Phyllis Berliant, Transferee, Petitioner-appellant, v. Commissioner of Internal Revenue, Respondent-appellee.florence Kraft, Transferee, Petitioner-appellant, v. Commissioner of Internal Revenue, Respondent-appellee, 729 F.2d 496 (7th Cir. 1984)

This is an appeal by Florence Berliant Kraft (Kraft) and Phyllis Berliant (Berliant) from a decision of the United States Tax Court finding Kraft, Berliant and Irene Berliant Magill¹  liable for unpaid taxes of the estate of decedent Rae Berliant (Rae). Magill v. Commissioner, 51 TCM (P-H) p 82,148 (filed March 24, 1982) (App. 1-53). Tax Court Judge Dawson determined that the estate tax owed was $67,294.85 plus interest and that the parties were each liable for the tax to the extent of the value of assets received (App. 54). Kraft and Magill, transferees of both probate and non-probate assets, were each held liable for the entire amount (App. 54). Berliant, transferee²  of only probate assets, was held liable for $46,000 plus interest (App. 56). The government, Kraft and Magill stipulated that "the payment of the entire liability of the transferor in the amount of $67,294.85 plus interest * * * by any one or a combination of the petitioners [Kraft, Berliant and Magill] liable therefor" would discharge the liability of all although Berliant need pay no more than $46,000 plus interest (App. 54-57).

* Rae Berliant, mother of Ernest Berliant, Sidney Berliant (husband of Phyllis), Florence Kraft, and Irene Magill, died testate on November 4, 1964. Although a Federal estate tax return was due to be filed on February 4, 1966, none was filed until December 16, 1971. In the tax return finally filed, Rae's gross estate was valued at $135,897.01 (Govt. Br. 3). On reviewing the return, the Internal Revenue Service determined that various properties had been improperly excluded from the gross estate³  and therefore not reported on the estate tax return nor included in calculations to determine the amount of any estate tax due. The I.R.S. decided that there was a $67,550.63 deficiency in Rae's estate taxes and, because of the late filing without reasonable cause, an addition to tax of $16,887.66 (App.2). The I.R.S. asserted that Magill, Kraft, and Berliant were each liable for the entire amount of the tax and addition to tax. Magill, Kraft and Berliant challenged the I.R.S. in the Tax Court. The Tax Court decided: (1) that Magill and Kraft as transferees and Berliant, widow of Sidney Berliant, as a transferee of a transferee were liable under I.R.C. Sec. 6901(a)⁴  for unpaid estate tax with respect to probate assets they received from Rae's estate; (2) Kraft and Magill were liable under I.R.C. Sec. 6324(a) (2)⁵  for unpaid estate tax with respect to non-probate assets which passed to them because of Rae's death; (3) the property in which Rae Berliant held a joint tenancy interest at death and the totten trust accounts for which she was the trustee (see supra note 3) were includable in the gross estate under I.R.C. Sections 2040 and 2036, 2037 or 2038 (App. 39-46) as well as 6324(a) (2) which is reproduced in note 5 supra; (4) the estate was entitled to deduct fees paid to an attorney in connection with litigation concerning the estate administration; and (5) the late filing of the estate tax return was without reasonable cause so that the addition to tax was proper. Only the first three issues are before this Court on appeal. The government has not appealed the Tax Court's determination with regard to attorney's fees (Govt. Br. 11) and Kraft and Berliant have not challenged the Tax Court's ruling regarding tardy return filing resulting in the addition to tax (Govt. Br. 8). This Court has considered seriously all the arguments raised by the parties in this appeal but will discuss only the important ones.

II

The government seeks to impose transferee liability on Kraft and Berliant for the value of the following property acquired by them on or after Rae's death (App. 20):

 Description Date Received Kraft Berliant ----------------- --------------- ----------- ---------- Stock (probate) January 1, 1973 $ 43,000.00 $43,000.00 Proceeds in disolution of Clara's Ltd. (an investment company (probate) October 1, 1974 3,000.00 3,000.00 Annuity (nonprobate) August 10, 1965 6,027.34 -- Joint tenancy property (nonprobate) Date of death 35,920.87 -- Totten trust accounts (nonprobate) Date of death 31,459.04 -- ----------- ---------- $119,407.25 $46,000.00 ----------- ----------

Preliminary to establishing petitioners' liability as transferees for these taxes under either Section 6901(a) or Section 6324(a) (2), it must be established that Rae in fact owned these assets at the time of her death. If Rae did not own them then, no transferee liability can be imposed. Kraft and Berliant argue that, with only two exceptions,⁶  Rae did not own these assets but held them for her children who had given her money to invest for them. Although they cannot trace to particular investments the money they claim the children gave Rae, Kraft and Berliant contend that Rae must have used the children's money since she had virtually no resources of her own with which to amass the sizable estate.

In response to similar arguments below by petitioners, the Tax Court found as facts that any contributions made to Rae by her children "were in the nature of gifts rather than conveyances in trust for the benefit" of the children (App. 7) and that Rae "supplied all the consideration for the * * * joint tenancy property and totten trust accounts" (App. 10). These findings are amply supported in the record. Neither Rae nor any of the children kept records of the amounts contributed to Rae (App. 7, 39). Rae reported on her individual income tax returns the dividend and interest income from the contributed money; neither her children nor their spouses did (App. 7, 27). The children never questioned Rae about the nature of her investment of their money or in any other way exercised control over the investments (App. 7-8, 27). Because these findings are amply supported by the record and certainly are not clearly erroneous, we must sustain them on appeal. Commissioner v. Duberstein, 363 U.S. 278, 80 S. Ct. 1190, 4 L. Ed. 2d 1218; Avco Delta Corp. Canada Ltd. v. United States, 540 F.2d 258 (7th Cir. 1976).

On appeal, Kraft and Berliant contend that the case of Mendelson v. Commissioner, 52 T.C. 727 (1969), supports their claim that the estate assets are actually the children's and not Rae's. However, in Mendelson the Tax Court found that the petitioner had not made a gift of her funds, so that her retaking of them did not make her a transferee. Since the Tax Court found that the Berliant children had made a gift to their mother, Mendelson has no application here. Therefore, we sustain the Tax Court's finding that Rae owned all the probate and non-probate assets at issue in this proceeding.

III

In order for Kraft and Berliant to be liable as transferees of probate assets for unpaid estate taxes, there must be a basis under state law or state equity principles for imposing transferee liability. Commissioner v. Stern, 357 U.S. 39, 78 S. Ct. 1047, 2 L. Ed. 2d 1126. Section 6901(a) merely establishes a procedure for tax collection but does not establish transferee liability. Since Rae Berliant's probate estate was administered under Illinois law, that law governs whether Kraft and Berliant are liable, legally or equitably, for the estate's unpaid taxes. The Tax Court concluded that Kraft and Berliant, as transferees of probate assets, could be held liable for estate taxes up to the value of probate assets received, or $46,000.⁷  We agree with this conclusion but in part for different reasons than set forth by the Tax Court.

The Tax Court first decided that Section 293, ch. 3 Ill.Ann.Stat. (Smith-Hurd 1961),⁸  provided for transferee liability. In reaching this conclusion, the court relied on the fact that under Section 293 the Illinois Probate Court may order a distributee to return whatever share of his distribution is necessary to pay claims "entitled to be paid from the estate distributed." Since tax claims of the United States are claims entitled to be paid from the estate (Section 202, ch. 3 Ill.Ann.Stat. (Smith-Hurd 1961)), the court reasoned that Kraft and Berliant as transferees are liable to the United States. However, the Tax Court's reasoning is flawed because it did not consider the nature of the transferee liability established in Section 293. By its own terms, Section 293 imposes transferee or distributee liability only when "the probate court upon the application of any interested person shall order the distributee to refund that portion of his distributive share which is necessary to pay the claim" (emphasis added). The government contended at oral argument that Section 293's probate court order requirement is a technical requirement relating only to the procedure for collection from the transferee and not to the establishment of transferee liability in the first place. But Section 293 imposes no transferee liability in the absence of an application to the probate court and a probate court order, so that the statute cannot provide a basis for transferee liability absent such an order. There is no indication that the government has applied to the Illinois Probate Court or that the Probate Court has issued an order to Kraft and Berliant to pay the estate taxes. Therefore the government has not met its burden of establishing that petitioners are liable as transferees under Section 293.

Alternatively, the Tax Court decided that transferees Kraft and Berliant are liable under Illinois equity principles. The Tax Court is correct in this conclusion. As a matter of equity, Illinois has long imposed on estate transferees liability to creditors of the estate. "Legatees are always compellable to refund in favor of creditors because the latter have a priority of right to satisfaction out of assets." Union Trust Co. v. Shoemaker, 258 Ill. 564, 572, 101 N.E. 1050, 1053 (1913); see also In re Bird's Estate, 410 Ill. 390, 396-397, 102 N.E.2d 329, 333 (1951); Snydacker v. Swan Land & Cattle Co., 154 Ill. 220, 225, 40 N.E. 466, 468 (1895). In Shoemaker, the Illinois Supreme Court analyzed extensively the scope of a creditor's equitable remedy against transferees of an estate's assets. Later cases have merely applied Shoemaker to the particular facts at hand without performing further independent analysis. See, e.g., Olsen v. Hartford Accident and Indemnity Co., 368 Ill. 194, 197, 13 N.E.2d 159, 161 (1938). In Shoemaker, the claim asserted against transferees of estate assets first arose five years after decedent's death, when judgment was entered in a case in which decedent and his business partners had become parties long before the death. At decedent's death, that claim was only contingent because its maturing depended on decedent's opponents' obtaining judgment, "a contingency which may or may not ripen into a liability and [was] dependent on an event that neither party can control," (Pet. Br. 7). Because Shoemaker involved a contingent claim, the Tax Court apparently assumed that the rationale for the decision there to allow recovery by an estate creditor against estate distributees was limited to cases of contingent claims. Since, as the government insists, estate taxes are not contingent liabilities, the Tax Court reasoned that Shoemaker's equitable principle should be applied analogously to petitioners' case (App. 32). Petitioners argue that the court erred in extending this equitable principle to cases involving non-contingent claims and contended that the principle must be limited to contingent claims cases.

Both the Tax Court and petitioners view too narrowly the equitable principle explicated in Shoemaker. It is clear that the Illinois Supreme Court established a rule with application beyond contingent claims cases. "It is an established doctrine of equity that creditors who have not been guilty of laches may pursue assets into the hands of distributees, where distribution has been made without discharging their debts," Shoemaker, 258 Ill. at 573, 101 N.E. at 1053. Even assuming that the defense of laches could be asserted against the United States, petitioners do not claim that the government unreasonably delayed in taking action to recover the unpaid taxes. Indeed, on the facts of this case, there is no basis for such a claim. The estate tax return was filed over five and a half years late on December 16, 1971 and omitted substantial assets. See supra note 3. Nevertheless the Internal Revenue Service completed its review of the return and filed a notice of deficiency within approximately two and a half years, on August 22, 1974. (I.R.S. Statutory Notice Statements to Kraft and Berliant.)

Under Illinois equity principles, the government may recover from Kraft and Berliant unpaid estate taxes of Rae Berliant's estate to the value of probate assets each received plus interest.⁹ 

IV

The Tax Court also decided that Florence Kraft is liable, under I.R.C. Sec. 6324(a) (2), for unpaid estate taxes to the extent of the date-of-death valuation of non-probate assets she received in connection with Rae Berliant's death.¹⁰  As noted at Part II supra, in the Tax Court proceeding Kraft contested liability with regard to the joint tenancy bank property and the totten trust accounts. On appeal, she continues to press only two arguments with respect to these assets. First, she contends that she and not Rae was the owner of the assets so that no transferee liability could arise on Rae's death. This argument has been considered and rejected in Part II.

Second, Kraft contends that her joint tenancy in the bank accounts was not proved because the government has not presented signature cards signed by her and Rae and stating that the accounts are joint with a right of survivorship. Kraft claims that such signature cards are required under Illinois law to establish joint tenancy in a bank account and that since joint tenancy has not been established under Illinois law, the property is not includable in the gross estate under I.R.C. Sec. 2040,¹¹  and transferee liability cannot arise under I.R.C. Sec. 6324 (supra note 5).

Kraft misinterprets Illinois law. The Illinois authorities on which Kraft relies state merely that a joint tenancy bank account may only be created when the parties to the account sign a written agreement such as a signature card. In re Estate of White, 56 Ill. 2d 265, 268-271, 307 N.E.2d 122, 124-125 (1971); Doubler v. Doubler, 412 Ill. 597, 600, 107 N.E.2d 789, 790 (1952); In re Estate of Gubala, 81 Ill.App.2d 378, 384, 225 N.E.2d 646, 650 (1967); Illinois Law and Practice, Joint Tenancy Sec. 5. None of the authorities state that the only way to prove a joint tenancy in a bank account is by presenting the signature card as evidence. Here the Tax Court noted that Kraft stipulated that at Rae's death she received and took possession and control of the bank accounts titled in her and Rae's names. The court found this behavior inconsistent with the tenancy in common which Kraft now urges on this Court (App. 33 n. 19). Furthermore, Kraft stipulated that these accounts were titled "joint tenants with the right of survivorship and not as tenants in common." Id. These stipulations provide sufficient proof that the bank accounts in issue were joint tenancy accounts.¹²  The Tax Court was correct in deciding that under Section 6324(a) (2) Kraft was liable to the extent of the $76,467.25 date-of-death value of the non-probate assets (see table supra, Part II) she received due to Rae's death, plus interest, for the unpaid estate taxes.

The decisions of the Tax Court involving the estate tax liabilities of Florence Kraft and Phyllis Berliant are affirmed.