Fraudulent Conveyances Part1 page1

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United States of America, Plaintiff v. Ronald L. Bodwell, Freedom Church of the Valley, Nassau Life Insurance Company, Ltd., Trustee for C.P.M. Management Company, C.P.M. Management Company, Exeter Investment Company, Defendants

U.S. District Court, East. Dist. Calif., CIV. S-95-1906 LKK/GGH, 7/26/96

[Code Sec. 6203 ]

Assessments: Certificate of Assessments and Payments: Presumption of correctness.--Assessments against an individual for federal income taxes, interest and penalties were reduced to judgment based upon the deficiencies enumerated in the certified Certificate of Assessments and Payments. The taxpayer failed to introduce any evidence to contradict the certificate's accuracy or reliability.

[Code Secs. 6212 and 7401 ]

Assessments: Tax Court decision: Res judicata: Deficiency notices.--The doctrine of res judicata entitled the government to reduce the assessments made against an individual for federal income taxes, interest and penalties to judgment. The taxpayer's previous action before the Tax Court involved the same parties and facts because it challenged the validity of the same assessments. Also, the Tax Court's dismissal of his action for failure to properly prosecute operated as a final adjudication upon the merits, and the Tax Court was a court of competent jurisdiction. However, the assessments were reduced to judgment only to the extent determined by the Tax Court. The taxpayer's claim that deficiency notices were fraudulent and incorrect was barred by res judicata because he brought or could have brought the claim before the Tax Court.

[Code Sec. 7401 ]

Assessments: Government's authority to bring action: Chief Counsel: Attorney General.--The government had authority to bring an action to reduce to judgment assessments made against an individual for federal income taxes, interest and penalties. The Chief Counsel, through an IRS District Counsel, a delegate of the Secretary of Treasury, authorized the Department of Justice to institute the action. Also, the Assistant Attorney General, as delegate of the Attorney General, authorized the government's counsel to bring the action.

[Code Sec. 6303 ]

Notice and demand for payment: Validity: IRS collection branch: Congressional authority.--The first notice and demand for payment was properly sent by the IRS to an individual who had been assessed federal income taxes, interest and penalties within 60 days of the assessment as evidenced by Form 4340 and a computer-generated statutory Notice and Demand. The Notice and Demand was not invalid even though it did not originate from the IRS Collection Branch. The taxpayer did not identify any statute, regulation, case law or other authority that would suggest that a tax could not be collected unless the Notice and Demand was sent from the Collection Branch. Further, although the taxpayer claimed to have lived and earned his funds outside the exterior boundaries of the United States , Congress could still legislate an income tax on him.

[Code Secs. 6323 and 6502 ]

Assessments: Fraudulent conveyances: Cause of action: Privy: Statute of limitations.--The government could bring a claim to set aside an individual's conveyances of his property to third parties even though assessments against the individual were made over two years after the conveyances. Although, under state ( California ) law, a provision limited a category of fraudulent conveyances to those made after a lien arises, the government had a cause of action under federal law to set aside a fraudulent conveyance because, according to the complaint, all the third parties were privy to the fraud. Further, since the conveyances occurred before 1987, the repealed state fraudulent conveyance act applied. Thus, the government filed the action within the limitations period because the applicable limitations period for a suit to set aside a fraudulent conveyance was the 10-year period under Code Sec. 6502 .

Jeffrey R. Meyer, Department of Justice, Washington, D.C. 20530, for U.S. Ronald L. Bodwell, P.O. Box 41843, Sacramento, Calif. 95841, for pro se.

ORDER

KARLTON, Chief Judge:

This case is before me on plaintiff's motions for summary judgment and for default judgments, and on defendant's motions to dismiss and to strike. Based upon the papers and pleadings on file, and upon oral argument heard July 15, 1996, the court disposes of the matters herein. See Local Rule 230(h).

I.

FACTS ¹

The United States brings this civil action to reduce to judgment certain outstanding unpaid assessments for federal income taxes, interest and penalties owed by defendant Ronald Bodwell. The United States also seeks to set aside conveyances of property made by Bodwell to the other defendants in this action.

The assessments at issue were made on October 21, 1995, and concern unpaid federal taxes for the 1979, 1980, and 1981 tax years. The Certificate of Assessments and Payments submitted by the government indicates that Bodwell has a total unpaid balance of $85,363.83 ² for the tax years 1979, 1980, and 1981. Bodwell contested the deficiencies of tax, interest and penalties for these taxable years in the U.S. Tax Court. On July 17, 1985, the Tax Court granted the government's motion to dismiss for failure to prosecute and ruled that Bodwell owed deficiencies for the taxable years at issue in the amount of $20,445.00. ³ See Ronald L. Bodwell and Betty Bodwell v. C.I.R., Docket No. 1113-84, entered on July 17, 1985, aff'd, 798 F.2d 472 (9th Cir. 1986), cert. denied, 479 U.S. 1093 (1987). None of the foregoing assessments have been payed.

With regard to the conveyances the government seeks to set aside, on April 15, 1983, Bodwell and his late wife conveyed their interest in Kyburz Mountain Resort Property (hereinafter "Kyburz") to defendant Freedom Church of the Valley (hereinafter "Freedom Church"). By grant deed, dated July 13, 1984, Freedom Church of the Valley transferred its interest in Kyburz to Nassau Life Insurance Co., Ltd. (hereinafter "Nassau Life"), ⁴ as "trustee" of CPM Management Company (hereinafter "CPM"). Although the evidence is not altogether clear, it appears from the complaint and Bodwell's statement of facts in his motion to dismiss, that Nassau Life, as trustee for CPM, then transferred its interest in Kyburz to CPM and/or Exeter Investment Company (hereinafter "Exeter").

In any event, Nassau Life went out of business in 1987. A print out of computer records seized during an IRS investigation indicates that on June 22, 1984 and May 14, 1985, respectively, Bodwell purchased CPM and Exeter from Nassau Life. The records also list Bodwell as president for both CPM and Exeter .

The United States maintains that Bodwell, as alter ego of Freedom Church , CPM and Exeter , fraudulently executed the foregoing conveyances, without fair consideration, to evade payment of his tax deficiencies to the government. Seeking to satisfy the debt by foreclosing its liens on Kyburz, the United States requests the court to determine and adjudge that defendants Freedom Church , Nassau Life, CPM and Exeter have no interest in the property.

On October 20, 1995, the United States filed its complaint in this court. On February 8, 1996, a summons and copy of the complaint was served upon Bodwell. Additional summons and copies of the complaint were given to Bodwell for Freedom Church , CPM, and Exeter . ⁵ On February 22, 1996, the court granted the United States an extension of time to serve Nassau Life by publication pursuant to 28 U.S.C. §1655. The uncontroverted Third Declaration of Jeffrey Meyer confirms that the United States executed service by publication as directed in the February 22, 1996 order. As of this date, none of the defendants other than Bodwell have responded to the complaint.

On March 13, 1996, the United States requested the Clerk to enter default against Freedom Church , CPM, and Exeter . On May 12, 1996, the United States requested the Clerk to enter default against Nassau Life. Since Bodwell opposed the requests for entry of default on the basis that service was defective upon the defendants, and since the same question of service was raised in Bodwell's current motion to dismiss, the court stayed the requests for default pending resolution of the service issue. See Orders, filed April 11, 1996 and June 20, 1996.

Before the court now are the United States ' motions for partial summary judgment on its claim to reduce the assessments to judgment and for default judgments against defendants Freedom Church , CPM, Exeter , and Nassau Life. Also before the court are Bodwell's motions to dismiss and to strike. Finally, Bodwell has filed a request for a continuance on the summary judgment motion so that he can perform additional discovery.

II.

STANDARDS

A. DISMISSAL STANDARDS UNDER FED. R. CIV. P. 12(b)(6)

On a motion to dismiss, the allegations of the complaint must be accepted as true. See Cruz v. Beto, 405 U.S. 319, 322 (1972). The court is bound to give the plaintiff the benefit of every reasonable inference that can be drawn from the "well-pleaded" allegations of the complaint. See Retail Clerks Intern. Ass'n, Local 1625, AFL-CIO v. Schermerhorn, 373 U.S. 746, 753 n.6 (1963). Thus, the plaintiff need not necessarily plead a particular fact if that fact is a reasonable inference from facts properly alleged. See Id. See also Wheeldin v. Wheeler, 373 U.S. 647, 648 (1963) (inferring fact from allegations of complaint).

In general, the complaint is construed favorably to the pleader. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). So construed, the court may not dismiss the complaint for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim which would entitle him or her to relief. See Hishon v. King & Spalding, 467 U.S. 69, 73 (1984) (citing Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). In spite of the deference the court is bound to pay to the plaintiff's allegations, however, it is not proper for the court to assume that "the [plaintiff] can prove facts which [he or she] has not alleged, or that the defendants have violated the ... laws in ways that have not been alleged." Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 526 (1983).

B. SUMMARY JUDGMENT STANDARDS UNDER FED. R. CIV. P. 56

Summary judgment is appropriate when it is demonstrated that there exists no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); See also Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970); Owen v. Local No. 169, 971 F.2d 347,355 (9th Cir. 1992).

Under summary judgment practice, the moving party

[A]lways bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any," which it believes demonstrate the absence of a genuine issue of material fact.

Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). "[W]here the nonmoving party will bear the burden of proof at trial on a dispositive issue, a summary judgment motion may properly be made in reliance solely on the 'pleadings, depositions, answers to interrogatories, and admissions on file.' " Id. Indeed, summary judgment should be entered, 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. Id. at 322. "[A] complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial." Id. In such a circumstance, summary judgment should be granted, "so long as whatever is before the district court demonstrates that the standard for entry of summary judgment, as set forth in Rule 56(c), is satisfied." Id. at 323.

If the moving party meets its initial responsibility, the burden then shifts to the opposing party to establish that a genuine issue as to any material fact actually does exist. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986); See also First Nat'l Bank of Ariz. v. Cities Serv. Co., 391 U.S. 253, 288-89 (1968); Ruffin v. County of Los Angeles, 607 F.2d 1276, 1280 (9th Cir. 1979), cert. denied, 455 U.S. 951 (1980).

In attempting to establish the existence of this factual dispute, the opposing party may not rely upon the denials of its pleadings, but is required to tender evidence of specific facts in the form of affidavits, and/or admissible discovery material, in support of its contention that the dispute exists. Rule 56(e); Matsushita, 475 U.S. at 586 n.11; See also First Nat'l Bank, 391 U.S. at 289; Strong v. France, 474 F.2d 747, 749 (9th Cir. 1973). The opposing party must demonstrate that the fact in contention is material, i.e., a fact that might affect the outcome of the suit under the governing law, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987), and that the dispute is genuine, i.e., the evidence is such that a reasonable jury could return a verdict for the nonmoving party, Anderson, 477 U.S. 248-49; See also Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1436 (9th Cir. 1987).

In the endeavor to establish the existence of a factual dispute, the opposing party need not establish a material issue of fact conclusively in its favor. It is sufficient that "the claimed factual dispute be shown to require a jury or judge to resolve the parties' differing versions of the truth at trial." First Nat'l Bank, 391 U.S. at 290; See also T.W. Elec. Serv., 809 F.2d at 631. Thus, the "purpose of summary judgment is to 'pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial.' " Matsushita, 475 U.S. at 587 (quoting Fed. R. Civ. P. 56(e) advisory committee's note on 1963 amendments); See also International Union of Bricklayers & Allied Craftsman Local Union No. 20 v. Martin Jaska, Inc., 752 F.2d 1401, 1405 (9th Cir. 1985).

In resolving the summary judgment motion, the court examines the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any. Rule 56(c); See also SEC v. Seaboard Corp., 677 F.2d 1301, 1305-06 (9th Cir. 1982). The evidence of the opposing party is to be believed, Anderson, 477 U.S. at 255, and all reasonable inferences that may be drawn from the facts placed before the court must be drawn in favor of the opposing party, Matsushita, 475 U.S. at 587 (citing United States v. Diebold, Inc., 369 U.S. 654, 655 (1962) (per curiam)); See also Abramson v. University of Hawaii, 594 F.2d 202, 208 (9th Cir. 1979). Nevertheless, inferences are not drawn out of the air, and it is the opposing party's obligation to produce a factual predicate from which the inference may be drawn. See Richards v. Nielsen Freight Lines, 602 F. Supp. 1224, 1244-45 (E.D. Cal. 1985), aff'd, 810 F.2d 898, 902 (9th Cir. 1987).

Finally, to demonstrate a genuine issue, the opposing party "must do more than simply show that there is some metaphysical doubt as to the material facts. ... Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no 'genuine issue for trial.' " Matsushita, 475 U.S. at 587 (citation omitted).

III.

DEFENDANT'S MOTION TO DISMISS

A. SERVICE UPON BODWELL

Bodwell first argues that the action must be dismissed because the complaint was not served upon him until one hundred and eight days after it was filed. This contention is not well taken. Fed. R. Civ. P. 4(m) permits a plaintiff one hundred and twenty (120) days to serve a complaint. While Bodwell contends that the United States did not serve the complaint within the forty-five (45) day deadline in the court's order setting status conference, a failure to comply with this request does not require dismissal. See Local Rule 110 (failure to comply with court order may be grounds for imposition of sanctions, including dismissal of action) (emphasis added). Since Bodwell does not identify any prejudice to him as a result of the delay, there are no grounds for dismissal, even if the delay in service was attributable to the United States . ⁶ See United Food & Commercial Workers Union v. Alpha Beta Co., 736 F.2d 1371, 1382 (9th Cir. 1984) (dismissal generally not justified absent showing of prejudice).

B. SERVICE UPON OTHER DEFENDANTS

Bodwell also contends that the action must be dismissed against Freedom Church , CPM, Exeter and Nassau Life for lack of service. With regard to Nassau Life, Bodwell does not have standing to challenge service because there is no standing to assert the defenses of others. C.E. Pope Equity Trust v. United States , 818 F.2d 696, 697 (9th Cir. 1986).

Next, if the court were to accept Bodwell's contention that he has no connection to CPM or Exeter , then he would also lack standing to challenge service upon them. Based upon the records seized during the criminal investigation, however, the court finds that Bodwell is the owner and president of CPM and Exeter . Thus, the court has jurisdiction to determine whether service was proper upon these entities.

Plaintiff properly served CPM and Exeter pursuant to Fed. R. Civ. P. 4(h). Rule 4(h) provides that service upon a corporation or association can be made either as provided by state law or by delivering a copy of the summons and of the complaint to an officer, a managing or general agent, or to any other agent authorized to receive service of process. Moreover, California law provides for service of process upon a corporation or association by delivering a copy of the summons and complaint to the president of the company. See Cal. Civ. Proc. Code §§416.10 and 416.40. Since Bodwell, as president of CPM and Exeter , does not deny that he was given copies of the summons and complaint for CPM and Exeter , these entities were properly served under Rule 4(h).

Last, Freedom Church was properly served as a business entity pursuant to Fed. R. Civ. P. 4(h)(1) because the record shows that a copy of the summons and complaint was served upon Bodwell on February 8, 1996. At the April 1, 1996, status conference, Bodwell conceded that he was the proper agent for service of process for Freedom Church . Thus, service was properly effected upon Freedom Church .

Accordingly, Bodwell's attempt to dismiss the complaint for lack of service upon defendants Freedom Church , CPM, Exeter , and Nassau Life must fail.

C. AUTHORIZATION

Next, Bodwell contends that the United States does not have authority to bring this action. In its complaint, the United States avers:

"This action is commenced pursuant to Sections 7401 , 7402 and 7403(a) of the Internal Revenue Code of 1986 (26 U.S.C.), at the direction of the Attorney General of the United States and with the authorization of Chief Counsel of the Internal Revenue Service, a delegate of the Secretary of the Treasury." See Compl. at ¶2.

Thus, the court cannot grant Bodwell's motion to dismiss unless, as a matter of law, the government cannot initiate the suit by the direction of the Attorney General and with the authorization of delegate of the Secretary of the Treasury. ⁷

26 U.S.C. §7401 provides that a suit is properly authorized if the Secretary of the Treasury sanctions the proceedings and the Attorney General or her delegate directs that the action be commenced. Thus, the complaint pleads proper authorization and the motion to dismiss on this ground must be denied.

D. FRAUDULENT CONVEYANCES

Bodwell contends that the United States does not have a claim to set aside the conveyances because the assessments were made on October 21, 1985, over two years after April 15, 1983, the date on which defendants recorded the transactions involving the Kyburz property. ⁸ Under 26 U.S.C. §6332 , a tax lien arises at the time the assessment is made. In turn, Cal. Civ. Code §1228 ⁹ , contains a provision which limits a category of fraudulent conveyances to those made after the lien arises. Accordingly, Bodwell contends that the United States cannot void the transfer because it had notice of the transfer at the time the lien was acquired.

Regardless of whether Cal. Civ. Code §1228 would preclude this action, Bodwell's contention cannot lie because the United States has a cause of action under federal law to set aside a fraudulent conveyance. See 26 U.S.C. §7403 ¹⁰; United States v. Bacon, 82 F.3d 822 (9th Cir. 1996); see also Chevron, U.S.A. Inc. v. United States [83-1 USTC ¶13,523 ], 705 F.2d 1487, 1491 (9th Cir. 1983). Moreover, section 1228 would not apply if the parties in whose favor the transfer was made were privy to the intended fraud. According to the allegations in the complaint, defendants Freedom Church , CPM, Exeter and Nassau Life, were privy to the fraud. Thus, Bodwell's argument that the United States does not have a cause of action to set aside the conveyance must fail whether the court applies federal or state law.

Finally, Bodwell argues that the claim to set aside the fraudulent transfers must be dismissed because the United States did not bring the action within the seven year statute of limitations set forth in the California Fraudulent Transfer Act, Cal. Civ. Code §§3439-3439.12. The Transfer Act, however, does not apply to this action because the conveyances at issue occurred prior to January 1, 1987. ¹¹ See Kepetz v. Wolf, 845 F.2d 842, 846, n.7 (9th Cir. 1988). Instead, the repealed California Fraudulent Conveyance Act governs. Id. ; Bacon, 82 F.3d at 824. In the Ninth Circuit, a state statute of limitations for actions under the Conveyance Act does not apply to the federal government; rather, the applicable limitation period for a suit to set aside fraudulent conveyances made prior to 1987 is the ten-year federal statute of limitations set forth in 26 U.S.C. §6502(a)(1) . Bacon, 82 F.3d at 825.

Section 6502(a)(1) provides that the statute of limitations for an action to collect a tax by levy or by a court proceeding is ten (10) years from the assessment of the tax. 26 U.S.C. §6502(a)(1) . Here, the United States assessed the tax against Bodwell on October 21, 1985. The government then brought the instant action on October 20, 1995. Thus, the government brought this action within the applicable statute of limitations.

E. DENIAL OF MOTION TO DISMISS

For all the reasons stated above, defendant's motion to dismiss the complaint is denied.

IV.

PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DEFENDANT'S MOTION TO STRIKE ¹²

The government's motion for summary judgment on its claim to reduce assessments to judgment is based upon the deficiencies enumerated in the certified Certificate of Assessments and Payments. The Ninth Circuit has held that Certificates of Assessments and Payments qualify as " '[r]ecords, reports, ... or data compilations, in any form, of public offices or agencies, setting forth ... matters observed pursuant to duty imposed by law as to which matters there was a duty to report,' thus meeting one of the definitions of public records set forth in Fed. R. Evid. 803(8)." Hughes v. United States [92-1 USTC ¶50,086 ], 953 F.2d 531, 539 (9th Cir. 1992). Moreover, "official documents--such as IRS 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." Id. at 540 (citing United States v. Zolla [84-1 USTC ¶9175 ], 724 F.2d 808, 810 (9th Cir.), cert. denied, 469 U.S. 830 (1984)).

The Certificate of Assessments and payments submitted by the government is certified as a true and correct form by Michael S. Bigelou, Department of the Treasury, as a delegate of the Secretary of the Treasury. The certificate indicates three quick assessments of $8,553.00, $8,404.00 and $3,488.00, and total assessments of $85,363.83. While Bodwell makes various assertions concerning the validity and authenticity of the certificate, he does not submit any evidence to contradict its accuracy or reliability. Under Hughes and the Rule 56(e) summary judgment standards, see Section II.B., supra, Bodwell must present more than allegations that the assessments are incorrect to defeat a motion for summary judgment. Since Bodwell has failed to meet this burden, I must find that the assessments are correct. ¹³

Alternatively, the Tax Court's final adjudication of the matter requires me to find that the assessments are correct as a matter of res judicata. ¹⁴ "The doctrine of res judicata operates to bar all grounds for recovery which could have been asserted, whether they were or not, in a prior suit between the same parties (or their privies) on the same cause of action, if the prior suit concluded in a final judgment on the merits rendered by a court of competent jurisdiction." Ross v. International Broth. of Elec. Workers, 634 F.2d 453, 457 (9th Cir. 1980). Two lawsuits involve the same cause of action if they arise out of the same transactional nucleus of facts. Costantini v. Trans World Airlines, 681 F.2d 1199, 1201-1202 (9th Cir. 1982).

The first prong of the res judicata test is satisfied because the Tax Court adjudication involved the same parties as the instant action. Second, the Tax Court's dismissal of Bodwell's action for failure to properly prosecute operated as a final adjudication upon the merits. See Rule 123(d) of Rules of Practice and Procedure of the United States Tax Court; Fed. R. Civ. P. 41(b); Nielson v. United States [92-2 USTC ¶50,618 ], 976 F.2d 951, 957 (5th Cir. 1992). Third, the Tax Court is a court of competent jurisdiction for purposes of res judicata. Russell v. C.I.R. [82-2 USTC ¶9429 ], 678 F.2d 782, 785 (9th Cir. 1982). Last, since Bodwell's action before the Tax Court challenged the validity of the same tax assessments as the present action, it involved the same transactional nucleus of fact. Thus, the Tax Court's decision is res judicata.

Since the accuracy of the deficiencies were either litigated or could have been litigated in the Tax Court proceeding, Bodwell cannot attack their reliability here. Accordingly, plaintiff is entitled to reduce its assessments to judgment by virtue of res judicata. ¹⁵

It is unclear, however, whether the Tax Court's Order precludes the United States from reducing more than $20,445.00 of the assessments to judgment. In its order, the Tax Court stated that

counsel for respondent could properly have sought the entry of a decision for respondent for the full amount of deficiencies as set forth in the statutory notice of deficiency. However, in a fair and equitable manner, respondent's counsel submitted a proposed decision in a lesser amount, reflecting concessions made previously in the case. ...

See Bodwell v. C.I.R., supra, at 1. Accordingly, the Tax Court ordered that there were deficiencies in income tax due for the taxable years 1979, 1980 and 1981 in the respective amounts of $8,553.00, $8,404.00 and $3,488.00 (i.e. $20,445.00). Id. at 2. Thus, while the Tax Court determined that all the assessments were valid, it seems to have held that the United States was only entitled to $20,445.00. Even if it may be possible to read the holding differently as a matter of res judicata, the order raises the question of whether the United States waived its right to reduce to judgment an amount greater than the $20,445.00 to which it apparently agreed at that time.

Accordingly, the government's motion for partial summary is granted only to the extent that it seeks to reduce $20,445.00 to judgment. If the government desires to reduce a larger amount to judgment, the court will provide it with an opportunity to make such a request, as well as to address the court's observation in footnote 2, supra. See Section VII, ¶6, infra.

Since Bodwell does not raise a genuine issue of material fact relative to the issues discussed above, the court grants the government's motion for partial summary judgment. Before doing so, however, the court feels compelled to address the several assertions which Bodwell makes in his opposition.

First, Bodwell claims that the lawsuit was not properly authorized. In resolving defendant's motion to dismiss, I determined that the complaint pleaded proper authorization. As I now review defendant's contention in the context of the summary judgment motion, I conclude that there is no disputed issue of material fact that the action was in fact properly authorized.

As discussed above, 26 U.S.C. §7401 provides that a suit is properly authorized if the Secretary of the Treasury sanctions the proceedings and the Attorney General or her delegate directs that the action be commenced. Under the Code, the term Secretary means the Secretary of the Treasury or its delegate. 26 U.S.C. §7701(a)(11)(B) . The term "delegate" means any officer, employee, or agency of the Treasury Department duly authorized by the Secretary of the Treasury directly or indirectly by one or more redelegations of authority to perform the function mentioned. 26 U.S.C. §7701(a)(12)(A) . Accordingly, a letter from the legal office of an agency of the Department of Treasury authorizing the commencement of a lawsuit is sufficient to establish the first requirement of section 7401 . See United States v. Walters, 638 F.2d 947, 950 (6th Cir. 1981). It is undisputed that on September 6, 1995, the Chief Counsel, through District Counsel of the Internal Revenue Service in Sacramento, California, a delegate of the Secretary of the Treasury, authorized the Department of Justice to institute this proceeding. Thus, the government provides sufficient evidence that the first requirement was met.

With regard to the second requirement, the term "delegate", when used with reference to any other official of the United States, is similarly construed as when used with reference to the Secretary of the Treasury. See 26 U.S.C. §7701a(12)(B). By letter dated October 18, 1995, the Assistant Attorney General, as delegate of the Attorney General, authorized plaintiff's counsel to bring this action. Thus, the evidence demonstrates that the second requirement was satisfied. Since Bodwell provides no evidence to the contrary, his authorization argument must fail.

Next, Bodwell contends that the notices of deficiency are fraudulent and incorrect. However, since Bodwell brought or could have brought these claims before the tax court, they are barred by res judicata. Ross, 634 F.2d at 457.

Third, Bodwell argues that the United States cannot collect the taxes because he never received a first Notice and Demand pursuant to 26 U.S.C. §6303(a) . Section 6303(a) requires the government to mail a Notice and Demand for payment to the taxpayer within 60 days of the assessment. ¹⁶ The deficiency assessment was made on October 21, 1985. The recitations on the Form 4340 and computer generated statutory Notices and Demand indicate that the notice was sent on or about that date. In the absence of evidence to the contrary, the presumption of procedural regularity thus requires me to find that the notices were in fact sent within sixty (60) days of the assessment. See United States v. Aherns [76-1 USTC ¶9241 ], 530 F.2d 781, 785 (8th Cir. 1976) (citing United States v. Chemical Foundation. Inc., 272 U.S. 1, 14-15 (1926)). ¹⁷

In a related argument, Bodwell asserts that the Notice and Demand was invalid because it did not originate from the IRS Collection Branch. Bodwell does not identify any statute, regulation, case law or other authority which would suggest that a tax could not be collected unless the Notice and Demand were sent from the Collection Branch. Thus, this argument must also be denied.

Fourth, Bodwell argues that Congress cannot legislate an income tax on him because he lived and earned his funds outside the exterior boundaries of any of the 50 United States. The Ninth Circuit has specifically rejected the argument that federal jurisdiction to impose an income tax is limited to the United States territories and the District of Columbia. See In re Becraft, 885 F.2d 547, 549, n.2 (9th Cir. 1989).

Last, Bodwell's objections to the government's use of affidavits to support its motion is not well taken. The facts the court draws from the affidavits and exhibits are properly considered on a motion for summary judgment. See Celotex, 477 U.S. at 324.

Bodwell makes various other arguments against summary judgment. Upon review, it is clear that they are no more than variations of the contentions discussed above. Accordingly, for all the reasons stated above, Bodwell's arguments are rejected and summary judgment on the claim to reduce assessments to judgment must be entered for the United States.

V.

DEFAULT JUDGMENTS

The United States moves pursuant to Fed. R. Civ. P. 55(b)(2) for default judgments against Freedom Church, CPM, Exeter and Nassau Life. The motion is granted.

VI.

CONTINUANCE

Finally, Bodwell moves for a continuance on plaintiff's motion for summary judgment. Bodwell contends that there is good cause for a continuance because he needs to perform additional discovery. Bodwell, however, does not identify any additional evidence which could affect the court's ruling, nor does there appear to be any. Moreover, the court has already granted Bodwell one continuance on this motion. See Order, filed May 3, 1995. Thus, Bodwell's request for a continuance is denied.

VII.

ORDER

For all the foregoing reasons, the court hereby ORDERS as follows:

1. Defendant's Motion to Dismiss is DENIED;

2. Defendant's Motion to Strike is DENIED;

3. Defendant's Request for a continuance is DENIED;

4. Plaintiff's motion for partial summary judgment on its claim to reduce the assessments to judgment is GRANTED to the extent that plaintiff desires to reduce $20,445.00 of defendant's deficiencies to judgment;

5. Plaintiff's requests for entry of defaults is GRANTED; and

6. Not later than twenty (20) days from the effective date of this order, plaintiff shall notify the court as to whether it desires to reduce more than $20,445.00 to judgment, and if so, the amount which it seeks to reduce. If plaintiff desires to reduce more than $20,445.00, the court shall set an appropriate briefing scheduling on this narrow issue.

IT IS SO ORDERED.

¹ Unless otherwise stated, the facts cited herein are based upon the declarations and exhibits submitted by the parties.

² In its motion for summary judgment, the United States accurately portrays the assessments as: $8,553.00, $8,137.34, $10.00, $30.00, $2,138.25, $15,864.30, $8,404.00, $6,574.09, $2,101.00, $14,298.32, $5,491.15, $3,488.00, $2,058.79, $838.45, $5,280.16, $33.55, and $2,063.43. Based upon these numbers, the United States represents that the total unpaid balance is $101,072.38. This appears to be an error, however, as the sum of all the assessments listed above is in fact $85,363.83.

³ In its order, the Tax Court stated that "counsel for respondent could properly have sought the entry of a decision for respondent for the full amount of deficiencies as set forth in the statutory notice of deficiency. However, in a fair and equitable manner, respondent's counsel submitted a proposed decision in a lesser amount, reflecting concessions made previously in the case. ..." Accordingly, the Tax Court ordered that there were deficiencies in income tax due for the taxable years 1979, 1980 and 1981 in the respective amounts of $8,553.00, $8,404.00 and $3,488.00. These amounts represent the three "Quick Assessments" delineated in the Certificate of Assessments and Payments.

⁴ According to the declaration of IRS Special Agent Edwin A. Williamson, Nassau Life is an organization, formed in the Turks and Cacios Islands, which acted as trustee for certain foreign business trusts used as a means to shelter income from federal taxation. Special Agent Williamson explains that the business trusts were formed as subsidiaries of Nassau Life, and that Nassau Life would appoint the customer/taxpayer as officer or agent of the trust with complete authority to control the company's financial and business activities. The customer/taxpayer would then transfer his or her assets into the newly formed company to evade federal taxation.

⁵ While Bodwell admitted during the April 1, 1996, status conference that he was a proper agent for service upon Freedom Church, he denies that he is an agent, trustee, beneficiary, representative or in any manner authorized to receive service of process for CPM or Exeter.

⁶ The United States claims that it did not serve Bodwell within forty-five (45) days because Bodwell was evading service.

⁷ Bodwell's argument that the suit is not authorized because 26 U.S.C. §7401 is rooted in the Federal Regulations concerning the Bureau of Alcohol, Tobacco and Firearms has been flatly rejected by the Ninth Circuit. United States v. Cochrane, 985 F.2d 1027, 1031 (9th Cir. 1993), denial of habeas corpus aff'd, 36 F.3d 1103 (9th Cir. 1994).

⁸ If credited, Bodwell's claims that he no longer has any interest in the Kyburz property would raise serious questions as to whether he has standing to contest the claim setting aside the transfer. Since Bodwell is president of CPM and Exeter, however, the court presumes that he does have standing with respect to this claim.

⁹ Cal. Civ. Code §1228 provides:

"No instrument is to be avoided under [section 1227] in favor of a subsequent ... incumbrancer having notice thereof at the time his ... lien acquired, unless the person in whose favor the instrument was made was privy to the fraud intended."

¹⁰ 26 U.S.C. §7403(a) provides:

"In any case where there has been a refusal or neglect to pay any tax, or to discharge any liability in respect thereof, whether or not levy has been made, the Attorney General or his delegate, at the request of the Secretary, may direct a civil action to be filed in a district court of the United States to enforce the lien of the United States under this title with respect to such tax or liability or to subject any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability." 26 U.S.C. §7403(a) .

In addition, subsection (b) requires all persons having liens upon or claiming any interest in the property to be joined in the action, while subsection (c) states that the court shall determine the merits of all claims to and liens upon the property. 26 U.S.C. §7403(b) and (c) .

¹¹ There is still debate concerning the applicability of the extinguishment provision of the Transfer Act on the federal government. See Bacon, 82 F.3d at 824 (comparing United States v. Vellalos [92-1 USTC ¶50,227 ], 780 F.Supp. 705, 708 (D.Hawaii 1992), aff'd on other grounds, 990 F.2d 1265(table) (9th Cir. 1993), with Stoecklin v. United States, 858 F.Supp. 167, 168 (M.D. Fla. 1994)).

¹² Bodwell's motion to strike is directed toward various documents and declarations submitted by the government in support of its motion for summary judgment. Since a motion to strike applies to the pleadings, rather than to evidence, see Fed. R. Civ. P. 12(f); Sidney-Vinstein v. A.H. Robins Co., 697 F.2d 880, 885 (9th Cir. 1983), the court construes Bodwell's motion as an objection to the use of those documents and/or declarations relative to the motion for summary judgment. Accordingly, I will address Bodwell's contentions in his motion to strike as I resolve the government's motion for summary judgment.

¹³ Bodwell contends that the forms are inadmissible because they were generated by a computer, and the government did not lay the foundation necessary for the admission of such computerized evidence. The Ninth Circuit has rejected this exact argument, however, holding that IRS documents, even if generated by a computer, are admissible as public records. Hughes [92-1 USTC ¶50,086 ], 953 F.2d at 540.

¹⁴ Bodwell's motion to strike the Tax Court's order from the record must be rejected because it is based on no more than "a mere allegation" that the declarant submitting the order is incapable of recognizing whether the document is a true copy of the order. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-249 (1986). In addition, the Tax Court decision is admissible as a judicially noticed fact. See Fed. R. Evid. 201(b) ("A judicially noticed fact must be one not subject to reasonable dispute in that it is ... capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.")

¹⁵ It is also possible to view the question of what assessments are due under the related doctrine of collateral estoppel (issue preclusion). "Collateral estoppel bars a party from relitigating an issue identical to one he has previously litigated to a determination on its merits in another action." Ross v. International Broth. of Elec. Workers, 634 F.2d 453, 457, n.6 (9th Cir. 1980).

¹⁶ While 26 U.S.C. §6303(a) does not provide for any consequence for the failure to give a Notice and Demand within 60 days of the making of the assessment, Treasury Regulation §301.6303-1(a) provides that the failure to give the Notice and Demand within 60 days does not invalidate the notice. Thus, even a failure to mail the demand within 60 days of the assessment would not necessarily invalidate the notice.

¹⁷ Since I must find that the notices were sent to Bodwell, it is immaterial whether Bodwell in fact received them. See King v. C.I.R. [88-2 USTC ¶9521 ], 857 F.2d 676, 681 (9th Cir. 1988) (notice sufficient so long as mailed to last known address). Bodwell does not provide any evidence that the address used by the IRS was not his last known address (e.g. Bodwell does not provide any evidence that he had changed his address with the IRS).

 

 

 

Dennis D. Fitzgerald, Plaintiff v. Jill Fitzgerald, Linda Ann Fitzgerald, John W. Kearns and the United States Internal Revenue Service. John W. Kearns, Counter-Plaintiff/Cross-Plaintiff/Third-Party Plaintiff v. Dennis D. Fitzgerald, Counter-Defendant and Jill Fitzgerald, Linda Ann Fitzgerald, Cross-Defendants and the United States Internal Revenue Service, Third-Party Defendant, Defendants

U.S. District Court, So. Dist. Fla., 95-1531-CIV-MORENO, 11/13/96

[Code Secs. 6321 and 6323 ]

Liens: Priority: Fraudulent conveyance: Summary judgment: Statute of limitations: Ten-year period.--Summary judgment was granted to the IRS on the question of whether a federal tax lien had priority over an interest in property that was obtained through a fraudulent conveyance. A taxpayer had conveyed the property by quit claim deed to her daughter for no consideration. The conveyance was determined to be fraudulent under a state (Florida) statute. Further, the question of fraudulent conveyance was properly placed in issue by the pleadings. Therefore, summary judgment was the proper avenue for resolving the dispute. Finally, the six-year statute of limitations under the Federal Debt Collection Procedures Act of 1990 did not apply because that Act does not limit the federal government's right to collect taxes. Instead, the motion for summary judgment was properly filed within the 10-year period for the collection of timely assessed income taxes.

Robert Arthur Koppen, Koppen, Watkins, Partner & Assocs., P.A., 700 Northeast 90th St., Miami, Fla. 33138-3206, for plaintiff. John W. Kerns, 431 Gerona Ave., Coral Gables, Fla. 33146, for defendants. Grisel Alonso, Miami, Fla. 33132, Mark Stier, Department of Justice, Washington, D.C. 20530, for third-party-defendant.

FINAL SUMMARY JUDGEMENT

MORENO, District Judge:

On July 26, 1996, the Court granted Defendant the United States' Motion for Summary Judgement, Denied Plaintiffs' Motion for Partial Summary Judgment, and required the parties to file pleadings regarding the final two competing claims of priority:

(1) The United States' claim under the federal tax liens; and

(2) Jill Fitzgerald's claim under the Quit-Claim Deed conveyed to her by Linda Fitzgerald on April 17, 1990, and recorded on April 23, 1990.

Subsequently, both the United States and Jill Fitzgerald motioned for summary judgment. Because Jill Fitzgerald's interest in the subject property is based on a fraudulent conveyance, and the applicable statute of limitations has not expired, the United States is entitled to enforce the federal tax lien against the subject property at issue in this dispute.

Facts

On April 17, 1990, Linda Fitzgerald conveyed the following described property by Quit Claim Deed (hereinafter referred to as the "subject property") to Jill Fitzgerald:

GRIFFING BISCAYNE PARK ESTATES, Block 15, Lot 31, as recorded in Plat Book 8 at Page 19 of the Public Records of Dade County, Florida. Folio No. 17 2231 0272 5.

Jill Fitzgerald gave no consideration for the subject property. Linda Fitzgerald Depo. of June 25, 1996 at 14; Jill Fitzgerald Depo. of June 25, 1996 at 5-6.

From 1985-1989, Linda Fitzgerald incurred $42,347 in income tax liabilities. See Certificates of Assessments and Payments, Defendant The United States's Exhibit 2. However, at the time of the conveyance, the United States had filed no liens against Linda Fitzgerald and had only assessed a $5,434 tax liability (which was less than the value of Linda Fitzgerald's interest in the subject property). Jill Fitzgerald's Motion for Summary Judgment at 5. In her Affidavit, Linda Fitzgerald does not list her assets at the time of the alleged fraudulent transfer. However, in her deposition, Linda Fitzgerald indicates that at the time of the alleged fraudulent transfer she had a boat valued at $6,000 and a Camaro of unstated value. Linda Fitzgerald Depo. of June 25, 1996 at 21-22.

Legal Analysis

Three issues are raised in these motions for summary judgment: whether a motion for summary judgment is the proper avenue for resolving this dispute, whether the transfer of the subject property from Linda Fitzgerald to Jill Fitzgerald was a fraudulent conveyance, and, if so, whether any claim based on the fraudulent conveyance is barred by the applicable statute of limitations. Each issue is considered in turn.

Sufficiency of Pleadings

In the Order Granting Defendant United States' Motion for Summary Judgment, Order Denying Plaintiff's Motion for Partial Summary Judgment and Order Requiring Parties to File Pleadings, filed on July 26, 1996, the Court required the Defendant United States to "file the appropriate pleadings . . . asserting the reasons why it has priority over the claim of Jill Fitzgerald." In addition, Federal Rule of Civil Procedure 8(a) requires that pleadings "contain a short and plain statement of the claim showing that the pleader is entitled to relief." Federal Rule of Civil Procedure 8(a). Federal Rule of Civil Procedure 9(b) states that "[i]n all averments of 1raud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Federal Rule of Civil Procedure 9(b) (emphasis added).

Jill Fitzgerald argues that the United States is asserting for the first time, in its Motion for summary Judgment, that a fraudulent conveyance occurred. Therefore, Jill Fitzgerald argues, the claim should fail because the United States has not raised the issue of fraudulent conveyance by a "pleading" as required by this Court's Order of July 26, 1996.

The United States contends that the issue of fraudulent conveyance was placed in issue by the pleadings filed in this case because Paragraph 6(g) of the original Complaint alleges that the subject property was conveyed "without good and valuable consideration and in fraud of the Plaintiff's rights." Further, the United States notes that in its prayer for relief the United States requested that the Court determine the priority of the competing liens and enforce the federal tax lien.

As noted by Defendant The United States, paragraph 6(g) of the original Complaint alleges that the subject property was made "without good and valuable consideration and in fraud of the Plaintiff's rights." Defendant Jill Fitzgerald denied this allegation in her Answer. Further, the United States, in its Prayer for Relief, requested that the Court determine the priority of the competing liens and enforce the federal tax lien. That the subject property was conveyed without valuable consideration, and therefore constituted a fraud, was sufficiently pled, although not by Defendant United States against Defendant Jill Fitzgerald. Nonetheless, Defendant Jill Fitzgerald was on notice that the conveyance of the subject property would be at issue in the case. There was no need for Defendant the United States to file a cross-claim to resolve this issue.

Fraudulent Conveyance

Under the Florida Uniform Fraudulent Transfer Act, sections 726.101-.112, Florida Statutes (hereinafter FUFTA), a transfer is fraudulent if:

1) the creditor's claim arose before the transfer was made;

2) the debtor did not receive a reasonably equivalent value in exchange for the transfer; and

3) the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.

§726.106, Fla. Stat. In addition, a debtor not paying debts as they come due is presumed insolvent. Id. §726.103(2).

Jill Fitzgerald argues that whether the conveyance was fraudulent is a disputed fact, both as to Linda Fitzgerald's intent in making the transfer and Linda Fitzgerald's solvency at the time of the conveyance. Jill Fitzgerald claims that Linda Fitzgerald's intent in making the transfer was not to defraud creditors, but was rather to protect her interest in her home for her daughter, Jill Fitzgerald, and against any claims by her husband, Dennis Fitzgerald, in the event of her death. Furthermore, Jill Fitzgerald argues, at the time of the conveyance Linda Fitzgerald had other assets and significant income, and the United States had only assessed a $5,434 tax liability. Therefore, according to Jill Fitzgerald, Linda Fitzgerald could have and would have paid the tax liability were it assessed at that time. Jill Fitzgerald asks that the Court consider the value of Linda Fitzgerald's one-half interest in the subject property in assessing Linda Fitzgerald's solvency.

The United States claims that intent is not an element of proof of a fraudulent conveyance under Florida Statutes section 726.106. The United States also contends that Linda Fitzgerald was responsible for paying her tax liabilities by the due date of the tax return. United States v. Ressler [77-1 USTC ¶9459], 433 F.Supp. 459 (S.D.Fla. 1977), aff'd [78-2 USTC ¶9571], 576 F.2d 650 (1978); cert. denied, 440 U.S. 929 (1979). Thus, the United States argues, Linda Fitzgerald was liable for all of her taxes at the time of the transfer.

Furthermore, the United States contends that there is no issue of fact as to whether Linda Fitzgerald was insolvent at the time of the transfer of the subject property. The United States notes that in her Affidavit, Linda Fitzgerald does not state what other assets she had at the time of the transfer. In her deposition, Linda Fitzgerald indicates she had a boat valued at $6,000 and a car of unstated value. The United States argues that if the car is liberally valued at $20,000, and the boat was worth $6,000, the combined value of these assets were less than the tax liability of $42,347. Therefore, the United States concludes, Linda Fitzgerald was not paying her debts as they came due, and she must be considered per se insolvent.

The Court notes that while intent was an element of the FUFTA's predecessor, the Florida Fraudulent Conveyance Statute, it is not an element of the FUFTA. "Section 726.106 of the new act disregards intent, and provides that a conveyance is per se fraudulent where the creditor's claim arose prior to the transfer, the transfer lacks valid consideration, and the debtor was insolvent prior to the transfer." Advest, Inc. v. Rader, 743 F.Supp. 851 (S.D.Fla. 1990) (emphasis added); Fla. Stat. §726.106. Therefore, evidence of Linda Fitzgerald's intent at the time of the transfer does not impact the relevant analysis. More importantly, it is not disputed that Linda Fitzgerald received no consideration for the subject property.

In addition, the fact that the United States had not filed any tax liens against Linda Fitzgerald nor assessed her entire tax liability at the time of transfer is not the relevant inquiry in assessing Linda Fitzgerald's solvency. "Regardless of when federal taxes are actually assessed, taxes are considered as due and owing, and constitute a liability, as of date the tax return for the particular period is required to be filed." United States v. Ressler [77-1 USTC ¶9459], 433 F.Supp. 459, 463 (S.D.Fla, 1977), aff'd [78-2 USTC ¶9571], 576 F.2d 650 (1978); cert. denied, 440 U.S. 929 (1979); Harper v. United States [91-1 USTC ¶50,253], 769 F.Supp. 362 (M.D.Fla. 1991). The federal tax liability for each tax year becomes a liability on April 15th of the following year. See 26 U.S.C. §6072; Ressler [77-1 USTC ¶9459], 433 F.Supp. at 463. Because Linda Fitzgerald's then-existing federal tax liabilities for the tax years 1985-1989 totaled $42,347, the United States was an existing creditor at the time Linda Fitzgerald transferred the subject property to her daughter, Jill Fitzgerald, on April 17, 1990.

Furthermore, Linda Fitzgerald's $42,347 tax obligation at the time of the subject conveyance exceeded her stated assets, even when these assets are valued in a light favorable to Jill Fitzgerald. The solvency analysis precludes consideration of the value of Jill Fitzgerald's one-half interest in the subject property, since the query is whether the debtor became insolvent as a result of the transfer. See §726.106(1), Fla. Stat. By her own admission, Linda Fitzgerald's boat was worth only $6,000. Therefore, considering all of the evidence in the record, for Linda Fitzgerald's assets to exceed her liabilities her Camaro would have to be valued at $36,347. Because no reasonable person could value the automobile at or greater than $36,347, this Court finds that Linda Fitzgerald's assets exceeded her liabilities, rendering her per se insolvent. See 726.103(2), Fla. Stat.

Statute of Limitations

According to Jill Fitzgerald, the Federal Debt Collection Procedures Act of 1990 (hereinafter FDCPA) has a six-year statute of limitations, and the United States' Motion for Summary Judgment is more than six years since the alleged fraudulent transfer. Consequently, Jill Fitzgerald argues that although Linda Fitzgerald's debt to the United States is not barred for 10 years, this does not give the United States the right to pursue claims against third parties (i.e., Jill Fitzgerald) by way of charging a fraudulent conveyance.

The United States claims that the statute of limitations for the FDCPA does not apply where another Federal law specifies procedures for recovering on a claim for a debt arising under such law. See 28 U.S.C. §3001(b). Therefore, according to the United States, the FDCPA statute of limitations does not apply to efforts to collect federal taxes because the Internal Revenue Code establishes procedures for collecting federal taxes. See 26 U.S.C. §§6502, 6301-44. Rather, the United States argues that the appropriate statute of limitations is that for the collection of timely assessed income taxes: ten years. See id. §6502(A).

The Court notes that while the United States' claim against the subject property is based on the FUFTA, "[i]t is well settled that the United States is not bound by state statutes of limitation . . .." United States v. Moore, 968 F.2d 1099, 1100 (11th Cir. 1992) (quoting United States v. Summerlin [40-2 USTC ¶9633], 310 U.S. 414, 416, 60 S.Ct. 1019, 1020, 84 L.Ed, 1283, 1285-86 (1940)); United States v. Fernon [81-1 USTC ¶9287], 640 F.2d 609 (5th Cir. Unit B 1091).

Furthermore, while the FDCPA generally imposes a six-year statute of limitations, see 28 U.S.C. §3306(b), the FDCPA carves out an exception for cases involving the collection of taxes. The FDCPA states that it "shall not be construed to curtail or limit the right of the United States under any other Federal law or any State law to collect taxes or to collect any other amount collectible in the same manner as a tax[.] 28 U.S.C. §3003(b)(1). In addition, the FDCPA contains a limitation clause stating that. where "another Federal law specifies procedures for recovering on a claim or a judgment for a debt arising under such law, those procedures shall apply to such claim or judgment to the extent those procedures are inconsistent with this chapter." Id. at 3001(b). The Internal Revenue Code establishes procedures for collecting taxes, 26 U.S.C. §6301, et seq., and also provides limitations on collection practices, id. §6501, et seq. Therefore, under both exceptions, the United States is bound by the limitations set forth in the Internal Revenue Code, which provides that an action to collect taxes must be initiated within ten years after the tax assessment. See 26 U.S.C. §6502(a)(1). Since Linda Fitzgerald incurred all of her outstanding tax liabilities within ten years of this action, the United States' enforcement of the federal tax liens are not time barred.

Conclusion

Having shown no genuine issue of material fact regarding any of the essential elements of FUFTA, the United States has satisfied its burden and is entitled to judgment as a matter of law. As stated above, this action is not time-barred. Therefore, the United States' Motion for Summary Judgment is GRANTED, Jill Fitzgerald's Motion for Summary Judgment is DENIED, and the United States is entitled to enforce the federal tax lien against the subject property.

DONE AND ORDERED.

 

 

 

United States of America, Plaintiff v. William E. Smith, et al., Defendants

U.S. District Court, No. Dist. Ind., South Bend Div., 3:94-CV-188RM, 10/8/96, 950 FSupp 1394

[Code Sec. 6203 ]

Assessment: Presumption of correctness: Unreported income: Reduce to judgment.--Assessment against an individual for taxes on unreported income for several tax years could not be reduced to judgment, and the government could not rely on the presumption of correctness because it failed to present evidence linking the taxpayer to any unreported income. Although the deficiency notice for several of the tax years indicated that the government had evidence linking the taxpayer to income-producing activity, the notice itself did not constitute evidence sufficient to give rise to the presumption that the assessments were correct.

[Code Sec. 6502 ]

Statute of limitations: State law: Fraudulent conveyances.--A state (Indiana) statute of limitations did not bar the government from attempting to void conveyances that the IRS claimed were fraudulently made by an individual to a family trust.

[Code Sec. 6321 ]

Tax liens: Property subject to lien: Fraudulent conveyances: Badges of fraud.--A family trust established by an individual to which he transferred certain real property was not invalidated. There was insufficient evidence that the taxpayer's purpose in establishing the trust was to defraud the government, and it could not be invalidated simply because it was a family trust. However, the taxpayer intended to defraud the government when he transferred the property to the trust. He attempted to attribute all of his income to the trust and claimed as income only a consulting fee paid from the trust. Although there was no indication that the taxpayer continued to use the property, he and his family were the sole beneficiaries of the trust; therefore, the transfer could be characterized as one between family members. Furthermore, the transfer of property was accomplished for little consideration.

[Code Sec. 6213 ]

Notice of deficiency: Mailing: Proof of receipt.--A genuine issue of material fact existed as to whether the IRS sent an individual a notice of deficiency for one of the tax years in question. The documentation submitted by the IRS did not support its assertion that the taxpayer was sent a deficiency notice. However, the taxpayer failed to offer evidence in support of his contention that the IRS did not send him a notice.

[Code Sec. 7403 ]

Jurisdiction: Party to suit: Authorization: Titleholder to property.--A family trust was properly made a party to an IRS action against an individual because it held title to the property that the government claimed was fraudulently conveyed by the taxpayer. The documentation authorizing and directing a suit against the taxpayer, but not naming the trust, was sufficient for purposes of jurisdiction over both the individual and the trust.

MEMORANDUM AND ORDER

MILLER, JR., District Judge:

This cause comes before the court on three ¹ related motions: plaintiff United States's motion for summary judgment, defendant William E. Smith's cross-motion for partial summary judgment and defendant William E. Smith Trust's cross-motion for summary judgment.

William E. and Beverly K. Smith, who are husband and wife, acquired a plot of land by warranty deed from Agnes Hartman ("Hartman property") on August 23, 1974. Several years later, on March 22, 1977, Mr. Smith established the William E. Smith Family Trust naming Mrs. Smith and Marvin Kornblith as trustees. The stated purpose of the trusts is "to accept rights, title and interest in and to real and personal properties" conveyed by the grantor, "so that William E. Smith [grantor] can maximize his lifetime efforts through the utilization of his Constitutional Rights; for the protection of his family in the pursuit of his happiness through his desire to promote the general welfare." The Declaration or Trust further provides that "[t]he purport of [the] instrument is to convey property to Trustees ... to provide for a prudent and economical administration by natural persons acting in a fiduciary capacity...." Both Mr. and Mrs. Smith have indicated through affidavits that the Trust was established to accomplish their estate planning goals. On the same day that Mr. Smith created the Family Trust, Mrs. Smith transferred her interest in the Hartman property for ten dollars to Mr. Smith by quit-claim deed, and indicated in a separate document that she was executing the deed solely to accomplish the transfer of the Hartman property to the Family Trust; accordingly, Mrs. Smith executed an affidavit in which she expressed this intention. Mr. Smith's understanding was that Mrs. Smith transferred the property in trust only, with the explicit understanding that he was required to transfer the Hartman property to the Family Trust. Three days later, on March 25, 1977, Mr. Smith transferred the Hartman property by warranty deed to the Family Trust for ten dollars' consideration and gave Mrs. Smith 50 units of beneficial interest in the Trust.

Four years later, on December 16, 1981, the Family Trust was modified. The Order of Modification provides, among other things that the trust is now named the William E. Smith Trust and its purpose is to "convey certain properties to the Trustees, to constitute a Trust, and to provide for a prudent and economical administration by natural persons acting in a fiduciary capacity for the benefit of the beneficiaries." The Order of Modification was signed by William E. Smith, grantor, and Beverly K. Smith and Darrel R. Gudeman, trustee.

Despite, or perhaps because of, Mr. Smith's attempts to manage his financial affairs "prudently and economically", he did not pay part or all of his federal income taxes from 1982-1986, thus drawing the attention of the Internal Revenue Service. A delegate of the Secretary of the Treasury made the following assessments against Mr. Smith: on March 9, 1987, an assessment totaling $19,420.95 for unpaid income taxes for the year 1982; on March 16, 1987, an assessment totaling $17,942.84 for unpaid income taxes for 1983; and on January 6, 1992, an assessment totaling $278,242.89 for unpaid income tax for the years 1983 through and including 1986. The United States brought this suit to reduce the assessments against Mr. Smith to judgment, seeking a lien on all Mr. Smith's assets, including the Hartman property. The United States seeks foreclosure on the Hartman property, alleging that the Trust is invalid and that the conveyance of the Hartman property to the Trust was fraudulent. Accordingly, the Trust was made party to this suit. Mrs. Smith intervened, asserting if the Trust is deemed void, her interest in the Hartman property should subsist. ² The arguments of all the parties, whether in motions, cross-motions, or supplemental briefs, have been considered by the court. ³

I. Summary Judgment Standard

A party seeking summary judgment must demonstrate that no genuine issue of fact exists for trial and that the movant is entitled to judgment as a matter of law. If that showing is made and the motion's opponent would bear the burden at trial on the matter that forms the basis of the motion, the opponent must come forth with evidence to show what facts are in actual dispute. A genuine factual issue exists only when there is sufficient evidence for a jury to return a verdict for the motion's opponent. Summary judgment should be granted if no reasonableness jury could return a verdict for the motion's opponent.

The parties cannot rest on mere allegations in the pleadings, or upon conclusory allegations in affidavits. The court must construe the facts as favorably to the non-moving party as the record will permit, and draw any permissible inferences from the materials before it in favor of the non-moving party, as long as the inferences are reasonable. The non-moving party must show that the disputed fact is material, or outcome-determinative, under applicable law.

Conery v. Bath Associates, 803 F.Supp 1388, 1392-1393 (N.D. Ind. 1992) (citations omitted).

II.

A. Jurisdiction

In its cross-motion for summary judgment, the William E. Smith Trust asserts that because the United States did not comply strictly with 26 U.S.C. §§7401 and 7403 , the court lacks subject matter jurisdiction over this action. Sections 7401 and 7403 require authorization and request by the Secretary of the Treasury and the direction of the Attorney General before commencement of a civil tax collection action such as this. The Trust attached to its summary judgment motion the authorization of the Secretary of the Treasury and the direction of a delegate of the Attorney General to commence this action against Mr. and Mrs. Smith. The Trust argues that because the United States can produce no evidence that this action was authorized as against the Trust, the court cannot assert jurisdiction over the entire action. The Trust demands more of the United States than §§7401 and 7403 require.

26 U.S.C. §7401 makes clear that "[n]o civil action for the collection or recovery of taxes ... shall be commenced unless the Secretary authorizes or sanctions the proceedings and the Attorney General or his delegate directs that the action be commenced." Once the action is commenced, however, 26 U.S.C. §7403(b) require that "[a]ll persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto." The Trust asserts that these sections require that the Unites States acquire specific authorization to proceed against the Trust. This action is against Mr. Smith for the collection of unpaid taxes; the Trust was made a party to the suit because it holds title to property that the United States alleges was fraudulently conveyed by Mr. Smith. Thus, the documentation authorizing and directing a suit against Mr. Smith, but not naming the Trust, is sufficient to comply with §§7401 and 7403 , and the Trust's motion for partial summary judgment is denied.

B. Certificates of Assessment

The United States asks the court to enter judgment as a matter of law on the tax assessments made against Mr. Smith for the years 1982-1986. The United States argues that it has established, through the corresponding Certificates of Assessments, that income tax assessments were made against Mr. Smith, and that the assessments are presumptively correct. Mr. Smith contends that the United States is not entitled to the presumption of correctness because the bases of the assessments are that Mr. Smith received unreported income.

Assessments generally are entitled to a "presumption of correctness" that imposes upon the taxpayer the burden of proving that the assessments is erroneous. Welch v. Helvering [3 USTC ¶1164], 290 U.S. 111 (1933); Letch v. Commissioner [89-1 USTC ¶9388 ], 877 F.2d 624, 631 (7th Cir. 1989), Pfluger v. Commissioner [88-1 USTC 9221], 840 F.2d 1379, 1382 (7th Cir. 1988). In certain situations, however, the court will not recognize the presumption if the assessments is shown to be "without rational foundation" or is "arbitrary and erroneous." Zuhone v. Commissioner [89-2 USTC ¶9512 ], 883 F.2d 1317, 1325 (7th Cir. 1989) (quoting Ruth v. United States [87-2 USTC ¶9408 ], 823 F.2d 1091, 1094 (7th Cir. 1987)). In Zuhone, the Seventh Circuit noted that "[t]he arbitrary and excessive doctrine is a challenge to the deficiency assessment itself on the basis that it bears no factual relationship to the taxpayer's liability, not a challenge to any proof offered by the Commissioner...." [89-2 USTC ¶9512 ], 883 F.2d at 1325. Accordingly, the court does not review "the commissioner's motives or administrative policy or procedure in making the determination." Zuhone v. Commissioner [89-2 USTC ¶9512 ], 883 F.2d at 1325. Further, the court "will not look behind an assessment to evaluate the procedure and evidence used in making the assessment.... Rather, courts conduct a de novo review of the correctness of the assessment, imposing the risk of nonpersuasion on the taxpayer." Ruth v. United States [87-2 USTC ¶9408 ], 823 F.2d at 1094 (citations omitted).

When the assessment is based on the taxpayer's receipt of unreported income, however, the court must find some evidence that linked the taxpayer with the tax-generating activity. Zuhone v. Commissioner [89-2 USTC ¶9512 ], 883 F.2d 1317, 1325 (7th Cir. 1989); Weimerskirch v. Commissioner [79-1 USTC ¶9359 ], 596 F.2d 358, 360-361 (9th Cir. 1979). This narrow exception recognizes that when receipts of unreported income is the basis of the taxpayer's liability, the taxpayer is in the difficult position of proving the nonexistence of income in order to challenge the assessments levied against him. Anastasato v. Commissioner [86-2 USTC ¶9529 ], 794 F.2d 884, 887 (3rd Cir. 1986) ("Given the obvious difficulties in proving the nonreceipt of income, we believe the Commissioner should have to provide evidence linking the taxpayer to the tax-generating activity in cases involving unreported income, whether legal or illegal.") Thus, the United States must come forward with some evidence that links the taxpayer to the alleged income generating activity. This burden is not substantial and requires only a minimal evidentiary foundation. In short, the United States, when basing an assessment on unreported income, cannot merely rest on the presumption of correctness that is normally afforded to the Certificate of Assessment.

Mr. Smith argues that the United States's assessments are based on his allegedly receiving unreported income; thus, the United States must come forward with some evidence that links him to the charged income. Because the United States has only put forth the assessments, and none of the evidence the delegate of the Secretary of the Treasury used in calculating the assessments, Mr. Smith argues that the United States cannot benefit from the presumption of correctness normally afforded to certificates of assessment.

The United States argues that Mr. Smith has not shown that the assessment for 1982 and the first assessment for 1983 are based on unreported income as opposed to disallowed deductions, so the United States argues that the presumption of correctness should apply to these two assessments. The courts have not addressed which party must establish that the assessments are based on unreported income, thus triggering the need for evidence linking the taxpayer to the charged income. The United States seems to argue that the taxpayer should make this initial showing, but the information regarding the basis of the taxpayer's deficiency is solely in the government's hands. It would be an anomaly to require the taxpayer, when sued by the United States to reduce an assessment to judgment, to come forward with evidence showing the basis of the deficiency. Here, the United States has only introduced into evidence the certificates of assessment. Although the taxpayer generally carries the burden of negating the presumption of correctness, the taxpayer cannot effectively challenge the assessments without information regarding the basis of the assessment. The court recognizes that the United States may well have informed Mr. Smith of the appropriate bases for the assessments long before this litigation began, but without evidence in the record regarding the bases of the assessments, the court cannot bar Mr. Smith from challenging the assessments as if they were based on unreported income. ⁴

Mr. Smith asserts that the United States has put forth no evidence linking him to any unreported income for 1982-1983. The court agrees. Accordingly, the United States, at this stage of the litigation, cannot reduce the assessment for 1982 and the first assessment for 1983 to judgment.

The United States concedes that the bases of the second assessment for 1983 and the assessments for 1984-1986 are based on unreported income. Mr. Smith argues that the United States has not come forward with any evidence linking him to the allegedly income-producing activity. The United States asserts that the evidence needed to link Mr. Smith to the unreported income is available in the evidentiary material presented by Mr. Smith in opposition to the United States's summary judgment motion. Mr. Smith, in an effort to show that the 1983-1986 assessments were based on unreported income, attached to his brief a notice of deficiency sent to him by the Internal Revenue Service, which explains the basis of the charged unreported income. The notice includes a list of checks payable to Mr. Smith or for his benefit, and calculates his income based on the amount of the checks. The United States argues that the notice of deficiency links Mr. Smith to the income-producing activity and so allows the United States to benefit from the presumption of correctness.

Although the notice of deficiency shows that the United States had evidence linking Mr. Smith to the income-producing activity for the 1983-1986 assessments, the notice itself is not evidence sufficient to presume that the assessments are correct. Rapp v. Commissioner [85-2 USTC ¶9750 ], 774 F.2d 932, 935 (9th Cir. 1985) ("While these records reflect that the IRS had before it information linking the Rapps with income-producing activities, including employment, the sale of their residence, and involvement in a business, that underlying information does not itself appear in the record.") The United States' burden is not high; it need only introduce into the record some evidence that links Mr. Smith to the alleged income, and once it does so the court will not evaluate the procedure or weight of the evidence used in making the assessment. Gold Emporium Inc. v. Commissioner [90-2 USTC ¶50,443 ], 910 F.2d 1374, 1378 (7th Cir. 1990) (where evidence of telephone calls, sales records, and bank deposits were introduced and thus established a link between the taxpayer and income-producing activity). Because the United States has not come forward with any evidence linking Mr. Smith to the alleged income-producing activity, the assessments are not presumed correct and cannot be reduced to judgment at this stage of the litigation.

Mr. Smith also argues that the United States cannot reduce the assessment for 1982 to judgment because proper notice of the deficiency was not given. ⁵ He asserts that 26 U.S.C. §6213(a) requires that the United States notify a taxpayer by mail before collecting on assessments, and that his individual Master File MCC Transcript ("IMF") shows that notice was not sent for 1982. Mr. Smith cites Wiley v. United States [94-1 USTC ¶50,150 ], 20 F.3d 222, 224 (6th Cir. 1994), for the proposition that the government must place a "494" code in a taxpayer's IMF each time notice is sent. The lack of a 494 code, Mr. Smith asserts, proves that the United States did not comply with the notice requirement, and thus it cannot reduce the 1982 assessment to judgment.

The United States argues that the absence of a 494 code does not indicate that a notice of deficiency was not sent. A 494 code only appears on an IRS transcript of an account if the notice of deficiency is computer generated. Thus, if a return is selected for examination, a "420" examination code is placed in the taxpayer's IMF, which prevents a 494 code from being input. A manually-generated notice of deficiency would not result in a 494 code in the taxpayer's IMF. The United States introduced a memorandum regarding Mr. Smith's tax liability, and asserts that this document indicated that the a notice of deficiency for 1982 and 1983 was sent to Mr. Smith on September 24, 1986. In addition, a receipt of certified mailing by the I.R.S and to Mr. Smith is dated September 25, 1986.

The document that the United States introduced, however, does not support the conclusion that Mr. Smith was given notice for his 1982 deficiency. The memorandum states the following: "The years 1982 and 1983 were examined and closed, based on information available at the time, on 9/9/86. This examination resulted in taxable income for 1983 of $25,000.00 from unreported wage income. The increase in tax for 1983 was $8,448.00 and penalties totaled $5,967.63. A Notice of Deficiency was issued on 9/24/86 and the tax was assessed on 3/16/87." The memorandum supports only that Mr. Smith was sent notice for the 1983 assessment. Furthermore, although the United States has explained the lack of a 494 code sufficiently, it has not come forward with any evidence that supports the proposition that the I.R.S sent Mr. Smith a notice of deficiency for his 1982 tax assessments. Mr. Smith, however, offers no other evidence to support his contention that the I.R.S. did not send him a notice of deficiency for the assessed deficiency for 1982. In short, a genuine issue of fact exists regarding whether the I.R.S. complied with the notice requirement of 26 U.S.C. 6213(a). Thus, Mr. Smith's motion for partial summary judgment, to the extent that it seeks to bar the United States's claim as it relates to the 1982 assessment, must be denied.

C. Validity of Trust

The United States asserts that it has valid tax liens on the Hartman property and seeks foreclosure of the liens. Although the United States has not yet acquired tax liens against Mr. Smith because it has not yet reduced the relevant assessments to judgments, the court will address the United States's ability to reach the Hartman property if a trial reveals that the assessments should be reduced to judgment. The United States argues that when the assessments were levied, Mr. Smith had title to the Hartman property because the conveyance of the property to the Trust should be considered a nullity. The United States argues that the Trust was not valid, thus the conveyance to the Trust was ineffective.

The United States first argues that the Trust is invalid because no valid purpose or object can be ascertained from the Trust's terms. The Trust's stated purpose is to "convey certain properties to the Trustees, to constitute a Trust, and to provide for a prudent and economical administration by natural persons acting in a fiduciary capacity for the benefit of the beneficiaries." The Trust's original terms stated that the Trust was established so that Mr. Smith "can maximize his lifetime efforts through the utilization of his Constitutional rights."

The existence of a trust is a matter of state law; Indiana law provides the following formal requirements to establish a trust:

(a) A trust either real or personal property is enforceable only if there is written evidence of its terms bearing the signature of the settlor or his authorized agent.

(b) Except as required in the applicable probate law for the execution of wills, no formal language is required to create a trust, but its terms must be sufficiently definite so that the trust property, the identity of the trustee, the nature of the trustee's interest, the identity of the beneficiary, the nature of the beneficiary's interest and the purpose if the trust may be ascertained with reasonable certainty.

IND. CODE 30-4-2-1.

Any attempt to create an express trust that omits one or more of the formal requirements will automatically fail, Pavy v. Peoples Bank & Trust Co., 195 N.E. 2d 862 (Ind. Ct. App. 1964), but trusts are construed so as to implement the intent of the settlor and the purposes of the trust. Matter of Walz, 423 N.E.2d 729, 733-734 (Ind. Ct. App. 1981). Thus, the court examines the facts and circumstances surrounding the execution of the trust to determine the grantor's intent at the time of execution. Id.

The United States argues that no purpose is reasonably ascertainable from the terms of the Trust. The purpose of the Trust may be broad, but it is not so ambiguous as to jeopardize its validity. The stated purpose of the Trust is to allow the trustees to hold various assets for the benefit of the those who hold units of beneficial interest. The trustees have the power and the duty to accept Mr. Smith's services and remuneration and to manage the Trust's assets in a prudent and economical fashion. This purpose is reasonably ascertainable from the terms of the original declaration of trust and order of modification.

The United States next argues that the Trust should be found invalid because Mr. Smith's purpose in creating the Trust was to defraud the United States. The United States asserts that family trusts, which are similar to the William E. Smith trust, have been condemned by several circuit courts because they are recognized as tax avoidance schemes. The United States cites several cases in support of this proposition, including Schulz v. Commissioner [82-2 USTC ¶9485 ], 686 F.2d 490 (7th Cir. 1982); Pfluger v. Commissioner [88-1 USTC ¶9221 ], 840 F.2d 1379 (7th Cir. 1988); Neely v. United States [85-2 USTC ¶9791 ], 775 F.2d 1092 (9th Cir. 1985); Holman v. United States [84-1 USTC ¶9265 ], 728 F.2d 1092 (10th Cir. 1984); Hanson v. Commissioner [83-1 USTC ¶9150 ], 696 F.2d 1232 (9th Cir. 1983); Vnuk v. Commissioner [80-2 USTC ¶9575 ], 621 F.2d 1318 (8th Cir. 1980). These cases, however, pertain to the I.R.S.'s ability to disregard a family trust for tax purposes. When a taxpayer sets up a family trust and assigns all of the family's income to the trust, the I.R.S. can disregard the trust and attribute the income to the taxpayer. Here, the United States asks the court to hold the Trust invalid, thus leaving Mr. Smith, not the Trust, with title to the Hartman property. The cases cited by the United States, although giving the government the authority to a tax Mr. Smith for income received by the Trust, do not give this court the authority to invalidate the Trust.

The United States asserts that Mr. Smith's purpose in establishing the Trust was to defraud the United States, but the United States puts forth no evidence that would establish that Mr. Smith was engaging in fraud at the time that he established the Trust. Generally, a court should construe a trust agreement in favor of validity. Meyer v. Northern Indiana Bank and Trust Co., 490 N.E.2d 400 (Ind. Ct. App. 1986); Hinds v. McNair, 413 N.E.2d 586 (Ind. Ct. App. 1980). Under Indiana law, though, a court has equitable powers to invalidate a trust agreement when improperly executed or if circumstances surrounding its execution so warrant. IND. CODE 30-4-3-30.

The court has examined the declaration of trust, order of modification, and affidavits of the Smiths for evidence of fraud at the time of creating the Trust. The Smiths, through their affidavits, indicate that their purpose in establishing the Trust was to facilitate estate planning, and the terms of the Trust, as indicated above, reveal only that the Smiths attempted to manage their economic affairs through the use of a family trust. The circumstances surrounding the use of the Trust to report Mr. Smith's income provide ample evidence upon which the I.R.S. could attribute the Trust's income to Mr. Smith, but there is not enough evidence to conclude that the Smiths' purpose when creating the Trust was to defraud. Thus, the court cannot invalidate the Trust on this record.

D. Hartman Property

The United States also argues that Mr. Smith fraudulently conveyed the Hartman property to the Trust, so the conveyance should be disregarded and Mr. Smith deemed the owner of the property. Mr. Smith and the Trust argue that Mr. Smith did not transfer the Hartman property with the intent to defraud and that the statute of limitations bars the United States's attempt to void the conveyance. The United States has responded that pursuant to United States v. Summerlin [40-2 USTC ¶9633 ], 310 U.S. 414 (1940), the United States is not bound by state statutes limitations. See also United States v. City of Palm Beach Gardens, 635 F.2d 337, 339 (5th Cir. 1981); United States v. Podell, 572 F.2d 31, 35 n.7 (2d Cir. 1978); Guaranty Trust Co. v. United States, 304 U.S. 126, 132-133 (1938) United States exempt from operation of statutes of limitations); Silverman v. Commodity Futures Trading Comm'n, 549 F.2d 28, 34 (7th Cir. 1977) ("[T]he United States is not bound by state statutes of limitations or subject to the defense of laches in enforcing its rights.")

The defendants acknowledge the general rule as set forth in Summerlin, but argue that, in this case, the state statute of limitations should apply to the United States. The defendants cite United States v. Vellalos [92-1 USTC ¶50,227 ], 780 F.Supp. 705 (D.C. Hawaii 1992), aff'd 990 F.2d 1265 (9th Cir. 1993), which held that the United States was barred by the applicable state statute of limitations when it attempted to void a fraudulent conveyance. The United States counters that the majority of courts have held that even when seeking to void a fraudulent conveyance, the United States is not bound by the applicable state statute of limitation. See, e.g., United States v. Fernon [81-1 USTC ¶9287 ], 640 F.2d 609 (5th Cir. 1981); United States v. Wurdeman [81-2 USTC ¶9757 ], 663 F.2d 50 (8th Cir. 1981); United States v. Parker House Sausage Co. [65-1 USTC ¶9402 ], 344 F.2d 787 (6th Cir. 1965). The Seventh Circuit has not specifically addressed the issue, but has applied Summerlin in other circumstances. See, e.g. United States v. Tri-No Enters., Inc., 819 F.2d 154 (7th Cir. 1987) (United States is generally not subject to state statutes of limitations).

The Vellalos case, cited by the defendants, argued that the Summerlin case "stands for the proposition that the state may not limit the federal government's common law right to collect debts owed to it." [92-1 USTC ¶50,227 ], 780 F.Supp. at 707. In Summerlin, the United States, as assignee of a claim against an estate, sought to collect on the claim outside of the state's statute of limitations. The Summerlin Court stated that "[i]t is well settled that the United States is not bound by state statutes or subject to the defense of laches in enforcing its rights." The Vellalos court would make a distinction that while the United States may seek recovery of its claims outside of the limitations period, the United States cannot take advantage of state-created rights, such as the right to void a fraudulent conveyance, outside of the limitations period, United States v. Vellalos [92-1 USTC ¶50,227 ], 780 F.Supp. at 707.

This court does not read Summerlin as narrowly as did the court in Vellalos. The Supreme Court in Summerlin allowed the United States to bring a claim against a decedent's estate, which is a state-created right, after the limitations period had run because even when the United States accepts a claim by assignment "it cannot be deemed to have abdicated its governmental authority so as to become subject to a state statute putting a time limit upon enforcement." [40-2 USTC ¶9633 ], 310 U.S. at 417. The Vellalos approach would allow the United States to pursue its claims outside of the limitations period, but would use the same statute of limitations to prevent the United States from using state-created doctrines to collect on its judgment. This distinction seems unwarranted given the Summerlin Court's explicit declaration against limiting the United State's ability to collect on its debts.

Furthermore, in Vellalos, the United States sought to avoid the taxpayer's conveyance by using the Hawaii Fraudulent Transfer Act, which extinguishes an action to void a fraudulent conveyance if not brought within four years of the transfer. The Vellalos court relied on this extinguishment provision and held that the United States was not able to proceed under the act because the cause of action was extinguished, not merely time barred. In other words, there was no cause of action under Hawaiian law that the government could assert. Indiana's law on fraudulent conveyances contains no extinguishment provision, so the rationale of Vellalos is inapplicable. See IND. CODE §32 -3-1-14.

In sum, although the Seventh Circuit has not decided whether the United States can take advantage of a fraudulent conveyance statute outside the state statute of limitations, this court agrees with the various other circuits that have allowed the United States to do so.

The United States seeks to void Mr. Smith's transfer of the Hartman property to the Trust because it was accomplished for fraudulent purposes. The principles of Indiana law on fraudulent conveyances are well established:

All conveyances or assignments, in writing or otherwise, of any estate in lands, or of goods or things in action, every charge upon lands, goods or things inaction, and all bonds, contracts, evidence of debt, judgments, decreed, made or suffered with the intent to hinder, delay or defraud creditors or other persons of their lawful damages, forfeitures, debts or demands, shall be void as to the persons sought to be defrauded.

IND. CODE 32-2-1-14.

Fraudulent intent is a question of fact under Indiana law, and a conveyance will not be deemed fraudulent merely because the conveyance was accomplished without the exchange of valuable consideration. IND. CODE 32-2-1-18; United States Marketing Concepts v. Don Jacobs, 547 N.E.2d 892 (Ind. Ct. App. 1989). Although the determination of whether a conveyance was fraudulent involves the consideration of various factors, certain circumstances so frequently indicate that the transfer is to defraud creditors that they are recognized as indicia or "badges of fraud." Id. at 894. For example, fraudulent intent may be inferred from

the transfer of property by a debtor during the pendency of a suit; a transfer of property that renders the debtor insolvent or greatly reduces his estate; a series of contemporaneous transactions which strip a debtor of all property available for execution; secret or hurried transactions not in the usual mode of doing business; any transaction conducted in a manner differing from customary methods; a transaction whereby the debtor retains benefits over the transferred property; little or no consideration in return for the transfer; a transfer of property between family members.

Jones v. Central Nat'l Bank of St. Johns, 547 N.E.2d 887, 889-890 (Ind. Ct. App. 1989) (citing Jackson v. Russell, 533 N.E.2d 153, 155 (Ind. Ct. App. 1989)); United States Marketing Concepts, Inc. v. Don Jacobs, 547 N.E.2d 887, 894 (Ind. Ct. App. 1989). No one badge of fraud constitutes a per se showing of fraudulent intent. Jones, 547 N.E.2d at 890; Johnson v. Estate of Rayburn, 587 N.E.2d 182, 186 (Ind. Ct. App. 1992). Badges of fraud must be "taken together to determine how many ... exist and if together they constitute a pattern of fraudulent intent." Jones, 547 N.E.2d at 890. The character of a sale or transfer of property must be judged by the circumstances existing at the time of the conveyance and not by subsequent events having no actual connection with the transaction. Stamper v. Stamper, 83 N.E.2d 184 (Ind. 1949); Deming Hotel Co. v. Sisson, 24 N.E.2d 912 (Ind. 1940); When all of the badges of fraud support an inference of fraudulent intent, a nonmovant must explain some of the inference away to survive summary judgment. United States v. Denlinger [93-1 USTC ¶50,040 ], 982 F.2d 233, 237 (7th Cir. 1992)

The United States contends that several of these badges of fraud indicate that Mr. Smith's transfer of the Hartman property to the Trust was fraudulent. The United States first argues that because Mr. Smith created the Trust to further a fraudulent tax scheme and then used the Trust to claim the Smith's income and deductions, he should have known that the I.R.S. would initiate legal action against him. See United States v. Denlinger [93-1 USTC ¶50,040 ], 982 F.2d 233, 236-237 (7th Cir. 1992). The defendants point out that no suit pending was against them when the Hartman property was transferred to the Trust, and the United States was not even a creditor of any of the defendants at that time. Although the United States was not a creditor of Mr. Smith or the Trust at the time of the conveyance, Mr. Smith attempted to attribute all of his income to the Trust and only claimed a consulting fee paid from the Trust on his tax return. Mr. Smith reasonably should have known that his attempts to defer income would "be an invitation to legal action by the I.R.S." Denlinger [93-1 USTC ¶50,040 ], 982 F.2d at 236-237 (transfer of property to a trust voided as fraudulent).

The United States also argued that Mr. Smith retained all of the benefits of the transferred property because he was a beneficiary of the Trust. The evidence introduced by the defendants shows that after the transfer of the Hartman property, Mr. and Mrs. Smith and their minor children held all of the units of beneficial interest in the Trust. Neither Mr. Smith nor the Trust have introduced any evidence to negate the United States's position. Although no evidence in the record indicates whether Mr. Smith continued to use the Hartman property after the transfer, it is enough to support this badge of fraud that Mr. Smith and his family were the sole beneficiaries of the Trust after the transfer.

The United States contends that the transfer of the Hartman property was accomplished for little consideration, another badge of fraud. The United States points out that the deed for the transfer of the Hartman property of the Trust recites that the transfer was made for less than $100.00 consideration. The defendants have presented no evidence to counter this assertion. Further, because Mr. Smith and his family were the sole beneficiaries of the Trust, the transfer can be characterized as one between family members.

The United States argues that Mr. Smith's estate was greatly diminished after the transfer of the Hartman property. The defendants assert that after transferring the Hartman property, the Smiths continued to own another piece of property ("Leonard property") and that he was not insolvent after the transfer. Aside from his interest in the Leonard property, however, Mr. Smith has alleged ownership of no other assets. In fact, the stated purpose of the Family Trust is to accept rights, titles, and interest conveyed by Mr. Smith, including "the exclusive use of his lifetime services and all of his earned remuneration accruing therefrom." Although Mr. Smith continued to assert an interest in the Leonard property after the Hartman transfer, he had assigned nearly all of his assets to the Trust.

The defendants contend that neither the creation of the Trust nor the subsequent transfer of the Hartman property were effected to defraud the United States: rather, the defendants allege that all of these transactions were an attempt at estate planning. This contention, however, does not negate the reasonable inference that Mr. Smith intended to defraud the government when he transferred the Hartman property nor is it enough to withstand summary judgment. The concurrence of these badges of fraud lead to one reasonable inference: that Mr. Smith intended to defraud the government when he established the Family Trust and assigned it title to the Hartman property. The United States is entitled to judgment as a matter of law on this issue.

III. Conclusion

For the foregoing reasons, the court

(1) DENIES defendant Trust's motion for partial summary judgment (filed July 15, 1996 (#106));

(2) DENIES defendant Mr. Smith's motion for summary judgment regarding the lack of notice of deficiency for 1982 (filed February 8, 1995 (#38)); and

(3) DENIES in part and GRANTS in part plaintiff's motion for summary judgment (filed November 25, 1994 (#23)).

SO ORDERED.

¹ Mr. Smith also moved for summary judgment asserting that he did not receive notices of deficiency for taxes owed for the years 1982-1983. On June 27, 1995, Mr. Smith withdrew his motion for partial summary judgment because evidence exists that Mr. Smith received notice for 1983-1986. Mr. Smith presumably did not intend to withdraw his challenge to the notice for 1982.

² The United States filed a summary judgment motion regarding Mrs. Smith claim to the Hartman property. Because that issue has not been fully briefed, this order does not address it.

³ The briefing for these motions originally covered unpaid income taxes for the years 1979-1986 for both Mr. and Mrs. Smith, but the action has been pared down to only the unpaid income taxes of Mr. Smith for the years 1982-1986. Although the court disregarded any arguments in the briefs that focused solely on the Smiths' pre-1982 tax liability, the court was careful to consider any argument that could be regarded as pertaining to Mr. Smith's 1982-1986 liability.

⁴ The government easily could have avoid this conundrum by introducing documents showing the bases of the assessments. Without such information, the court must allow Mr. Smith, for summary judgment purposes, to challenge the assessments as if they were based on unreported income.

⁵ Mr. Smith originally argued that he received notice for the tax deficiencies for 1982-1986. In a June 27, 1995 motion, Mr. Smith indicated that evidence does exist that shows that he received Notices of Deficiency for 1983-1986. Accordingly, the court considers Mr. Smith's arguments regarding notice only for 1982.

 

 

 

United States of America, Plaintiff-Appellee v. Russell M. Odd, Joann H. Odd, Russell E. Odd, Defendants-Appellants

(CA-9), U.S. Court of Appeals, 9th Circuit, 95-35218, 8/19/96, Affirming an unreported District Court decision

[Code Sec. 6321 ]

Conveyances: Fraudulent: Hinder and delay creditors.--A transfer of certain real property from a married couple to their daughter constituted a fraudulent conveyance because it was intended to hinder, delay or defraud creditors or other persons. Thus, under state (Alaska) law, the transfer was void. The transfer was made in anticipation of a pending suit, for inadequate consideration, and to a related party. Moreover, the taxpayers lived on the property rent-free after the transfer.

[Code Sec. 6203 ]

Tax assessments: Valid Forms 4340: Certificates of assessments and payments.--The lower court did not err in granting the IRS partial summary judgment and reducing to judgment the tax assessments against a married couple who made a fraudulent conveyance of real property. The tax assessments made against the taxpayers were proper. The assessments were based on the taxpayers' self-reported liabilities, and the taxpayers failed to establish that their liability was different than that shown on the Forms 4340, Certificates of Assessments and Payments, submitted by the IRS.

Robert J. Brannan, Anchorage, Alas. 99513-7567, Gary R. Allen, Bruce Ellisen, Kevin M. Brown, Department of Justice, Washington, D.C. 20530, for plaintiff-appellee. John H. Odd, Russell E. Odd, Russell M. Odd, P.O. Box 39296, Ninilchik, Alas. 99639, pro se.

Before: BROWNING, SCHROEDER, and RYMER, Circuit Judges. ^*

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

MEMORANDUM ^**

Russell E. Odd, along with his parents Russell M. and Joann H. Odd, appeal pro se the district court's judgment following a bench trial in favor of the United States. The district court held that the 1983 transfer of certain real property constituted a fraudulent conveyance under Alaska Stat. §34.40.010. The district court then foreclosed liens on the Ninilchik property to satisfy outstanding tax liabilities for taxable years 1978 through 1988.

We AFFIRM.

The district court did not err in granting partial judgment and reducing the tax assessments to judgment. The taxpayers did not appeal the Tax Court's decisions sustaining the Commissioner's deficiency determinations for taxable years 1978 through 1983 and are therefore precluded from relitigating their liability for those years. See Commissioner v. Sunnen [48-1 USTC ¶9230 ], 333 U.S. 591, 597 (1948). Taxpayers did not file federal income tax returns for taxable years 1984, 1985, and 1986. Where the taxpayer does not file a return, the deficiency is the amount of tax due. Roat v. Commissioner [88-1 USTC ¶9364 ], 847 F.2d 1379, 1381 (9th Cir. 1988). For taxable years 1987 and 1988, taxpayers filed late returns showing outstanding tax liabilities but failed to include payment. The assessments for these years were based on the self-reported tax liabilities, plus penalties and interest.

The Government submitted Certificates of Assessments and Payments (Forms 4340) showing that the assessments were properly made. Taxpayers have not produced sufficient evidence to establish that their tax liability is any different than that shown on Forms 4340. "[I]n the absence of contrary evidence, [Forms 4340] are sufficient to establish that notices and assessments were properly made." Hughes v. United States [92-1 USTC ¶50,086 ], 953 F.2d 531, 540 (9th Cir. 1992).

The district court did not err in finding that the transfer of the Ninilchik property was a fraudulent conveyance under Alaska law. The conveyance was made: 1) in anticipation of a pending suit, 2) for inadequate consideration, 3) to a related party (the taxpayers' daughter). Further, taxpayers have lived on the property rent-free since 1988. The conveyance was "intended to hinder, delay or defraud creditors or other persons" and is void under Alaska law. Gabaig v. Gabaig, 717 P.2d 835, 838 (Alaska 1986); Alaska Stat. §34.40.090.

AFFIRMED.

^* The panel unanimously finds this case suitable for decision without oral argument. Fed. R. App. P. 34(a) and Ninth Circuit Rule 34-4.

^** This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir. R. 36-3.

 

 

 

United States of America, Plaintiff v. Thomas E. O'Day, David H. Eiland, Thomas E. O'Day II, and Barnett Bank of Central Florida, Defendants

U.S. District Court, Mid. Dist. Fla., Orlando Div., 95-86-CIV-ORL-18, 12/23/96

[Code Secs. 6321 , 6323 and 7403 ]

Tax liens: After-acquired property: Fraudulent conveyances: Transfers to third parties: Priority against third parties: Bona fide purchasers: Action to enforce lien: Foreclosure.--The government was entitled to foreclose on the property of a delinquent taxpayer in satisfaction of his tax liabilities. The taxpayer's transfer of the property following the issuance of assessments to his son and stepson while retaining a life estate was fraudulent under state (Florida) law. The taxpayer received no consideration and continued to live on the property. Therefore, the transferees acquired their interest in the property subject to the government's tax lien. Furthermore, the tax lien was superior to the transferees' interest because they were not bona fide purchasers.

[Code Sec. 6203 ]

Assessments: Presumption of correctness.--A delinquent taxpayer failed to present evidence refuting the accuracy of IRS assessments made against him. Therefore, he did not meet his burden of proving that the assessments were arbitrary or erroneous.

[Code Sec. 6871 ]

Bankruptcy: Dischargeability.--Since a delinquent taxpayer fraudulently attempted to evade tax by conveying property to his son and stepson, closing his bank accounts, and dealing solely in cash, his tax liabilities were not dischargeable in bankruptcy. Instead, the liabilities were reduced to a judgment in favor of the government.

Karen L. Gable, Orlando, Fla. 32801, Brian L. Schwalb, Department of Justice, Washington, D.C. 20530, for plaintiff. Roy L. Beach, 1415 E. Robinson St., Orlando, Fla. 32801, for Thomas E. O'Day. Roy L. Beach, 1415 E. Robinson St., Orlando, Fla. 32801, for David H. Eiland. Dkyes C. Everett, Winderweedle, Haines, Ward & Woodman, P.A., 390 N. Orange Ave., Orlando, Fla. 32802, for Barnett Bk. of Cent. Fla., N.A.

ORDER

SHARP, District Judge:

The United States of America brings this instant action against Thomas E. O'Day (O'Day), David H. Eiland (Eiland), Thomas E. O'Day II (O'Day II), and Barnett Bank of Central Florida (Bank) alleging that O'Day failed to pay his federal tax liabilities owed to the federal government. In their suit, the government seeks to have the court: (1) determine and adjudge O'Day's tax liability; (2) determine the respective priorities of the federal tax liens already in place; (3) determine that a purported real property transfer was fraudulent and void pursuant to Florida Statute chapter 726.105(1); (4) order a foreclosure of the federal tax liens; and (5) grant a deficiency judgment against O'Day if the proceeds from the sale of the real property do not satisfy his indebtedness. The case is presently before the court on the United States' motion for summary judgment against defendants O'Day and Eiland, ¹ to which the defendant have responded in opposition. Following a review of the case file and relevant law, the court concludes that the United States' motion should be granted.

I. Findings of Fact

After an examination by the Internal Revenue Service (IRS) of O'Day's federal income tax returns, they determined that O'Day owed the federal government additional taxes, plus interest and penalties for the years of 1981, 1982, 1984, 1985, 1986. Following an audit, the IRS sent O'Day a Notice of Deficiency and Report of Individual Income Tax Examination Changes for the years 1982, 1984 and 1985 which explained the basis of the proposed income tax adjustments and also advised O'Day of his right to challenge the proposed adjustments in the United States Tax Court. Additionally, O'Day signed a Revised Report of Individual Income Tax Examination Changes for the 1986 tax year acknowledging his agreement with the IRS adjustment of the 1986 tax liability and waived his right to exercise his administrative appellate rights or to contest the adjusted tax deficiency in the United States Tax Court. Because O'Day did not file a petition with the United States Tax Court challenging the IRS adjusted liabilities for the years of 1981, 1982, 1984 and 1985, the Secretary of the Treasury issued assessments against O'Day for his tax deficiencies, plus interest and penalties. The IRS, pursuant to 26 U.S.C. §6.303(a), also sent O'Day notice of his tax liabilities and demands for payment. Later, O'Day failed to file an income tax return for 1990 and the IRS sent him a Notice of Deficiency. Since O'Day took no action contesting the notice, the Secretary of the Treasury issued an assessment and demand for payment of his tax liability. As of November 1, 1996, O'Day's unpaid assessed federal income tax liability for the years 1981, 1982, 1984, 1985, 1986, and 1990 totaled $55,011.57.

While O'Day was involved in his tax controversy, he worked as a modest electrical contractor, usually out of his home. O'Day has and continues to live in the same residential property which he purchased on February 27, 1969. ² But, on March 9, 1990, O'Day allegedly conveyed his interest in the subject property to his son, O'Day II, and his stepson, Eiland, while retaining a life estate in the property for himself. Neither O'Day II or Eiland paid O'Day any consideration for the interest in the subject property and O'Day has continued to reside on and oversee the management of the property.

On September 25, 1995, O'Day filed for Chapter 7 bankruptcy protection in the United States Bankruptcy Court for the Middle District of Florida, Orlando Division. As a result, this civil action was stayed until O'Day's bankruptcy proceeding had concluded. On January 4, 1996, the Bankruptcy Court entered an order of discharge, resulting in the removal of the automatic stay and the renewal of this civil suit.

II. Legal Discussion

A. Summary Judgment Standards

Summary judgment is authorized 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); accord Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). "[A]t the summary judgment stage the judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson, 477 U.S. at 249. "[T]he substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted." Id. at 248.

The moving party bears the burden of proving that no genuine issue of material fact exists. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). In determining whether the moving party has satisfied the burden, the court considers all inferences drawn from the underlying facts in a light most favorable to the party opposing the motion, and resolves all reasonable doubts against the moving party. Anderson, 477 U.S. at 255; see Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986). The moving party may rely solely on his pleadings to satisfy this burden. Celotex, 477 U.S. at 323-24; Fed. R. Civ. P. 56(c).

"[A]ll that is required [to proceed to trial] is that sufficient evidence supporting the claimed factual dispute be shown to require a jury or judge to resolve the parties' differing versions of the truth at trial." Anderson, 477 U.S. at 249 (quoting First Nat'l Bank v. Cities Serv. Co., 391 U:S. 253, 288-89 (1968)). Summary judgment is mandated, however, "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.

B) The Merits of Plaintiff's Motion

In their motion for summary judgment against O'Day and Eiland, the government seeks to foreclose the federal tax liens placed on the subject property, and to reduce the assessed tax liabilities to judgment entered in the government's favor. The court will address each issue in their respective order.

1) Foreclosure of Federal Tax Liens

In their motion for summary judgment, the government explained how the tax lien issued against O'Day's property pursuant to 26 U.S.C. §§6321 and 6622 was lawfully executed and thus capable of a foreclosure action. Section 6321 states in pertinent part that:

[I]f any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

26 U.S.C. §6321 (1994). Section 6322 goes on to state that "unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time of assessment is made and shall continue until the liability for the amount so assessed ... is satisfied or becomes unenforceable by reason of lapse of time." 26 U.S.C. §6322 (1994). The government maintains that because it holds a lawful lien against any interest O'Day has in any property, that the court may force the sale of such property to satisfy the debtor's obligation to the government pursuant to 26 U.S.C. §7403. Section 7403 states that:

[T]he court shall, after the parties have been notified of the action, proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property, and ... may decree a sale of such property, by the proper officer of the court, and a distribution of the proceeds of such sale according the findings of the court in respect to the interests of the parties and of the United States....

26 U.S.C. §7403 (1994). Accordingly, the government is motioning this court to allow them to foreclose on the subject property and use the sale proceeds to satisfy O'Day's federal tax obligations.

In response to the government's motion, O'Day contends that the government is not entitled to foreclose on the subject property for two reasons. First, O'Day claims that when he voluntarily filed for Chapter 7 bankruptcy protection, all creditor claims and liens against him and his property were thereby discharged. Second, O'Day contends that he conveyed his interest in the subject property to his son and stepson and thus the subject property is not susceptible to the government's foreclosure action.

While attempting to foreclose on the subject property and have the proceeds used to satisfy O'Day's tax liabilities, O'Day argues that his Chapter 7 bankruptcy and the bankruptcy court's order of discharge absolved him of payment of those liabilities. The government denies that O'Day's Chapter 7 bankruptcy discharged his federal tax liabilities, and argues that even if O'Day's assertions were true, that such a discharge does not prohibit the government from seeking to foreclose the tax liens on O'Day's interest in real property resulting from those federal tax liabilities. The government cites to several United States Supreme Court cases which support their position. See Dewsnup v. Timm, 502 U.S. 410, 418 (1992) (stating that a bankruptcy discharge extinguishes only one mode of enforcing a claim--namely, an action against the debtor in personam--while leaving intact another--namely, an action against the debtor in rem) (quoting Johnson v. Home State Bank, 501 U.S. 78, 84 (1991)) (emphasis in original); Farrey v. Sanderfoot, 500 U.S. 291, 297 (1991) (stating that ordinarily, liens and other secured interests survive bankruptcy). See also, In Re Millsaps, 133 B.R. 547, 550 (Bankr. M.D. Fla. 1991) (holding that whether or not the personal prepetition tax obligations are discharged, however, exempt real property remains subject to any properly filed tax liens). The court agrees with the government's argument and finds that the O'Day's Chapter 7 bankruptcy does not prohibit the government from seeking to foreclose on the subject property in an effort to satisfy O'Day's tax liabilities.

Next, O'Day argues that even if the government is entitled to foreclose their federal tax liens on the subject property, he claims that he properly conveyed the property to O'Day II and Eiland while retaining a life estate interest for himself. O'Day claims that he suffers from a serious medical condition, hyperliperdemia, which was the cause of death for both of his parents. He contends that he was afraid of the same fate occurring to him, so as an estate planning exercise, he conveyed the subject property to both O'Day II and Eiland. (O'Day Aff. at 1; Doc. 52).

The government maintains that even if O'Day trasferred his interest to the subject property to O'Day II and Eiland, that it can still foreclose the property to recoup O'Day's tax liabilities for three reasons. First, the government claims that both O'Day II and Eiland transferred their interest in the subject property back to O'Day by use of a quitclaim deed, though O'Day never recorded the instrument. The government offers two documents (Doc. 34; Exh. 9, 10) which purport to show that both O'Day II and Eiland executed and delivered quitclaim deeds relinquishing all their interest in the subject property back to O'Day for the sum of $10 on May 2, 1992, and June 10, 1992 respectively. The deeds, however, were never recorded by O'Day. The government claims that O'Day's failure to record the quitclaim deeds does not affect O'Day's ownership interest in the subject property. See Sweat v. Yates, 463 So. 2d 306, 307 (Fla. Dist. Ct. App. 1984) (holding that a deed takes effect from the date of delivery, and the recording of a deed is not essential to its validity as between the parties or those taking with notice).

Second, the government contends that if O'Day II and Eiland still possess an interest in the subject property, that they acquired the property subject to a federal tax lien which allows the government to foreclose. The government contends that both O'Day II and Eiland allegedly acquired their interests in the subject property on March 9, 1990, after the government had already made assessments, demands for payment, and the imposition of liens against O'Day for his tax liabilities. The government relies heavily on the United States Supreme Court case of United States v. Bess, which states that a "transfer of property subsequent to the attachment of the lien does not affect the lien, for it is the very nature and essence of a lien, that no matter into whose hands the property goes, it passes cum onere...." United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 57 (1958) (citations omitted). See also, United States v. Avila [96-2 USTC ¶50,357], 88 F.3d 229, 233 (3rd Cir. 1996) (holding that a transfer of property subsequent to the attachment of a lien does not affect the lien); accord Jarro v. United States, 830 F. Supp. 606, 608 (S.D. Fla. 1993) (holding that tax liens follow the property to which they have attached wherever it may be transferred). Thus, the court finds that O'Day II and Eiland acquired their interest in the subject property subject to a federal tax lien which allows the government to foreclose on the subject property.

The government also contends that because O'Day II and Eiland were not bona fide purchasers of the subject property, that they are not entitled to any protection. See Rodeck v. United States, 697 F. Supp. 1508, 1510 (D. Minn. 1988) (holding that a lien need not be filed to be effective against the delinquent taxpayer or against third party claimants of the taxpayer's property except for those creditors and transferees specifically protected under section 6323(a), which provides that a federal tax lien will not be superior to four particular interests unless notice of that lien has been properly filed). Section 6323(a) provides that a lien imposed by section 6321, as is the case here, shall not be valid against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditors. 26 U.S.C. §6323(a) (1994). Section 6323 goes on to define a purchaser as "a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property...." 26 U.S.C. §6323(h)(6) (1994). Because the governments claims that neither O'Day II nor Eiland paid any consideration for their interest in the subject property, the two can not be considered "purchasers" for section 6323 purposes and therefore the federal lien is superior to any interest O'Day or Eiland may have in the subject property. The court agrees with the government's argument and concludes that foreclosure of the federal tax liens on the subject property is lawful and will therefore grant their motion for summary judgment on that issue.

Because the court determined that summary judgment was appropriate on the government's motion for foreclosure on the subject property, it need not analyze the government's remaining arguments, namely that O'Day's transfer of the subject property constituted a fraudulent conveyance and thus not subject to protection. The court notes however that it agrees with the government's argument and finds that O'Day's supposed transfer to O'Day II and Eiland constituted a fraudulent conveyance. In support of their argument, the government cites to Florida Statute chapter 726.101 which states in pertinent part that:

[a] transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.

Fla. Stat. Ch. 726.101(1) (1995). Prior to conveying the subject property, O'Day was indebted to the government for unpaid, assessed income tax liabilities. Neither O'Day II nor Eiland paid O'Day any consideration for the subject property, and after the conveyance. O'Day was rendered insolvent. Thus, all the elements of Florida Statute chapter 726.101 are satisfied. In addition to satisfying Florida Statute chapter 726.101, certain actions made by O'Day may constitute badges of fraud and render the conveyance fraudulent as well. The court may use various kinds of circumstantial evidence to infer fraudulent intent since direct evidence of such an intent rarely exists. In re Griffith, 161 B.R. 727, 733 (Bankr. S.D. Fla. 1993) (citations omitted). Some of these badges of fraud include: (1) inadequate financial records; (2) transfer of assets to a family member; (3) transfer for inadequate consideration; (4) transfer that greatly reduced assets subject to IRS execution; (5) transfers that were made in the face of serious financial difficulties. Id. O'Day satisfies all of these examples as evidence of badges of fraud. While O'Day contends that his transfer was simply for estate planning purposes, the court is not persuaded. The court agrees with the governments contentions outlined in their memorandum and concludes that O'Day's March 9, 1990 transfer of the subject property was fraudulent and therefore the government has the authority to foreclose their federal tax liens on the subject property.

2) Reduce Assessed Tax Liabilities to Judgment

In addition to foreclosing the federal tax liens on the subject property, the government wishes to reduce O'Day's assessed income tax liabilities to judgment. When evaluating the IRS's tax liability determinations, the court is required to consider their conclusions presumptively correct. See United States v. Chila [89-1 USTC ¶9299], 871 F.2d 1015, 1018 (11th Cir. 1989) (stating that the Certificate of Assessment and Payment submitted by the government is presumptive proof of a valid claim); George v. United States [87-2 USTC ¶9384], 819 F.2d 1008, 1013 (11th Cir. 1987) (stating that the commissioner's determination of a tax deficiency is presumed to be correct and that the taxpayer bears the burden of proving otherwise). Once the Certificate of Assessments and Payment is filed, the burden then shifts to the taxpayer to show that the government's assessment was arbitrary or incorrect. Bar L Ranch, Inc. v. Phinney [70-1 USTC ¶9399], 426 F.2d 995, 999 (5th Cir. 1970). If the taxpayer does not present evidence indicating to the contrary, a district court may properly rely on the certificates and conclude that valid assessments were made. Guthrie v. Sawyer [92-2 USTC ¶50,391], 970 F.2d 733, 737-38 (10th Cir. 1992) (citing Hughes v. U.S., 531 F.2d 531, 535 (9th Cir. 1992)).

The government cites to numerous examples of how O'Day failed to present evidence or question the incorrectness of the assessments, and thereby fails to meet his burden of proof in this case that the assessments were erroneous. First, the government points out that O'Day voluntarily signed a Revised Report in 1986 consenting to the change in assessments made for that year. Second, the government mentions that O'Day failed to file a petition with the Tax Court regarding any of the assessments at issue in this case. The government argues that a taxpayer:

cannot rebut the Government's assessment on mere allegations that such assessment was arbitrary, excessive, invalid and illegal. The assessment can be overturned only by the taxpayer producing records and other evidence which clearly demonstrates the proper amount of tax which he owes the Government. Failing to produce such evidence, the Government's assessment is entitled to be reduced to judgment.

Ginsburg v. United States [67-2 USTC ¶15,757 ], 1967 WL 14746 (C.D. Cal. 1967), aff'd [69-1 USTC ¶15,888 ], 408 F.2d 1016 (9th Cir. 1969) (citing O'Neill v. United States [61-2 USTC ¶15,371 ], 198 F. Supp. 367, 370 (E.D. N.Y. 1961). Because O'Day can not substantiate his expenses or deductions, or demonstrate the source of his unreported income due to the inadequacy or non existence of any records, the government argues that it is proper to reduce the assessments to judgments in favor of the government.

Without producing any records or evidence of the government's error in calculating their assessment, O'Day relies on his filing for Chapter 7 bankruptcy protection for discharging his federal income tax liabilities. The court has previously ruled that O'Day's filing for Chapter 7 bankruptcy protection did not discharge the government's lien against his real property, and now rules that his tax liabilities were not discharged either. First, because O'Day failed to file a tax return for the year 1990, the government prepared a substitute return for him. Accordingly, O'Day is not entitled to a discharge for a return that was never filed. See 11 U.S.C. §523(a)(1)(B)(i) (1994) (stating that a discharge under section 727 ... does not discharge an individual debtor from any debt for a tax ... with respect to which a return, if required--was not filed). Because O'Day presents no evidence to disprove the IRS's assessment, the court must presume it to be correct. George [87-2 USTC ¶9384], 819 F.2d at 1013.

Additionally, the government contends that a debtor is not entitled to have his tax liabilities discharged if he acted fraudulently while preparing a return or attempting to evade the tax due. See 11 U.S.C. §523(a)(1)(C) (1994) (stating that a discharge under section 727 ... does not discharge an individual debtor from any debt--from a tax or a customs duty--with respect to which the debtor made a fraudulent return or wilfully attempted in any manner to evade or defeat such tax). The government argues that O'Day fraudulently transferred his interest in the subject property to protect it from seizure; closed all of his bank accounts and began dealing solely in cash to avoid an IRS levy; in addition to filing several frivolous lawsuits. The court notes that:

[O]ne of the primary purposes of the Bankruptcy Code is to give the "honest but unfortunate" debtor a fresh start. Disallowing a discharge of tax debts owed by debtors who endeavored to evade taxes will not undermine the Bankruptcy Code's fresh start objective; however, it will promote an equally important objective expressed by Congress, namely that the Bankruptcy Code not become an inappropriate tax evasion device.

In re Spirito, 198 B.R. 624, 629 (Bankr. M.D. Fla. 1996). As recited earlier in the government's argument seeking a foreclosure on the subject property in Count I, the court agrees with the government's contentions that O'Day acted fraudulently and in an attempt to disrupt and impede the government's efforts from imposing and collecting his tax liabilities. Therefore, the court concludes that O'Day's tax liabilities were not discharged by his Chapter 7 bankruptcy filing and that his liabilities should be reduced to a judgment in favor of the government. Accordingly, the court will grant the government's motion seeking such a result.

III. Conclusion

In their motion for summary judgment, the government sought to foreclose the federal tax lien placed on O'Day's property and to reduce O'Day's assessed tax liabilities to judgment entered in the government's favor. First, the court finds that O'Day II and Eiland took whatever interest they may have in O'Day's property subject to the government's lien. Additionally, the court finds that O'Day's conveyance of the subject property was fraudulent in violation of Florida statute chapter 726.101(1). For both of the above reasons, the court concludes that the government is entitled to foreclose on the subject property to satisfy O'Day's assessed federal tax liability. Next, the court finds that the IRS' certificates and assessments are presumptively correct and that O'Day failed to meet his burden to persuade the court otherwise. Additionally, the court concludes that because both his property conveyance and attempted evasion of his tax liabilities were fraudulent activities, O'Day's tax liabilities were thereby never discharged by his filing for Chapter 7 bankruptcy protection. There being no issue of material fact to preclude the entry of judgment, the court GRANTS the government's motion for summary judgment (Doc. 42) and directs the Clerk of Court to enter judgment accordingly.

It is SO ORDERED.

¹ O'Day II is not a named party in the government's present motion for summary judgment. O'Day II has already waived service of process and because he did not answer the government's compliant within 60 days of his waiver pursuant to Fed. R. Civ. P. 12, the government is filing an application for an entry of default on O'Day II in a separate legal action.

² The subject property is more fully described as: Lot 21, SUNLAND ESTATES, FIRST ADDITION, as per plat thereof recorded in Plat Book 12 at pages 97 and 98 of the Public Records of Seminole County, Florida. The mailing address of the subject property is 307 Tucker Drive, Sanford, Florida 32773.

 

 

 

United States of America, Plaintiff-Appellee v. Richard A. Sherlock, et al., Defendants, Richard A. Sherlock, Defendant-Appellant

(CA-5), U.S. Court of Appeals, 5th Circuit, 97-30245, 12/18/97, 134 F3d 369, Affirming a District Court decision, 96-2 USTC ¶50,462

[Code Secs. 6321 , 6502 , 7401 and 7403 ]

Tax protestor: Lien for taxes: Jurisdiction: Statutes of limitation: Authorization: Res judicata.--Although the government's production of letters proving that a suit had been authorized by the Secretary of the Treasury and the Attorney General was delayed, the delay did not strip the court of jurisdiction. A federal, rather than a state, statute of limitations applied to the action. Additionally, the taxpayer, who raised meritless tax protestor arguments, presented no evidence to support his contention that the lower court's findings of fact were clearly erroneous.

Ann Belanger Durney, Ellen Page DelSole, Department of Justice, Washington, D.C. 20530, for plaintiff-appellee. Richard A. Sherlock, 6409 Gillen St., Metairie, La. 70003, pro se.

Before: JOLLY, BENAVIDES, and PARKER, Circuit Judges.

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

Per Curiam"

EC: ^* In this tax protester case, Richard A. Sherlock objects on multitudinous grounds to the district court's reduction of his tax liabilities to judgment. After a thorough review of the record and a close study of the briefs, we conclude that Sherlock's arguments are all without merit.

Sherlock's principal complaint is that the district court lacked subject matter jurisdiction over this case because of a technical error on the part of the government. Specifically, he argues that the government never presented evidence that the suit had been properly authorized by a delegate of the Secretary of the Treasury and a delegate of the Attorney General pursuant to 26 U.S.C. §7401. Although such an error would indeed deprive the district court of jurisdiction, the record is clear that the government did produce the appropriate authorization letters, albeit with some delay. ¹

Sherlock next contends that jurisdiction was lacking because the government failed to produce Form 23C in proof of his tax assessment. There is, however, no connection between Form 23C and the district court's jurisdiction. With regard to proof of the tax assessment itself, this court has specifically held that Form 4340 is sufficient to establish a presumptively valid tax assessment. United States v. McCallum [92-2 USTC ¶50,448], 970 F.2d 66, 71 (5th Cir. 1992). In this case, the government produced Form 4340, so there is no merit to this argument either.

Sherlock next argues that the district court erred by applying a federal statute of limitations to the government's claim instead of the shorter Louisiana statute. This court has held, however, that the United States is not bound by state statutes of limitations in such cases, and that the federal statute applies. United States v. Fernon [81-1 USTC ¶9287], 640 F.2d 609, 612 (5th Cir. 1981).

Sherlock next argues that the district court clearly erred in a number of its factual findings with regard to his ownership interests in various property. The record, however, reveals the district court's findings to be well founded and Sherlock has presented no specific arguments to the contrary. As such, the district court's findings regarding the property on which the government may foreclose are not clearly erroneous.

Finally, Sherlock's additional arguments that the district court erred with respect to the res judicata effect of the underlying Tax Court decision, that jurisdiction is lacking due to the government's failure to publish various information in the Federal Register, and that the district court erred by proceeding with this case after the bankruptcy court lifted its automatic stay are entirely without legal foundation.

Accordingly, the judgment of the district court is

AFFIRMED.

^* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

¹ The record reveals that the government initially responded to Sherlock's discovery request for the authorization letters with a claim of privilege. We note that it is a very questionable litigation tactic to ever refuse to produce evidence of a necessary prerequisite for jurisdiction. Nonetheless, in the instant case, the letters were produced eventually, and well before the district court ruled on its jurisdiction.

 

 

 

United States of America v. Richard A. Sherlock, et al

U.S. District Court, East. Dist. La., Civ. 94-1867, 1/31/96

[Code Sec. 6321 ]

Liens: Property subject to lien: Property transferred to third parties.--An individual offered no support for his argument that property to which tax liens had attached did not belong to him. Thus, a motion to dismiss the government's suit to foreclose tax liens on his residence and a fishing camp was denied. The government set forth detailed allegations that the transfer of the residence was a sham and that the individual was the true owner of the fishing camp.

[Code Sec. 6502 ]

Statute of limitations: Levy: 10-year period: State law.--The government's suit to foreclose tax liens on an individual's residence and a fishing camp was not barred by a state (Louisiana) statute allowing one year for the filing of a revocatory action to annul a contract. The state law may have limited the government's ability to challenge a transfer of the residence and the ownership of the camp, but the 10-year federal statute of limitations governed the time period in which the government was required to file the suit.

[Code Sec. 7403 ]

Action to enforce lien: Res judicata: Different issues.--The doctrine of res judicata did not apply to the government's suit to foreclose tax liens on an individual's residence and a fishing camp. An earlier Tax Court case (R.A. Sherlock, 57 TCM 218, Dec. 45,636(M) , TC Memo. 1989-183) involved the assessment of the individual's taxes, but the current case dealt with the enforcement of the IRS's tax liens.

Neal I. Fowler, Robert E. Dozier, Department of Justice, Washington, D.C. 20530, Robert J. Boitmann, Eneid A. Francis, Hale Boggs Federal Bldg., 501 Magazine St., New Orleans, La. 70130, for plaintiff. Richard A. Sherlock, 6409 Gillen St., Metaine, La. 70003, pro se. Dan A. Smetherman, 7700 Hayne Blvd., New Orleans, La. 70126, Charles Edmund McHale, Jr., 601 Poydras St., New Orleans, La. 70130, for defendants.

ORDER AND REASONS

DUVAL, JR., District Judge:

Pending before the Court are "Defendants [sic] Richard A. Sherlock's Rule 12(B)(6) Motion to Dismiss and/or in the Alternative Motion for Judgment on the Pleadings with Points and Authorities" and "Motion to Enlarge Time to File Pre-trial Motions," which were taken under submission without oral argument. Having reviewed the memoranda of the parties, the record and the applicable law, the Court DENIES the motions.

Background

The United States brings this civil action

to reduce to judgment the outstanding federal tax liabilities of defendant Richard Arthur Sherlock; to foreclose Federal tax liens on the properties at issue; to determine that Richard Sherlock is the true owner of the real property at issue (Richard Sherlock's residence) which is held in the name of defendant Sherlock Family Preservation Trust; to determine that the real and personal property comprising Richard Sherlock's fishing camp is held by defendant Stephanie Marie (Sherlock) Loper and other defendants only in a nominee capacity; to sell the properties at issue; and to obtain a judgment against Richard Sherlock for any tax liability not satisfied by the foreclosure. ¹

Additional defendants include the Sherlock Family Preservation Trust, various individual Sherlock children, and the Lake Catherine Land Co., which allegedly owns the property where the fishing camp is located and through stock ownership of which plaintiff allegedly controls the fishing camp. ²

The United States alleges that Richard A. Sherlock owes more than $436,000 as of April 6, 1993, in past tax assessments for ten income tax periods from 1975 through 1984, plus unassessed interest and "statutory additions." ³ The tax assessments were made pursuant to a decision of the United States Tax Court. ⁴ Count One of the Complaint alleges that liens for the unpaid taxes have arisen against all of Richard Sherlock's property, real and personal, tangible and intangible, including plaintiff's personal residence and the fishing camp. ⁵

Count Two alleges that during the time that Richard A. Sherlock's tax liability accrued, and on or about June 8, 1988, he transferred his personal residence, previously owned by him and his wife, to the Sherlock Family Preservation Trust, with the various individual Sherlock children as acceptors and trustees. ⁶ The United States claims that this transfer "was made without full, fair or adequate consideration and does not have a legitimate economic purpose of any kind." ⁷ Further, the United States contends that at the time of the transfer Richard A. Sherlock was living in the personal residence and was paying its taxes and utilities, despite his insolvency due to the tax indebtedness. ⁸ The United States claims that the transfer of the personal residence to the trust was "with the purpose or intent to delay, hinder, or defraud the United States in its attempt to collect his unpaid income tax liabilities" and asks that the transfer be set aside and that Richard A. Sherlock be recognized as the true owner. ⁹ Alternatively, the United States seeks to have the transfer to the trust declared a simulation under the Louisiana Civil Code, with Richard A. Sherlock recognized as the true owner. In the further alternative, the government requests that the Court annul the transfer of property to the trust and deem Richard A. Sherlock the true owner under the Louisiana Civil Code. ¹⁰ Finally as to Count Two, the United States contends that the personal residence is subject to Richard A. Sherlock's debts pursuant to the Federal Debt Collection Procedures Act, 28 U.S.C. §3304 . ¹¹

Count Three of the Complaint alleges that CSX Transportation and its predecessors leased the fishing camp to Richard A. Sherlock and his family from approximately 1983 until 1990, when CSX Transportation sold the land to Lake Catherine Land Company, Inc. ¹² In September 1983, Richard A. Sherlock allegedly purchased the movable property of the fishing camp in the names of his children and, later, one of the children purchased fifty shares of stock in Lake Catherine Land Co., which provided the true owner of the stock a beneficial interest in the fishing camp "because each stockholder in the Lake Catherine Land Company, Inc., either has a beneficial interest in the property or will receive title to a designated parcel of property on Lake Catherine at a future date." ¹³ The government contends that because the children acted as Richard A. Sherlock's nominees in purchasing the movable and immovable property comprising the fishing camp, Richard A. Sherlock is the true owner. ¹⁴

In the instant motion, pro se defendant Richard A. Sherlock alleges that the United States' claims should be dismissed as having prescribed under Louisiana law and under the principle of res judicata. Richard A. Sherlock also seeks dismissal of the Complaint on the basis that, on the face of the Complaint, the property at issue is not owned by him.

Richard Sherlock also seeks an enlargement of time within which to file pretrial motions, allegedly due to defendant's delays in answering discovery.

In opposition, the United States contends that the statute of limitations in this matter is controlled by federal, not state, law, and that res judicata is inapplicable. As to the issue of ownership of property, the government claims that its Complaint meets the pleading requirements under the applicable law.

The United States filed no opposition to defendant's motion for enlargement of time within which to file pre-trial motions.

Law and Application

I. Motion to Dismiss

A. Standards of Review

To the extent that defendant's motion to dismiss is based on Fed.Civ.P. 12(b)(6), he has the burden of showing that plaintiff can prove no set of facts consistent with the allegations in the complaint which would entitle it to relief. Baton Rouge Building and Construction Trades Council AFL-CIO v. Jacobs Constructors, Inc., 804 F.2d 879, 881 (5th Cir. 1986), citing Hishon v. King & Spalding, 467 U.S. 69, 104 S.Ct. 2229, 2233, 81 L. Ed. 2d 59 (1984). The purpose of a Rule 12(b)(6) motion is to test the sufficiency of the complaint, not to decide the merits of the case, even if it "appear[s] on the face of the pleadings that a recovery is very remote and unlikely." Scheur v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686 40 L. Ed. 2d 90 (1974). The court must accept all well-pleaded factual allegations in the complaint as true and view the allegations in the light most favorable to the non-moving party. American Waste & Pollution Control Company, Inc. v. Browning-Ferris, Inc., 949 F.2d 1384, 1386 (5th Cir. 1991). Motions to dismiss for failure to state a claim are viewed with disfavor and rarely granted. Tanglewood East Homeowners v. Charles-Thomas, Inc., 849 F.2d 1568, 1572 (5th Cir. 1988).

To the extent that defendant seeks dismissal pursuant to pursuant to Fed.R.Civ.P. 12(c), i.e., a motion for judgment on the pleadings, the standard of review is similar to that under Rule 12(b)(6), and a court must "look only at the pleadings and accept them as true." St. Paul Ins. of Bellaire v. AFIA Worldwide Ins., 937 F.2d 274, 279 (5th Cir. 1991). The district court in Park Center, Inc. v. Champion International Corporation, 804 F.Supp 294, 301 (S.D.Ala. 1992), provided a succinct summary of the standard of review on a motion for judgment on the pleadings:

On a motion for judgment on the pleadings, Federal Rule of Civil Procedure 12(c) requires the Court to view the pleadings in the light most favorable to, and to draw all reasonable inferences in favor of, the nonmovant. The Court may grant judgment on the pleadings if it appears beyond doubt that the non-movant [sic] can plead or prove no set of facts in support of his claim which would entitle him to relief. Judgment on the pleadings is also appropriate where material facts are undisputed and where judgment on the merits is possible merely by considering the contents of the pleadings. The Court may grant judgment on the pleadings only if, on the admitted facts, the moving party is clearly entitled to judgment.

(Citations omitted.) See also Greenbert v. General Mills Fun Group, Inc., 478 F.2d 254, 256 (5th Cir. 1973)(comparing motion for judgment on the pleadings to motion for summary judgment); Wright & Miller, Federal Practice & Procedure: Civil 2d §1368 .

With these standards in mind, the Court analyzes the three issues raised by defendant's motion to dismiss.

B. Prescription

Richard Sherlock first contends that the government's claim is prescribed under LSA-C.C. Art. 2041, which provides that a revocatory action by an obligee to annul a contract entered into by an obligor "must be brought within one year from the time he learned or should have learned of the act, or the result of the failure to act ... but never three years from the date of that act or result." Sherlock argues that because the transfers of property took place more than one year prior to the United States' filing of this suit, as set forth in the complaint, plaintiff's action should be dismissed.

While it is clear that the substantive law of Louisiana controls as to the burden of the government in proving its claim as to the transfer/ownership of the property at issue, it is equally clear that United States law, not Louisiana law, governs the time period within which the United States had to file this lawsuit. United States v. Fernon [81-1 USTC ¶9287 ], 640 F.2d 609, 611-12 (5th Cir. 1981). Title 26, §6502 provides that "[w]here the assessment of any tax ... has been made within the period of limitation properly applicable thereto, such tax may be collected ... by a proceeding in court, but only if the ... proceeding [is] begun ... within 10 years after the assessment of the tax." 26 U.S.C. §6502(a)(1) . ¹⁵ Because the tax assessment was made in October 1989, ¹⁶ and, further, because this lawsuit was filed in June 1994, the suit was filed well within the 10-year statute of limitations. Thus, defendant's argument as to prescription fails, and the Court finds that the lawsuit states a claim. ¹⁷

C. Res Judicata

Plaintiff next argues that the government's lawsuit should be dismissed under the principle of res judicata because the government is relitigating in this suit what was litigated in Tax Court.

The test to be applied [as to res judicata] is settled in our circuit:

For a prior judgment to bar an action on the basis of res judicata, the parties must be identical in both suits, the prior judgment must have been rendered by a court of competent jurisdiction, there must have been a final judgment on the merits and the same cause of action must be involved in both cases. Nilsen v. City of Moss Point, 701 F.2d 556, 559 (5th Cir. 1983)(en banc).

While the parties appear to be identical in this action as in the tax court matter, i.e., the government and Richard A. Sherlock, neither party has provided the Court with a copy of the Tax Court decision referenced in the Complaint to allow the Court to make an independent determination of what issues were litigated there. Even so, the Court notes that the United States brings this matter pursuant to its authority under 26 U.S.C. §7403 to enforce its liens through judgment and "to finally determine the merits of all claims to and liens upon property." ¹⁸ According to the Complaint, the issue involved in Tax Court involved the assessment of taxes, which is not the issue here, as recounted above. ¹⁹ Hence, construing the allegations of the Complaint in the light most favorable to the United States, as this Court is required to do, the Court finds that res judicata is not applicable and that plaintiff's motion to dismiss founders on this point.

D. Foreclosure Barred

Plaintiff's final argument is that "foreclosure against the property stated is barred as a matter of law since the property in question is not owned by defendant Richard Sherlock." ²⁰ Plaintiff offers nothing in support of this bald-faced statement, and such a naked argument is insufficient. As set forth above, the United States has detailed its allegations for believing that the transfer of Richard Sherlock's personal residence was a sham and that he is the true owner of the fishing camp. Clearly the United States can prove a set of facts consistent with its complaint which would entitle it to relief. Baton Rouge Building Trades Council, supra. Thus, the Court denies defendant's motion to dismiss on this point.

II. Motion to Enlarge Time

Defendant's motion for enlargement of time to file pretrial motions is based on the alleged delay of the government in responding to his discovery. However, according to his own motion, defendant did not tender discovery to the government until November 13, 1995, a little more than two months prior to trial. ²¹ Additionally, this matter has been pending for more than a year and a half, and the deadline for discovery was December 9, 1995. ²² The Court finds that it is defendant who has been dilatory, not the United States, and therefore will not enlarge the time for filing any further pretrial motions in this matter. Such a decision is within the court's inherent power to "control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants." Landis v. North American Co., 299 U.S. 248, 254, 57 S.Ct. 163, 166, 81 L. Ed. Landis 153 (1936). ²³ See also In re Stone, 986 F.2d 898, 903 (5th Cir. 1993) (courts have inherent power to require party to have representative with settlement authority present at pretrial conferences where district court invoked inherent power to manage docket as basis for this power; such inherent power, as described in Landis, is part of court's powers "deemed necessary for efficient and orderly administration of justice"); Matter of U.S. Abatement Corp., 39 F.3d 556, 560 (5th Cir. 1994)(bankruptcy court's determination as to what order to consider motions is left to sound discretion under inherent power set forth in Landis).

III. Conclusion

In summary, the Court finds that the United States' action is neither prescribed nor subject to the principle of res judicata. Further, accepting all well-pleaded factual allegations in the complaint as true and in the light most favorable to the United States, the Court finds that the government can prove a set of facts consistent with the allegations in its Complaint which would entitle the United States to the relief it seeks. Pro se defendant Richard A. Sherlock has failed to present this Court with any adequate legal or factual contentions to show otherwise.

Additionally, plaintiff has not set forth any adequate reason why this Court should enlarge the time for filing pretrial motions at this late date.

Accordingly,

IT IS ORDERED that "Defendants [sic] Richard A. Sherlock's Rule 12(b)(6) Motion to Dismiss and/or in the Alternative Motion for Judgment on the Pleadings with Points and Authorities" is DENIED.

IT IS FURTHER ORDERED that defendant Richard A. Sherlock's "Motion to Enlarge Time to File Pre-trial Motions" is DENIED.

¹ "Complaint," ¶1. (R.Doc. 1.)

² Id., ¶¶4, 6, 7 and 8.

³ Id., ¶9-10.

⁴ Id., ¶9.

⁵ Id., ¶11.

⁶ Id., ¶¶14-17.

⁷ Id., ¶19.

⁸ Id., ¶¶21-23.

⁹ Id., ¶¶24-25, 30.

¹⁰ Id., ¶32.

¹¹ Id., ¶33.

¹² Id., ¶35.

¹³ Id., ¶36-37.

¹⁴ Id., ¶¶39-40.

¹⁵ The Court agrees with the government that the 10-year statute of limitation is applicable in this case, not the previous six-year period in force and effect prior to the passage of the Omnibus Budget Reconciliation Act of 1990. See P.L. 101-508, §11317(a) and (c), reprinted in 1990 U.S.C.C.A.N. 104 Stat. 1388. That Act provided that the amended 10-year statute of limitations is applicable to "taxes assessed on or before [the date of enactment] if the period specified in section 6502 of the Internal Revenue Code of 1986 ... for collection of such taxes has not expired as of such date." Id. In this case, the prior six-year period had not expired as of the date of enactment, November 5, 1990, because the taxes were assessed in this case, taking the government's pleadings as true, as the Court must, on October 24, 1989. (R.Doc. 1, ¶9.) Therefore, the 10-year statute of limitations applies. Of course, even under the six-year statute of limitations, the United States' filing of suit in June 1994 was timely as it was within six years of the assessments in October 1989.

¹⁶ "Complaint," ¶9. (R.Doc. 1.)

¹⁷ Having reviewed the merits of defendant's contention, the Court need not address at this time whether Richard A. Sherlock is precluded from waiving the statute of limitations as an affirmative defense, a contention presented by the government.

¹⁸ See "Complaint," ¶3, citing 26 U.S.C. §7403 . (R.Doc. 1.)

¹⁹ Id., ¶9.

²⁰ Defendant's motion, p. 5. (R.Doc. 38.)

²¹ Defendant's motion, p. 9. (R.Doc. 38.)

²² See Minute Entry, pp. 1-2. (R.Doc. 36.)

²³ Although the Supreme Court made this statement in the context of a court's power to stay a matter, the Supreme Court stated that the power to stay proceedings is "incidental" to the inherent power described above. Id. Other courts have not limited the Supreme Court's pronouncement to the issue of whether to grant a stay of a matter, as shown by the Fifth Circuit citations infra.

 

 

 

United States of America, Plaintiff v. William H. Zuhone, Jr., Audra M. Zuhone, Debra Heller, Diane Shore, Carol Zuhone, and Agribank, FCB, Defendants

U.S. District Court, Cent. Dist. Ill., 96-1078, 5/29/96

[Code Secs. 6321 and 6502 ]

Lien for taxes: Fraudulent conveyances: Related parties: Statute of limitations: State law.--The government's action to enforce a tax lien against a delinquent couple and set aside their conveyances of real property to their daughters was timely filed within the 10-year statute of limitations under Code Sec. 6502(a)(1) . The government was not bound by a statute of limitations contained in a state (Illinois) uniform fraudulent transfer act.

[Code Secs. 6871 and 7402 ]

Lien for taxes: Fraudulent conveyances: Sovereign immunity: Bankruptcy.--The government did not waive sovereign immunity in an action to enforce a tax lien against a delinquent couple and set aside their conveyances of real property to their daughters by having filed a proof of claim in the couple's bankruptcy proceeding. The relevance of the sections of the Bankruptcy Code cited by the couple was unclear, and the government had not asserted a sovereign immunity defense.

ORDER

MIHM, Chief District Judge:

Before the Court are two Motions for Summary Judgment. Defendants William H. Zuhone, Jr., and Audra M. Zuhone ("Taxpayers") filed a Motion for Summary Judgment on Count II [#36]. Defendants Debra Heller, Diane Shore, and Carol Zuhone ("Daughters") also filed a Motion for Summary Judgment on Count II [#42]. Plaintiff, the United States of America ("US"), filed a single Response in Opposition to Motions for Summary Judgment on Count II [#45]. For the reasons set forth below, both Motions for Summary Judgment are DENIED.

Background

On December 29, 1987 and January 8, 1988, the Taxpayers conveyed record title in two parcels of real property to the Daughters. (Amended Complaint ("Complaint"), ¶¶14-16.) On August 22, 1988 and July 31, 1989, the US assessed Taxpayers for federal income taxes. Id., ¶¶11, 12. On May 25, 1995, the US commenced this lawsuit against the Taxpayers and the Daughters (together, "Defendants"). On August 3, 1995, the US filed a three-count Amended Complaint, suing Defendants pursuant to the Internal Revenue Code, 26 U.S.C. §§7401 , ¹ 7403. ² Id., ¶2. Also on August 3, 1995, the Court endorsed an Agreed Judgment Order as to Count I, entering judgment in favor of the US and against the Taxpayers for $4,096,321.10 "plus interest and other statutory additions according to law accruing from and after May 15, 1995." (Agreed Judgment Order.)

Count II of the Complaint alleges that there was no consideration for the Taxpayers' conveyances to the Daughters and that after the conveyances, the Taxpayers lacked sufficient assets to pay their federal income tax liabilities. (Complaint, ¶¶14-17.) Count II also alleges that the conveyances were void as against the United States because they were intended to disturb, delay, hinder, or defraud the Taxpayers' creditors and that the Daughters hold their interest as the nominees of the Taxpayers. Id., ¶¶18-19. Count II concludes that the amounts of the assessments for unpaid income tax and interest are liens against the Taxpayers. Id., ¶20.

On November 22, 1995 and December 8, 1995, respectively, the Taxpayers and the Daughters each filed a Motion for Summary Judgment on Count II. Defendants do not address the applicability of the Illinois Uniform Fraudulent Transfer Act ("IUFTA"), 740 ILCS 160/5, et seq., but argue that IUFTA's statute of limitations bars Plaintiff's claim, pursuant to United States v. Vellalos [92-1 USTC ¶50,227 ], 780 F. Supp. 705 (D. Haw. 1992), appeal dismissed by, No. 92-15491, 1993 WL 78061 (9th-Cir. Mar. 19, 1993). Defendants further argue that the US's having filed a proof of claim in the bankruptcy court means the government has waived any claim to invoke the doctrine of sovereign immunity.

On December 21, 1995, the US filed its Response in Opposition to Motions for Summary Judgment on Count II. First, it counters that a federal statute of limitations, 26 U.S.C: §6502(a)(1) , governs its ability to bring this action to set aside fraudulent conveyances because state statutes of limitations do not bind it. Further, the US argues that IUFTA does not apply because it became effective January 1, 1990, ³ after the real property transfers from the Taxpayers to the Daughters, and does not apply retroactively. However, if IUFTA applies, the US argues that Vellalos was improperly decided. The US contends that pre-IUFTA Illinois law does not include an extinguishment provision.

Second, the US maintains that Defendants' sovereign immunity argument is based on inapplicable bankruptcy law. The US argues that if there is merit to either of Defendants' arguments, Count II is still viable under a separate theory of nominee ownership.

Discussion

Summary judgment is appropriate where "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).

I. Statute of Limitations

The primary issue before the Court is whether federal or state law governs the time period in which the United States may bring a cause of action to enforce a tax lien through attack on an allegedly fraudulent transfer of real property. The Court finds that the US is not bound by any state statute of limitations in this action, despite Defendants' reliance on contrary authority. As a result, the Court needs to decide neither whether IUFTA applies nor, if it does, whether it applies retroactively.

Defendants urge this Court to adopt the reasoning in Vellalos, which they argue is Ninth Circuit authority. However, contrary to Defendants' assertions, in Vellalos the Ninth Circuit found that it lacked jurisdiction to review the district court's granting of a motion to dismiss the government's claim pursuant to Hawaii's Uniform Fraudulent Transfer Act ("UFTA"). Vellalos, 1993 WL 78061. The district court in Vellalos held that Hawaii's UFTA governs the statute of limitations within which the United States must sue. Vellalos [92-1 USTC ¶50,227 ], 780 F. Supp. at 708. The court in Vellalos distinguished its holding from United States v. Summerlin [402- USTC ¶9633], 310 U.S. 414 (1940), in that Summerlin involved the "government's common law right to collect on a debt" and not the government's invocation of a "carefully delimited state statutory right." Vellalos [92-1 USTC ¶50,227 ], 780 F. Supp. at 707. Defendants contend that the Commission on Uniform Laws made explicit that the extinguishment provision in the UFTA bars actions asserted by the US under the Summerlin principle.

Defendants do not acknowledge the opposing authority cited in Vellalos [92-1 USTC ¶50,227 ], 780 F. Supp. at 708 n.3. Defendants do urge this Court to reject United States v. Brown [93-2 USTC ¶50,375 ], 820 F. Supp. 374 (N.D. Ill. 1993), as an erroneous decision. The court in Brown applied pre-IUFTA Illinois law and concluded that the US "would not be barred by any applicable Illinois statute of limitations." Brown [93-2 USTC ¶50,375 ], 820 F. Supp. at 382, citing United States v. Tri-No Enterprises, Inc., 819 F.2d 154, 158 (7th Cir. 1987). Defendants contend that Brown improperly relied on Tri-No, which dealt with the enforcement of a federal statute by the US. See also United States v. Werner [94-2 USTC ¶50,345 ], 857 F. Supp. 286, 289 (S.D.N.Y. 1994) (explaining the timeliness under 26 U.S.C. §6502(a)(1) of a Federal Debt Collection Act claim brought pursuant to 26 U.S.C. §§7401 , 7403 of the Internal Revenue Code).

The US argues that "the United States is not bound by state statutes of limitation." United States v. Summerlin [40-2 USTC ¶9633 ], 310 U.S. 414, 416 (1940); cf. United States v. California, -- U.S. --, 113 S.Ct. 1784, 1791 (1993) (setting forth the principle in Summerlin, while acknowledging that the question of applying federal or state statutes of limitations is difficult). The US relies on the absence of an express congressional directive subjecting the United States to a state statute of limitations. Summerlin [40-2 USTC ¶9633 ], 310 U.S. at 416. As no such directive exists, the US urges the Court to apply 26 U.S.C. §6502(a)(1) 's 10-year statute of limitations. The 10-year limit of 26 U.S.C. §6502(a)(1) applies when the time for collection expired after November 5, 1990; prior to that time, the limit was 6 years. United States v. Wright [95-2 USTC ¶50,334 ], 57 F.3d 561, 562 (7th Cir. 1995).

When the United States brings a fraudulent conveyance action under state law but not pursuant to a state's version of the UFTA, a federal statute of limitations applies. Brown [93-2 USTC ¶50,375 ], 820 F. Supp. at 382; United States v. Fernon [81-1 USTC ¶9287 ], 640 F.2d 609, 612 (5th Cir. 1981); United States v. Wurdemann [81-2 USTC ¶9757 ], 663 F.2d 50, 51 (8th Cir. 1981).

In states which have adopted the UFTA, the federal statute of limitations also applies. United States v. Bantau, 907 F. Supp. 988, 991 (N.D. Tex. 1995) (stating that "the United States may bring an action pursuant to [the Texas UFTA] without reference to state law limitation periods"); United States v. Perrina, 877 F. Supp. 215, 217 (D.N.J. 1994) (stating that "it is beyond dispute" that 26 U.S.C. §6502 and not the New Jersey Uniform Fraudulent Conveyance Law binds the United States); Stoecklin v. United States, 858 F. Supp. 167, 168 (M.D. Fla. 1994) (applying Fernon in the context of Florida's UFTA); United States v. Romano [89-2 USTC ¶9672 ], 757 F. Supp. 1331, 1339 n.5 (M.D. Fla. 1989), aff'd, 918 F.2d 182 (11th Cir. 1990) (mentioning that Summerlin and Fernon direct that federal and not state time constraints operate on the federal government); United States v. Sitka [94-2 USTC ¶50,624 ], No. 90-268, 1994 WL 715902, at *3 (D. Conn. Sept. 21, 1994) (rejecting both Vellalos and the statute of limitations from Connecticut's UFTA); Flake v. United States [95-2 USTC ¶50,588 ], No. 93-0306, 1995 WL 735740, at *3-4 (D. Ariz. Sept. 29, 1995) (rejecting Vellalos and citing other cases in which courts have declined to distinguish between applying Summerlin to common law and statutory actions); United States v. Christensen [90-2 USTC ¶50,543 ], 751 F. Supp. 1532, 1535-36 (D. Utah 1990), appeal dismissed by, 961 F.2d 221 (10th Cir. 1992) (stating that the United States' claim was not barred by the Utah UFTA statute of limitations).

The Court finds that Brown, authority from within the Seventh Circuit, reached a proper result and that Tri-No, a Seventh Circuit opinion, is applicable. The Court declines to follow Vellalos and prefers the reasoning of the abundant opposing authority. the US's claim is not barred by any Illinois statute of limitations, whether IUFTA applies or not. Instead, the US's claim is timely within the 10-year statute of limitations imposed by 26 U.S.C. §6502(a)(1) . Accordingly, Defendants' Motions for Summary Judgment are DENIED on this ground.

II. Sovereign Immunity

Defendants argue that 11 U.S.C. §106(a) abrogates sovereign immunity as to a governmental unit with respect to 11 U.S.C. §548, the bankruptcy code provision dealing with "Fraudulent transfers and obligations." Defendants further argue that, pursuant to 11 U.S.C. §106(b) , when a governmental unit files a proof of claim, it waives sovereign immunity with respect to a claim against it where the claim belongs to the estate and arose out of the same transaction or occurrence as the governmental unit's claim. Defendants contend that the US waived any possibility of a sovereign immunity defense by having filed a proof of claim in the Chapter 7 bankruptcy proceeding of the Taxpayers. The Taxpayers argue, without citing any authority, that the US should have brought its action to set aside the fraudulent transfers in the bankruptcy action or should have had the bankruptcy trustee pursue the issue.

The US counters that it has not asserted a sovereign immunity defense to any claim against it. It argues that Defendants' argument is inapplicable because this case is not a bankruptcy case, is not brought pursuant to 11 U.S.C. §548, and does not involve a counterclaim by Defendants against the US pursuant to 11 U.S.C. §106(b) .

The relevance of 11 U.S.C. §106(a) , abrogation of sovereign immunity in connection with the fraudulent transfers provision of the bankruptcy code, and 11 U.S.C. §106(b) , counterclaims against a governmental unit, to the US's fraudulent conveyance claim is unclear. The US has not asserted a sovereign immunity defense. Further, there is no counterclaim against Plaintiff.

The only point remaining is the Taxpayers' argument that Plaintiff's claim belongs in the bankruptcy court. In pleadings related to the motions to dismiss [##14, 16], the parties argued as to the standing of the US. The Magistrate Judge's Report and Recommendation, adopted on November 15, 1995, states that the bankruptcy trustee had abandoned the property, leaving other creditors free to proceed against it. (Report and Recommendation [#26], p.5; Order [#33].)

Accordingly, the Taxpayers' and the Daughters' Motions for Summary Judgment are DENIED as to this argument.

Conclusion

Accordingly, for the reasons set forth above, the Motion for Summary Judgment on Count II filed by Defendants William H. Zuhone, Jr., and Audra M. Zuhone [#36] is DENIED, and the Motion for Summary Judgment on Count II filed by Defendants Debra Heller, Diane Shore, and Carol Zuhone [#42] is also DENIED.

¹ 26 U.S.C. §7401 , "Authorization," states:

No civil action for the collection or recovery of taxes ... shall be commenced unless the Secretary authorizes or sanctions the proceedings and the Attorney General or his delegate directs that the action be commenced.

26 U.S.C. §7401 .

² 26 U.S.C. §7403(a) , "Action to enforce lien or to subject property to payment of tax," states:

In any case where there has been a refusal or neglect to pay any tax, or to discharge any liability in respect thereof, whether or not levy has been made, the Attorney General or his delegate, at the request of the Secretary, may direct a civil action to be filed in a district court of the United States to enforce the lien of the United States under this title with respect to such tax or liability or to subject any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability.

26 U.S.C. §7403(a) .

³ Prior to January 1, 1990, under Illinois law, fraudulent conveyances were regulated by Ill. Rev. Stat. ch. 59, para. 4, which was governed by a five-year statute of limitations pursuant to Ill. Rev. Stat. ch. 110, para. 13-205. See In re Martin, 142 B.R. 260, 263 (Bankr. N.D. Ill. 1992). On January 1, 1990, Illinois' Uniform Fraudulent Transfer Act became effective, with an extinguishment provision after a maximum of four years. 740 ILCS 160/10.

 

 

 

United States of America, Plaintiff v. Robert E. Hatfield, the Victorian Trust of Jo Daviess County, and Wanda Mae Hatfield, individually and as trustee of the Victorian Trust of Jo Daviess County, Defendants

U.S. District Court, No. Dist. Ill. , West. Div., 94 C 50397, 4/2/96

[Code Sec. 6502 ]

Collection after assessment: Limitations period: State law.--A state (Illinois) uniform fraudulent transfer statute did not apply retroactively to bar an IRS action to set aside the transfer of a couple's house to a trust and subject the husband's interest to tax liens arising out of his unpaid tax assessments. State courts have applied a strict rule of construction against retrospective application, and federal courts in the district have limited retroactive application to situations involving equitable relief. There were no equitable considerations in the instant situation, and the trust did not advance any arguments concerning the statute's retroactive application. The government timely filed its suit within 10 years after assessment of the tax.

[Code Sec. 7401 ]

Suits by U.S. : Authorization: Summary judgment: Sufficiency of evidence.--The government was denied summary judgment on the issue of the amount of unpaid tax assessments because it failed in its motion and initial brief to submit evidence linking the taxpayer with a tax-generating activity. Therefore, the foundation for the assessments was not properly before the court.

[Code Sec. 6321 ]

Lien for taxes: Fraudulent conveyance: Set aside.--Under state ( Illinois ) law, a trust was not the alter ego of an individual for purposes of subjecting his interest in the trust's property, which consisted of the residence he owned in joint tenancy with his wife, to federal tax liens arising with respect to unpaid tax assessments. Although the husband continued to use the property as his residence and place of business, the trust's beneficiaries, who were his children, also resided at the property. It was not shown whether the trustees, including his wife, had ever met or that the couple exercised complete dominion and control over the property. However, the conveyance of the house by the joint tenants to the trust was set aside under a state fraudulent conveyance statute, and the husband's one-half interest in the property was subject to the tax liens. The transfer was made for inadequate consideration, the husband had been contacted by the IRS concerning his failure to file tax returns and, thus, had at least contemplated indebtedness at the time of the transfer, and he did not retain any property of significant value. The wife's transfer to the trust remained valid.

Vern Davit, 504 N. Church, Rockford , Ill. 60103 , for plaintiff. Richard Gagnon, Department of Justice, Washington , D.C. 20530 , for defendant.