Creation of Lien page2

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[2002-2 USTC ¶50,541] United States of America , Plaintiff v. Patricia Labato, Denise Labato a/k/a Denise Labato Hunt, and Brevard County , Florida , Defendants

U.S. District Court, Mid. Dist. Fla., Orlando Div., 6:97-cv-900-Orl-28JGG, 6/17/2002

[Code Sec. 6212 ]

Notice of deficiency: Last known address: Receipt of deficiency notice.--The government was entitled to summary judgment against an individual taxpayer in its action to reduce to judgment assessed taxes and penalties against her that arose from her unpaid income taxes. The taxpayer unsuccessfully contended that she did not receive the notice of deficiency. However, the government presented evidence showing that it had sent notices to four different addressees, only one of which was returned as unclaimed. Thus, the government was entitled to summary judgment as to whether it had properly mailed the deficiency notice to the taxpayer.

[Code Sec. 6321 ]

Tax liens: Creation of lien: Family transactions: Fraudulent conveyances.--The government was entitled to set aside as fraudulent an individual's conveyance of real property to her daughter despite the fact that it assessed its tax liability more than a year and half after the taxpayer acquired and then transferred the subject property. Under state (Florida) law it was entitled to have the conveyance set aside as fraudulent since the government's claim arose as of the date on which the taxes were due and owing and constituted a liability as of the date when the tax return was required to be filed. Moreover, the transfer was to the taxpayer's daughter, the taxpayer received no consideration and conceded that she was insolvent as a result of the government's attempts to collect her tax debt, and the daughter did not take possession of the property until two years after the sale.

[Code Sec. 7403 ]

Tax liens: Family transactions: Fraudulent conveyances: Foreclosure.--The government was entitled to foreclose on an individual's real property that she fraudulently conveyed to her daughter. The government proved that the transfer was made to impede, hinder, or delay the government's collection action. The transfer was to the taxpayer's daughter, the taxpayer received no consideration and conceded that she was insolvent as a result of the government's attempts to collect her tax debt, and the daughter did not take possession of the property until two years after the sale. In the absence of evidence to rebut the government's proof of actual and constructive fraud, the government was entitled to foreclose its tax lien against the property.

ORDER

ANTOON II, District Judge:

This is an action by the United States of America (" United States " or "the Government") against Defendant Patricia Labato ("Ms. Labato"), her daughter, Denise Labato a/k/a Denise Labato Hunt ("Ms. Hunt"), and Brevard County , Florida arising from Ms. Labato's alleged failure to pay income tax for the year ended December 31, 1992. The Government seeks to reduce to judgment the balance of Ms. Labato's unpaid income tax liability, to set aside as fraudulent a 1993 conveyance of real property from Ms. Labato to Ms. Hunt, and to foreclose the federal tax lien against that property. This Court has jurisdiction pursuant to 28 U.S.C. §§1340 and 1345.

This case is currently before the Court on the Motion for Summary Judgment (Doc. 101, filed January 30, 2002) filed by Defendant Ms. Labato, and the Opposition of Plaintiff United States of America to Motion for Summary Judgment by Defendant Patricia Labato and Plaintiff's Cross-Motion for Summary Judgment (Doc. 104, filed February 12, 2002). The United States has also filed a Memorandum of Law in Support of Opposition of Plaintiff United States of America to Motion for Summary Judgment by Defendant Patricia Labato and Plaintiff's Cross-Motion for Summary Judgment (Doc. 105, filed February 12, 2002). Defendant Ms. Labato has filed Defendant's Amended Memorandum in Opposition to the Government's Counter-Motion for Summary Judgment (Doc. 113, filed March 13, 2002). ¹ Upon consideration of the record in this matter, and as more specifically set forth below, the Court concludes that the Government's motion shall be granted and that Defendant's motion shall be denied.

I. Factual Background

On July 10, 1992, Ms. Labato and her husband, Gennaro Labato, sold approximately one hundred sixty acres of land and improvements thereon in Woodstown , New Jersey for $3,140,022. (Ex. 6 to Doc. 18). The Labatos had purchased the land in the early 1970s for approximately $70,000, and consequently, upon the sale a substantial capital gain was realized. Despite this significant capital gain, however, the Labatos failed to pay income tax on that gain and failed to file an income tax return for the year 1992.

The proceeds from the sale of the New Jersey property were used, inter alia, to purchase some real property, including a $450,000-500,000 house in St. Cloud , Florida , and the subject property, a house in Cocoa , Florida . The Cocoa house, located at 3034 Winchester Drive, was purchased for $62,145.24 on June 29, 1993 Ms. Labato signed the settlement statement for that property (Ex. 8 to Doc. 105), and a warranty deed dated June 29, 1993 was recorded reflecting the sale from the sellers, Timothy and Diedre Decker, to Ms. Labato (Ex. 10 to Doc. 105). A "corrective" warranty deed from Ms. Labato to Ms. Hunt was recorded on July 23, 1993 (Ex. 11 to Doc. 105).

On February 1, 1995, the IRS made a jeopardy assessment of Ms. Labato's income tax liability for 1992. The jeopardy assessment totalled $947,289.12, representing the tax liability plus penalties and interest. As noted by the Government, on that same date a jeopardy assessment was also made against Ms. Labato's husband, Gennaro Labato; as explained by the Government, "[s]eparate assessments were made because Mr. and Mrs. Labato had not filed a tax return for 1992, and thus, had not elected the filing status 'married filing joint.' " (Government's Memorandum of Law, Doc. 105 at 4. n.6). Mr. Labato's tax liability has since been satisfied.

On March 29, 1995, the IRS sent notices of deficiency by certified mail to Ms. Labato at four different addresses: (1) 4540 Albritton Road, St. Cloud, Florida 34772, certified mail number 058869; (2) Rural Delivery 1, Box 540, Woodstown, New Jersey 08098, certified mail number 058870; (3) 204 South Main Street, Woodstown, New Jersey 08098, certified mail number 058871; and (4) Rural Delivery 4, Box 254, Woodstown, New Jersey 08098, certified mail number 058872. Copies of all four letters (Exs. 2-5 to Doc. 105) as well as a certified mail list reflecting delivery of those letters to the Postal Service on March 29, 1995 (Ex. 6 to Doc. 105) are contained in the record. Ms. Labato claims that she did not receive a notice of deficiency, and she has submitted an "Affidavit of Truth" that she "never received an original. Notice of Deficiency, (either direct or forwarded from another address), at my current address, 4540 Albritton Rd. St. Cloud Florida . I have lived at this St. Cloud address since 1992." (Attach. to Doc. 101). However, only the notice mailed to the South Main Street address (certified mail number 058871) was returned to the IRS unclaimed. (Ex. A-2 to Doc. 101). According to the Government's memorandum and a supporting affidavit (Doc. 107), some payments have been made since 1995, but as of January 31, 2002, Ms. Labato's federal income tax liability totalled $1,377,706.93.

II. Procedural Background

This case has a long and somewhat complicated procedural history. The Government filed its Complaint (Doc. 1) on July 18, 1997, against Ms. Labato, Ms. Hunt, and Brevard County , Florida . The Complaint notes that Ms. Hunt is named as a Defendant because she may claim an interest in the subject real property, and Brevard County is named as a Defendant because it is owed ad valorem real property taxes and may claim a lien or other interest in the subject real property. (Doc. 1 at 3). ² After Answers (Docs. 7 & 9) were filed, on May 6, 1998, the Government filed its Motion for Summary Judgment against Defendants Labato and Hunt (Doc. 18) and supporting Memorandum of Law (Doc. 19). On May 29, 1998, United States District Judge G. Kendall Sharp granted the motion, finding that Ms. Labato was indebted to the United State for unpaid federal income taxes for 1992, setting aside as fraudulent the transfer of the Cocoa house from Ms. Labato to Ms. Hunt, declaring that the United States has a valid tax lien on all of Ms. Labato's property, and foreclosing that tax lien (Doc. 24).

Ms. Labato and Ms. Hunt attempted to appeal the order granting summary judgment (Doc. 25), but the Court of Appeals for the Eleventh Circuit dismissed the appeal for lack of jurisdiction, finding that the order (Doc. 24) was not final or otherwise appealable. (Doc. 27). A Decree of Foreclosure and Order of Forfeiture was entered on June 19, 1998 (Doc. 26), and on August 12, 1998, the property was sold to Charles Campbell for the highest bid of $42,000. (Doc. 29).

Ms. Labato and Ms. Hunt filed an Emergency Motion to stay the transfer of the property (Doc. 30, filed August 28, 1998). A hearing on the motion was held on September 24, 1998, after which the court took the matter under advisement. (Docs. 34 & 40). Meanwhile, the United States filed a Motion for Confirmation of Sale (Doc. 35, filed October 1, 1998), and that motion was heard on November 17, 1998 (Docs. 38 & 41). At that hearing, the Court found that a factual dispute existed regarding the conveyance of the property and an alleged scrivener's error in the property initially being placed in Ms. Labato's name rather than Ms. Hunt's name; the Court apparently was reconsidering its order granting the Government's motion for summary judgment. (Doc. 41 at 7). The hearing was continued pending completion of an IRS audit regarding Mr. Gennaro Labato, and the Court ordered that Ms. Hunt would be permitted to temporarily occupy the house. (Doc. 41 at 9). On July 13, 1999, the Court ordered the U.S. Marshal to assist Defendants in gaining access to the house. (Doc. 47).

On June 13, 2000, the Government filed its Notice of Withdrawal of Plaintiff's Motion fro Confirmation of Sale (Doc. 55), advising that confirmation of the sale was no longer desirable. The Government also filed Plaintiff's Motion for an Order Permitting the United States Marshal to Return Funds to Successful Bidders (Doc. 56, filed June 16, 2000). On June 20, 2000, Ms. Labato and Ms. Hunt filed a "Motion for Clarification of Issues" (Doc. 57).

The case was reassigned to the undersigned United States District Judge on June 29, 2000 (Doc, 59). A status hearing was held on September 22, 2000 (Doc. 62), during which the court granted the Government's withdrawal of motion to confirm sale, granted the motion for return of funds to successful bidders, and announced that Mr. Gennaro Labato would be permitted to intervene if he moved to do so within ten days thereof. (Doc. 62). On October 4, 2000, the Court entered an Order (Doc. 66) declining to confirm the sale of the property, directing the return of the purchase price to Mr. Campbell, denying Defendants' Motion for Clarification of Issues (Doc. 57) as moot, and denying Defendants' motion for an order removing all tax liens from the property (Doc. 57). On October 25, 2000, the Court granted (Doc. 67) Mr. Gennaro Labato's Motion to Intervene (Doc. 64).

On January 8, 2001, Ms. Labato advised the Court that she had filed a Chapter 7 Bankruptcy petition (Doc. 71), and this matter was stayed (Docs. 72 & 76) until April 9, 2001 (Doc. 79). A Case Management and Scheduling Order was entered on September 4, 2001 (Doc. 90) setting this matter for trial in July 2002. The summary judgment motions filed by the parties (Docs. 101 & 104) are now ripe for consideration by the Court.

III. Discussion

A. Summary Judgment Standards

Summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The moving party bears the burden of establishing that no genuine issues of material fact remain. Celotex Corp. v. Catrett, 477 U.S. 317 (1986).

In ruling on a motion for summary judgment, the Court construes the facts and all reasonable inferences therefrom in the light most favorable to the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986). However, summary judgment is mandated "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322. At the summary judgment stage, "[t]he function of the court is not to 'weigh the evidence and determine the truth of the matter but to determine whether there is an issue for trial.' " Lockett v. Wal-Mart Stores, Inc., No. Civ.A. 99-0247-CB-C, 2000 WL 284295, at *2 (S.D. Ala. Mar. 8, 2000) (quoting Anderson , 477 U.S. at 249).

When faced with a "properly supported motion for summary judgment, [the nonmoving party] must come forward with specific factual evidence, presenting more than mere allegations." Gargiulo v. G.M. Sales, Inc., 131 F.3d 995, 999 (11th Cir. 1997). "The evidence presented cannot consist of conclusory allegations or legal conclusions." Avirgan v. Hull, 932 F.2d 1572, 1577 (11th Cir. 1991); see also Fed. R. Civ. P. 56(e) (providing that nonmovant's response "must set forth specific facts showing that there is a genuine issue for trial.").

B. The Merits of the Parties' Summary Judgment Motions

i. Ms. Labato's Motion for Summary Judgment (Doc. 101)

In her motion (Doc. 101), Ms. Labato makes only one argument: that the IRS did not serve her with a Notice of Deficiency and that therefore she was denied an opportunity to petition the tax court for redress. Ms. Labato contends that she never received a Notice of Deficiency, but she does not contest that the Government delivered the notices to the Post Office for mailing. The Government responds that Ms. Labato's alleged failure to receive the deficiency notice does not invalidate the tax assessment where the Government has presented unrebutted evidence of mailing the deficiency notice to Ms. Labato.

Section 6212 of Title 26 provides in part, "if the Secretary determines that there is a deficiency in respect of any tax imposed . . . , he is authorized to send notice of such deficiency to the taxpayer by certified mail or registered mail." 26 U.S.C. §6212(a). "The notice is valid even if not received by the taxpayer, if it is mailed to the taxpayer's last known address." United States v. Zolla [84-1 USTC ¶9175 ], 724 F.2d 808, 810 (9th Cir. 1984); accord Wiley v. United States [94-1 USTC ¶50,150 ], 20 F.3d 222 (6th Cir. 1994) ("The only requirement is that the IRS send the notice of deficiency by certified or registered mail to the taxpayer's last known address; actual receipt of the notice is not necessary."); United States v. Dixon [87-2 USTC ¶9485 ], 672 F.Supp. 503, 506 (M.D. Ala. 1987) ("[A]ctual receipt of the Notice is not necessary."), aff'd, 849 F.2d 1478 (11th Cir. 1988).

In the instant case, both parties have submitted with their motions a copy of an IRS certified mail list stamped "March 29, 1995" and listing four certified mail items--one for each of the four addresses to which the IRS sent the notice to Ms. Labato. (Ex. A to Doc. 101; Ex. 6 to Doc. 105). The Government has also submitted certification that this list is a true copy of an official record of the IRS. (Ex. 6 to Doc. 105). Ms. Labato does not dispute that only one of these notices was returned unclaimed or that notice was sent to her "last known address," but she has submitted an affidavit stating that she never received a deficiency notice at her St. Cloud address. (Attach. to Doc. 101).

Ms. Labato cites several cases where the sufficiency of a notice of deficiency was allegedly determined based on whether it was actually received by the taxpayer. See, e.g., Berger v. Comm'r of Internal Rev. [69-1 USTC ¶9103 ], 404 F.2d 668 (3d Cir. 1968); see also Sicker v. Comm'r of Internal Revenue [87-1 USTC ¶9304 ], 815 F.2d 1400, 1401 (11th Cir. 1987) (finding notice of deficiency which was improperly addressed by the IRS was not effective when mailed where notice was not "actually received by the taxpayer within ample time to file a petition for redetermination") (citing Pugsley v. Comm'r of Internal Rev. [85-1 USTC ¶9121 ], 749 F.2d 691 (11th Cir. 1985) (holding notice sufficient even though not sent to "last known address" of taxpayer where taxpayer was not prejudiced because he actually received the notice)). Ms. Labato reads these cases as requiring actual receipt of the notice of deficiency.

However, these cases do not hold that receipt of the notice by the taxpayer is required. Berger, for example, dealt with the situation where the IRS does not send the notice to the last known address but the taxpayer nevertheless receives it. In such a situation, actual receipt can, depending on the circumstances, overcome the IRS's failure to send the notice to the taxpayer's last known address. This does not mean that a notice sent to the last known address is not effective even if not received; indeed, the Berger court noted that when notice is sent to the last known address, "the notice is adequate and effective even though it may later be shown in fact it was never delivered to the taxpayer." [69-1 USTC ¶9103 ], 404 F.2d at 673. Hence, these cases do not support Ms. Labato's position that the notice must be received to be effective, nor does her affidavit which states she never received a notice at her St. Cloud address. See Dixon [87-2 USTC ¶9485 ], 672 F.Supp. at 506 ("[D]efendant's affidavit that he did not receive the statutory notice is not evidence that it was not mailed."). Despite Ms. Labato's arguments to the contrary, it is the mailing of the notice rather than the receipt of the notice that determines its sufficiency. See, e.g., Zolla.

In her memorandum (Doc. 113) in opposition to the Government's summary judgment motion, Ms. Labato argues, citing three cases, that the absence of signed return receipts shows that she did not receive the deficiency notice. However, all three of those cases--McPartlin v. Commissioner of the IRS [81-2 USTC ¶9569 ], 653 F.2d 1185 (7th Cir. 1981), Mulder v. Commissioner of Internal Revenue [88-2 USTC ¶9512 ], 855 F.2d 208 (5th Cir. 1988), ³ and Powell v. Commissioner of Internal Revenue [92-1 USTC ¶50,147 ], 958 F.2d 53 (4th Cir. 1992)--dealt with the issue of whether notice had been sent to the taxpayer's last known address and whether the IRS had acted with due diligence in determining that address. In each of those cases, the court viewed the IRS's actions under the circumstances as not amounting to due diligence, considering in part the presence or absence of a return receipt as it bore on the IRS's actions in determining the taxpayer's last known address.

None of these cases relied upon by Ms. Labato addressed the issue before this Court--whether a notice properly sent to the taxpayer's last known address is sufficient--and they are not instructive on this point. Indeed, the language of McPartlin regarding error of the post office has been rejected as dicta. See Keado v. United States [88-2 USTC ¶9489 ], 853 F.2d 1209, 1212 n.9 (5th Cir. 1988) (affirming summary judgment for Government where Government had presented proof of delivery by IRS to the postal service and rejecting taxpayer's argument, based on McPartlin, that receipt of notice is required, noting that "[i]n McPartlin, however, the Seventh Circuit found that the IRS did not mail the notice of deficiency to the taxpayers' last known address. This finding was sufficient to support the court's holding. The court's comments regarding the effect of the post office's error were dicta."). ⁴

Hence, although Ms. Labato attempts to create an issue by arguing that there is no return receipt to show that she received the notice of deficiency, the Court finds her arguments insufficient to create an issue of fact to defeat summary judgment for the Government. Again, the cases on which she relies relate to the IRS's diligence in ascertaining the taxpayer's "last known address" rather then to the sufficiency of a notice properly sent to the "last known address" as in the case at bar. Ms. Labato does not contend that the notice was not sent to her last known address. Indeed, the Government has presented evidence that in March 1995 it sent notices to four different addresses including Ms. Labato's address on Albritton Road in St. Cloud --the address at which Ms. Labato admittedly has resided since 1992. The record includes copies of the four letters dated March 29, 1995, as well as a certified mail list reflecting delivery of those four letters to the Postal Service. The evidence is unrebutted that only one of the four letters was returned "unclaimed." Although the record is silent as to whether the letters in the instant case were sent certified with a requested return receipt or certified without a return receipt, this silence does not create a material issue of fact on the issue of whether the IRS properly mailed the notice of deficiency to Ms. Labato.

The evidence is unrebutted that the IRS mailed a notice of deficiency to four addresses, including Ms. Labato's correct"last known address," and that only one letter was returned unclaimed. This evidence is sufficient to establish as a matter of law that the IRS properly mailed the deficiency notice to Ms. Labato. Hence, Ms. Labato's motion for summary judgment based on her alleged failure to receive a deficiency notice will be denied, and the Government's motion on this issue will be granted.

ii. The Government's Cross-Motion for Summary Judgment (Doc. 104)

In its motion (Doc. 104) and supporting memorandum (Doc. 105), the Government contends that there are no genuine issues of material fact and that it is entitled to summary judgment on the issues of Ms. Labato's outstanding tax debt and the transfer of property from Ms. Labato to her daughter, Ms. Hunt. In her amended opposition memorandum (Doc. 113), Ms. Labato argues only the issue of the notice of deficiency discussed above in part III.B.i. of this Order and does not respond to the Government's other arguments, each of which will now be addressed in turn.

a. Ms. Labato's Tax Liability

The Government first argues that it is entitled as a matter of law to reduce to judgment the unpaid balance of Ms. Labato's 1992 federal income tax liability. The Government avers that Ms. Labato's tax debt has been duly assessed, that notice of deficiency was properly sent to Ms. Labato, and that Ms. Labato did not file a complaint challenging the jeopardy assessment within the allowable time period. Therefore, the Government argues, there are no remaining issues as to Ms. Labato's tax liability.

The Government correctly notes that the assessment of Ms. Labato's tax debt is presumed correct. Welch v. Helvering [3 USTC ¶1164], 290 U.S. 111, 115 (1933); accord United States v. Pomponio [80-2 USTC ¶9820 ], 635 F.2d 293 (4th Cir. 1980). Thus, upon a showing like the Government has made here of certified copies of the certificate of assessment (Ex. 1 to Doc. 105), the Government establishes a prima facie case. Pomponio [80-2 USTC ¶9820 ], 635 F.2d at 296; see also United States v. Chila [89-1 USTC ¶9299 ], 871 F.2d 1015, 1017 (11th Cir. 1989) (" '[A] Certificate and Assessments and Payments is presumptive proof of a valid assessment.' ") (quoting appellant's brief therein) (citing United States v. Dixon [87-2 USTC ¶9485 ], 672 F.Supp. 503 (M.D. Ala. 1987), aff'd, 849 F.2d 1478 (11th Cir. 1988)).

The Government having presented its proof, the burden shifts to Ms. Labato to contest the tax assessment as arbitrary or incorrect. Bar L Ranch, Inc. v. Phinney [70-1 USTC ¶9399 ], 426 F.2d 995, 998 (5th Cir. 1970) ("Of course we agree with the District Court that the Commissioner's determination of a deficiency is prima facie Correct and that the burden is on the taxpayer to prove to the contrary."). Ms. Labato has not presented any evidence or argument regarding the propriety of the tax assessment other than her contention, discussed earlier, that she did not receive the notice of deficiency. Accordingly, the Government is entitled to summary judgment on the issue of Ms. Labato's 1992 federal income tax liability.

b. Transfer of the Subject Real Property to Ms. Hunt

The Government next seeks to foreclose its tax lien on the subject real property in Cocoa , Florida . The Government contends that the property is subject to foreclosure on the tax lien because Ms. Labato fraudulently transferred the property to Ms. Hunt and the transfer should be set aside.

Upon Ms. Labato's refusal to pay or neglect in not paying her tax liability after demand for payment, the amount of her tax liability became "a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to [her]." 26 U.S.C. §6321. As set forth in the Internal Revenue Code, "the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time." 26 U.S.C. §6322. Section 7403 of the Code provides for enforcement of liens and subjection of property to payment of tax. 26 U.S.C. §7403.

In the instant case, the IRS assessed Ms. Labato's tax liability in 1995--more than a year and a half after Ms. Labato acquired and then transferred the subject Cocoa real property. Therefore, as noted by the Government, a federal tax lien did not attach to the property before Ms. Labato conveyed it to Ms. Hunt. Nevertheless, the Government may still seek to enforce its lien against the property pursuant to state fraudulent conveyance law. See, e.g., Ressler v. United States [77-1 USTC ¶9459 ], 433 F.Supp. 459, 463 (S.D. Fla. 1977) ("[W]here a taxpayer disposes of property prior to the existence of federal tax liens, the United States may seek relief under the applicable fraudulent conveyance laws of the particular state in which the property and taxpayer are located."), aff'd [78-2 USTC ¶9571 ], 576 F.2d 650 (5th Cir. 1978). cert. denied, 440 U.S. 929 (1979).

Florida 's fraudulent conveyance law is codified in Florida 's Uniform Fraudulent Transfer Act, Sections 726.101 et seq., Florida Statutes. The Government contends that the transfer of the Cocoa property from Ms. Labato to Ms. Hunt was fraudulent under section 726.106(1), Florida Statutes, which deems fraudulent "as to a creditor whose claim arose before the transfer was made" a transfer of property made "without receiving a reasonably equivalent value in exchange" where the debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer.

Even though the IRS did not assess Ms. Labato's 1992 tax liability until 1995, the Government's "claim arose" before the July 1993 transfer of the subject property from Ms. Labato to Ms. Hunt as required by section 726.106(1). As noted by the Ressler court, "[r]egardless of when federal taxes are actually assessed, taxes are considered as due and owing, and constitute a liability, as of [the] date the tax return for the particular period is required to be filed." [77-1 USTC ¶9459 ], 433 F.Supp. at 463. Accordingly, Ms. Labato's 1992 federal income tax liability arose on April 15, 1993, when her tax return was due. See 26 U.S.C. §§6072, 6151 (prescribing, respectively, that tax returns are to be filed by April fifteenth of the following year and that tax owed is to be paid at time return is due). At the time of the July 1993 transfer of the property to Ms. Hunt, therefore, the Government's claim had already arisen.

Turning to the remaining elements of section 726.106(1), the Government correctly notes that it is undisputed that Ms. Labato did not receive any consideration for the transfer of the Cocoa property. (Dep. of Patricia Labato, Ex. 4 to Doc. 18, at 44). Additionally, the Government points out that Ms. Labato admitted in her 1998 deposition that she was insolvent and had been for several years as a result of the IRS's attempts to collect the tax debt. (Dep. of Patricia Labato, Ex. 4 to Doc. 18, at 57-61). The Court agrees that the unrebutted evidence establishes that the conveyance of the Cocoa property to Ms. Hunt was fraudulent under section 726.106, Florida Statutes.

The Government also argues that the transfer to Ms. Hunt was fraudulent and should be set aside under section 726.105(1)(a), Florida Statutes, which provides that a transfer of property made "[w]ith actual intent to hinder, delay, or defraud any creditor of the debtor" is fraudulent as to that creditor "whether the creditor's claim arose before or after the transfer was made." The statute provides a nonexclusive list of factors which may be considered in determining the transferor's intent. §726.105(2). ⁵ Applying those factors to the instant facts, the transfer was to an insider, ⁶ §726.105(2)(a); Ms. Hunt did not take possession of the property until 1995--two years after the sale--implying that Ms. Labato "retained possession or control of the property transferred after the transfer," §726.105(2)(b); the transfer was not for reasonably equivalent value; §726.105(2)(h); as discussed above Ms. Labato "was insolvent or became insolvent shortly after the transfer was made," §726.105(2)(i); and the 1993 transfer occurred shortly after Ms. Labato's tax liability arose, §726.105(2)(j).

Considering these factors, the Court finds that the transfer of the Cocoa property from Ms. Labato to her daughter, Ms. Hunt, was fraudulent under Florida law and should be set aside. The Government--anticipating in its supporting memorandum that Ms. Labato would argue in response that her husband, Gennaro Labato, and not she, purchased the property and gave it to Ms. Hunt--aptly notes that the undisputed record evidence reflects that it is Ms. Labato's name and signature on the closing documents and warranty deed. A "corrective" deed was entered a month later conveying the property from Ms. Labato to Ms. Hunt, and the Court finds that taking into account all of the circumstances the property was purchased by Ms. Labato and then was conveyed by Ms. Labato to Ms. Hunt for no consideration. ⁷ Thus, the transfer was fraudulent under section 726.105(1)(a) as well as under section 726.106(1).

Ms. Labato has not presented any evidence to rebut the Government's evidence of actual and constructive fraud. Accordingly, the transfer of the property shall be set aside and the Government shall be permitted to foreclose its tax lien against the Cocoa property.

IV. Conclusion

In accordance with the foregoing, it is ORDERED and ADJUDGED as follows:

1. The Motion for Summary Judgment (Doc. 101, filed January 30, 2002) filed by Defendant Patricia Labato is DENIED.

2. Defendant's Motion for a Hearing on Defendant's Motion for Summary Judgment (Doc. 115) is DENIED.

3. Plaintiff's Cross-Motion for Summary Judgment (Doc. 104, filed February 12, 2002) is GRANTED in all respects.

4. Patricia Labato is indebted to the United States for unpaid federal income taxes for 1992 in the total amount of $1,377,706.93, plus interest accruing between January 31, 2002, and the date of judgment.

5. The purported transfer on July 23, 1993, of the subject real property at 3034 Winchester Drive in Cocoa, Florida, from Patricia Labato to Denise Labato a/k/a Denise Labato Hunt is hereby set aside as a fraudulent conveyance.

6. The United States, as a result of Defendant Patricia Labato's failure to pay her assessed federal income tax liability for 1992, has a valid federal tax lien upon and against all property, and all rights to property, belonging to Defendant Patricia Labato, including the subject real property at 3034 Winchester Drive in Cocoa, Florida.

7. The federal tax lien is hereby FORECLOSED, and the United States may sell the subject real property and apply the sale proceeds to the payment or partial payment of Defendant Patricia Labato's outstanding federal income tax liability for 1992.

8. A judgment and order of foreclosure will be entered separately. The Government shall file a proposed judgment and order of foreclosure within five (5) days of the date of this Order.

9. The Motion by Plaintiff United States of America to Strike Defendant's Demand for Trial by Jury (Doc. 114) is DENIED as moot.

DONE and ORDERED.

¹ Defendant's Amended Memorandum in Opposition to the Government's Counter-Motion for Summary Judgment (Doc. 113) supersedes the initial Defendant's Memorandum in Opposition to the Government's Counter-Motion for Summary Judgment (Doc. 111).

² The Government concedes that any lien that Brevard County may claim for unpaid ad valorem property taxes is superior to the federal tax lien. (Doc. 105 at 2 n.2).

³ In Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir. 1981) (en banc), the Eleventh Circuit adopted as binding precedent all Fifth Circuit decisions handed down as of September 30, 1981.

⁴ Moreover, Keado preceded the Fifth Circuit's Mulder decision by a few weeks, and the Fifth Circuit has reiterated its Keado holding since Mulder. See, e.g., Jones v. United States [89-2 USTC ¶9671 ], 889 F.2d 1448, 1450 (5th Cir. 1989) ("Section 6212 does not require actual receipt by the taxpayer of the notice of deficiency. Rather, it provides that the notice "shall be sufficient" if mailed to the taxpayer at his 'last known address.'. . . The statutory scheme, therefore, provides a method of notification which insures that the vast majority of taxpayers will be informed that a tax deficiency has been determined against them without imposing on the Commissioner the virtually impossible task of proving that the notice actually has been received by the taxpayer.") (citing Keado); Pomeroy v. United States [89-1 USTC ¶9168 ], 864 F.2d 1191, 1195 (5th Cir. 1989) ("The relevant statutes simply require that the deficiency notice be mailed to the taxpayer's last known address, not that it be received.") (citing Keado) (emphasis in original).

⁵ Section 726.105(2) provides:

(2) In determining actual intent under paragraph (1)(a), consideration may be given, among other factors, to whether:

(a) The transfer or obligation was to an insider.

(b) The debtor retained possession or control of the property transferred after the transfer.

(c) The transfer or obligation was disclosed or concealed.

(d) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.

(e) The transfer was of substantially all the debtor's assets.

(f) The debtor absconded.

(g) The debtor removed or concealed assets.

(h) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.

(i) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.

(j) The transfer occurred shortly before or shortly after a substantial debt was incurred.

(k) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

⁶ "Insider" is defined in subsection 726.102(7), Florida Statutes, to include "[a] relative of the debtor." Ms. Hunt is Ms. Labato's daughter.

⁷ Although earlier in the case Ms. Labato contended that the initial titling of the property in her name was a mistake, she has not made that or any other argument in opposition to this portion of the Government's current motion. In any event, the Court finds that any such mistake would not create an issue of material fact sufficient to defeat the Government's motion for summary judgment.

 

 

 [99-2 USTC ¶50,813] United States of America v. R&E Corporation and Commonwealth of Pennsylvania

U.S. District Court, East. Dist. Pa., CIV. 98-1068, 8/31/99

[Code Secs. 6321 and 6323 ]

Federal tax liens: Priority over state liens: Pennsylvania: Creation of lien: Judgment creditor: Notice of lien filed: Lien interest: Superpriority: Supremacy Clause.--Federal tax liens against proceeds from the sale of a delinquent taxpayer's liquor license were superior to most of the state (Pennsylvania) tax liens filed against the taxpayer. Although the state liens attached as soon as proper notice was filed by the state, the notice did not constitute a judgment or allow the state to qualify as a judgment creditor. Accordingly, the federal liens were perfected as soon as the taxpayer's federal deficiencies were assessed, regardless of when the IRS filed notice of them, and only a state lien that was filed prior to the assessment of the taxpayer's federal deficiencies was superior to the federal liens. Finally, state law prohibiting the sale of a liquor license by a party that owed state taxes did not give the state a lien interest in the license; also, to the extent that the law granted the state a reserved interest in the license that amounted to a superpriority over federal tax liens, it was preempted by the Supremacy Clause of the U.S. Constitution.

[Code Secs. 7402 and 7403 ]

District court: Jurisdiction: Tax Injunction Act: Federal tax liens: Foreclosure: State liens.--The Tax Injunction Act, 28 U.S.C. §1341, did not bar the government's action to foreclose federal tax liens against property that was also subject to state (Pennsylvania) tax liens. The foreclosure suit did not qualify as an attempt to enjoin, suspend or restrain the state's assessment and collection action, or to use an injunction or a declaratory judgment to deprive the state of any interest it had in the taxpayer's property

[Code Sec. 6321 ]

Tax liens: Property subject to: Liquor license.--Under state (Pennsylvania) law, a delinquent taxpayer's liquor license constituted property that was subject to federal and state tax liens.

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER

YOHN, Judge:

The United States brought this foreclosure action against a liquor license owned by R&E Corporation ("R&E"). The United States named Pennsylvania 's Bureau of Employer Tax Operations ("BETO") as a party possibly claiming rights to the liquor license. On November 2, 1998, default was entered against R&E. Shortly thereafter, the court approved a consent decree allowing the sale of the license. This sale occurred on May 11, 1999, and yielded proceeds in the amount of $6,100.00. ¹ Both the United States and BETO now assert that they are entitled to these proceeds. The United States claims that its tax liens were perfected on the date of assessment and have priority over all but one of the Commonwealth's liens. See Pl.'s Trial Brief at 16-17. BETO maintains that the Tax Injunction Act divests the court of jurisdiction to hear this case. Substantively, BETO argues that it is a judgment lien creditor and therefore, under 26 U.S.C. §6323 the IRS's liens can have priority only from the date they were recorded. See Def.'s Trial Mem. at 3-4. Alternatively, BETO contends that the United States has liens only on the amount of the proceeds that exceed R&E's outstanding state tax debt. Defendant bases this claim on the theory that the provision in the Pennsylvania Liquor Code which makes the right to transfer, sell, or renew a liquor license contingent upon payment of state taxes, limits R&E's, and therefore the IRS's, interest in the license to something less than its entire value.

The court held oral argument on these issues. Following this hearing, the parties submitted joint findings of all the facts relevant to a determination of the parties' respective rights in the proceeds. These findings are incorporated herein as follows.

I. FINDINGS OF FACT

1. R&E Corporation t/a Living Room Lounge is a corporation organized under the laws of the Commonwealth of Pennsylvania .

2. The Pennsylvania Liquor Control Board (PLCB) granted a liquor license #R6957 to R&E, which operated a liquor establishment by virtue of that license.

3. Between 1989 and 1996, the Internal Revenue Service (IRS) made various assessments against R&E for unpaid federal employment taxes (withheld income taxes and FICA taxes). These assessments plus statutory additions are summarized as follows:

Tax         Date of   Amount of    Unpaid   Statutory

Period     Assessment Assessment  Balance   Additions

06/30/88     09/18/89  $3,060.62    $966.48  $1,228.97

09/30/88     09/18/89  $3,135.27  $1,380.83  $1,936.76

12/31/88     09/18/89  $3,209.92  $1,449.43  $2,038.38

09/30/89     07/15/96    $698.88  $1,704.10    $421.02

12/31/89     07/15/96    $698.88  $1,661.58    $380.50

03/31/90     07/15/96    $709.80  $1,664.59    $406.36

06/30/90     07/15/96    $709.80  $1,603.71    $396.24

09/30/90     07/15/96    $709.80  $1,563.94    $386.37

03/31/91     07/08/96    $596.70  $1,274.37    $317.62

09/30/91     06/15/92    $865.42    $337.21    $860.49

12/31/91     06/15/92    $865.42  $1,075.38    $979.05

03/31/92     11/30/92    $879.08  $1,040.59  $1,551.76

09/30/92     12/14/92    $890.78  $1,915.69  $1,732.46

12/31/92     07/15/96    $892.72  $1,634.47    $439.53

03/31/93     06/24/96    $596.70  $1,107.45    $311.86

09/30/93     06/24/96    $892.72  $1,509.20    $462.65

12/31/93     06/24/96    $892.72  $1,471.89    $466.65

03/31/94     06/24/96    $892.72  $1,435.77    $470.83

06/30/94     06/24/96    $892.72  $1,398.22    $474.73

09/30/94     10/14/96    $892.72  $1,397.56    $436.16

12/31/94     06/24/96    $892.72  $1,316.05    $480.69

03/31/95     06/24/96    $446.36    $637.37    $241.81

06/30/95     07/01/96    $446.36    $619.25    $240.46

09/30/95     06/24/96    $446.36    $596.13    $242.51

12/31/95     06/24/96    $446.36    $555.71    $233.55

03/31/96     06/24/96    $446.36    $476.55    $212.26

 

4. From 1989 to 1996, the IRS also made assessments against R&E for unpaid federal unemployment taxes. These assessments plus statutory additions are summarized as follows:

Tax         Date of   Amount of    Unpaid   Statutory

Period     Assessment Assessment  Balance   Additions

1989         07/15/96    $112.00    $270.37     $66.81

1991         06/26/92    $112.00     $25.57     $18.25

1992         07/08/96    $112.00    $204.74     $55.49

1993         07/15/96    $868.00  $1,414.74    $404.18

1994         07/15/96    $868.00  $1,289.99    $457.81

1995         07/15/96    $434.00    $545.15    $219.33

The parties agree that the assessments for the 1993, 1994, and 1995 tax periods may be reduced if 940 recertifications are issued by BETO.

5. The IRS issued a notice and a demand for payment to R&E on or about the dates of the assessments.

6. Despite notice and demand for payment, liabilities for federal taxes listed in paragraphs three and four remain unpaid.

7. The Department of Labor and Industry, Bureau of Employer Tax Operations is a state taxing entity that collects state taxes.

8. R&E registered with BETO as an employer offering covered employment for wages subject to state unemployment compensation ("UC") taxes.

9. R&E self-reported and self-assessed UC taxes to BETO. Some of these taxes remain due and unpaid.

10. On October 12, 1984, BETO filed a lien against R&E on behalf of the Pennsylvania Unemployment Compensation Fund ("Pa. UC Fund") in the amount of $335.95 in the Prothonotary's Office of Philadelphia County at Docket Number 2288 October Term, 1984, which lien was timely revived September 28, 1992. This lien remains unsatisfied of record. The amount due as of January 1, 1999, is $34.30.

11. On November 23, 1990, BETO filed a lien against R&E on behalf of the Pa. UC Fund in the amount of $1,240.07 in the Prothonotary's Office of Philadelphia County at Docket Number 3782 November Term, 1990, which lien was timely revived September 21, 1995. This lien remains unsatisfied of record. The amount due as of January 1, 1999, is $41.00.

12. On November 9, 1992, BETO filed a lien against R&E on behalf of the Pa. U.C. Fund in the amount of $695.48 in the Prothonotary's Office of Philadelphia County at Docket Number 1001 November Term, 1992, which lien was timely revived September 19, 1997. This lien remains unsatisfied of record. The amount due as of January 1, 1999, is $41.00.

13. On March 4, 1996, BETO filed a lien against R&E on behalf of the Pa. U.C. Fund in the amount of $742.47 in the Prothonotary's Office of Philadelphia County at Docket Number 297 March Term, 1996. This lien remains unsatisfied of record. The amount due as of January 1, 1999, is $903.26.

14. On April 18, 1996, the IRS filed a notice of federal tax lien against R&E in the amount of $6497.58 in the Prothonotary's Office for Philadelphia County , docketed to 020281, for amounts assessed in 1991 and 1992. This lien remains unsatisfied of record. The amount due as of January 1, 1999, is $9,536.45.

15. On April 21, 1997, the IRS filed a notice of federal tax lien against R&E in the amount of $31,312.27 in the Prothonotary's Office for Philadelphia County , docketed to 020134, for amounts assessed in 1996. This lien remains unsatisfied as of record. The amount due as of January 1, 1999, is $25,534.15.

16. On April 21, 1997, the IRS filed a notice of federal tax lien against R&E in the amount of $5,972.63 in the Prothonotary's Office of Philadelphia County, docketed to 020135, for amounts assessed in 1996. This lien remains unsatisfied of record. The amount due as of January 1, 1999, is $8,104.83, but which amount may be reduced if 940 recertifications are issued by BETO.

17. On April 29, 1997, BETO filed a lien against R&E on behalf of the Pa. UC Fund in the amount of $776.58 in the Prothonotary's Office of Philadelphia County at Docket Number 3098 April Term, 1997. This lien remains unsatisfied of record. The amount due as of January 1, 1999, is $921.62.

18. On July 31, 1998, the IRS filed a notice of federal tax lien against R&E in the amount of $5,160.89 in the Prothonotary's Office for Philadelphia County , docketed to 020191, for amounts assessed in 1989. This lien remains unsatisfied of record. The amount due as of January 1, 1999, is $9,000.85.

19. At the time of oral argument, liquor license #R6957 had expired, but it was recoverable upon approval of a completed renewal application and payment of the PLCB's renewal fees.

20. In order to expedite the litigation, the IRS and BETO agreed that license #R6957 would be renewed and sold upon renewal. ² The IRS completed a renewal application and agreed to pay the renewal fees. See Pl.'s Mot. for Approval of the Consent Order Allowing the Sale of Liquor License ("Mot. for Consent Order"), Att. A.

21. Liquor license #R6957 was sold on May 11, 1999, for $6,100.

22. BETO issues a tax clearance certificate for each transaction initiated by a liquor licensee, and that clearance certificate is limited to that particular transaction.

23. If the liquor licensee does not have a tax clearance certificate upon application for renewal or transfer, a letter is issued by the PLCB to the licensee to contact the appropriate state taxing authority.

24. The PLCB does not take further action until the tax clearance certificate is issued.

II. CONCLUSIONS OF LAW

A. Jurisdiction

1. This is a foreclosure action by the United States pursuant to 28 U.S.C. §§1340, 1345, and 26 U.S.C. §§7402, 7403.

2. The Tax Injunction Act ("TIA"), 28 U.S.C. §1341, provides that "[t]he district courts shall not enjoin, suspend or restrain the assessment, levy, or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State."

3. Based on the plain language of §1341, the Act is inapplicable to this case. Plaintiff is not seeking to "enjoin, suspend or restrain" Pennsylvania 's tax assessment and collection activities. The United States brought its complaint pursuant to federal law in an effort to foreclose on its federal tax liens against R&E's liquor license. Plaintiff joined the Commonwealth as a defendant because it also had a potential interest in the property. Plaintiff, through this action, is not trying to deprive defendant of any interest it may have in the property by means of an injunction or declaratory judgment. The foreclosure action simply establishes the priority of both parties' interests relative to each other. Consequently, this action does not fall within the ambit of the TIA.

4. Additionally, §1341 does not affect the court's ability to assert jurisdiction when the United States or one of its instrumentalities has initiated the action to "protect [itself] from 'unconstitutional state exactions.' " Department of Employment v. United States, 385 U.S. 355, 358 (1966); accord, Simon v. Cebrick, 53 F.3d 17 (3d Cir. 1995) (holding jurisdiction proper where instrumentality of the United States "sought the protection afforded by a federal statute to prevent its assets from being foreclosed without its consent"); In re Levy v. United States, 574 F.2d 128 (2d Cir. 1978) (finding that §1341 did not prevent jurisdiction where United States sought to prevent unconstitutional taking of its property in form of state taxes on veteran's estate that escheated to federal government).

5. The United States believes that, pursuant to federal law, its interest in the proceeds from the sale of the liquor license is superior to all but one lien held by the Commonwealth and, therefore, it is entitled to the lion's share of the $6001.00. The United States has brought suit to protect this interest in the property. Consequently, §1341 does not preclude the court from hearing this case and jurisdiction is proper.

B. Rules of Attachment and Perfection

6. The IRS has liens that arose automatically when the taxes were assessed on all of R&E's property including the liquor license. See 26 U.S.C. §§6321, 6322 (West 1989); Monica Fuel, Inc. v. Internal Revenue Serv. [95-2 USTC ¶50,477], 56 F.3d 508, 511 (3d Cir. 1995).

7. BETO's liens attached on the date they were filed in the office of the Prothonotary. See 43 Pa. Cons. Stat. Ann. §788.1 (a) (West 1991). ³

8. Federal law determines the relative priority of federal tax liens and any competing liens on the property. See Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 513-14 (1960); United States v. Oswald & Hess Co., 345 F.2d 886, 887 (3d Cir. 1965) ("federal law is determinative where the question involved is the priority to be accorded to a lien of the federal government whatever its source"). As a general matter, priority is established according to the principle that "the first in time is the first in right." United States v. City of New Britain [54-1 USTC ¶9191], 347 U.S. 81, 85 (1954)

9. As against most liens (except those enumerated in 26 U.S.C. §6323(a)) federal tax liens are perfected and can be first in time from the day of assessment. See 21 West Lancaster Corp. v. Main Line Restaurant, Inc. [86-2 USTC ¶9516], 790 F.2d 354, 356 (3d Cir. 1986) (stating that "lien arising under §6321 is afforded priority over all other unperfected liens or claims asserted against the taxpayer's property" except those set forth in §6323(a)); Terwilliger's Catering Plus, Inc. v. Internal Revenue Serv. [90-2 USTC ¶50,460], 911 F.2d 1168, 1175 (6th Cir. 1990) (declaring "federal tax lien need not be filed to gain priority over other interests; it is perfected at the time the lien is assessed").

10. Under §6323, federal tax liens cannot have priority over a "security interest, mechanic's lienor, or judgment lien creditor until notice thereof . . . has been filed" in accordance with state law. 26 U.S.C. §6323(a), (f) (Supp. 1999). Thus, as against these three types of liens, a federal tax lien becomes perfected and can be first in time only when notice of the lien has been properly filed. See In re Fisher v. Bentz [80-2 USTC ¶9583], 7 B.R. 490, 494 (W.D. Pa. 1980) (stating that federal tax lien is perfected against "bankruptcy trustee and other judgment lien creditors upon the filing of the Notice of Federal Tax Lien").

11. For any state law liens to have priority over a federal tax lien, the state lien must be "perfected in the sense that there is nothing more to be done to have a choate lien" prior to the assessment or filing of the federal tax lien (whichever is required). Monica Fuel, Inc. v. Internal Revenue Serv. [95-2 USTC ¶50,477], 56 F.3d 508, 511 (3d Cir. 1995) (quoting United States v. Vermont [64-2 USTC ¶9520], 377 U.S. 351, 355 (1964)); accord, United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 449-50 (1993) .

12. A lien is choate and perfected when "the identity of the lienor, the property subject to the lien, and the amount of the lien are established." McDermott [93-1 USTC ¶50,164], 507 U.S. at 449 (quoting City of New Britain [54-1 USTC ¶9191], 347 U.S. at 84). To meet the last requirement of choateness, "the lienor must either have obtained judgment on the lien or it must be enforceable against the property by summary proceeding." Oswald & Hess Co., 345 F.2d at 888.

13. UC tax liens filed in accordance with 43 Pa. Cons. Stat. Ann. section 788.1, "attach and [became] choate at the time of their recording in prothonotaries' offices." Almi, Inc. v. Dick Corp., 375 A.2d 1343 ( Pa. Commw. Ct. 1977); accord, Mozingo v. Pennsylvania Dept. of Labor and Indus., 234 B.R. 867 (E.D. Pa. 1999) (stating that valid statutory lien under §788.1 "became choate at the time of its recording").

C. BETO as Judgment Lien Creditor

14. The Federal Tax Regulations on Procedure and Administration contain the following definition of judgment lien creditor:

The term 'judgment lien creditor' means a person who has obtained a valid judgment, in a court of record and of competent jurisdiction, for the recovery of specifically designated property or for a certain sum of money. . . . The term 'judgment' does not include the determination of a quasi-judicial body or of an individual acting in a quasi-judicial capacity such as the action of State taxing authorities. 26 C.F.R. §301.6323(h)-1(g).

15. The term "judgment creditor," now "judgment lien creditor," is used in its "conventional sense of a judgment of a court of record" according to the Supreme Court. ⁴ United States v. Gilbert Assoc., Inc. [53-1 USTC ¶9291], 345 U.S. 361, 364 (1953). The mere assessment of taxes does not qualify a state or local taxing authority as a judgment creditor. See id. (holding that assessment of taxes did not make town judgment creditor).

16. The term "judgment creditor" generally refers to "[a] person in whose favor a money judgment has been entered by a court of law and who has not yet been paid. One who has obtained a judgment against his debtor under which he can enforce execution. . . ." Black's Law Dictionary 844 (6th ed. 1990).

17. A judgment lien is the "right to subject property of judgment debtor to satisfaction of judgment. A charge on or attachment of property of one who owes a debt and is subject to a judgment thereon." Id. at 845.

18. The crucial element for the creation of a judgment creditor or a judgment lien is receipt of a judgment, which is defined as "[t]he official and authentic decision of a court of justice upon the respective rights and claims of the parties to an action or suit therein litigated and submitted to its determination. The final decision of the court, resolving the dispute and determining the rights and obligations of the parties. . . ." Id. at 841-42.

19. No court of record has issued a decision regarding BETO's tax liens against R & E's liquor license.

20. BETO filed its notice of liens with the Prothonotary's Office of Philadelphia County pursuant to 43 Pa. Cons. Stat. Ann. §788.1. ⁵ Filing a notice of a lien pursuant to section 788.1, involves no "judicial intervention" and "[t]he fact that the legislation stated that the paper should be filed in the office of the Prothonotary does not make it a 'judgment,' even though the Prothonotary also is the repository for judicial records." In re Braxton v. Bureau of Unemployment Compensation Benefits & Allowances, 224 B.R. 564, 569 (W.D. Pa. 1998) (holding that state tax lien was not judicial lien arising from judgment such that it could be avoided in bankruptcy by Chapter 13 debtor); accord, Almi, Inc., 375 A.2d at 1351-53 (determining priority between federal tax liens and state tax liens based on date federal tax liens were assessed--"a Commonwealth lien entered prior to the date of assessment of a United States tax lien is first in time and first in right").

21. Based on the plain language of the regulations, the common definitions of the terms comprising "judgment lien creditor," and the foregoing cases, I conclude that BETO does not qualify as a judgment lien creditor.

22. As BETO is not a judgment lien creditor, the federal tax liens have priority over all of BETO's liens perfected after the IRS assessments.

D. BETO's Interest Pursuant to 47 Pa. Cons. Stat. Ann. §4-477

23. The Pennsylvania Liquor Code provides that a liquor license "shall constitute a privilege between the board and the licensee. As between the licensee and third parties, the license shall constitute property." 47 Pa. Cons. Stat. Ann. §4-468(d) (West 1997).

24. As defendant, a taxing entity, already has filed liens against the liquor license pursuant to section 788.1 and such liens can only attach to "the franchises and property, both real and personal, . . . of the employer," BETO must be a "third party" under section 4-468. See In re Pompeo v. Pennsylvania Dept. of Revenue, 195 B.R. 43, 47 n.5 (W.D. Pa. 1996) (en banc) (determining that "taxing authorities are not the Liquor Control Board but rather third parties" and proceeds from sale of license constitutes property as between taxing authority and licensee). The United States is clearly not the Board and therefore, as between R&E and the United States , the license and its proceeds are also property. See also 21 West Lancaster Corp. [86-2 USTC ¶9516], 790 F.2d at 358 (holding that regardless of state's characterization of liquor license, for purposes of federal law, it is property subject to federal tax lien).

25. The Liquor Code also establishes that PLCB "shall not approve any application for the grant, renewal or transfer of any [liquor license] where the applicant has failed to . . . (3) pay any State taxes not subject to a timely administrative or judicial appeal or subject to a duly authorized deferred payment plan." 47 Pa. Cons. Stat. Ann. §4-477(d)(3) (West 1997).

26. The purpose of section 4-477(d)(3), as declared by the Office of the Attorney General in a previous bankruptcy case involving the same statutory provision, was "to collect taxes" with the method being "to give the State a superior right over other creditors." In re Pompeo, 195 B.R. at 53-54 (quoting statements regarding the history of section 4-477 made during hearing before en banc panel of bankruptcy court in Western District of Pennsylvania).

27. If section 4-477(d)(3) grants to BETO some reserved interest in the liquor license having superpriority over all other creditors' interests regardless of time of perfection, the statute conflicts with the priority scheme set forth in 26 U.S.C. §6323. Cf. In re Pompeo, 195 B.R. at 52 (finding that 4-477(d)(3) conflicts with priority and distribution provisions of federal bankruptcy law); In re Kick-Off, Inc., 82 B.R. 648, 650 (D. Mass. 1987) (holding that similar provision in Massachusetts liquor licensing statute conflicted with priority provisions of federal bankruptcy law).

28. To the extent that section 4-477(d)(3) conflicts with the Internal Revenue Code, it is preempted by federal law pursuant to Article VI, Clause 2, of the United States Constitution (the Supremacy Clause). ⁶

29. If section 4-477(d)(3) creates some other lien interest or lien-like interest on behalf of BETO in the proceeds of the license, any such lien would necessarily be subject to the federal choateness requirements and priority provisions discussed previously. See In re Terwilliger's Catering Plus, Inc. v. United States [90-2 USTC ¶50,460], 911 F.2d 1168 (6th Cir. 1990) (finding that lien created by Ohio liquor code was not choate at time federal assessments made); United States v. Comptroller of the Treasury of Maryland [97-2 USTC ¶50,684], No. MJG-96-3045, 1997 WL 669957, *1 (D. Md. Aug. 12, 1997) (same).

30. Section 4-477(d)(3), however, does not mention the word "lien" anywhere in the text. See In re Pompeo, 195 B.R. at 52 (stating that absence of reference to lien is significant because when Commonwealth "has wished to create a lien, [it] has been clear in doing so"). Moreover, 4-477(d)(3) does not give the state the right to sell the license and apply the proceeds to the tax debt--to do this, the state must actually file a lien. See 47 Pa. Cons. Stat. Ann. §4-477(d)(3); In re Pompeo, 195 B.R. at 52-53 (quoting discussion between court and Commonwealth). Therefore, I conclude that this provision does not create a lien interest on behalf of BETO in the liquor license.

E. Conclusion

31. Defendant filed its first lien in the Prothonotary's office in 1984 for $335.95, $34.30 of which remains unpaid as of January 1, 1999. This lien was perfected before the IRS effected any federal tax assessments.

32. Prior to any further liens being recorded by BETO, the IRS made three tax assessments in 1989 which, as of January 1, 1999, have unpaid balances and statutory additions totaling $9,000.85. See Findings of Fact, ¶¶3, 10-11 supra (detailing unpaid balances and statutory additions on IRS assessments including those made in 1989 prior to BETO's second lien filed on Nov. 23, 1990).

33. Based on the premise that the first in time is the first in right, I conclude that the Commonwealth is entitled to $34.30 of the proceeds from the sale of the liquor license #R6957 and that the United States is entitled to the remaining $6,065.70.

34. As only $6,100.00 in proceeds exist, and the 1984 state lien and first three IRS assessments will deplete this entire amount, any further evaluation of the priorities of the various liens is unnecessary.

ORDER

AND NOW, this -- day of August 1999, upon consideration of the pleadings and oral arguments in this case, IT IS HEREBY ORDERED that the United States has valid and subsisting federal tax liens which attach to the proceeds of the sale of liquor license #R6957 and on the basis of which the United States has foreclosed on the proceeds of the sale of said liquor license. IT IS FURTHER ORDERED that the proceeds of the liquor license in the amount of $6,100.00 held by the Clerk of Courts shall be distributed in the following order of priority:

1. To satisfy the balance of the lien against all property and rights to property of R&E Corporation filed on October 12, 1984 by the Commonwealth of Pennsylvania 's Department of Labor and Industry. The unpaid balance of this lien as of January 1, 1999, was $34.30.

2. To satisfy the liens of the Internal Revenue Service that arose as a result of assessments made against R&E Corporation through September 18, 1989. The unpaid balance of these liens as of January 1, 1999, was $9,000.85.

¹ The Internal Revenue Service ("IRS") deposited the proceeds from the sale with the Clerk of Court on June 1, 1999.

² Pursuant to a consent agreement, approved by the court on November 16, 1998, the United States sold the liquor license and deposited the proceeds with the Clerk of Courts. In the consent agreement, the parties stipulated that the sale of the license would not affect the parties' claims or defenses and that the parties would maintain the same priority to the proceeds that they had to the underlying liquor license. See Mot. for Consent Order, Att. A.

³ Section 788.1 provides that

"All contributions and the interest and penalties thereon due and payable by an employer under the provisions of this act shall be a lien upon the franchises and property, both real and personal, ... of the employer liable therefor and shall attach thereto from the date a lien of such contributions, interest and penalties is entered of record in the manner hereinafter provided."

43 Pa. Cons. Stat. Ann. §788.1(a) (West 1991)

⁴ The subsequent revision to §6323, which inserted the term lien "did not alter the definition courts had traditionally given to 'judgment creditor.' " Air Power, Inc. v. United States [84-2 USTC ¶9732], 741 F.2d 53, 56 n.3 (4th Cir. 1984). Thus, to be a judgment lien creditor, one still needs a judgment from a court of record.

⁵ Section 788.1 states in relevant part:

(b) The department may at any time transmit to the prothonotaries of the respective counties of the commonwealth, to be by them entered of record and indexed as judgments are now indexed, certified copies of all liens imposed hereunder, upon which record it shall be lawful for writs of execution to be directly issued without the issuance and prosecution to judgment of writs of scire facias: Provided, That not less than ten (10) days before issuance of any execution on the lien, notice of the filing and the effect of the lien shall be sent by registered or certified mail to the employer at his last known post office address. No prothonotary shall require as a condition precedent to the entry of such liens the payment of the costs incident thereto....

43 Pa. Cons. Stat. Ann. §788.1 (b) (West 1991).

⁶ Article VI, clause 2, of the United States Constitution provides:

This Constitution and the Laws of the United States which shall be made in Pursuance thereof; and all treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.

 

 

[99-2 USTC ¶50,623] United States of America v. Uwe Freudenberg, Bobbie Freudenberg, Timothy Fox and Lisa Fox

U.S. District Court, East. Dist. Tenn. , at Greeneville, 2:97-CV-192, 6/9/99

[Code Sec. 6321 ]

Insolvent taxpayer: Fraudulent conveyance: Badges of fraud: Burden of proof, failure of taxpayer to meet.--The conveyance of real property by delinquent married taxpayers to the wife's daughter and son-in-law was set aside as fraudulent because it was intended to defeat the rights of the IRS as a creditor. The lack of consideration for the transfer and the fact that the grantees were close relatives of the grantors rendered the transfer suspect. The taxpayers failed to rebut these inferences of fraud because testimony they offered to show that the property was conveyed in exchange for the daughter's agreement to postpone having children was not credible.

[Code Secs. 6321 and 7403 ]

Tax liens, foreclosure of: Insolvent taxpayer: Fraudulent conveyance.--The conveyance of real property by delinquent married taxpayers to the wife's daughter and son-in-law was set aside as fraudulent because it was intended to defeat the rights of the IRS as a creditor. Although the assessments were made shortly after the conveyance, the taxpayers knew they were in severe financial difficulty at the time they transferred the property. Since the IRS was deemed to be a creditor from the date the obligation to pay taxes accrued, rather than from the date the assessment was made, the tax liens filed against the taxpayers and against their daughter and son-in-law as nominees for the taxpayers were valid and could be foreclosed.
MEMORANDUM

HULL , District Judge:

This is an action filed by the United States of America to set aside what it alleges was a fraudulent conveyance of real property in Hamblen County, Tennessee. Specifically, the United States alleges that a transfer of a house and lot on Lakemont Circle in Morristown , Tennessee , by Uwe and Bobbie Freudenberg to Lisa and Timothy Fox was made with the intent to impede, delay, and defeat the rights of the United States as a creditor of the Freudenbergs.

On November 20, 1992, Uwe and Bobbie Freudenberg purchased the subject property, generally described as 2660 Lakemont Circle , Morristown , Tennessee (hereafter "the property") for $67,500.00. On August 30, 1993, the Freudenbergs transferred this property to Lisa and Tim Fox for $20,000.00. Lisa Fox is Bobbie Freudenberg's daughter and Uwe Freudenberg's stepdaughter. On that same date (August 30, 1993), Lisa and Tim Fox borrowed $22,000.00 from Franklin Federal Savings Bank of Morristown ¹, $16,500.00 of which was paid by the Foxes to Bobbie Freudenberg, and $2,500.00 of which was used to defray miscellaneous closing costs; there was no explanation offered for the disposition of the remaining loan proceeds. The day after receiving the $16,500.00 payment from Lisa, Bobbie Freudenberg gave Lisa a check for $20,000.00.

On October 7, 1993, assessments were levied against Uwe Freudenberg for the tax years 1990 and 1991 for unpaid income taxes, interest, and penalties in the amount of $323,174.00 and $376,860.00, respectively. On July 3, 1995, additional assessments were made against Uwe Freudenberg in the amount of $45,038.00 (for tax year 1990) and $6,410.00 (for tax year 1991), plus additional penalties and interest.

On October 8, 1993, the United States recorded its notice of federal tax lien against the Freudenbergs in the Register of Deeds Office for Hamblen County , Tennessee , in the amount of $298,943.00, representing federal income taxes due by the Freudenbergs for the taxable year 1992.

On October 7, 1994, the United States recorded a notice of federal tax lien in the amount of $298,943.00 against Timothy and Lisa Fox as nominees of the Freudenbergs.

The United States insists that the transfer of the property by the Freudenbergs to the Foxes was intended to impede, delay and defeat the rights of the United States as a creditor of the Freudenbergs and therefore should be set aside as fraudulent. The defendants contend that the transfer was the consummation of an oral agreement between Bobbie Freudenberg and Lisa Fox in 1990 (one week prior to Lisa's marriage to Tim), that the Freudenbergs would buy a house for Lisa and Tim if they waited some period of time before having another child. ² The avowed reason underlying this offer by the Freudenbergs was the additional strain another child would place on Lisa and Tim Fox's already shaky financial situation.

Where a taxpayer has allegedly fraudulently transferred his property prior to the filing of federal tax liens, the United States may seek relief under the applicable fraudulent conveyance laws of the state in which the property is located. See, Commissioner v. Stern [58-2 USTC ¶9594], 357 U.S. 39, 45 (1958); and United States v. Westley [98-2 USTC ¶50,545], 1998 W.L. 427375 (W.D. Tenn.). Thus, Tennessee 's law applies to this case. That law is as follows:

66-3-305. Conveyances by insolvent without fair consideration declared fraudulent.--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 such person's actual intent, if the conveyance is made or the obligation is incurred without a fair consideration.

. . . .

66-3-308. Conveyances with intent to defraud.--Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud, either present or future creditors, is fraudulent as to both present and future creditors.

Tenn. Code Ann.

The plaintiff must prove fraud (actual or constructive) by a preponderance of the evidence. James v. Joseph, et al, 1 S.W.2d 1017, 1019 ( Tenn. 1928); Middle Tenn. Electric Membership Corp. v. Neely, 1988 W.L. 86342 (Tenn. App. 1988); United States v. Kerr [78-2 USTC ¶9827], 470 F.Supp. 278, 281 (E.D. Tenn. 1978). However, if there are "badges of fraud" which cast suspicion on the transaction, the burden of proof shifts to the defendant to explain the transaction and show that it was not fraudulent. Stevenson v. Hicks, 176 B.R. 466 (W.D. Tenn. 1995), listed a number of "badges of fraud" identified over the years by the Tennessee appellate courts: The transferor is in a precarious financial condition; he knew there was or soon would be a large money judgment rendered against him; inadequate consideration was given for the transfer; secrecy or haste existed in carrying out the transfer; a family or friendship relationship existed between the transferor and the transferee; the transfer included all or substantially all of the transferor's nonexempt property; the transferor retained a life estate or other interest in the property transferred; the transferor failed to produce available evidence explaining or rebutting a suspicious transaction; and there was a lack of innocent purpose or use for the transfer. See, 176 B.R. at 470.

There are at least two "badges of fraud" present in this case: There was no consideration for the transfer, and the grantees were close family relatives of the grantors. Also, it strains credulity to believe that the Freudenbergs did not know that they were significantly indebted at that time to the United States for unpaid taxes. Therefore, the burden of proof shifted to the defendants to demonstrate that the transfer was not fraudulent, i.e., was not intended to impede, delay and defeat the rights of the United States as a creditor of the Freudenbergs. The Court finds that the defendants failed to carry their burden of proof. To state it succinctly, neither Lisa Fox nor Bobbie Freudenberg were credible witnesses and the Court did not believe this proffered explanation for this conveyance.

For example, in her pro se answer filed to the government's complaint, Bobbie Freudenberg did not mention any parol agreement to buy the Foxes a house in return for their delay in having a baby. Nor did she mention any such oral agreement in her answer to interrogatories served upon her by the United States . Rather, her answer to the interrogatory suggests that Lisa and Tim Fox would buy the house from the Freudenbergs when they were financially able to do so. Further, in her deposition upon oral examination, Bobbie Freudenberg again failed to mention anything about an oral agreement conditioned upon the Foxes waiting to have a child.

Similarly, Lisa Fox's answers to the government's interrogatories say nothing about the alleged oral agreement.

Although the IRS assessments were made shortly after the transfer of the property, the Court concludes that the Freudenbergs knew that they were in severe financial difficulty. First, the United States is deemed to be a creditor from the date the obligation to pay income taxes accrues. See, United States v. Jones [95-1 USTC ¶50,190], 877 F.Supp. 907, 914 (D. N.J.), and cases cited therein. Thus, the IRS was a creditor of the Freudenbergs from 1990 and thereafter. Second, at the time of the transfer, the Freudenbergs owned a house in Florida with an equitable value of $300,000.00, the subject property worth $67,500.00, three vehicles worth $55,000.00, $300,000.00 in cash, and an investment business of some sort. This business in fact was worth nothing; the Freudenbergs ultimately "walked away from it." Shortly before or after the subject conveyance, the IRS called the Freudenbergs and asked that they come in for a discussion. Although Bobbie Freudenberg testified that she and her husband had no idea that they owed significant money to the IRS, they fled the country in September or October 1993 after their home in Daytona , Florida , was seized by the IRS. This is hardly the action of anyone who had no idea of a delinquent tax liability. It was at this same time that they abandoned their business. The Freudenberg literally dumped all their records into the ocean in December 1993. Although each drew a $100,000.00 salary from the business in 1993, and some amount of salary in 1992, it is noteworthy that Uwe Freudenberg's conduct of this business resulted in allegations of criminal fraud and conspiracy in Germany .

The defendants have failed to rebut the inference of fraud raised by the badges of fraud present in this case. The Court is convinced that at the time of the transfer to the Foxes, the Freudenbergs knew that they imminently faced the prospect of a significant delinquent tax liability to the United States and that their business in Florida not only was worthless, but likely was going to result in charges of criminal wrongdoing.

Thus, at the time of the transfer to the Foxes, the Freudenbergs were essentially insolvent and the transfer was intended to defeat the rights of the United States as a creditor.

The conveyance of the subject property from the Freudenbergs to the Foxes is declared fraudulent as to the United States . It therefore is void as to the United States and should be set aside. Title to the subject property, therefore, is deemed vested in Uwe and Bobbie Freudenberg. The federal tax liens filed against the Freudenbergs, and against the Foxes as nominees for the Freudenbergs, are valid and should be foreclosed. The United States Marshal should take possession of the property and sell same according to its procedures and protocol. After selling the property, the United States Marshal should report to this court the proceeds of the sale and the expenses thereof. The distribution of the net proceeds of the sale should be distributed with the following priority: payment of the remaining balance on Union Planters' note; satisfaction of the outstanding liens of the United States ; the fees of the attorneys representing the United States ; the costs incurred by the United States in prosecuting this action.

A judgment shall be prepared in accordance with the foregoing.

JUDGMENT

In accordance with the Memorandum Opinion this day entered, the conveyance from Bobbie and Uwe Freudenberg to Lisa and Timothy Fox, as same appears in Warranty Book 401 at page 521 in the Register of Deeds Office for Hamblen County, Tennessee, is hereby declared to be NULL AND VOID and same is therefore SET ASIDE. Title to the property described in the foregoing warranty deed is deemed to reside in Uwe and Bobbie Freudenberg.

The United States Marshal Service is directed to take possession and control of said property and, pursuant to its procedures and protocol, sell same and thereafter report to this Court the proceeds of the sale and expenses of sale. Distribution of the sale proceeds will be made in the following priority: payment of the remaining balance on Union Planters' note; satisfaction of the outstanding liens of the United States ; the fees of the attorneys representing the United States ; and the costs incurred by the United States in prosecuting this action.

After the United States Marshal has made his report regarding the sale, Union Planters Bank and the United States government will file affidavits specifying the precise amounts owing on their respective liens, as well as attorneys fees and costs incurred by the United States government, after which an order will be entered to make appropriate distribution.

SO ORDERED.

¹ Franklin Federal Savings Bank (now Union Planters Bank) is the holder of a deed of trust on the subject property. It was stipulated by all parties that should this Court set aside the transfer of the subject property from the Freudenbergs to the Foxes and order same sold, Union Planters Bank would be entitled to priority over the claims of the United States to the proceeds of such sale to the extent of the amounts remaining owing on the note secured by the deed of trust. See, Doc. 9.

² Lisa already had one child at the time of her marriage to Tim Fox.

 

 

[99-2 USTC ¶50,948] George M. Brown, Plaintiff-Appellant v. United States , Defendant-Appellee

(CA-FC), U.S. Court of Appeals, Federal Circuit, 99-5082, 11/5/99, Affirming the Court of Federal Claims, 99-1 USTC ¶50,337 and 96-2 USTC ¶50,468

36 FedCl 290.

[Code Secs. 7402 , 7432 and 7433 ]

Refund claims: Jurisdiction: Court of Federal Claims: Tort claims: Due process: Failure to release lien: Unauthorized collection.--Jurisdiction was lacking in the Court of Federal Claims over an individual's claims for monetary damages based on alleged asserted tortious acts and violations of procedural due process by the IRS. The taxpayer claimed that the IRS failed to review his amended return and ascertain his correct tax until ordered to do so by the court. However, under the Tucker Act, damage claims are expressly excluded from the jurisdiction of the Court of Federal Claims. Moreover, actions for damages under Code Sec. 7432 (for failure to release a lien) and Code Sec. 7433 (for negligent actions by IRS personnel) may only be brought in a federal district court. Jurisdiction was also lacking over the taxpayer's due process claims since they were not distinct from claims that he could pursue under Code Secs. 7432 and 7433 .

[Code Secs. 6651 and 6654 ]

Penalties, civil: Failure to timely file: Failure to pay estimated tax: Reasonable cause not established.--The penalties for late payment of tax and failure to pay estimated taxes were properly assessed to an individual. The taxpayer offered no showing that his failures to timely pay his taxes were reasonable and not a result of willful neglect.

[Code Secs. 6402 , 6665 and 7422 ]

Penalties, civil: Statute of limitations: Total tax liability: Offsets.--The statute of limitations did not bar the assessment of an additional penalty that was offset against an individual's overpayment refund more than three years after he filed his return. The court was bound by a prior holding allowing an offset of interest that was assessed after the limitations period in a case in which the taxpayer's total tax liability was before the court. G.C. Fisher (CA-FC), 96-1 USTC ¶50,204 , followed

Before: MAYER, Chief Judge, and NEWMAN and RADER, Circuit Judges.

 Caution: This court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.

NEWMAN, Circuit Judge:

George M. Brown appeals the final judgment of the United States Court of Federal Claims, dismissing two counts of his three count complaint, George M. Brown v. United States [96-2 USTC ¶50,468], 36 Fed. Cl. 290 (1996), and granting the government's motion for summary judgment on the remaining count. George M. Brown v. United States [99-1 USTC ¶50,337], 43 Fed. Cl. 463 (1999), as amended, No. 94-257T (Fed. Cl. Mar. 11, 1999). The judgment is affirmed.

OPINION

Taxpayer Brown filed his 1990 federal income tax return on April 15, 1991. This return reported trust beneficiary and royalty income, upon which Mr. Brown calculated an income tax liability of $21,438. No payment accompanied the return, and no estimated tax payments had been made. Although Mr. Brown included a Form 6251 (Alternative Minimum Tax--Individual), several lines of the form were not completed, including the line for the minimum alternative tax. This form was read by the IRS as reporting a minimum alternative tax of zero, and on this basis Mr. Brown's income tax liability was recalculated by the IRS as $48,226.98. To this amount the IRS added a penalty of $960.04 for failure to pay estimated tax, a penalty of $214.37 for failure to pay tax, and interest of $558.07 as of May 27, 1991, the date the return was processed.

Mr. Brown filed an amended return on July 17, 1991. The amended return again included an incomplete Form 6251. The IRS recalculated Mr. Brown's tax, and informed him on August 27, 1991 that his total liability at that time, including penalties and interest, was $48,257.15.

Between June 3, 1991 and December 5, 1991 Mr. Brown made seventeen $100 payments. On December 6, 1991 the IRS filed notice of federal tax liens. Ten days later Mr. Brown filed a second amended return showing a 1990 tax liability of $25,453. Included with the second amended return were a fully completed Form 6251 (alternative minimum tax) and an amended Schedule K-1 generated by the trust setting forth Mr. Brown's income and deductions as beneficiary. During December 1991 and January 1992 Mr. Brown paid $10,990.55 to the IRS.

In January 1992 the IRS placed tax liens on Mr. Brown's bank account and on the trust payments. In February 1992 Mr. Brown paid, under protest, the remaining assessed amount of tax, fees, penalties, and interest, for total payments of $56,978. The IRS did not respond to Mr. Brown's second amended return, and refused his request for refund of overpayments. His ensuing suit in the Tax Court was dismissed on March 6, 1992 for lack of jurisdiction pursuant to 26 U.S.C. §6213 as the statutory notice of deficiency required for jurisdiction in the Tax Court never issued to Mr. Brown as a result of the course of the assessment and collection proceedings. In 1994 he brought this refund suit in the Court of Federal Claims. At the court's instruction, in 1996 the government reviewed Mr. Brown's second amended return. The IRS determined that the correct tax liability for 1990 was $25,268. No refund of the overpayment, or the undisputed amount thereof, was made. Mr. Brown disputed the assessment of some of the $4,958.01 charged for penalties, interest, and fees. On March 11, 1999 the Court of Federal Claims granted the government's motion for summary judgment for the entire assessed amount of penalties, interest, and fees, and ordered refund of the overpayment of $26,751.99 plus statutory interest. Mr. Brown appeals from the court's assessment of additional penalties after expiration of the three-year statute of limitations, and from the dismissal of Counts II and III of his complaint.

Dismissal of Counts II and III

In Counts II and III Mr. Brown sought monetary damages for negligent and tortious acts and violations of procedural due process, in the Service's failure to review his amended return and ascertain his correct tax until ordered to do so by the Court of Federal Claims. The court dismissed these counts for lack of jurisdiction. George M. Brown v. United States [96-2 USTC ¶50,468], 36 Fed. Cl. 290 (1996). The dismissal of these counts was not appealable until final decision of all counts of the complaint. See Houston Indus., Inc. v. United States [96-1 USTC ¶50,174], 78 F.3d 564, 568 (Fed. Cir. 1996); 28 U.S.C. §195(a)(1); Fed. R. Civ. P. 54(b).

On the merits of the dismissal, we give plenary review to decisions concerning the trial court's jurisdiction. James M. Ellett Constr. Co. v. United States , 93 F.3d 1537, 1541 (Fed. Cir. 1996). The jurisdiction of the Court of Federal Claims is established in part by the Tucker Act, which provides:

The United States Court of Federal Claims shall have jurisdiction to render judgment upon any claim against the United States founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States , or for liquidated or unliquidated damages in cases not sounding in tort.

28 U.S.C. §1491(a)(1). Mr. Brown's damages claims against the United States sound in tort, and thus are expressly excluded from the jurisdiction of the Court of Federal Claims. To the extent that Counts II and III state claims within the purview of Internal Revenue Code §7432 (allowing monetary damages for failure to release a lien), or §7433 (allowing monetary damages for reckless or negligent actions on the part of IRS personnel), these sections specify that actions for damages must be brought in a district court of the United States. We affirm the ruling that the Court of Federal Claims does not have jurisdiction of the portion of these claims based on asserted wrongful acts by the IRS.

Mr. Brown's due process claims, although undeveloped, appear to be based on the asserted misdeeds of the IRS in its miscalculations of tax due, its non-responsiveness, and the ensuing negligent or tortious levies and liens. These asserted wrongs are not distinct from those for which redress must be taken to the district court under I.R.C. §7432 and §7433. The Court of Federal Claims lacks jurisdiction of constitutional due process claims when the underlying cause of action is not within the court's jurisdiction. See Murray v. United States [87-1 USTC ¶9310], 817 F.2d 1580, 1583 (Fed. Cir. 1987).

The dismissal of Counts II and III is affirmed. ¹

Summary Judgment as to Penalties, Fees and Interest

We give plenary review to the grant of summary judgment, see Deluxe Corp. v. United States [89-2 USTC ¶9545], 885 F.2d 848, 849 (Fed. Cir. 1989), resolving any disputed material facts and drawing factual inferences in favor of the non-movant.

The statutory penalty for late payment of tax, when the tax return is timely filed, is 0.5% per month, to a maximum of 25%. 26 U.S.C. §6651(a)(3). No penalty shall be assessed if the taxpayer shows that his failure of timely payment was reasonable and was not a result of willful neglect. Id. Mr. Brown offered no such showing. Similarly, Mr. Brown made no showing of excuse or error with regard to his non-payment of estimated tax, and the Court of Federal Claims correctly held that none of the exceptions listed in 26 U.S.C. §6654(e) applied to Mr. Brown.

The focus of Mr. Brown's challenge is the assessment in 1996 of an additional penalty, which the government then withheld from the sum which it eventually refunded. Mr. Brown states that since this assessment was made more than three years after the tax return was filed, it is barred by the statute of limitations. See 26 U.S.C. §6501(a) (tax assessment can be made only up to three years after a tax return has been filed). In Fisher v. United States [96-1 USTC ¶50,204], 80 F.3d 1576 (1996) this court held, applying 26 U.S.C. §6601(e), that the statute of limitations did not bar an offset of interest assessed after the statutory three-year period had run, when the total tax liability was before the court. A companion statute, 26 U.S.C. §6665, relates to the assessment of penalties. Although Mr. Brown challenges Fisher as not well reasoned, it is binding upon this court. We thus must conclude that both the increased interest and penalty are available as setoff.

Costs

No costs.

¹ Mr. Brown also requests review of the decision of the United States Tax Court dismissing his petition for lack of jurisdiction. Although we do not have jurisdiction to review decisions of the Tax Court, see 26 U.S.C. §7482(a), claims for refund of overpaid tax are properly brought in the Court of Federal Claims.

 

 

[99-1 USTC ¶50,337] George M. Brown, Plaintiff v. United States , Defendant

U.S. Court of Federal Claims, 94-257T, 2/26/99, 43 FedCl 463

43 FedCl 463. Other counts in the complaint decided earlier

96-2 USTC ¶50,468 .

[Code Sec. 6103 ]

Return information: Disclosure of: Federal courts: Disclosure upheld.--The court was entitled to reexamine a taxpayer's return and documentation regarding a trust from which he received income since the information was relevant to proceedings regarding imposition of penalties for failure to file timely returns and failure to pay estimated taxes, and interest and fees. The government is authorized to disclose such information to the Department of Justice and federal courts under Code Sec. 6103(h) once a lawsuit is filed.
[Code Sec. 6321 ]

Fees and costs: Creation of lien.--A taxpayer failed to contest the assessment of fees imposed by the IRS in connection with the placement of tax liens and levies on his property.
[Code Sec. 6601 ]

Interest: Deficiencies: Interest on penalty.--A taxpayer was liable for interest on his unpaid taxes and penalties.

[Code Sec. 6651 ]

Penalties, civil: Failure to timely file: Reasonable cause not established.--A taxpayer who failed to show that his late payment was due to reasonable cause was liable for the penalty for failure to timely file.
[Code Sec. 6654 ]

Penalties, civil: Failure to pay estimated taxes: Disaster exception not established.--A taxpayer failed to introduce evidence showing that the disaster exception applied to excuse his underpayment of estimated taxes.

[Code Secs. 6654 and 7422 ]

Penalties, civil: Failure to pay estimated taxes: Mandatory imposition: Timeliness of penalty: Refund actions: Offsets.--Although the IRS recomputed a taxpayer's estimated tax penalty after the expiration of the three-year assessment period following the late filing of his return, imposition of the penalty was not untimely. The IRS can offset against a tax refund previously unassessed interest on a tax underpayment, even though the statute of limitations bars assessment. The penalty was imposed because the taxpayer's case did not fall within any of the statutory exceptions to liability. George M. Brown, Dallas, Tex., pro se. Loretta C. Argrett, Assistant Attorney General, Robert N. Dorosin, David Gustafson, Mildred L. Seidman, Department of Justice, Washington, D.C. 20530, for defendant.

OPINION

HORN, Judge:

Initially the plaintiff, George Brown, filed his complaint before this court seeking a refund of federal taxes paid for the 1990 tax year. Plaintiff's complaint sought a recovery of $29,303.39, plus statutory interest. Count I of the complaint alleged that plaintiff overpaid his regular income tax, penalties, and assessed interest for the 1990 tax year. Counts II and III of plaintiff's complaint sought monetary damages for alleged violations of plaintiff's rights as a result of negligent and wrongful actions of Internal Revenue Service (IRS) personnel. The court previously dismissed Counts II and III of the complaint for lack of subject matter jurisdiction pursuant to Rule 12(b)(1) of the Rules of the United States Court of Federal Claims (RCFC). Specifically, the court ruled that Counts II and III of the complaint should be dismissed because they raised tort and due process claims. See Brown v. United States [96-2 USTC ¶50,468], 36 Fed. Cl. 290 (1996). In a status report filed with the court, the parties indicated that they were pursuing settlement of Count I, the remaining Count at issue. According to a status report filed by the defendant, plaintiff and defendant did agree that plaintiff's revised total federal income tax liability for 1990 is $25,268.00. Plaintiff's 1990 corrected tax liability of $25,268.00, is comprised of regular income tax of $23,051.00 and Alternative Minimum Tax (AMT) of $2,217.00. ¹ Settlement negotiations continued for some time on the penalty, interest and fee issues remaining in the case, but, ultimately, failed to resolve the remainder of the case.

The defendant, therefore, filed a motion for summary judgment on Count I of the plaintiff's complaint pursuant to RCFC 56. The defendant argues that the plaintiff is liable for the late-payment penalty, the estimated tax penalty, interest, and assessed fees for the tax year 1990. In response, the plaintiff moved to strike the documents submitted by the defendant in support of its motion for summary judgment. The plaintiff argues that such material is irrelevant, and that revealing his tax return and other supporting documents violates his right of privacy.

The underlying facts regarding plaintiff's tax history are fully detailed in the court's opinion on the defendant's successful motion to dismiss Count II and III. See Brown v. United States [96-2 USTC ¶50,468], 36 Fed. Cl. at 292-95. These facts are equally pertinent to the defendant's instant motion for summary judgment for Count I of the complaint, and need not be repeated here. For the reasons discussed more fully below, defendant's motion for summary judgment on Count I is GRANTED.

DISCUSSION

In its current motion for summary judgment, the defendant argues that the plaintiff is liable for the late-payment penalty, the estimated tax penalty, the interest, and assessed fees for the 1990 tax year. Summary judgment in this court should be granted only when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. RCFC 56 is patterned on Rule 56 of the Federal Rules of Civil Procedure (Fed. R. Civ. P.) and is similar both in language and effect. ²Both rules provide that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."

RCFC 56(c) provides that in order for a motion for summary judgment to be granted, the moving party bears the burden of demonstrating that there are no genuine issues of material fact and that the moving party is entitled to judgment as a matter of law. Adickes v. S. H. Kress & Co., 398 U.S. 144, 157 (1970); Creppel v. United States , 41 F.3d 627, 630-31 (Fed. Cir. 1994); Meyers v. Asics Corp., 974 F.2d 1304, 1306 (Fed. Cir. 1992); Lima Surgical Assocs., Inc. Voluntary Employees' Beneficiary Ass'n Plan Trust v. United States [90-1 USTC ¶50,329], 20 Cl. Ct. 674, 679 (1990), aff'd [91-2 USTC ¶50,473], 944 F.2d 885 (Fed. Cir. 1991); Rust Communications Group, Inc. v. United States [90-1 USTC ¶50,263], 20 Cl. Ct. 392, 394 (1990). Disputes over facts which are not outcome determinative under the governing law will not preclude the entry of summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Summary judgment, however, will not be granted if "the dispute about a material fact is 'genuine,' that is, if the evidence is such that a reasonable jury [trier of fact] could return a verdict for the nonmoving party." Id. ; see also Uniq Computer Corp. v. United States , 20 Cl. Ct. 222, 228-29 (1990).

When reaching a summary judgment determination, the judge's function is not to weigh the evidence, but to determine whether there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. at 249; see, e.g., Cloutier v. United States , 19 Cl. Ct. 326, 328 (1990), aff'd, 937 F.2d 622 (Fed. Cir. 1991). The judge must determine whether the evidence presents a disagreement sufficient to require submission to fact finding, or whether the issues presented are so one-sided that one party must prevail as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. at 250-52. When the record could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial, and the motion must be granted. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). If the nonmoving party cannot present evidence to support its case under any scenario, there is no need for the parties to undertake the time and expense of a trial, and the moving party should prevail without further proceedings.

If, however, the nonmoving party produces sufficient evidence to raise a question as to the outcome of the case, then the motion for summary judgment should be denied. Any doubt over factual issues must be resolved in favor of the party opposing summary judgment, to whom the benefit of all presumptions and inferences runs. Id. ; see also Litton Indus. Prods., Inc. v. Solid State Sys. Corp., 755 F.2d 158, 163 (Fed. Cir. 1985); H.F. Allen Orchards v. United States , 749 F.2d 1571, 1574 (Fed. Cir. 1984), cert. denied, 474 U.S. 818 (1985).

The initial burden on the party moving for summary judgment, to produce evidence showing the absence of a genuine issue of material fact, may be discharged if the moving party can demonstrate that there is an absence of evidence to support the nonmoving party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986); see also Lima Surgical Assocs., Inc. Voluntary Employees' Beneficiary Ass'n Plan Trust v. United States [90-1 USTC ¶50,329], 20 Cl. Ct. at 679. If the moving party makes such a showing, the burden then shifts to the nonmoving party to demonstrate that a genuine factual dispute exists by presenting evidence which establishes the existence of an element of its case upon which it bears the burden of proof. Celotex Corp. v. Catrett, 477 U.S. at 322; Lima Surgical Assocs., Inc. Voluntary Employees' Beneficiary Ass'n Plan Trust v. United States [90-1 USTC ¶50,329], 20 Cl. Ct. at 679.

Pursuant to RCFC 56, a motion for summary judgment may succeed whether or not accompanied by affidavits and/or other documentary evidence in addition to the pleadings already on file. Celotex Corp. v. Catrett, 477 U.S. at 324. Generally, however, in order to prevail by demonstrating that a genuine issue for trial exists, the nonmoving party will need to go beyond the pleadings by use of evidence such as affidavits, depositions, answers to interrogatories and admissions. Id.

In the above captioned-case there is no genuine issue as to any material fact. Both parties are in agreement on the date of filing of the tax return and on the dates of payment of taxes by the plaintiff. The parties disagree on the plaintiff's legal liability for the late-payment penalty, the estimated tax penalty, the interest, and the assessed fees for the tax year 1990.

The plaintiff's response to defendant's motion for summary judgment primarily addresses his request to strike all exhibits submitted by the defendant in support of its motion on the grounds that the material is irrelevant and that the filing of the exhibits violates his right to privacy. Plaintiff urges the court to strike from the record his 1990 tax return and all the supporting documents defendant submitted in the appendix to its motion for summary judgment, including the documents relating to the 1990 monthly payments from the Flossie Northcutt Wheeler Trust (Wheeler Trust), which appears from the record to be a major source of plaintiff's income. In addition, the plaintiff addresses a number of unrelated and hypothetical examples of what plaintiff alleges are unfair examples of tax statutes and actions by tax authorities.

The defendant argues that 26 U.S.C. §6103 (1988) authorizes the United States Department of Justice and the federal courts to reexamine the tax return filed by a taxpayer once a suit is filed in court. Defendant contends that in order to determine the plaintiff's liability for tax penalties, his tax return and other relevant information are essential to determine whether to assess penalties and to determine the amount of any appropriate penalty. The court agrees with the defendant that the material is relevant and that the filing and use of the supporting documentation does not violate the defendant's right to privacy.

It is correct that 26 U.S.C. §6103 makes tax returns and related information confidential from the public at large. The statute, however, explicitly allows disclosure of tax "returns" and "return information" to the United States Department of Justice and to the federal courts. More specifically, the statute states:

(2) Department of Justice

In a manner involving tax administration, a return or return information shall be open to inspection by or disclosure to officers and employees of the Department of Justice (including United States attorneys) personally and directly engaged in, and solely for their use in, any proceeding before a Federal grand jury or preparation for any proceeding (or investigation which may result in such a proceeding) before a Federal grand jury or any Federal or State court, but only if--

(A) the taxpayer is or may be a party to the proceeding, or the proceeding arose out of, or in connection with, determining the taxpayer's civil or criminal liability, or the collection of such civil liability in respect of any tax imposed under this title;

***

(4) Disclosure in judicial and administrative tax proceedings

A return or return information may be disclosed in a Federal or State judicial or administrative proceeding pertaining to tax administration, but only [if]--

(A) the taxpayer is a party to the proceeding, or the proceeding arose out of, or in connection with, determining the taxpayer's civil or criminal liability. . . .

26 U.S.C. §6103(h)(2)(A) and (4)(A).

The statute defines a "return" as:

any tax or information return, declaration of estimated tax, or claim for refund required by, or provided for or permitted under, the provisions of this title which is filed with the Secretary by, on behalf of, or with respect to any person, and any amendment or supplement thereto, including supporting schedules, attachments, or lists which are supplemental to, or part of, the return so filed.

26 U.S.C. §6103(b)(1). Furthermore, the statute defines "return information" to include "a taxpayer's identity, the nature, source, or amount of his income, [or] payments. . . ." 26 U.S.C. §6103(b)(2)(A).

The trust documents at issue in the instant case reflect the nature, source, and amount of plaintiff's income for the year 1990. Therefore, the information included in defendant's appendix, including the trust documents relating to the monthly payments by the Wheeler Trust, fits within the statutory definitions. The plaintiff's argument that his right to privacy is being violated by inclusion of the documents submitted to the court in defendant's appendix is not persuasive. Disclosure of plaintiff's tax return and the other information submitted by the defendant is necessary in order to properly evaluate the allegations plaintiff chose to raise in this court. In accordance with the plain meaning of the statute, the documents were properly utilized by the defendant and appropriately made available in the court proceeding. The plaintiff's motion to strike is, therefore, DENIED.

The defendant seeks summary judgment on its decision to impose a number of related tax penalties on the plaintiff. These penalties include: a late-payment penalty, an estimated tax penalty, interest, and assessed fees for the tax year 1990. Each penalty is contested by the plaintiff.

The late-payment penalty is codified in 26 U.S.C. §6651(a)(2) (1988). The statute allows a penalty, in addition to the taxpayer's tax liability, for the failure to pay one's taxes on time. The penalty for late payment is 0.5 percent of the amount of the tax due, if the payment is under one month late, with an additional 0.5 percent for the delay of each additional month, or fraction thereof. The statute also notes that the penalty amount may not exceed 25 percent of the total tax in the aggregate. See id. Payment of plaintiff's taxes for the year 1990 was due on April 15, 1991. The plaintiff did not pay his taxes by that date. In fact, plaintiff did not make any of the required tax payments until June 3, 1991, and did not complete payment of his full tax liability until February 13, 1992.

The statute provides for an exception to the late-payment penalty. See 26 U.S.C. §6651. If the taxpayer is able to show that failure to pay was due to "reasonable cause and not due to willful neglect," the statute explicitly states that the taxpayer will not be subject to the late-payment penalty. 26 U.S.C. §6651(a)(2). Plaintiff, however, has not demonstrated that his late payment was due to reasonable cause or willful neglect. IRS regulations state that in order to demonstrate "reasonable cause," the taxpayer must make an affirmative showing that he "exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship. . . ." 26 C.F.R §301.6651-1(c)(1) (1990). In United States v. Boyle [85-1 USTC ¶13,602], 469 U.S. 241, 245 (1985), the United States Supreme Court stated that a taxpayer "bears the heavy burden of proving" reasonable cause. The IRS regulations at 26 C.F.R. §301.6651-1(c)(1) require that, to avoid the late-payment penalty, a taxpayer "must make an affirmative showing of all facts alleged as a reasonable cause for his failure to file such return or pay such tax on time in the form of a written statement containing a declaration that it is made under penalties of perjury." Plaintiff never submitted such a written statement. ³ In the instant case, the record does not support the conclusion that plaintiff's non-payment was due to any reasonable cause. Since the plaintiff was late in paying his tax and has not demonstrated reasonable cause for such failure to pay on time, summary judgment as to the late-payment penalty is granted in favor of the defendant. The plaintiff is liable in the amount of $1,190.90 for the late-payment penalty.

Defendant argues that the plaintiff is also liable for a penalty for underpayment of estimated income tax. See 26 U.S.C. §6654 (1988). The statute requires that the taxpayer pay either one hundred percent of the tax paid the previous year, or ninety percent of the tax due for the current year, in this case 1990. See 26 U.S.C. §6654(d)(1)(B). The payments for the tax year 1990 should have been made in four installments. See 26 U.S.C. §6654(c)(1). The plaintiff did not pay any of his taxes through wage withholding, because his income came from a trust account and other royalties.

The statute provides exceptions to the estimated tax penalty, none of which apply to the plaintiff. See 26 U.S.C. §6654(e). Section 6654(e)(1) states that, "[n]o addition to tax shall be imposed . . . for any taxable year if the tax shown on the return for such taxable year (or, if no return is filed, the tax), . . . is less that $500." This exception does not apply to the plaintiff, because his tax liability for the tax year 1989 was $23,832.00 and for the year 1990 was $25,268.00. Moreover, Section 6654(e)(2) provides that the penalty will not be enforced if in the preceding year the taxpayer had no tax liability. As indicated above, however, the plaintiff did have a tax liability for the preceding year.

Plaintiff, in his second amended return filed with the IRS for 1990, also attempted to rely on the exception provided in 26 U.S.C. §6654(e)(3)(A). This section provides an exception for the estimated tax penalty when the "Secretary [of the Treasury] determines that by reason of casualty, disaster, or other unusual circumstances the imposition of such addition to tax would be against equity and good conscience." Id. The plaintiff, however, does not offer any proof of facts that would support a finding of "casualty, disaster, or other unusual circumstances," or that "the addition to tax would be against equity or good conscience." Therefore, plaintiff is unable to rely on this exception.

The plaintiff further challenges the estimated tax penalty on the grounds of timeliness. Under 26 U.S.C. §6501(a) (1988), any tax assessment can be made up to three years after a tax return has been filed. Plaintiff filed his return on April 15, 1991, therefore, the three year time period remained open until April 15, 1994. It also should be noted that a tax assessment includes the potential, in appropriate cases, for the assessment of penalties and interest. See 26 U.S.C. §6671(a) (1988); 26 U.S.C. §6601(e)(1) (1988). Originally, the IRS assessed an estimated tax penalty of $960.04 on May 27, 1991. A subsequent recomputation, however, was made on April 24, 1996, in the amount of $1,664.00. Plaintiff argues that, since this assessment was made after the three year limit, it cannot be enforced. This argument is not persuasive. In Fisher v. United States [96-1 USTC ¶50,204], 80 F.3d 1576 (Fed. Cir. 1996), the court held that in a tax refund suit the IRS is allowed to offset against a tax refund previously unassessed interest on an underpayment of tax, the assessment of which applicable time limits would have barred. The Fisher court reasoned that Lewis v. Reynolds [3 USTC ¶856], 284 U.S. 281 (1932) and Dysart v. United States [65-1 USTC ¶9188], 169 Ct. Cl. 276, 340 F.2d 624 (1965), "stand for the proposition that the government may offset against a tax refund claim any additional amounts the taxpayer owes with respect to the tax shown on the return, even though the statute of limitations would bar assessing the additional amount owed." Fisher v. United States [96-1 USTC ¶50,204], 80 F.3d at 1579 (citations omitted). In Fisher, the court stated: "In a refund action . . . [the taxpayer's] entire tax liability under the particular tax return is therefore open for redetermination." Fisher v. United States [96-1 USTC ¶50,204], 80 F.3d at 1580 (quoting Dysart [65-1 USTC ¶9188], 340 F.2d at 628) (brackets in original). Under the reasoning of these decisions, the plaintiff, in the lawsuit he brought before this court, cannot claim that the estimated tax penalty, or any of the other penalties at issue in this proceeding, are barred by the statute of limitations.

The plaintiff argues that this court should overrule Fisher, because it is poorly reasoned. The court, however, is bound by the decisions of the United States Court of Appeals for the Federal Circuit and the United States Supreme Court. The importance of precedent was explained in South Corp. v. United States, 690 F.2d 1368 (Fed. Cir. 1982). In South Corporation, the court stated that precedent is necessary to maintain the stability of our judicial system, which is relied upon by the public and the bar. See South Corp. v. United States , 690 F.2d at 1371. The court further observed that the absence of precedent would "cast the court, the public, and the bar adrift on a sea of uncertainty." Id. at 1371.

The plaintiff failed to make any of the required estimated tax payments for 1990; plaintiff's case does not fit within any of the exceptions announced by the statute; and the estimated tax penalty assessed is not barred by the statute of limitations. Therefore, summary judgment for the defendant is granted. Plaintiff is liable for the estimated tax penalty in the amount of $1,664.00.

The defendant also seeks to collect interest on unpaid taxes and penalties for the tax year 1990. The statute at 26 U.S.C. §6601(a) (1988) states that: "If any amount of tax imposed by this title . . . is not paid on or before the last day prescribed for payment, interest on such amount at the underpayment rate . . . shall be paid for the period from such last date to the date paid." Plaintiff's tax liability was due on April 15, 1991. Final payment was not made until February 13, 1992. As mandated by the statute, an interest penalty, in the amount of $2068.11, is assessed on the plaintiff's tax liability for 1990. This penalty also includes interest imposed on the late-payment penalty as authorized by 26 U.S.C. 6601(e)(2).

Finally, defendant contends that, "[u]nder §§6321 and 6331 . . . plaintiff also is liable for assessed fees of $106 as shown on the Service Center's certified and computer printout transcripts of plaintiff's income tax account for the suit year 1990." The two statutes in 26 U.S.C. cited by defendant address the authority to place tax liens and levies on taxpayer property, and provide that the IRS may collect the costs and expenses of instituting such actions. 26 U.S.C. §§6321, 6331 (1988). The IRS Service Center 's certified printout lists $106.00 for "fees and costs." The plaintiff has failed to contest the issue. The court, therefore, concludes that plaintiff is liable for assessed fees in the amount of $106.00.

CONCLUSION

After full consideration of the contentions raised by the parties, for the reasons discussed above, the court, hereby, DENIES plaintiff's motion to strike irrelevant material, and GRANTS the defendant's motion for summary judgment as to all penalties, interest and fees claimed by the United States against the plaintiff in the above-captioned case. The plaintiff is liable for the late-payment penalty, estimated tax penalty, interest, and assessed fees in the amount of $5,029.01.

IT IS SO ORDERED.

¹ The AMT was an attempt by Congress to address the matter of taxpayers avoiding taxes on a substantial portion of their incomes through various deductions. The AMT applies a smaller tax rate against a larger tax base (i.e., a tax base without certain deductions). See 26 U.S.C. §55 (1988).

² In general, the rules of this court are patterned on the Federal Rules of Civil Procedure. Therefore, precedent under the Federal Rules of Civil Procedure is relevant to interpreting the rules of this court, including RCFC 56. See Jay v. Sec'y DHHS, 998 F.2d 979, 982 (Fed. Cir. 1993); Imperial Van Lines Int'l, Inc. v. United States , 821 F.2d 634, 637 (Fed. Cir. 1987); Lichtefeld-Massaro, Inc. v. United States , 17 Cl. Ct. 67, 70 (1989).

³ Moreover, it does not appear likely that he would have been able to demonstrate reasonable cause. The record reflects that the plaintiff's main source of income was monthly cash payments to him from the Wheeler Trust. The IRS regulations at 26 C.F.R. §301.6651-1(c) provide guidance as to what is considered ordinary business care and prudence. A taxpayer is considered to have used ordinary business care if the taxpayer made reasonable efforts to conserve sufficient assets, in marketable form, to satisfy the tax liability. The regulation provides the example that living beyond one's means would be an example of not using ordinary care. See id. The record reflects that the plaintiff received monthly payments throughout 1990 of $5,857.84 and a cash payment in February 1991 of $20,502.00, two months before his tax return was due. Given the amounts of these payments and the level of his tax liability, this raises questions as to whether the plaintiff could demonstrate that his failure to pay was due to reasonable cause.

 

 

[98-2 USTC ¶50,636] United States of America , Plaintiff-Appellee v. Scott A. Stemm, Defendant-Appellant

(CA-11), U.S. Court of Appeals, 11th Circuit, 95-1543-CIV-T-24A, 7/22/98, 152 F3d 934, Affirming a District Court decision, 97-2 USTC ¶50,838

[Code Sec. 166 ]

Losses: Bad debts: Wholly worthless.--A debt owed by a corporation to an individual taxpayer did not become wholly worthless during the tax year at issue; therefore, the taxpayer was not entitled to a bad debt deduction. The loans giving rise to the debt were guaranteed by a publicly traded company with a total equity approximately 16 times the amount of the debt.
[Code Secs. 6321 and 7403 ]

Liens and levies: Arising on assessment: Valid assessment: Perfection of liens: Judicial sale.--The IRS correctly assessed tax against an individual who was denied a bad debt deduction for a loan that had not become totally worthless, and it had valid tax liens upon all property belonging to him. Furthermore, the IRS perfected its liens, and a judicial sale of the property was appropriate. .

Before: TJOFLAT, COX and HULL , Circuit Judges

 Caution: This court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.

PER CURIAM:

AFFIRMED. See 11th Cir. R. 36-1. ¹

¹ 11th Cir. R. 36-1 provides:

When the court determines that any of the following circumstances exist:

(a) judgment of the district court is based on findings of fact that are not clearly erroneous;

(b) the evidence in support of a jury verdict is sufficient;

(c) the order of an administrative agency is supported by substantial evidence on the record as a whole;

(d) summary judgment, directed verdict, or judgment on the pleadings is supported by the record;

(e) judgment has been entered without a reversible error of law; and an opinion would have no precedential value, the judgment or order may be affirmed or enforced without opinion.

 

 

[97-2 USTC ¶50,838] United States of America , Plaintiff v. Scott A. Stemm, Defendant

U.S. District Court , Mid. Dist. Fla., Tampa Div., 95-1543-CIV-T-24(A), 7/16/97

[Code Sec. 166 ]

Losses: Bad debts: Wholly worthless.--A debt owed by a corporation to an individual taxpayer did not become wholly worthless during the tax year at issue; therefore, the taxpayer was not entitled to a bad debt deduction. The loans giving rise to the debt were guaranteed by a publicly traded company with a total equity approximately 16 times the amount of the debt.

[Code Secs. 6321 and 7403 ]

Liens and levies: Arising on assessment: Valid assessment: Perfection of liens: Judicial sale.--The IRS correctly assessed tax against an individual who was denied a bad debt deduction for a loan that had not become totally worthless, and it had valid tax liens upon all property belonging to the taxpayer. Furthermore, the IRS perfected its liens, and a judicial sale of the property was appropriate
ORDER

BUCKLEW, District Judge:

This cause is before the Court on Plaintiff's Motion for Summary Judgment (Doc. No. 14, filed February 27, 1997) and Defendant's Motion for Summary Judgment (Doc. No. 20, filed June 16, 1997). Each party filed a response in opposition (Doc. Nos. 21 & 22).

The Government commenced this action, pursuant to 26 U.S.C. §7401, on September 15, 1995, seeking to foreclose a federal tax lien securing the unpaid tax liabilities of the Defendant for the year 1991 and to obtain a deficiency judgment for any tax liability remaining unsatisfied after application of any proceeds of sale. The Government alleges that pursuant to 26 U.S.C. §6321 a federal tax lien in favor of the United States arose on November 23, 1992 (the date of the tax assessment in the amount of $159,113.14, plus interest and penalties) ¹ and attached to all property and rights to property of the Defendant, including his interest in the shares of Seahawk Deep Ocean Technology, Inc. ("SDOT") stock and Estimated Prophet, Inc. stock. The Wherefore Clause of the complaint prays that the Court: (1) order, adjudge and decree that the Defendant is indebted to the United States in the amount of $159,113.14, plus interest and statutory additions thereon according to law accruing since March 31, 1995; (2) adjudge and decree that the United States has a valid federal tax lien upon the shares of stock in SDOT and Estimated Prophet, Inc. owned by the Defendant; (3) adjudge and decree that the tax lien of the United States be foreclosed on the shares of the stock and that the said shares of stock be sold by a proper officer of the Court, according to the law, free and clear of any right, title and interest of the Defendant, and that the proceeds of said sale be distributed to the United States for application of the unpaid federal tax liabilities of the Defendant; (4) adjudge that if the amount distributed to the United States is insufficient to fully satisfy the federal tax liability of the Defendant, the United States shall have a deficiency judgment against the Defendant for the unsatisfied amount; and (5) award the United States such other and further relief as the Court deems just and proper. Finally, the complaint alleges that this Court has jurisdiction pursuant to 26 U.S.C. §7402.

By its motion the Government requests that the Court: (1) determine and adjudge that the tax liens of the United States attach to the Defendant's stock in SDOT and Estimated Prophet, Inc. (collectively the "subject property"); (2) order the foreclosure of the tax liens upon the subject property and order the judicial sale of said property; (3) apply any proceeds of such sale against the Defendant's outstanding federal income tax liability; and (4) reduce the balance of Defendant's unpaid federal income tax liabilities to judgment.

Defendant's motion contends that the Court should enter summary judgment in his favor, (1) finding that his 1991 deduction of the Seahawk Museum Development, Inc. ("SMDI") loan as a bad debt under section 166 was proper, (2) granting Defendant thirty (30) days within which to pay to the Government his outstanding principal tax liability for 1991, or to otherwise enter into a payment plan-with the Government for the payment of the same, (3) reserving jurisdiction to determine the propriety of the Government's lien rights, if any, (4) reserving jurisdiction to determine the Government's entitlement, if any, to interest and penalties, and (5) reserving such other jurisdiction as may be necessary to resolve this matter.

Summary Judgment Standard

The Eleventh Circuit has discussed the standard for granting summary judgment:

Federal Rule of Civil Procedure 56(c) authorizes summary judgment when all "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." F.R.C.P. 56(c).

Hairston v. Gainesville Sun Pub. Co. , 9 F.3d 913, 918 (1993), reh'g and reh'g en banc denied, 16 F.3d 1233 (11th Cir. 1994).

The Eleventh Circuit recognized the seminal case concerning summary judgment, Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986), by highlighting the following passage:

[T]he plain language of Rule 56(c) mandates the entry of summary judgment after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial. In such a situation, there can be "no genuine issue as to any material fact," since a complete failure of proof concerning an essential element of the non-moving party's case necessarily renders all other facts immaterial.

Hairston, 9 F.3d at 918.

Finally, the parties' respective burdens and the Court's responsibilities were outlined:

The party seeking summary judgment bears the initial burden to demonstrate to the district court the basis for its motion for summary judgment and identify those portions of the pleadings, depositions, answers to interrogatories, and admissions which it believes show an absence of any genuine issue of material fact. Taylor v. Espy, 816 F. Supp. 1553, 1556 (N.D. Ga. 1993) (citation omitted). In assessing whether the movant has met this burden, the district court must review the evidence and all factual inferences drawn therefrom, in the light most favorable to the non-moving party. Welch v. Celotex, 951 F.2d 1235, 1237 (11th Cir. 1992); Rollins v. TechSouth, Inc., 833 F.2d 1525, 1528 (11th Cir. 1987). If the movant successfully discharges its burden, the burden then shifts to the non-movant to establish, by going beyond the pleadings, that there exist genuine issues of material fact. Matsushita Electric Industrial Co. v. Zenith Radio Corp.[,] 475 U.S. 574, 586-87, 106 S.Ct. 1348, 1355-56, 89 L.Ed.2d 538 (1986); Clark v. Coats & Clark, Inc., 929 F.2d 604, 608 (11th Cir. 1991).

Applicable substantive law will identify those facts that are material. Anderson v. Liberty Lobby, 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). Genuine disputes are those in which the evidence is such that a reasonable jury could return a verdict for the non-movant. Id. For factual issues to be considered genuine, they must have a real basis in the record. Matsushita, 475 U.S. at 586-87, 106 S.Ct. at 1355-56. It is not part of the court's function, when deciding a motion for summary judgment, to decide issues of material fact, but rather determine whether such issues exist to be tried. Anderson, 477 U.S. at 249, 106 S.Ct. at 2135. The Court must avoid weighing conflicting evidence or making credibility determinations. Id. at 255, 106 S.Ct. at 251314. Instead, "[t]he evidence of the non-movant is to be believed in his favor." Id. Where a reasonable fact finder may "draw more than one inference from the facts, and that inference creates a genuine issue of material fact, then the court should refuse to grant summary judgment." Barfield v. Brierton, 883 F.2d 923, 933-934 (11th Cir. 1989) (citation omitted).

Id. at 918-19. See Mulhall v. Advance Sec. Inc., 19 F.3d 586, 589-90 (11th Cir. 1994); Howard v. BP Oil Co., 32 F.3d 520, 523-24 (11th Cir. 1994).

Discussion

Having reviewed the motions, the critical issue is whether Defendant is entitled to deduct his loans of approximately $238,000.00 from May 16, 1991 to July 31, 1991 to Seahawk Museum Development, Inc. ("SMDI") ² as a "wholly worthless" deduction. Defendant contends that the loans were wholly worthless because (1) SMDI was insolvent as of December 31, 1991, (2) SMDI had abandoned its business by December 31, 1991, (3) SMDI was negatively impacted by regulatory/governmental, i.e., the SEC, decisions, and (4) SMDI lacked assets to satisfy the loans. Plaintiff maintains, however, that the loan was not worthless because repayment of the loans was guaranteed by SDOT. Plaintiff stresses that (1) on January 21, 1992 the board of directors of SDOT executed a document entitled Consent in Lieu of Special Meeting ratifying, confirming and approving a prior decision by SDOT to guarantee the promissory notes issued by SMDI, specifically including those notes issued by SMDI to the Defendant, ³ and (2) on July 31, 1991 SMDI, the maker, issued an unsecured note in the amount of $238,000.00 to Defendant Stemm, the holder, that was guaranteed by SDOT. ⁴

Pursuant to 26 U.S.C. §166(a), a taxpayer may deduct any debt that becomes wholly worthless within the taxable year. Worthlessness is a fact question which the taxpayer bears the burden of proving by a preponderance of the evidence. Cox v. C.I.R. [95-2 USTC ¶50,595], 68 F.3d 128, 131 (5th Cir. 1995). Although the taxpayer need not be an "incorrigible optimist," there must be "reasonable grounds for abandoning any hope of repayment in the future." Estate of Mann [84-1 USTC ¶9454], 731 F.2d 267, 276 (5th Cir. 1984). The taxpayer supports his position via the "existence of identifiable events" demonstrating the valuelessness of the debts. Id.

Having reviewed the motions under the appropriate standard, the Court finds that a reasonable person knowledgeable in the field of business would not deem collection of the $238,000.00 hopeless. Although not an exhaustive list, the Court stresses that the loans were guaranteed by a publically traded company with total equity in excess of $4 million. Additionally, the Court is unpersuaded by Defendant's argument that the unsecured note was actually made in 1992 and/or that the note was never delivered to Defendant, the holder.

Having resolved the issue of the deduction, the Court turns to the tax assessment and the issues of attachment and foreclosure. In his response in opposition to Plaintiff's motion, Defendant argues that the motion must be denied because the Government has not proven that the tax assessment against him is accurate. The assessment is inaccurate because it is overstated in that it does not recognize the proper deduction of the "wholly worthless" debt Specifically, Defendant states in his response, "Because the amount of the Government's assessment is incorrect or, at the very least, there is a genuine issue as to its accuracy, the Government is not entitled to the relief requested." Doc. No. 21 at 5. However, in his motion, Defendant argues that "the Government cannot dispute or contradict any of the facts. . . . the Government can offer no evidence that the SMBI loan is not worthless or that the SMDI loan became worthless in any year other than 1991. . . . Accordingly, there is no genuine issue of material fact and the Court should grant a Summary Judgment in Stemm's favor as a matter of law." Doc. No. 20 at 8.

The Court finds that the tax assessment of $159,420.12, plus interest and statutory additions as allowed by law is correct. United States v. Chila [89-1 USTC ¶9299], 871 F.2d 1015, 1018 (11th Cir. 1989). Accordingly, pursuant to section 6321 of the Internal Revenue Code, the United States has valid tax liens upon all property and rights to property, whether real or personal, belonging to the Defendant. Additionally, the Court finds that the Government has perfected its liens against the Defendant and that a judicial sale of the subject property is appropriate under 26 U.S.C. §7403(c).

Accordingly, it is ADJUDGED AND ORDERED that Plaintiff's Motion for Summary Judgment (Doc. No. 14, filed February 27, 1997) is GRANTED and Defendant's Motion for Summary Judgment (Doc. No. 20, filed June 16, 1997) is DENIED. The Clerk is directed to enter judgment in favor of the Plaintiff. The Defendant is indebted to the United States in the amount of $159,420.14, plus interest and statutory additions as allowed by law, less any payments or credits applied toward the Defendant's liabilities. The United States has valid, perfected federal tax liens against all the Defendant's real and personal property. The tax liens attach to the Defendant's stock in SCOT and Estimated Prophet, Inc. Finally, the Court orders foreclosure of the tax liens upon the subject property and the judicial sale of said property.

DONE AND ORDERED.

¹ On May 24, 1993 and September 20, 1993 fees were assessed against the Defendant in the amount of $12.00 and $295.00, making the a total assessment of $159,420.14.

² SMDI is wholly-owned subsidiary of SDOT.

³ Plaintiff further notes that as of December 31, 1991 SDOT was a publicly traded company with total assets in excess of $7.3 million and a book value in excess of $4 million.

⁴ The note was not actually signed by the maker and guarantor until August 21, 1991.

 

 

[97-1 USTC ¶50,307] Richard Craig Krause, P.C., and Richard C. Krause, Plaintiffs v. United States of America , Defendant

U.S. District Court, West. Dist. Mich. , So. Div., 5:95-CV-137, 10/15/96

[Code Secs. 6213 and 7422 ]

Deficiency notice: Last known address: Refund claims: Standing: Voluntary payment: Third parties.--An attorney was not entitled to a refund of withheld employment taxes because he lacked standing to assert the claim. The taxes were collected from the individual but were owed by his professional corporation. The government did not assert a lien or levy or take official action against the individual's property. Furthermore, alleged threats by an IRS agent were not deemed to be the substantial equivalent of a lien or levy because the threats were not so intimidating as to convert his voluntary payment of the taxes into an involuntary one. The professional corporation also lacked standing to bring the action because it had dissolved. Assuming the corporation had standing, the government satisfied the notice requirement by sending an assessment to the corporation's last known address.

Steven E. Bangs, Richard Craig Krause & Assocs., 411 W. Lake Lansing Rd., East Lansing, Mich. 48823, for plaintiffs. David A. Haimes, Department of Justice, Washington , D.C. 20530 , for defendant.

EXCERPT

MCKEAGUE, District Judge:

The sole dispute in the matter before the court is whether the plaintiffs, Richard Craig Krause, P.C., and Richard C. Krause, are entitled to a refund of $4,028.35 plus statutory interest for 1988 federal employment withholding taxes alleged to have been erroneously and illegally assessed and collected by the Internal Revenue Service.

Motions for summary judgment have been filed by both the plaintiffs and the government with respect to these claims. These motions require the court to look beyond the pleadings and evaluate the facts to determine whether there is a genuine issue of material tact that warrants a trial. See generally Barnhart v. Pickrel, Schaeffer & Ebeling Co., 12 F.3d 1382 at 1388 to 89 (6th Circuit 1993). An issue of fact is "genuine" if the evidence is such that a reasonable jury could return a verdict for the nonmovant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242 at 248 (1986). An issue of fact concerns "material" facts only if establishment thereof might affect the outcome of the lawsuit under governing substantive law. Id. A complete failure of proof concerning an essential element of the plaintiff's case necessarily renders all other facts immaterial. Celotex Corp. v. Catrett, 477 U.S. 317 at 322 to 23 (1986). Production of a "mere scintilla of evidence" in support of an essential element will not forestall summary judgment. Anderson, supra, 477 U.S. at 251. The nonmovant must "do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Electric Ind. Co., Ltd., v. Zenith Radio Corporation, 475 U.S. 574 at 586 (1986). The court has discretion to grant the motion if a claim is, in the factual context, implausible. Id. ; Barnhart, supra, 12 F.3d at 1389.

In analyzing the positions advanced in these competing motions for summary judgment, it is first of paramount importance to maintain clarity regarding the different claims and the interests of the two different plaintiffs. The court notes that the complaint is stated in vague, general terms, not distinguishing between the interests of the two named plaintiffs but assuming that their interests are joint or parallel. This, however, as the court has discussed at some length with Mr. Bangs this afternoon, is a faulty assumption. Moreover, the court notes that the complaint does not even allege the basis upon which the money collected by the IRS is believed to have been erroneously collected. The plaintiffs have only reluctantly admitted this afternoon that this case involves money collected from Mr. Krause that was due by the corporation and not amounts otherwise assessed against Mr. Krause as an "otherwise responsible party."

Turning first to the plaintiffs' motion for summary judgment, the court finds that the main interest asserted through the motion, notwithstanding Mr. Bangs' concession here this afternoon with respect to the entity on whose behalf these taxes were paid, are those of the individual Richard C. Krause, contending he is entitled a refund because the money collected from him individually was not preceded by a proper and timely assessment against him individually. The government responds essentially by conceding that no penalty or deficiency was assessed against Richard C. Krause individually because he was not the "taxpayer." The government then goes on to argue, however, that since Mr. Krause was and is not the taxpayer, he has no standing to assert a claim for refund of money paid on behalf of a third party, i.e., his former professional corporation, in satisfaction of the deficiency owed by it. The government acknowledges that under the case of United States v. Williams [95-1 USTC ¶50,218], 115 SCt 1611 (1995), there is an exception whereby a third party may have standing to seek a refund of monies paid on behalf of a third party. The government contends, however, that the exception does not apply in this case.

In Williams the plaintiff who paid a tax under protest to remove a lien on her property was held by the Supreme Court to have standing to bring a refund action even though the tax she paid was assessed against a third party. The government contends Williams does not apply to this case because plaintiff Richard C. Krause did not pay his former professional corporation's tax to remove a lien and did not pay under protest. In response, plaintiffs' position is essentially that IRS Agent Walker's threats to seize his Individual assets in satisfaction of the professional corporation's tax liability are substantially equivalent to a lien filed against real property and that Richard C. Krause's payment of the amount owed by the professional corporation was made under reservation of right to contest the timeliness of the notice of assessment against the professional corporation.

Under the facts of this case the court finds that there is no reason to expand the rule established in United States v. Williams. Accordingly, the court finds that Richard C. Krause lacks standing to assert this claim for two reasons. First, no lien or levy or any official action was taken against Richard C. Krause's individual property. Agent Walker's alleged "threats" are not deemed by this court to be the substantial equivalent of such a lien or levy because to extend the Williams rule so far would be to invite the "he said/she said" sorts of dispute that are easy to assert and difficult to substantiate. In Williams the majority explicitly declined to "decide the circumstances, if any, under which a party who volunteers to pay a tax assessed against someone else may seek a refund." 115 SCt, at 1620. This statement leaves the door open to the argument made in this case, but the court finds that telephonic statements alleged to constitute threats by an IRS agent to a lawyer could be deemed to have been so intimidating as to convert the voluntary payment by Mr. Krause on behalf of the corporation to an involuntary one or to warrant treating them as the equivalent of a lien against property.

A second reason for refusing to extend the rule of Williams is that the reservation of rights contained in the August 10, 1993, letter which accompanied Richard C. Krause's payment of the professional corporation's tax liability (see Exhibit A to docket 17, the government's reply in support of its own motion for summary judgment) does not assert Richard C. Krause's objection to his payment of the professional corporation's tax liability but asserts only the professional corporation's objection to the untimeliness of a notice of assessment. Presumably, the plaintiff's "protest" in Williams was material to the court's holding insofar as it indicated that payment was not "voluntarily" made. Here, by contrast, the reservation of rights appears to represent a reservation of the corporate taxpayer's right to object to the timeliness of the notice of assessment rather than an indication that Richard Krause's payment was other than "voluntary."

The court having found that Richard C. Krause has no standing individually, then it stands to reason that he may neither complain of a lack of timeliness under any pertinent statute of limitation nor of the "strong arm tactics" employed by IRS Agent Walker. Moreover, as argued in the government's reply brief (see docket number 17, page 6), plaintiff Richard C. Krause has not properly stated a claim under 26 USC section 7433 which seems to be the only section of the code that could conceivably apply to the facts of this case, the plaintiff having failed to cite the court to any code section with respect to Agent Walker's conduct, and the court specifically finding under the facts of this case--or excuse me--and the court specifically finding that Agent Walker did not recklessly or intentionally disregard the law in her collection efforts under the facts of this case.

The court notes that plaintiff Krause is a licensed attorney and consulted with another licensed attorney with an L.L.M. in taxation who represented him before the IRS in connection with this dispute. As plaintiff's counsel now concedes, Mr. Krause had ample time to research the liability of the professional corporation and his own personal liability, and the argument that he had to make the payments or he would default on obligations to third parties makes no logical sense whatsoever under the facts of this case. If Mr. Krause had the money to make this payment, as he obviously did, it Ms. Walker had levied, as she allegedly threatened to do, that money would clearly have been unavailable to make the payment to the third parties. In the court's opinion, the facts of this case clearly do not take this case outside of the narrow rule set forth by the Supreme Court in U.S. v. Williams.

The court would also note that, assuming for purposes of argument that Mr. Krause has standing, there is a complete failure in this case by the plaintiff to plead any facts in support of the claim by either the corporation or the individual that the corporation did not owe the taxes in question in this case, Mr. Krause instead relying upon a statute of limitations and collection practices arguments for purposes of this hearing. If the tax was due, as the government alleges and as the plaintiffs have utterly failed to refute, no overpayment occurred, and even if Mr. Krause has standing, the court has rejected the collection practices argument for the reasons discussed previously and, based upon Mr. Bangs' concession that he has no statute of limitations argument with respect to the corporate liability of the professional corporation, the plaintiffs' claims must fail.

With respect to the corporate plaintiff, the government contends that Richard Craig Krause, P.C., lacks capacity under state law to bring the instant action because it dissolved on May 15, 1990. This argument has gone unrefuted in the pleadings filed with the court, and Mr. Bangs has again reluctantly conceded this afternoon that in the face of the failure of the corporation to file the necessary reinstatement papers, the plaintiff has no corporate existence and thus no standing as of the time of this argument.

Furthermore, to the extent that the professional corporation had standing to pursue its claim based upon the untimeliness of the notice of assessment, the government argues that it satisfied the notice requirement by sending the assessment to the professional corporation's "last known address." See 26 USC section 6303(a). Indeed, it appears this notice need not have been received to be deemed effective. See Pursifull v. United States [93-2 USTC ¶50,584], 849 F. Supp. 597 at 601 (Southern District Ohio 1993), affirmed 19 F.3d 9 (6th Circuit 1994).

Plaintiffs' argument that "last known address" can be construed only in the light of the government's obligation to exercise due diligence is not persuasive under the facts of this case. This is not a case where, for instance, the IRS had been advised of a change of address but negligently failed to properly record it. Neither did the IRS have reason to suspect that Richard C. Krause's change of address to a different location in the Lansing area indicated a change of address of the professional corporation. Thus, even if the professional corporation were found to have standing to proceed, it appears that timely notice of the assessment was given although not received. The court finds that there is no genuine issue of material fact, and the government is entitled to summary judgment on the professional corporation's claim to the extent that it is based on the untimeliness of notice.

The court finds that plaintiffs' reliance on Kennedy v. United States [76-1 USTC ¶9229], 403 F. Supp. 619 (1975), is unavailing. That case is readily distinguishable based on its facts from the facts of this case, and to the extent that it is factually analogous to this case, the court declines to follow that case, believing it to have been wrongly decided.

Finally, any claims of the P.C. with respect to the tactics of Agent Walker are dismissed for the same reasons that they were dismissed with respect to Mr. Krause individually as they failed to state a claim with respect to Mr. Krause individually. Accordingly, summary judgment is granted to the government in its entirety.

Mr. Haimes, please prepare a judgment that refers to this decision of the court from the bench, submit it to Mr. Bangs within 10 days, and then file it with the court forthwith.

Is there anything further to come before the court this afternoon, Mr. Bangs?

MR. BANGS: No, Your Honor.

THE COURT: Mr. Haimes?

MR. HAIMES: No, Your Honor.

THE COURT: All right. That concludes this proceeding. Thank you for your arguments here this afternoon.

 

 

[97-1 USTC ¶50,426] United States of America, Plaintiff v. Glen D. Bell, Jeanette Bell, Glen and Jeanette Bell as Trustees of the Glen D. Bell Family Trust, Glen D. Bell and Jeanette Bell as Trustees of Racine Trust, Glen D. Bell as Trustee of Stark Management Company, Stockton Financial Corp., Defendants

U.S. District Court, East. Dist. Calif. , CV-F-95-5346 OWW SMS, 4/1/97

[Code Sec. 6871 ]

Assessment and collection: Bankruptcy court: Determination of liability: Res judicata.--Married taxpayers could not relitigate a bankruptcy court's determination of the husband's tax liability. The prior decision was a final judgment on the merits, and therefore, the doctrine of res judicata applied.

[Code Sec. 6203 ]

Certificates of Assessments and Payments: Presumption of correctness.--Married taxpayers were liable for amounts included in validly issued Certificates of Assessments and Payments because their frivolous arguments were insufficient to overcome the certificates' presumption of correctness.

[Code Sec. 6321 ]

Notice and hearing: Tax liens.--Married taxpayers' motion to dismiss an IRS action seeking to reduce their outstanding tax liabilities to judgment for failure of service was denied. The IRS's tax lien was a charge against property, not a self-executing seizure. Thus, there were no other judicial actions to which the taxpayers were denied notice and a hearing, and as a result, the taxpayers were properly served.

[Code Secs. 7401 and 7403 ]

Jury trials: Foreclosure on real property: Fraudulent conveyances.--Married taxpayers were not entitled to trial by jury with respect to the IRS's attempt to foreclose on their real property or on the issue of their fraudulent conveyances of real property because both were equitable actions.

MEMORANDUM OPINION AND ORDER RE: PLAINTIFF'S MOTION FOR SUMMARY ADJUDICATION OF TAX LIABILITY, TO STRIKE DEMAND FOR JURY TRIAL, AND TO MODIFY SCHEDULING ORDER; DEFENDANTS' MOTION TO DISMISS FOR LACK OF SUBJECT MATTER JURISDICTION, FAILURE OF SERVICE, AND LACK OF PERSONAL JURISDICTION.

I. INTRODUCTION

WANGER, District Judge:

In this case the United States ("Plaintiff") seeks to set aside fraudulent transfers, reduce tax assessments to judgment, and foreclose tax liens on real property owned by Glen Bell and his spouse Jeanette Bell ("Defendants"). The subject property consists of several parcels of land and improvements (Defendants' residence) located at 3549 Kiernan Road , Modesto . ¹

Here Plaintiff moves under Rule 56 to reduce tax assessments to judgment; to strike Defendants' demand for jury trial on the fraudulant transfer and foreclosure causes of action; and to modify the Scheduling Order of September 1, 1995, to extend the time to file dispositive motions.

Defendants appear in propria persona and move to dismiss Plaintiff's action for lack of subject matter jurisdiction, lack of personal jurisdiction, failure of service, and, apparently, improper venue.

For the reasons stated herein, the motion of Plaintiff United States is GRANTED. The motion of Defendants is DENIED.

II. BACKGROUND

A. Tax Liability: Assessments and Former Adjudication

Plaintiff alleges Defendant Glen Bell's liability for employment ² and personal income ³ taxes in amount $2,680,283.30 plus accrued interest from the date of assessment. First Am. Compl. (Sept. 8, 1995) at 7. Plaintiff alleges Defendant Jeanette Bell's liability for unpaid personal income taxes in amount $1,022,865.20 plus accrued interest from the date of assessment. ⁴ First Am. Compl. at 8.

Plaintiff alleges, and Defendants do not dispute, that some of these liabilities were established in a prior bankruptcy adversary proceeding. Mr. Bell objected to Plaintiff's claims in his bankruptcy case, In re Glen D. Bell, Bankr. No. 990-00969 (E.D. Cal.), and the matter was converted to an adversary proceeding. Glen D. Bell v. United States , Adversary Proceeding No. 91-9071. On October 2, 1991, the Bankruptcy Court filed its consolidated Judgment After Trial. See Decl. of Patrick Jennings, Pl.'s Exh. A. (Consolidated Judgmt. after Trial, Glen D. Bell v. United States , Adversary Proceeding No. 91-9071 (Bankr. E.D. Cal.)). The Bankruptcy Court held Glen D. Bell personally liable for taxes, as of April 9, 1990, in the amount of $883,902.66. See Pl.'s Exh. A at 3-6. ⁵ See also Decl. of Patrick Jennings, Pl.'s Exh. B (Consolidated Findings of Fact and Conclusions of Law).

B. Subject Property and Transfers

Plaintiff filed this action in part to foreclose against certain real property. The subject property consists of several parcels of real property at 3549 Kiernan Road , Modesto , California , more specifically described in Plaintiff's complaint. That complaint sets forth a number of averments concerning the chain of title in the property. All parties currently known to be interested in the property appear to be joined in this action. In this action Plaintiff also seeks to set aside various purported transfers of title. Plaintiff relies heavily on fraudulent conveyance theories, but also urges other theories to void the transfers.

C. Tax Procedure

The service has assessed tax liabilities against Glen Bell and Jeanette Bell and several entities. See Pl.'s Exhibits C-E. These exhibits are certified as "Form 4340s," but nowhere do they bear that legend as they are merely computer print-outs. No party, however, disputes that these print-outs follow the format of Form 4340, and they do bear the official title of that form, "Certificate of Assessments and Payments." Defendants do not allege any procedural irregularity (e.g., failure of Plaintiff's to mail required notices).

No party disputes that the Service recorded Notices of Federal Tax Liens with the Stanislaus County Recorder's Office with respect to the assessments against Defendant Glen Bell on February 10, 1989; August 14, 1989; August 24, 1989; January 24, 1990; January 25, 1990; May 11, 1993; and August 17, 1993. See, e.g., Def.s' Exh. C.

III. STANDARDS

A. Summary Judgment

Summary judgment is appropriate only "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A genuine issue of fact exists when the non-moving party produces evidence on which a reasonable trier of fact could find in its favor viewing the record as a whole in light of the evidentiary burden the law places on that party. Anderson v. Liberty Lobby, 477 U.S. 242, 252-56 (1986). The non-moving party cannot simply rest on its allegation without any significant probative evidence tending to support the complaint. Id. at 249.

[T]he plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to the party's case, and on which that party will bear the burden of proof at trial. In such a situation, there can be "no genuine issue as to any material fact," since a complete failure of proof concerning an essential element of the non-moving party's case necessarily renders all other facts immaterial.

Celotex, 477 U.S. at 322-23.

The more implausible the claim or defense asserted by the opposing party, the more persuasive its evidence must be to avoid summary judgment. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1996). Nevertheless, "[t]he evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in its favor." Liberty Lobby, 477 U.S. at 255. Even where the basic facts are undisputed, if reasonable minds could differ as to the inferences to be drawn from those facts, summary judgment should be denied. Hopkins v. Andaya, 958 F.2d 881, 888 (9th Cir. 1992). The Court's role on summary judgment, however, is not to weigh the evidence, i.e., issue resolution, but merely is issue finding. Id.

Evidence submitted in support of or in opposition to a motion for summary judgment must be admissible under the standard articulated in 56(e). Hal Roach Studios, Inc. v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1550 (9th Cir. 1989). Properly authenticated documents, including discovery documents, although such documents are not admissible in that form at trial, can be used in a motion for summary judgment if appropriately authenticated by affidavit or declaration. United States v. One Parcel of Real Property, 904 F.2d 487, 491-492 (9th Cir. 1990); Zoslaw v. MCA Distributing Corp., 693 F.2d 870, 883 (9th Cir. 1982), cert. denied, 460 U.S. 1085 (1983). Supporting and opposing affidavits must be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein. Fed. R. Civ. P. 56(e); see also Taylor v. List, 880 F.2d 1040, 1045 n.3 (9th Cir. 1989).

IV. DISCUSSION

A. Motion to Reduce Assessments to Judgment

1. Former Adjudication

Plaintiff seeks to reduce assessments to judgment. Some assessments against Mr. Bell were the subject of previous bankruptcy litigation. Congress has conferred jurisdiction on the bankruptcy courts to determine tax liabilities:

[t]he [Bankruptcy] court may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.

11 U.S.C. §5059a)(1).

This authority is limited to the determination of tax liability of the debtor. American Principals Leasing Corp. v. United States [90-1 USTC ¶50,292 ], 904 F.2d 477, 481 (9th Cir. 1990). In Glen D. Bell v. United States, Adversary Proceeding No. 91-9071, the Bankruptcy Court determined Glen Bell liable as of April 9, 1990 for taxes in the amount of $883,902.66. ⁶

Plaintiff argues Glen Bell is barred from relitigating his liability for this amount under established principles of res judicata. The preclusive effect of a prior bankruptcy court decision is determined by federal law. See McClain v. Apodaca, 793 F.2d 1031, 1033 (applying federal law). The normal rules of res judicata apply to decisions of the bankruptcy courts. Katchen v. Landy, 382 U.S. 323, 334 (1966). A final judgment on the merits of an action precludes the parties or their privies from relitigating issues that were or could have been raised in that action. See Federated Dep't Stores v. Moitie, 452 U.S. 394, 398 (1981) citing Commissioner v. Sunnen [48-1 USTC ¶9230], 333 U.S. 591 (1948) and Cromwell v. County of Sac, 94 U.S. 351, 352-353 (1877); see generally In re Varat Enterp., Inc., 81 F.3d 1310, 1315 (4th Cir. 1996). A judgment on the merits is res judicata as to any subsequent proceeding involving the same claim and the same tax year. Sunnen [48-1 USTC ¶9230], 333 U.S. 591, 598 (1948).

The Bankruptcy Court is a unit of the District Court. 28 U.S.C. §151. See Yochum v. United States [96-2 USTC ¶50,390], 89 F.3d 661, 669 (9th Cir. 1996). In a bankruptcy case, if a particular adversary proceeding has been finally resolved, the outcome constitutes an appealable "final decision" sufficient to preclude relitigation in the district court. Turshen v. Chapman, 823 F.2d 836, 839-40 (4th Cir. 1987). Defendants do not argue the decision should not be given res judicata effect.

The judgment of the Bankruptcy Court is res judicata. Plaintiff's motion for summary judgment as to the liability determined therein is GRANTED.

B. Unlitigated Assessments

Plaintiff argues the only taxes for which Mr. Bell's liability remains an issue are "Form 941" taxes for the year ending December 31, 1987 and individual income tax for Glen D. Bell for calendar year tax years 1986-1989 inclusive. The bankruptcy action could not have adjudicated the tax liability of Jeannette Bell, so that too remains undecided. Plaintiff introduces "Certificates of Assessments and Payments" for the taxpayers as Exhibits C-E and moves for summary adjudication.

An assessment is made when the Service records the taxpayer's liability on its records. See I.R.C. §6203; Treas. Reg. §301.6203-1. The assessment is made on a Certificate of Assessment. A properly certified assessment for unpaid federal taxes creates a presumption the assessment was properly made and applicable notices were sent to the taxpayer. E.g., United States v. Janis [76-2 USTC ¶16,229], 428 U.S. 433, 440-41 (1976); United States v. Zolla [84-1 USTC ¶9175], 724 F.2d 808, 810 (9th Cir. 1984). The burden is on the taxpayer to rebut the presumption. ⁷ Id. ; Hughes v. United States [92-1 USTC ¶50,086], 953 F.2d 531, 540 (9th Cir. 1992) ("I.R.S. forms are probative evidence in and of themselves and, in the absence of contrary evidence, are sufficient to establish that notices and assessments were properly made."). See generally Mertens Law of Federal Income Taxation §49D:01. Computer print-outs of "Certificates of Assessments and Payments" fall within the definition of the hearsay exception for public records. Fed. R. Evid. 803(8); Hughes [92-1 USTC ¶50,086], 953 F.2d at 539, 540. Internal Revenue Service forms are self-authenticating under Rule 902(1) of the Federal Rules of Evidence when accompanied by a certificate under seal on Internal Revenue Service Form 2866. Hughes [92-1 USTC ¶50,086], 953 F.2d at 540.

Plaintiff argues the taxpayers should be barred from introducing evidence to raise triable issues as to their tax liability because Glen D. Bell has been uncooperative in discovery. Pl's. Mot. at 7 n.4. No accompanying declaration supports this assertion. Nevertheless, Defendants introduce no evidence to raise triable issues as to the validity of these assessments or any infirmity in the procedures followed in their case. Defendants make only a broad challenge to the legitimacy of the Internal Revenue Service and purport to revoke their status as taxpayers. Defendants' submit a pair of "declarations" which are not, in fact, evidence. The "declarations" do not set forth evidentiary facts known to Defendants, but contain legal argument and purport to renounce their citizenship. ⁸ Defendants offer to supply a ninety page memorandum of law with over four thousand pages of "documented evidence" to support their contentions if it pleases the court. Def.'s Opp. ¶13. The submission is unnecessary and, in any event, untimely. Most of these allegations and theories have been considered by the appellate courts and determined to be invalid; for example, the following arguments made by the Bells are frivolous per se: (1) The Internal Revenue Service has no lawful authority in "the several States" or to administer the Internal Revenue Laws; (2) Income and related taxes in subtitles A & C have never been mandatory for anyone other than officer, agents, and employees of the United States and agencies of the United States; (3) The Sixteenth Amendment did not alter constitutional provisions requiring all direct taxes to be apportioned among the states because "wages and other returns from enterprise of common right are property, not income"; (4) individuals (free born, white, preamble, sovereign, natural, individual 1 common law 'de jure', citizens of a state, etc.) are not "persons" subject no taxation. See Lonsdale v. United States [90-2 USTC ¶50,581], 919 F.2d 1440, 1442-43 (10th Cir. 1990). The Bells' remaining arguments are insufficient to overcome the presumption of official regularity in tax. administration. See United States v. Ahrens [76-1 USTC ¶9241], 530 F.2d 781, 785-786 (8th Cir. 1976). ⁹ Defendants fail to establish a triable issue with respect to their liability. See Fed. R. Civ. P. 56(d). Summary judgment in favor of the Government is appropriate upon submission of Certificates of Assessments and Payments absent a showing the assessments are incorrect. See, e.g., Adams v. United States, 358 F.2d 986, 994 (Ct.Cl. 1966). Summary adjudication as to the assessment amounts is GRANTED.

C. Demands for Jury Trial

Plaintiff did not demand trial by jury, but Defendant taxpayers have demanded trial by jury. Plaintiff moves to strike the demand as it relates to the fraudulent conveyance and foreclosure causes of action.

1. Foreclosure

It is not open to dispute that foreclosure on real property is an equitable action for which there was no right to trial by jury at common law. ¹⁰ Gefen v. United States [68-2 USTC ¶9552], 400 F.2d 476, 479 (5th Cir. 1968), cert. denied, 393 U.S. 1119 (1969) (foreclosure is ward of equity); Damsky v. Zavatt [61-1 USTC ¶9351], 289 F.2d 46, 53 (2d Cir. 1961). There is no right to trial by jury on the foreclosure claim. Plaintiff's motion is GRANTED.

2. Fraudulent Conveyance of Real Property

As Plaintiff concedes, whether there is a right to jury trial on the fraudulent conveyance of real property issue is a more difficult question. Prior to Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), the appellate courts had reached a consensus that no such right existed. See In re Pasquariello. 16 F.3d 525, 530 (3d Cir. 1994) (citing cases); Johnson v. Gardner, 179 F.2d 114 (9th Cir. 1949), cert. denied 339 U.S. 935 (1950). Plaintiff concedes some courts have recognized a jury trial right in fraudulent conveyance cases in reliance on Granfinanciera. See, e.g., In re Stoecker, 117 B.R. 342 (N.D. Ill. 1990). Plaintiff notes, however, that actions under 26 U.S.C. §7403 to enforce tax liens are by their nature proceedings in equity. United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 708 (1983).

In Granfinanciera, a Chapter 11 trustee sued to void allegedly fraudulent transfers of money to Columbian Defendants. Defendants asserted a right to jury trial. The Court held that parties who had not submitted claims against the bankruptcy estate had a right to a jury trial when sued by the trustee in bankruptcy to recover an allegedly fraudulent monetary transfer.

Plaintiff argues Granfinanciera 's silence in light of the prior appellate consensus indicates there is a distinction between actions to set aside fraudulent transfers of money and actions to set aside fraudulent transfers of real property, such that the former were actions at law while the latter remained creatures of equity. In re Pasquariello, 16 F.3d 525, 529-31 (3d Cir. 1994) apparently reads Granfinanciera in this way to preserve the understanding there is no right to jury trial on the issue of fraudulent conveyances of real property.

The Third Circuit correctly interprets the Supreme Court's discussion in Granfinanciera, which was directed to the fraudulent transfer of money. In addressing the jurisprudential history of the fraudulent transfer of money, the Court cited precedent relating to actions for money and personal property (trover, money had and received; assumpsit; goods sold and delivered; replevin). The Court cited scholarly authority distinguishing between the nature of property at issue:

If the subject matter is a chattel, and is still in the grantee's possession, an action in trover or replevin would be the [ ] remedy; and if the fraudulent transfer was of cash, the trustee's action would be for money had and received. Such actions at law are as available to the trustee today as they were in the English courts of long ago. If, on the other hand, the subject matter is land or an intangible, or the trustee needs equitable aid for an accounting or the like, he may invoke the equitable process, and that also is beyond dispute.

Id. at 44 citing 1. G. Glenn, Fraudulent Conveyances and Preferences §98 at 183-84 (rev. ed. 1940).

The Court likened the action to void the transfer of money to an action for damages. Id. at 47-48. It held: "respondent would have had to bring his action to recover an alleged fraudulent conveyance of a determinate sum of money at law in 18th century England , and that a court of equity would not have adjudicated it." Id. at 46-47.

The Court was not oblivious to assertions of a distinction between real property and personal property. It addressed Damsky v. Zavatt [61-1 USTC ¶9351], 289 F.2d 46 (2d Cir. 1961), however, only in a footnote. It did not overrule the case, but considered it "questionable" in light of the decision in Whitehead v. Shattuck, 138 U.S. 146 (1891). See Granfinanciera, 492 U.S. at 46 n.5. Although footnote 6 also suggests there is no distinction between real and personal property, the Court has not clearly overruled existing precedent and it has stated actions under 26 U.S.C. §7403 to enforce tax liens are by their nature proceedings in equity. United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 708 (1983). There is, as yet, no established right to jury trial on the issue of the fraudulent transfer of real property. The motion to strike the demand for jury trial as to this claim is GRANTED.

D. Motion to Modify Scheduling Order

Plaintiff asserts delays in the process of re-ordering two misplaced deposition transcripts (of the putative trustees of Glen D. Bell's trusts) have delayed preparation of a summary judgment motion on the fraudulent transfer causes of action. Decl. ¶4; Pl.'s Mot at 8. Plaintiff also asserts the holiday season has prevented a revenue officer from signing a declaration. (This motion was filed on January 6, 1997). Plaintiff requests leave to file dispositive motions up to, and including, 30 days from the hearing of this motion.

The standard for modifications to the Scheduling Order is "good cause." Fed. R. Civ. P. 16(b). The proper inquiry focuses on the movant's reasons for seeking modification. Generally the movant should show the order's schedule cannot be met even with the exercise of due diligence, and the reasons for difficulty cannot be traced to the movant's own carelessness. Johnson v. Mammoth Recreations, Inc., 975 F.2d 604, 609 (9th Cir. 1992).

Defendant does not oppose the motion. There is no claim of prejudice. The motion is GRANTED.

E. Defendants' Motion to Dismiss

Defendants move to dismiss on a number of grounds variously styled as lack of subject matter jurisdiction, lack of due process (lack of personal jurisdiction, failure of service) and venue.

1. Venue

Venue is proper under 28 U.S.C. §1396 (venue for civil action to collect tax proper in district of taxpayer's residence) or 28 U.S.C. §1291 (venue generally proper under federal question in district where defendant resides). Defendants have also waived any objection to improper venue. Defendants' objections to venue are meritless.

2. Service and Jurisdiction

Defendants move to dismiss for failure of service. Defendants offer an unauthenticated TRW credit report. Defs.' Exh. A. The report indicates their liability for taxes. Defendants construe numbers on this report as "docket numbers" and argue these numbers and their associated entries are associated with "actual liens as a result of some unknown judicial process or ruling." Defendants argue they had no knowledge of these judicial actions and were not served, therefore this case must be dismissed because due process requires notice and a hearing.

Defendants also argue strict compliance with statutory procedures is required in any nonjudicial tax collection effort, citing Goodwin v. United States [91-2 USTC ¶50,323], 935 F.2d 1061, 1065 (9th Cir. 1991) (levying, seizing, and selling property for tax collection purposes without prior judicial hearing are dependent upon strict compliance with the procedures prescribed by statute). Defendants' contentions as to the law are misplaced. A general assessment lien ("general tax lien" or "federal tax lien") arises automatically at the time of assessment against "all property and rights to property, whether real or personal, belonging to" the taxpayer as of the date of assessment or subsequently acquired by the taxpayer during the existence of the lien. I.R.C. §§6321, 6322. Assessment is merely the recording of the tax liability, together with the taxpayer's name and address and the date of assessment, in the office of the District Director. ¹¹ See I.R.C. §6203; Treas. Reg. 301.6203-1. The lien is a charge against property, but it is not a self-executing seizure. The Service must enforce liens either through civil action or administrative levy. Recording of the lien, as at the Stanislaus County Recorder's Office, is necessary only to obtain priority against subsequent creditors.

Defendants have not been denied notice of other judicial actions. This action is the "judicial action" and Defendants have been properly served. Jurisdiction is proper under 28 U.S.C. §1345 ( United States as Plaintiff) and 28 U.S.C. §1331 (federal questions). Defendants' motion is DENIED.

V. CONCLUSION

For the foregoing reasons, Plaintiff's motions for partial summary adjudication, to strike Defendants' jury trial demand, and to modify the scheduling order are GRANTED. Defendants' various motions are DENIED.

Counsel for Plaintiff shall prepare an order in conformity with this memorandum opinion and lodge it with the court within five (5) days following the date of service of this opinion.

SO ORDERED.

¹ The property is more accurately described in Plaintiff's Complaint at 2.

² These employment tax liabilities were assessed on January 9, 1995. They are associated with nonpayment of "Form 940" taxes under the Federal Unemployment Tax Act ("FUTA") and "Form 941" taxes under the Federal Insurance Compensation Act ("FICA"). The liabilities were associated with business conducted through the following entities: (1) Silver Creek Construction; (2) Silver Creek Partnership; (3) Robert D. David and BDG, a General Partnership; (4) Nightingale Development Co.; (5) Robert D. and B.G.D., dba Silver Creek Construction Co.; (6) Dr. Glen D. Bell, D.P.M. (sole proprietorship). See Pl.'s Exhs. A & B.

Plaintiff attaches certified public records of these assessments. See Decl. of Patrick Jennings, Pl.'s Exh. C, Certificates of Assessments and Payments for entities.

³ The income taxes were assessed on March 15, 1993. See Decl. of Patrick Jennings, Pl.'s Exh. D, certified Certificates of Assessments and Payments for Glen D. Bell's individual income tax liabilities (Dec. 31, 1986 through December 31, 1989).

⁴ This liability was assessed on March 15, 1993 for several prior years tax years 1986-1989. See Decl. of Patrick Jennings, Pl.'s Exh. E, certified Certificates of Assessments and Payments of Jeanette Bell's individual income tax liabilities (Dec. 31, 1986 through December 31, 1989).

⁵ This figure represents the sum of "assessed balances," exclusive of penalties and interest, for the several entities named above. See supra, n. 2; see Pl.'s Exh. A.

⁶ Judicial notice is taken of these adversary proceedings. Federal courts may "take notice of proceedings in other courts, both within and without the federal judicial system, if those proceedings have a direct relation to the matters at issue." E.g., United States ex rel. Robinson Rancheria Citizens Council v. Borneo, Inc., 971 F.2d 244, 248 (9th Cir. 1992).

⁷ Only rarely can the presumption be defeated by an attack on the foundation of the assessment. See United States v. Schroeder [90-1 USTC ¶50,250], 900 F.2d 1144 (7th Cir. 1990). Generally courts will not look behind an assessment to engage in an evaluation of the procedures and evidence giving rise to it. See Ruth v. United States [87-2 USTC ¶9408], 823 F.2d 1091 (7th Cir. 1987).

⁸ In opposition to Plaintiff's motion for partial summary judgment and in support of their motion to dismiss, Defendants Glen D. Bell and Jeanette Bell submit equivalent "Declarations of Revocation." These statements purport to revoke, retroactive to the date they obtained taxpayer identification numbers, any express or implied elections they have made to be treated or taxed as citizens or residents of the "federal United States." This revocation extends to any election to be taxed as either " United States citizens" or "nonresident aliens." Defendants assert they were born in Utah , are "nationals" of the United States and therefore "nonresident aliens" that have never engaged in a United States trade or business. Defendants assert they were never informed they had a choice not to file income tax returns and could "elect" to be taxed as a resident of the United States , therefore they are now entitled to revoke "the election" with retroactive effect. Defendants also argue Plaintiff is authorized only to collect taxes in the District of Columbia , American Samoa , Guam, other federal territories and enclaves and there is no authority extending tax authority to the several states or over property in California .

⁹ The Bells argue the Internal Revenue Service is not registered to do business in the several States. The Bells-cite no authority that any agency of the federal government must register to do business within the State of California to carry out duties imposed by Congress. The Bells argue the Internal Revenue Service may not "impose" administratively issued liens or take any other action compromising life, liberty or property without proceeding through "judicial courts with proper jurisdiction." The Congress, however, has determined that a lien arises automatically upon an assessment. See 26 U.S.C. §6322. Judicial action is unnecessary. The Bells believe they can choose whether they will be taxed. Paying taxes, however, is not voluntary. Wilcox v. Commissioner [88-1 USTC ¶9387], 848 F.2d 1007, 1008 (9th Cir. 1988). The Bells argue the Internal Revenue Service is an unregistered agent of Puerto Rico and not properly registered under the Foreign Agent Registration Act, 22 U.S.C. §611 et seq. There is no evidence in the record, but only Defendants' conclusory, unsupported assertion, the Service is under the direction and control of Puerto Rico . Nor does this Act appear to create any defense for Defendants.

¹⁰ Damsky v. Zavatt [61-1 USTC ¶9351], 289 F.2d 46 (2d Cir. 1961) held an action to recover an (in personam) judgment for taxes was a suit at common law for which, in 1791, the right of jury trial existed. Id. at 49, 51. It also held that an action to establish the validity of tax liens against real property and for the sale of the property in satisfaction thereof was historically a suit in equity so that there is no right to jury trial with respect to the ascertainment of the amount of the tax lien as against taxpayer's property and enforcement of the lien by sale. Id. at 53. Similarly, Damsky held there is no right to jury trial in an action to set aside a fraudulent conveyance of real property. Id. at 53 citing Johnson v. Gardner , 179 F.2d 114, 117 (9th Cir. 1949) (wrong sought to be remedied by fraud in real estate not remedy at law).

¹¹ The Service generally has 60 days from the date of assessment to notify the taxpayer of the assessment and demand payment. See I.R.C. §6203(a).