated from a transcript of the account beginning July 29, 1944. The closing balance was determined from working papers which reconciled the opening and closing balances. Miscellaneous personal expenditures were estimated.

Petitioners urge that decedent's personal and nondeductible expenses were reflected in his returns and should not be added to net income as reported. However, estimates of personal expenses made by the respondent when computing decedent's income were inclusive of, rather than additional to, amounts reflected in decedent's returns.

Decedent's net income, as computed by respondent, exceeded net income as reported for each of the tax years in question. During the years 1944 through 1947 this discrepancy was particularly large.

Petitioners urge that apparent increases in net worth were due not to unreported income but rather to the transfer of assets held by decedent prior to 1944. Requests by the respondent for information as to the nature and amount of these prior-held assets elicited no response from petitioners, nor has any evidence been introduced tending to confirm their existence. Had the decedent possessed such assets and revealed the amount and nature thereof he might have disclosed the savings banks accounts or otherwise convicted himself of fraudulent conduct in failing to file returns in the years when he made no return.

Other facts cast further doubt upon the tenability of petitioner's contentions. In keeping with decedent's attitude in reporting prior to 1943, his annual net income could not have exceeded $ 3,500. In 1943 his reported net income was $ 5,398. Decedent carried six life insurance policies. In 1932 and some subsequent years premiums amounted to $ 1,634.34 annually, such sum being more than half of his reported net income. Moreover, between 1939 and 1942 he borrowed $ 10,266 against these life insurance policies.

Decedent's professional activities were presumptively recorded on patient cards. However, the admissions records of Beth Israel Hospital, which he patronized exclusively, establish that the number of his patients admitted to the hospital in 1946 and 1947 greatly exceeded the number recorded on his patient cards for those years. Examination of the 27 claims paid decedent by a prepayment medical care plan throughout 1949 and 1950 reveals that in 17 cases decedent's fee listed on the claims exceeded the fee recorded on his patient cards. In some instances the differential amounted to $ 50. Clearly, the patient cards do not accurately reflect decedent's earnings or income.

We conclude, on the whole record, that respondent has not only negatived the existence of any substantial assets held by decedent prior to January 1, 1944, but also has shown a source from which the net worth increases might well have flowed, i. e., unrecorded professional earnings. In the absence of contrary evidence we accept as correct respondent's revised net worth computations. Holland v. United States, 348 U.S. 121">348 U.S. 121 (1954).

The decedent repeatedly informed internal revenue agents, auditing his income tax returns for 1945, 1946, and 1947, that he had no bank account other than a checking account at the Corn Exchange Bank and Trust Company and that this account represented all his taxable income. This statement was absolutely and knowingly false. In actuality, he had unrevealed cash in 37 different savings banks totaling $ 120,017.53 on December 31, 1947.

Eighty-three of the 84 deposit slips used by decedent to make deposits in his checking account in the Corn Exchange Bank and Trust Company between January 4 and December 26, 1947, show deposits of checks only. In the same period he made 71 deposits in savings accounts, only 4 of which contained checks, the remaining 67 being in currency. No explanation is offered for this segregation of checks and currency.

During 1944, 1945, 1946, and 1947 Schneider deposited large sums in 37 savings accounts in 37 different savings banks, in trust for various individuals. Such accounts are commonly known as Totten trusts. Totten trusts are tentative and revocable at will until the depositor dies or completes the gift in his lifetime by some unequivocal act or declaration, such as permanent delivery of the passbook or notice to the beneficiary. If the trustor dies without revocation the presumption arises that an absolute trust was created as to the balance on hand at the death of the depositor. In re Totten, 179 N. Y. 112, 71 N. E. 748 (1904).

Petitioners urge that decedent delivered the passbooks of these Totten trust accounts to Catherine Smith and Jules Schneider, and thereby made the trusts irrevocable. Catherine Smith testified that after each of the 11 trusts was established for her, Schneider gave her the passbook and that she at all times retained possession of it, keeping it under lock and key. She further stated that she made no withdrawals from these accounts. As a matter of banking practice in New York she, as a beneficiary, could not have made withdrawals during decedent's lifetime.

Among an aggregate of 11 withdrawals, totaling $ 13,767.66, from the various trust accounts, 2 withdrawals -- 1 of $ 1,000 and another of $ 3,600 -- were made, prior to decedent's death, from separate trust accounts established by decedent for Catherine Smith. Notation of these withdrawals was entered in the passbooks. The inference is inescapable that the withdrawals were made by decedent and that he must have had possession of the passbooks at the time of the withdrawals. This inference is in direct conflict with Catherine Smith's testimony; therefore, we find it impossible to give credence to her testimony as to decedent's action and the ownership of the accounts. We conclude that by the very act of making withdrawals decedent demonstrated that he regarded the trusts as still owned by him and revocable by him at any time. Attention is also called to the corroborating fact that the administratrix, in preparing the estate tax return, enumerated the savings bank accounts and stated that --

at the time of decedent's death he had left certain funds in trust under Totten trusts for the beneficiaries hereinafter named and in the savings banks hereinafter named, all located in the City of New York and in the following amounts.

In October 1950 decedent turned over to Jules Schneider 26 savings bank passbooks. These books represented Totten trust accounts in trust for various relatives. Decedent instructed Jules that he should "keep possession" of the passbooks and that Molly Schneider should not get possession of them.

It has been held in New York that delivery of the passbook of a Totten trust account to the beneficiary is a method by which the settlor may display an intention to make the trust irrevocable. In re Farrell, 298 N. Y. 129, 81 N. E. 2d 51 (1948). The Farrell case was specifically limited by the court in scope to its peculiar circumstances. It has also been held that transfer of the passbook for the purpose of safekeeping does not evidence an intent to make the trusts irrevocable. In re Slobiansky's Estate, 152 Misc. 232">152 Misc. 232, 273 N. Y. S. 869 (1934). Decedent's act in this case portrays only an intent that Jules should have the passbooks for safekeeping.

The contention that there was an absolute transfer and that decedent's action made the trusts irrevocable would be more persuasive had he given the passbooks to each of the respective beneficiaries rather than giving all the books to one beneficiary, obviously merely as a custodian. We hold that these 26 trust accounts, like the 11 accounts in trust for Catherine Smith, were revocable up to the time of decedent's death, at which time they passed to their respective beneficiaries.

The interest from the trust accounts was substantial. In 1948 it amounted to $ 2,070.38; in 1949, $ 2,517.90; and in 1950, $ 2,623.70. Since the trusts were revocable, this interest earned was taxable to decedent. Helvering v. Clifford, 309 U.S. 331">309 U.S. 331 (1940); Regs. 111, sec. 29.22(a)-21. It was not reported on his returns.

The conclusion to be drawn from the foregoing and other facts of record is that decedent, at all times from 1944 through 1950, entertained a continuing willful intent to defraud the Government of tax revenues. During 1944, 1945, 1946, and 1947 he failed to report large amounts of income received. No valid explanation or excuse is suggested. This income was deposited in savings accounts in trust for others. Apparently in order to conceal the existence of these funds, he omitted patients from his records, recorded smaller fees than those actually charged, failed to disclose the existence of the 37 savings accounts when questioned by internal revenue agents, and omitted from his returns for 1948, 1949, and 1950 interest income earned by these funds. The fact that the 37 savings accounts were maintained in 37 different and widely scattered savings banks gives rise to an inference, if not to a conclusive presumption, that Schneider hoped by so scattering the accounts to conceal them from the Government. This strategy almost succeeded since it was not until after Schneider's death, when the estate tax return was filed, that the existence of the 37 trust accounts was learned by the Government. These vital facts cannot be attributed to ignorance, or negligible or unintentional error. They evidence a calculated intention to defraud, supported by deliberate concealment and other conduct consistent only with fraud. Such evidence is clear and convincing.

We hold that the income tax returns of Harry Schneider were false and fraudulent for the years 1944, 1945, 1946, 1947, 1948, 1949, and 1950. M. Rea Gano, supra at 533; Arlette Coat Co., 14 T. C. 751, 756 (1950). We further hold that the respondent did not err in determining additions to tax under section 293 (b), I. R. C. 1939. ⁴

Since the returns were false and fraudulent for each of the tax years concerned, the statute of limitations is no bar to consideration of other issues involved.

The second question presented is whether respondent, as a basis for determining transferee liability, correctly determined deficiencies in Schneider's income tax returns for each of the years 1944 through 1950.

In the absence of countervailing evidence we have accepted respondent's net worth computations based on stipulated facts and figures. Therefore, we hold that the deficiencies and additions to tax in Docket Nos. 54292, 54294, 54295, and 54296, which served as the basis for transferee liability, are correct as now claimed by respondent for the years 1944, 1945, 1946, and 1947.

Since the respondent has not claimed increased liabilities in the transferee proceedings in Docket Nos. 54292, 54294, 54295, and 54296 for 1948 and 1950 as to such petitioners, the liabilities are sustained as originally determined and assessed. Sec. 272 (e), I. R. C. 1939. ⁵ The liability determined for 1949 in Docket Nos. 54292, 54294, 54295, and 54296 should be reduced to reflect the decrease in net worth for that year.

The respondent filed an amended answer in Docket No. 54289 in which he claimed increased deficiencies for 1948 and 1949 and a lesser deficiency for 1950. This determination is based not upon net worth but rather upon the specific omissions method. The burden of proving this new matter rested upon the respondent. Sheldon Tauber, 24 T. C. 179 (1955); Rule 32, Tax Court Rules of Practice (Jan. 15, 1957). ⁶

In his amended answer respondent reconstructed decedent's income for 1948, 1949, and 1950 by adding interest income and professional income where omitted. Professional income was calculated by multiplying the number of decedent's patients admitted to Beth Israel Hospital each year by an average fee of $ 100 and the number of gynecological consultations by an average fee of $ 10.

The summaries of hospital admissions records include instances in which the same patient was admitted for labor or childbirth twice within 30 days. It is evident that a delivery could not have taken place upon each such admission. Thus, it cannot be assumed that decedent received a delivery fee for every hospital patient.

The respondent has submitted no evidence to substantiate the use of $ 10 as an average fee for gynecological consultations. We have found the fee for such consultations varied from $ 3 to $ 5 unless an operation was involved. Moreover, any gynecological operations performed would be reflected in the figure for total hospital admissions and would be included in the income as reconstructed.

Clearly, these assumptions, basic to respondent's computations, are not proven justified. We hold that respondent has not sustained his burden of proof as to new matter in the amended answer.

Likewise, petitioner has failed to carry its burden of proving respondent's original determination to be in error.

In Docket No. 54289, therefore, deficiencies and additions to tax for 1948 and 1950 are sustained as originally determined, while the deficiency and addition to tax for 1949 should be recomputed to reflect the conceded decrease in net worth for that year.

We now turn to the third issue presently before us -- that is, whether the petitioners Ruth Schneider, Leo Schneider, Jules Schneider, and Catherine Smith were liable as transferees of the assets of Harry Schneider.

Ruth Schneider, Leo Schneider, Jules Schneider, and Catherine Smith were beneficiaries of Totten trusts which passed to them upon decedent's death. Molly Schneider, Katherine Schneider, and Manny Schneider were beneficiaries of life insurance policies on the life of decedent, the proceeds of which were paid to them after decedent's death.

The respondent has the burden of proving transferee liability. Sec. 1119, I. R. C. 1939. ⁷ This he may do at law or in equity. ⁸ When the respondent sustains his burden of proof the transferee is retroactively liable for the transferor's taxes in the year of transfer and prior years, including penalties and interest, to the extent of the assets received from the transferor, even though the transferor's tax liability was unknown at the time of the transfer. Leon Papineau, 28 T. C. 54 (1957).

The New York Debtor and Creditor Law provides as follows:

Sec. 273. Conveyances by insolvent

Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration.

The evidence shows that the transfers to the petitioners were purely voluntary and totally lacking in consideration.

At the time of decedent's death his adjusted net worth was $ 185,352.50, exclusive of back taxes. Simultaneously, considering only the years 1944, 1945, 1946, and 1947, he owed deficiencies and additions to tax totaling $ 114,479.79. Upon his death $ 135,587.71 in savings account trusts and $ 39,312.44 in life insurance proceeds passed to the above-named petitioners, thus rendering the decedent clearly insolvent.

Petitioners argue that the transfers did not render decedent insolvent, first, because there was no fraudulent intent on the part of decedent and thus there should be no additions to tax assessed and due under section 293 (b), supra; and second, that transfer of the Totten trust accounts did not occur at the time of decedent's death but rather when decedent turned over the passbooks to Catherine Smith and Jules Schneider.

We have already determined that the returns of decedent for the years 1944 through 1950 were false and fraudulent; that some part of each of the deficiencies was due to fraud with intent to evade tax; and that the respondent did not err in determining additions to tax under section 293 (b). We have further determined that the Totten trust accounts were revocable until decedent's death and passed to the beneficiaries at that time.

Petitioners cite In re Smith's Estate, 177 Misc. 601">177 Misc. 601, 31 N. Y. S. 2d 603 (1941), to support the proposition that Totten trust accounts cannot be set aside to satisfy either the debt or tax liabilities of settlor. In that case it was held that the value of a Totten trust account was not required to be included in the valuation of the settlor's estate for New York estate tax purposes. However, in the Smith case and cases cited therein the trust became irrevocable during the settlor's lifetime. In the instant case the trusts did not become irrevocable until decedent's death.

We therefore conclude that the transfer of the trust accounts took place at a time when decedent was indebted to the United States for taxes, which transfer rendered him insolvent, and was in fraud of the United States Government. We further hold that petitioners Ruth Schneider, Leo Schneider, Jules Schneider, and Catherine Smith are liable as transferees to the extent of trust assets received. Leon Papineau, supra.

Decisions in Docket Nos. 54289, 54292, 54294, 54295, 54296 will be entered under Rule 50.

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Footnotes

• 1. Proceedings of the following petitioners were consolidated for trial: Molly Schneider, Docket No. 54290; Katherine Schneider, Docket No. 54291; Ruth Schneider, Docket No. 54292; Manny Schneider, Docket No. 54293; Leo Schneider, Docket No. 54294; Jules Schneider, Docket No. 54295; Catherine Smith, Docket No. 54296.↩

• 2. In Docket Nos. 54290, 54291, and 54293, incidental to the determination of the liability of the petitioners as transferees, a question is presented as to whether the payment of the proceeds of certain insurance policies on the life of the decedent to the petitioners constituted a transfer of assets by the decedent within the meaning of the term "transferee," as used in section 311, I. R. C. 1939. This question is presently before the Supreme Court of the United States. Accordingly, the present findings of fact and opinion is limited to the disposition of Docket Nos. 54289, 54292, 54294, 54295, and 54296. The three cases involving the insurance question will be the subject of a subsequent opinion.↩

• 1. The cash surrender values on these policies are applicable to the policies as such, and to the beneficiaries thereof on a pro rata basis.

• 1. Income from United States savings bonds.↩

• 2. $ 1,000 net operating loss claimed.↩

• 1. No record.↩

• 2. Nontaxable.↩

• 1. An alternate claim of $ 7,578.75 representing the redemption value of United States savings bonds placed in coownership on February 6, 1951, was made in Docket No. 54290.↩

• 3. Internal Revenue Code of 1939.

  SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.

  Except as provided in section 276 --

  (a) General Rule. -- The amount of income taxes imposed by this chapter shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.

  SEC. 276. SAME -- EXCEPTIONS.

  (a) False Return or No Return. -- In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment at any time.

• 4. SEC. 293. ADDITIONS TO THE TAX IN CASE OF DEFICIENCY.

  (b) Fraud. -- If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid, in lieu of the 50 per centum addition to the tax provided in section 3612 (d) (2).

• 5. SEC. 272. PROCEDURE IN GENERAL.

  (e) Increase of Deficiency After Notice Mailed. -- The Board shall have jurisdiction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency, notice of which has been mailed to the taxpayer, and to determine whether any penalty, additional amount or addition to the tax should be assessed -- if claim therefor is asserted by the Commissioner at or before the hearing or a rehearing.↩

• 6. RULE 32. BURDEN OF PROOF.

  The burden of proof shall be upon the petitioner, except as otherwise provided by statute, and except that in respect of any new matter pleaded in his answer, it shall be upon the respondent.

• 7. SEC. 1119. PROVISIONS OF SPECIAL APPLICATION TO TRANSFEREES.

  (a) Burden of Proof. -- In proceedings before the Tax Court the burden of proof shall be upon the Commissioner to show that a petitioner is liable as a transferee of property of a taxpayer, but not to show that the taxpayer was liable for the tax.↩

• 8. SEC. 311. TRANSFERRED ASSETS.

  (a) Method of Collection. -- The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this chapter (including the provisions in case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds):

  (1) Transferees. -- The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this chapter.

  * * * *

  (f) Definition of "Transferee." -- As used in this section, the term "transferee" includes heir, legatee, devisee, and distributee.↩