ESTATE OF DeNIRO v. C.I.R. No. 83-1100.
746 F.2d 327 (1984)
ESTATE of Vincent DeNIRO, Deceased, Helen M. Papalie and Joanne F. DeNicholas, Administratrices, Louis R. DeNiro, Transferee, Frank DeNiro, Transferee, and Michael DeNiro, Transferee, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
United States Court of Appeals, Sixth Circuit.
Decided October 17, 1984.
James C. Herndon, William T. Walker, Robert W. Malone (argued), Buckingham, Doolittle & Burroughs, Akron, Ohio, for petitioners-appellants.
Kenneth W. Gideon, Chief Counsel Internal Revenue Service, Glenn L. Archer, Jr., Michael L. Paup, Jonathan S. Cohen, Stephen Gray (argued), Tax Division, Dept. of Justice, Washington, D.C., for respondent-appellee.
Before KEITH, MERRITT and WELLFORD, Circuit Judges.
WELLFORD, Circuit Judge.
The estate of Vincent DeNiro appeals from the tax court's determination that the payment of the estate's tax liability in 1969 by two corporations constituted income to the estate in the form of a constructive dividend. The estate further disputes the penalty imposed upon the estate for failing to file a tax return for 1969. We affirm in part and remand for further proceedings.
The parties to this controversy have been litigating tax matters for many years following the death of Vincent DeNiro under mysterious circumstances in the Cleveland area in 1961.
This appeal involves income taxes allegedly due from the estate, represented by the official representatives and by the DeNiro brothers as transferees. The tax court upheld assessments of income tax against the estate for the year 1969 and additions to the tax for failure to file a return in that year. See Estate of DeNiro v. Commissioner, 44 T.C.M. (CCH) 981 (1982). It found as follows:
Id. at 982.
NCS filed a refund claim in 1972 based on its position that it should be entitled to a deduction for the $89,257 payment. The
Petitioners argue that the tax court erred in characterizing the payments at issue here as constructive dividends to the estate. They urge alternatively that the payments were loans or were made for business purposes. They also argue that NLS had insufficient earnings and profits to pay a dividend of $89,257.
Receipt of a dividend constitutes gross income under I.R.C. § 61(a)(7); and a dividend is defined under id. § 316(a) as "any distribution of property made by a corporation to its shareholders" out of certain funds. Although VLC and NCS may not have intended that the tax payments be considered a dividend, and did not treat these payments as dividends on their books, this does not prevent the payment from being considered a constructive dividend. See Loftin & Woodard, Inc., v. United States, 577 F.2d 1206, 1214 (5th Cir.1978); Sachs v. Commissioner, 277 F.2d 879, 882-83 (8th Cir.), cert. denied, 364 U.S. 833, 81 S.Ct. 63, 5 L.Ed.2d 59 (1960). We agree with the tax court that "the corporation's payment of the estate tax conferred an economic benefit" upon the estate, and "[t]he estate tax was petitioner's and not the corporations' liability," since no assessment was made against the corporations. 44 T.C.M. (CCH) at 984.
Whether a payment is a loan as opposed to a dividend is a factual question, and the tax court's judgment is entitled to deference. See Wilkof v. Commissioner, 636 F.2d 1139, 1140 (6th Cir.1981) (per curiam).
The tax court concluded that, "[p]rior to March 1978, neither NCS nor VLC had ever attempted to recoup any portion of their payments other than through their participation in the refund litigation." 44 T.C.M. (CCH) at 984-85. No clear or contemporary book entry was made by VLC to indicate that the payment was a loan.
Petitioners contend the payments by both VLC and NCS should not be considered constructive dividends because the corporations undertook the payments to protect their own business interests. The estate further argues that the imposition by the IRS of liens on the corporate assets imperiled the corporations' very existences. Dicta in this court's 1977 DeNiro decision supports this contention and the contention that the payments were not voluntary. See supra p. 330. But see id. (court held that payments constituted dividends). Therefore, petitioner argues that the payments should be treated as corporate business expenses rather than income to the estate under Parker v. Commissioner, 365 F.2d 792, 800-01 (8th Cir.1966), cert. denied, 385 U.S. 1026, 87 S.Ct. 752, 17 L.Ed.2d 674 (1967).
The appropriate standard to apply in determining whether payments of this sort amount to constructive dividends was enunciated in Loftin, 577 F.2d at 1215, where the court held that distributions of this sort should be deemed constructive dividends if they are made for the primary purpose of benefiting the shareholder. The court in Sammons v. Commissioner, 472 F.2d 449, 452 (5th Cir.1972), termed this analysis a "subjective requirement." The fact-finding of the tax court in this respect is entitled to great deference; it should be upheld unless clearly erroneous. See Loftin, 577 F.2d at 1215; Wilkof, 636 F.2d at 1140.
We do not believe that the tax court's findings regarding the purpose for the payments was clearly erroneous despite the testimony of the DeNiro brothers that the payments were made with a primary business purpose in mind. The tax court was free to discredit this testimony. See supra pp. 330-331. That court stated that
44 T.C.M. (CCH) at 986 (emphasis added).
The tax court concluded that the estate had
Id. at 987.
We affirm the tax court's conclusions as being based upon substantial evidence. This result is also compelled, we believe, by this court's rationale in its 1977 DeNiro opinion. The record before this court in 1977 did not include the testimony of IRS attorney Ruggieri, found here by the tax court to be a "candid and credible witness," 44 T.C.M. (CCH) at 986, that the IRS did not threaten to padlock NCS or to take over VLC if Louis DeNiro and his brothers refused to accept a proposed tax deficiency against the estate. The basis for this court's dicta that the corporate payments were involuntary was that Louis DeNiro's testimony to that effect was "without contradiction."
In addition, the tax court found as a fact that, contrary to the DeNiro's assertions, the IRS representatives, at a conference with the DeNiro brothers following the filing of a lien on the corporate properties, did not threaten to padlock the doors of the corporations or to terminate their operations. Rather, it found that the purpose of the meeting was to determine the fair market value of the estate assets. See 44 T.C.M. (CCH) at 986. Even if the corporate payments were not voluntary and were induced in considerable measure by the pressure of liens against VLC and NCS properties, we conclude that the primary purpose was to benefit personally the DeNiro brothers, who had arrogated to themselves the estate assets and refused to make any accounting for them for estate or inheritance tax purposes or otherwise.
Whether the corporations had another available legal remedy besides arranging and paying the tax, as the tax court asserted they did under 28 U.S.C. § 2410, need not be decided. This was not a principal basis for the court's factual findings and conclusion that the tax payments were constructive dividends to the estate and thus subjected it to income tax liability in 1969.
Having decided that the corporate payments were not made for a primary business reason, we must next determine the extent of the earnings and profits of NLS
The problem with petitioners' position concerning NCS is that while there is a purported deficit in accumulated earnings and profits as of January 1, 1969, claimed to be $96,335, substantial taxable income is reflected for the years 1966, 1967, and 1968, as well as in 1969 if the estate tax payment is deemed not deductible. See Jt.App. at 184. It is difficult to reconcile the claim of accumulated deficit with a consistent pattern of earnings from 1966 through 1969.
In reaching its conclusion, however, the tax court was cryptic. It stated, "the evidence contained in the record is insufficient to establish the accumulated earnings and profits of either corporation." 44 T.C.M. (CCH) at 987. The tax court did not say why the exhibits and the accountant's testimony, substantially unrebutted, were "insufficient" as to NCS; it simply reiterated the above statement and added, "petitioner has failed to prove the amount of either corporation's earnings and profits." Id. The tax court therefore did not address the Commissioner's argument that payment of the estate tax liability by NCS constituted ordinary income to the estate "regardless of whether the corporations had sufficient earnings and profits to make the payment taxable as constructive dividends." Id. at 987 n. 6.
We conclude that this matter should be remanded to the tax court for further consideration and a more specific determination about the sufficiency or insufficiency of the earnings and profits of NCS. If, upon reconsideration, the tax court concludes that NCS's contention is correct at least in part and that some portion of the $89,257 considered as a constructive dividend should be treated as a reduction in basis, it should so indicate and set forth how the sum should be allocated. If the tax court considers that the evidence is insufficient to support the petitioners' contention, it should set out in what respect petitioners have failed to meet the necessary criteria to establish the amount of 1969 earnings and profits. It may also consider further the Commissioner's argument that the entire payment by NCS is taxable as income to the estate regardless whether it is considered a constructive dividend under the rationale of Davis v. United States, 226 F.2d 331 (6th Cir.1955), cert. denied, 350 U.S. 965, 76 S.Ct. 432, 100 L.Ed. 838 (1956), Weir v. Commissioner, 283 F.2d 675 (6th Cir.1960), and United States v. Goldberg, 330 F.2d 30, 38 (3d Cir.), cert. denied, 377 U.S. 953, 84 S.Ct. 1630, 12 L.Ed.2d 497 (1964). Cf. DiZenzo v. Commissioner, 348 F.2d 122, 125-27 (2d Cir.1965).
Finally, we conclude that the estate was liable for a 26 U.S.C. § 6651(a) addition to tax, as determined by the tax court. The estate filed no return for the year 1969. Although the tax court conceded that it was unclear whether anyone actually "represented the decedent's estate in a fiduciary capacity at the time its return for 1969 was required to be filed," 44 T.C.M.
Re Fisk's Estate, 203 F.2d 358, 359 (6th Cir.1953). The tax court itself has put the standard this way:
Shomaker v. Commissioner, 38 T.C. 192, 202 (1962).
The tax court looked at the elements of reasonable cause in the context of reliance upon professional tax advice that were mentioned in Haywood Lumber & Mining Co. v. Commissioner, 178 F.2d 769 (2d Cir.1950), a case cited by this court with approval in Re Fisk's Estate, and determined that there had been no adequate showing by petitioners as to the competency of the corporate accountants, or that they were given all the pertinent facts concerning the status of the estate. While the DeNiro brothers themselves may not have been familiar with the tax implications of a constructive dividend, the burden was upon them as "de facto executors" or upon Vincent DeNiro's daughters as co-administratrices to demonstrate reasonable cause for the failure to file an income tax return on behalf of the estate. We cannot conclude that the tax court committed clear error in deciding that petitioners did not carry this burden. It was, therefore, proper for the Commissioner to assess the additional tax, which has "the remedial character of sanctions ... provided primarily as a safeguard for the protection of the revenue and to reimburse the government for the heavy expense of investigation." Helvering v. Mitchell, 303 U.S. 391, 401, 58 S.Ct. 630, 634, 82 L.Ed. 917 (1938).
Accordingly, we affirm the tax court except for the remand to consider and specify the basis for its decision as to whether and to what extent the entire amount of the payment by NCS in 1969 was taxable to the estate as ordinary income.
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