Fraudulent Conveyances Part1 page10

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Conclusions of Law

1. The court has jurisdiction of the parties and the subject matter pursuant to 28 U. S. C., Sections 1340 and 1345.

2. Defendant William E. Cox is solely indebted to the United States of America for federal taxes, penalties and interest in the amount of $22,477.67 as of January 1, 1979, and the United States is entitled to judgment for that amount.

3. Defendants, William E. Cox and Norma J. H. Cox, are jointly indebted to the United States of America for federal taxes, penalties, and interest in the amount of $22,482.37, as of January 1, 1979, and the United States is entitled to judgment for those amounts.

4. The unpaid balances of the assessments against William E. Cox and Norma J. H. Cox, plus interest and additions thereon according to law, are secured by federal tax liens in favor of the United States of America, which attach to all property and rights to property of the defendants, William E. Cox and Norma J. H. Cox, both real and personal, tangible and intangible. 28 U. S. C. §§ 6321, 6322.

5. The conveyance of real estate by defendant, William E. Cox, to his children by deed dated December 5, 1973, was in fraud of creditors under Section 27-23-10, Code of Laws of South Carolina (1976). Gardner v. Kirven, 184 S. C. 37, 191 S. E. 814 (1937); Coleman v. Daniel, 261 S. C. 198, 199 S. E. 2d 74 (1973).

6. The aforesaid conveyance described in Finding No. 14 is hereby declared to be null and void. The federal tax liens of the United States attach to the interest of William E. Cox in this property, and the plaintiff is entitled to foreclose said liens by selling this property in accordance with law, with the proceeds to be first distributed to the United States for application on the unpaid tax liabilities of William E. Cox.

7. Plaintiff had the burden of proving fraud by evidence that is clear and convincing. Plaintiff failed to meet this burden of proof, and defendants are entitled to judgment in their favor on such issue. Gilbert v. Mid-South Machinery, 267 S. C. 211, 227 S. E. 2d 189.

8. Once the plaintiff proved that assessments had been made against defendants, defendants had the burden of proving by a preponderance of the evidence that the assessments were erroneous. Higginbotham v. United States [77-2 USTC ¶12,265], 556 F. 2d 1173 (4th Cir. 1977). Defendants have failed to carry this burden and the assessments are therefore presumed to be correct.

9. The taxpayer was under a statutory duty to keep adequate daily records of the wagers he received--Internal Revenue Service Code of 1954 Sections 4403, 4423, 6001(a); Treas. Regs. Sections 44.4403-1 and 44.6001-1; Carson v. United States [75-1 USTC ¶9203], 560 F. 2d 693 (5th Cir. 1977). In this case, the taxpayer failed to keep such records.

10. When a taxpayer fails to keep adequate records, the Commissioner is authorized to reconstruct the taxpayer's income by any reasonable method. Gatling v. Commissioner [61-1 USTC ¶9198], 286 F. 2d 139 (4th Cir. 1961); United States v. Firtel [71-2 USTC ¶16,002], 446 F. 2d 1005 (5th Cir. 1971).

11. Having failed to keep adequate records, the oral testimony of the taxpayer and the alleged summaries of wagers are not sufficient to overcome the presumption of correctness attached to the Commissioner's determination. Burka v. Commissioner [50-1 USTC ¶9167], 179 F. 2d 483 (4th Cir. 1950); DeLorenzo v. United States [77-1 USTC ¶16,262], 555 F. 2d 27 (2d Cir. 1976); Heyman v. United States [74-1 USTC ¶16,154], 497 F. 2d 121 (5th Cir. 1974); Mitchell v. Commissioner [69-2 USTC ¶9587], 416 F. 2d 101 (7th Cir. 1969).

12. The defendant State of South Carolina has tax liens against the property which are junior to the liens of the United States as established by the respective dates of filing. The unpaid amounts to which the liens relate, after deducing the fraud penalty and payments, are $3,478.45 for 1970, and $2,863.26 for 1971, for a total of $6,341.71.

AND IT IS SO ORDERED.

¹ It came as quite a surprise to this court to hear that an agent of the government would sell plaintiff a tax stamp for his wagering business and advise him to destroy his records to avoid state gambling prosecution; however, this court does not sit to investigate the internal policies of the IRS.

 

 

 

United States of America v. Perry A. Gant, Jo Ann Gant, and Decatur Federal Savings and Loan Association

U. S. District Court, No. Dist. Ga. , Atlanta Div., Civil Action No. C75-1236A, 9/29/78

[Code Sec. 6323--result unchanged by '76 Tex Reform Act]

Validity of lien: Conveyance by taxpayer: State law.--Whether a transfer was intended as a device to defraud creditors is determined by state law. The defendant's original purchase of real estate as a joint tenant with his wife was not a fraudulent transfer, but his later transfer to his wife for a consideration of $10 was fraudulent because there was insufficient consideration, the defendant continued to live in the house, and at the time he owed approximately $100,000 in back taxes.

[Code Sec. 6323--result unchanged by '76 Tax Reform Act]

Validity of lien: Priority over recorded mortgage.--A loan secured by a mortgage filed prior to the filing of the tax lien had priority over the tax lien despite the refinancing of the loan, but the additional loan resulting from the refinancing was not prior in right to the tax lien.

John W. Stokes, Jr., United States Attorney, William D. Mallard, Jr., Assistant United States Attorney, Atlanta , Ga. 30301 , Bruce E. Morton, Randall M. Roden, Francis P. Dicello, Department of Justice, Washington , D. C. 20530, for plaintiff. George H. Carley, McCurdy & Candler, P. O. Box 57, Decatur, Ga. 30031, Albert B. Wallace, P. O. Box 565, Jonesboro, Ga. 30237, for defendants.

Order

EDENFIELD, District Judge:

This suit to set aside a fraudulent conveyance, to foreclose a federal tax lien, and to obtain a deficiency judgment against defendant Perry A. Gant for any taxes remaining unsatisfied is now before the court for decision following a trial without a jury. This order will serve as the findings of fact and conclusions of law required by Rule 52(a), Fed. R. Civ. P.

From before 1969 until 1971, defendant Perry A. Gant was the proprietor and manager of a plumbing business known as P. A. Plumbing. In connection with that business he incurred liability for employment taxes accrued during 1969, 1970, and 1971. In 1971, Mr. Gant incorporated his business under the name "Apartment and Commercial Plumbers, Inc.", and he became president and Mrs. Gant became secretary-treasurer of the new corporation. By mid-1971, Mr. Gant had accrued tax liabilities in excess of $90,000 and, as a result of these unpaid employment taxes, an assessment was made against Mr. Gant pursuant to section 6672 of the Internal Revenue Code of 1954.

Defendants Perry A. Gant and Jo Ann Gant, husband and wife, became the record owners as tenants in common of property located at 5896 Foxfield Trail in Clayton County, Georgia on February 5, 1970 by virtue of a warranty deed from Duke and Jones, Inc. The purchase price of the property was $29,900.00, and the Gants paid $6,000 in cash and obtained a loan in the amount of $23,900 from defendant Decatur Federal Savings and Loan Association ("Decatur Federal"). As security for this loan, the Gants executed a deed to secure debt conveying to Decatur Federal fee simple title to the purchased property. This deed to secure debt was recorded on February 6, 1970 in deed book 561, page 623, in the Superior Court and Clayton County. On May 4, 1971, Mr. Gant conveyed his undivided one-half interest in the Clayton County property to his wife. The deed of conveyance states a consideration of ten dollars and other valuable consideration and bears no transfer tax stamps. It is recorded in deed book 609, page 701, in the Superior Court of Clayton County.

On October 5, 1971 and November 11, 1971, the government filed notices of federal tax liens against Mr. Gant in Clayton County Superior Court in the amounts of $11,821.09 and $18,922.97, respectively. Subsequently, on November 22, 1972, the Gants signed a new note for $32,000 with defendant Decatur Federal. That sum represented $23,015.82 remaining owing on the earlier loan plus an additional loan of $8,984.18. As security for this loan, Mrs. Gant executed a second deed to secure debt covering the subject property, which was recorded in the Superior Court of Clayton County on November 27, 1972 in deed book 671, page 671. The first deed to secure debt securing the original $23,000 was then cancelled and marked satisfied. In connection with this second loan, Mr. Gant gave an affidavit to Decatur Federal stating that he was not the defendant in certain listed executions, which included a federal tax lien dated November 11, 1971, against P. A. Gant, P. A. Gant Plumbing Co.

Initially plaintiff seeks a determination that Perry Gant is indebted to the United States government for federal taxes. Further, it contends that both the initial conveyance to the Gants as tenants in common and the May 1971 transfer from husband to wife constituted fraudulent conveyances and should be set aside. Finally, the government asks the court to find that it is entitled to priority over defendant Decatur Federal is foreclosing the federal tax liens against the property in question.

Defendant Perry Gant's liability for taxes appears to be clear. At trial plaintiff introduced into evidence self-authenticating certified copies under ribbon and seal of Forms 4340, Certificate of Assessments and Payments. These certificates are presumptively correct tax assessments and establish a prima facie case of liability. Mersel v. United States [69-2 USTC ¶15,914], 420 F. 2d 517 (5th Cir. 1969). Since defendants presented no evidence refuting the amount owed, ¹ the court finds that Mr. Gant is indebted to the government for the sum set forth in the Certificates of Assessment.

Section 6321 of the Internal Revenue Code of 1954 provides for the imposition of a tax lien in favor of the United States upon all property and rights to property belonging to any person who fails to pay taxes for which he is liable. A general lien becomes effective after demand and is related back to the date of assessment. In the instant action, the dates of assessment, notice, and demand all occurred after the conveyances of the Clayton County land and in normal circumstances would not have attached to the property in question. However, when a taxpayer fraudulently disposes of his property prior to the existence of federal tax liens, the government may seek relief pursuant to state fraudulent conveyance laws. See United States v. Hickox [66-1 USTC ¶15,679], 356 F. 2d 969 (5th Cir. 1966). On this basis plaintiff asserts that both the initial purchase of the property by the Gants as tenants in common in 1970 and the 1971 conveyance from Mr. Gant to Mrs. Gant of his undivided one-half interest in the property should be set aside pursuant to G. Code Ann. §28-201. ²

At the time of the purchase of the property in 1970 the government states that the Gants owed personal income taxes for 1968, which taxes were later discharged in bankruptcy, and that Mr. Gant owed certain employment taxes for 1969. Mr. Gant testified that during 1969 he believed that his office manager had paid the taxes as due and did not discover until much later that this was not so. Since taxes are considered due and owing and constitute a liability as of the date the tax return is required to be filed, Hartman v. Lauchli [57-1 USTC ¶9571], 238 F. 2d 881 (8th Cir. 1956), the government contends that the joing purchase of the property by the Gants in 1970 was designed to hinder and delay his creditors and was therefore fraudulent.

The court declines to reach this result, however. When the Gants purchased the property in February, 1970, they paid $6,000 in cash, a portion of which was supplied by Mrs. Gant. Further, the "badges of fraud" customarily relied upon to establish the fraudulent character of a transaction are not present here. See United States v. Hickox, supra; State Banking Co. v. Miller, 185 Ga. 653 (1938). Although a close relationship exists between the parties, there has been no showing that the Gants were threatened with litigation at that time or that the purchase of the property was concealed. Nor did the conveyance serve to transfer Mr. Gant's entire estate to his wife. In view of Mr. Gant's uncontroverted testimony that until much beyond 1969 he believed his office manager had paid the employed taxes when due, and since Mr. Gant's half-interest in the property would have been sufficient to cover the outstanding income taxes for 1968, the court concludes that the 1970 conveyance was proper, as factors indicating an attempt to defraud are not present.

Mr. Gant's transfer of his original one-half interest in the property to his wife by warranty deed on May 4, 1971 must be treated differently, however. Numerous badges of fraud were present. The transfer was between husband and wife and was for a consideration of only ten dollars. It divested Mr. Gant of all of his property although he remained in possession after the conveyance, and it occurred at a time when Mr. Gant owed approximately $100,000 in taxes to the government and was apparently aware of his debt. Mr. Gant's testimony that he transferred the property to his wife because she was the one who made all the payments on it is completely unconvincing since Mr. Gant was the sole wage-earner in the marriage. The court, therefore, concludes that the May, 1971 conveyance of Mr. Gant's interest in the property to Mrs. Gant must be set aside as fraudulent.

The final issue before the court involves the priority of the federal tax lien on the property. Although the government has the right to enforce its liens against all property or rights to property of a delinquent taxpayer, such liens are of no effect against a holder of a security interest until a notice of federal tax lien has been filed and indexed. I. R. C. §6323. In the present case, Decatur Federal claims to have had such a security interest before plaintiff's liens were filed and therefore claims priority in foreclosure.

As previously noted, Decatur Federal advanced the Gants $23,900 upon their purchase of the home in 1970 in exchange for a deed to secure debt, which deed was later property recorded. At the time this deed was executed, no federal tax liens had been filed against Mr. Gant. In November 1972, Decatur Federal loaned the Gants an additional amount of money, issued a new note and deed to secure debt, and cancelled the earlier deed. The government now argues that by cancelling the 1970 note and deed and executing another deed after the tax liens had been filed, Decatur Federal is not entitled to protection as a holder of a security interest.

Decatur Federal contends that the security interest in the property which it acquired by virtue of the execution of the 1970 deed was not subordinated to any intervening tax liens as a result of the issuance of the 1972 deed and cancellation of the 1970 document since that transaction constituted merely a renewal of the mortgage. Further, the 1970 deed to secure debt provided:

This deed also secures any other indebtedness due said Association now existing or hereafter created and it is expressly agreed that the Association may make an additional loan or loans or future advances to the party of the first part or any successor in title and such additional loan or advances shall be secured by this deed to secure debt . . ..

Accordingly, Decatur Federal argues that not only did it have priority over the tax lien in the amount of the first loan but that because of the above "dragnet clause", the additional advance of $8,984.18 was entitled to priority.

The priority of a federal tax lien is always a question of federal law, Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960), and, as noted in First National Bank v. Hill [76-1 USTC ¶9254], 406 F. Supp. 351, 353 (N. D. Ga. 1975), "it is a matter of federal and not state law as to when a lien has acquired sufficient substance and has become so perfected as to defeat a federal tax lien." In order for a lien to defeat a federal tax lien, the identity of the lienor, the property subject to the lien, and the amount of the lien must be established. United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 374 U. S. 84 (1964). In the case at bar, it is clear that the deed to secure debt executed in 1970 met this test for perfection. The deed properly identified Decatur Federal as the secured party, the Clayton County property as the property subject to the lien, and $23,900 as the amount of the debt. The 1970 deed thus had priority over the federal tax liens filed in October and November of 1971.

The question then posed is what effect the refinancing of the mortgage in 1972 had upon Decatur Federal's prior lien on the property. In Georgia, indebtedness may be renewed between the same parties as to the same subject matter and upon the same consideration. Wilson v. Nauman, 88 Ga. App. 782 (1953). In Albany Loan & Finance Co. v. Tift, 43 Ga. App. 789 (1931), the court stated:

In order that the taking of a new note and a new lien to secure it, between the same parties, will operate to discharge or displace the pre-existing lien, it is essential that the new lien embrace different property, or that it be based upon a new and distinct consideration.

In the case at bar the second deed to secure debt covered precisely the same property as did the first. Moreover, inasmuch as the initial agreement contained a provision contemplating future advances, the later deed did not embody a new consideration. See id. at 790.

In Propes v. Todd, 89 Ga. App. 308, 311 (1953), the court held that "where it is the intention of the parties that the debt represented by the original instrument shall not be cancelled but shall be brought forward in the renewal instrument, the renewal instrument does not lose priority over an instrument given after the original instrument of which it is a renewal." In the instant suit, it is clear that the parties to the 1972 deed to secure debt did not intend to extinguish the debt incurred in 1970; therefore the later deed merely constituted a renewal of the earlier mortgage to Decatur Federal. Accordingly, Decatur Federal has priority over the federal tax lien to the extent of the amount still owed to it on the 1970 note at the time the second deed to secure debt was executed.

As to the additional sum advanced to the Gants in 1972, the court finds that Decatur Federal's interest is subordinated to the federal tax lien. The "dragnet clause" quoted earlier in this order does not entitle the bank to priority for money advanced after the filing of federal tax liens. See United States v. Ball Construction Co. [58-1 USTC ¶9327], 355 U. S. 587 (1958); United States v. Christiansen, 269 F. 2d 624 (9th Cir. 1959). Decatur Federal's claim that at the time of the 1972 loan it had no notice of the existing federal tax liens is not persuasive and does not overcome this rule of law. The bank notes that in 1972 title to the property in issue was vested solely in Mrs. Gant, by virtue of the fraudulent conveyance in May, 1971 and argues that because the tax liens against Perry A. Gant were outside the pertinent chain of title it should not be charged with notice of such liens. Decatur Federal might have prevailed on this point had it not been for the fact that the bank did discover at least one of the tax liens filed against Gant. Attempting to protect itself from this knowledge, the bank prepared and obtained Mr. Gant's signature on an affidavit, which stated, in essence, that he was not the taxpayer identified in the notice of lien. This affdavit, when considered in connection with the bank's previous dealings with the Gants, indicates that Decatur Federal advanced the additional funds with knowledge of the existence of federal tax liens against Mr. Gant and knowledge of sufficient facts to put it on inquiry regarding the 1971 conveyance between the Gants. Accordingly, the federal tax liens are entitled to priority over the additional sums advanced by the defendant bank in 1972. See United States v. Hickox [66-1 USTC ¶15,679], 356 F. 2d 969 (5th Cir. 1966).

The clerk is DIRECTED to enter final judgment in accordance with this order, with each party to bear its own costs.

¹ Mr. Gant admits that while he was proprietor of P. A. Plumbing he failed to pay certain employment taxes. Although he thinks that he may have made some payments for which he did not receive credit, no competent evidence establishing the dates and amounts of such payments was offered.

² Section 28-201 provides in pertinent part: "The following acts by debtors shall be fraudulent in law against creditors and others, and as to them null and void, viz:

". . . .

"2. Every conveyance of real of personal estate, by writing or otherwise, and every bond, suit, judgment and excavation, or contract of any description, had or made with intention to delay or defraud creditors, and such intention known to the party taking. A bona fide transaction on a valuable consideration, and without notice or ground for reasonable suspicion, shall be valid."

 

 

United States of America v. Sam Alta Dryden, et al.

U. S. District Court, No. Dist. Ga., Newnan Div., Civil Action No. 1136, 6/30/77

[Code Sec. 6321--result unchanged by '76 Tax Reform Act]

Lien for taxes: Fraudulent transfer of real estate: Conveyance to wife: Prior mortgage.--The United States had a valid lien for taxes, subject to a prior mortgage, against property which had been conveyed by the tax-debtor to his wife without consideration, and with intent, known to his wife, to defraud creditors, done while the tax-debtor was liable for taxes and in violation of the Georgia law on fraudulent conveyances.

[Code Sec. 6321--result unchanged by '76 Tax Reform Act]

Lien for taxes: Estoppel.--The United States is not estopped from asserting certain tax liens on real estate because the government had made no representations by conduct or otherwise on which the title holder had relied.

William D. Mallard, Jr., Assistant United States Attorney, Atlanta, Ga. 30303, Herbert L. Moody, Jr., Department of Justice, Washington, D. C. 20530, for plaintiff. E. B. Jones, Jr., P. O. Box 578, Bremen, Ga. 30110, Murphy, Witcher & Murphy, 101 Atlantic Ave., Bremen, Ga. 30110, Howe, Howe & Sutton, 18 Alabama St., Tallapoosa, Ga. 30176.

Order

HENDERSON, JR., District Judge:

This is an action by the United States against Sam Alta Dryden, individually and as executor of the estate of Margaret Dryden, his wife, and the First Federal Savings and Loan Association of Bremen, Georgia, to reduce certain excise and income tax liabilities to judgment, to set aside transfers by the taxpayer to his wife as fraudulent or otherwise invalid, to foreclose the government's liens and to obtain an accounting for any deficiency. Alternatively, the United States seeks judgment against the estate of Margaret Dryden if it is determined that she assumed Sam Alta Dryden's debts including those to the United States.

Sam Alta Dryden and Margaret Dryden ¹ deny that transactions between them were fraudulent contending that the transfers of property to Margaret Dryden were made pursuant to an oral agreement in consideration of a past loan to her husband, her supporting and raising his two children and her promise to pay certain of his debts in the future. They insist that Margaret Dryden took the property without notice or grounds for reasonable suspicion of any intent to delay or defraud creditors or of any existing or potential tax liens. The Drydens also urge that the government is barred by the doctrine of equitable estoppel, laches or unjust enrichment because its delay in filing suit caused Margaret Dryden to expend her personal funds to preserve and improve the property. First Federal Savings and Loan Association of Bremen is a party as stakeholder of several savings accounts and as a creditor asserting liens against certain property pledged as collateral for loans. The case was tried by the court sitting without a jury and at the conclusion of the trial the parties were directed to submit proposed findings of fact and conclusions of law. The parties have complied with that directive.

Although federal law governs the right of the United States to enforce a tax lien, state law is applied to determine the taxpayer's interest in the property to which the lien attaches. United States v. Kocher [72-2 USTC ¶9730], 468 F. 2d 503 (2nd Cir. 1972), cert. den. 411 U. S. 931, 93 S. Ct. 1897, 36 L. Ed. 2d 390. Georgia law provides, Ga. Code Ann. §28-201, that certain transactions are fraudulent and void as against creditors, including:

(2) Every conveyance of real or personal estate, by writing or otherwise, and every bond, suit, judgment and execution, or contract of any description, had or made with intention to delay or defraud creditors, and such intention known to a party taking. A bona fide transaction on a valuable consideration, and without notice or ground for reasonable suspicion, shall be valid.

(3) Every voluntary deed or conveyance, not for a valuable consideration, made by a debtor insolvent at the time of such conveyance.

Ga. Code Ann. §53-505 defines dealing between a husband and wife:

A married woman may make contracts with other persons; but when a transaction between husband and wife shall be attacked for fraud by the creditors of either, the onus shall be on the husband and wife to show that the transaction was fair. If the wife shall have a separate estate, and shall purchase property from persons other than her husband, and the property shall be levied on as the property of the husband, the onus shall be upon the creditor to show fraud or that the wife did not have the means wherewith to purchase the property.

Construing these code sections together, the Georgia courts require the creditor to prove the indebtedness and the transfer of the property by the debtor to his wife. The burden then shifts to the wife to show that "the transaction as a whole is free from fraud, and the bona fides must be clearly established." Parker v. Harling, 189 Ga. 224, 5 S. E. 2d 755 (1939); see Mercantile National Bank v. Aldridge, 233 Ga. 318, 210 S. E. 2d 791 (1974); Dwight v. Acme Lumber & Supply Co., 189 Ga. 473, 6 S. E. 2d 586 (1939); Richardson Company v. Subers, 82 Ga. 427 (1889); see also United States v. McMahan [75-1 USTC ¶9447], 392 F. Supp. 1159 (N. D. Ga. 1975); Spiegel v. Ross [60-2 USTC ¶9749], 188 F. Supp. 812 (N. D. Ga. 1960); United States v. Phillips [46-1 USTC ¶9262], 59 F. Supp. 1006 (S. D. Ga. 1945).

Thus, if the debtor was solvent at the time of the transfer, and did not become insolvent by reason of the conveyance, the wife must show that it was not made with the intent to delay or defraud creditors or that she did not have notice or grounds for reasonable suspicion of such intent. If the debtor was already insolvent or the transfers resulted in insolvency, the wife must show the lack of fraudulent intent or notice thereof as well as a valid and adequate consideration supporting them. ² If the wife has a separate estate and purchases property from third parties, a creditor attempting to reach that property has the burden of proving fraud or that the wife was a mere nominee and did not have sufficient funds to make the purchase from her own estate.

Traditionally, estoppel against the government has been applied only where the sovereign acts in a proprietary capacity as opposed to exercising its governmental functions. See United States v. Summerlin [40-2 USTC ¶9633], 310 U. S. 414, 60 S. Ct. 1019, 84 L. Ed. 1283 (1940); United States v. State of Florida, 482 F. 2d 205 (5th Cir. 1973). Although there is some authority which seems to invoke estoppel more broadly against the government, these cases generally involve situations in which the sovereign's cause of action can be characterized as arising out of either transactions of a proprietary nature or contractual relationships. Cf. Pan Am v. United States, 273 U. S. 456 (1926) (oil leases to which the United States was a party); Ehrlich v. United States, 252 F. 2d 772 (5th Cir. 1958) (deed to which the United States was a party); United States v. Jones, 176 F. 2d 278 (9th Cir. 1949) (sale of surplus goods); People of Puerto Rico v. Livingston, 47 F. 2d 712 (1st Cir. 1931) (action in ejectment and to quiet title to lands allegedly belonging to the government); United States v. Certain Parcels of Land, 131 F. Supp. 65 (S. D. Cal. 1955) (contract). The assessment and collection of taxes has been interpreted as a governmental duty. Elrod Slug Casting Machine Co. v. O'Mallery [44-2 USTC ¶9521], 57 F. Supp. 915 (D. Neb. 1944).

Recent decisions dealing with the government's interest in real property, however, have held that when the elements of equitable estoppel are present, the government is prohibited from asserting a particular claim or defense because of a citizen's reliance upon representations or conduct of the government or its agents. See Brandt v. Hickel, 427 F. 2d 53 (9th Cir. 1970); United States v. Georgia-Pacific Co., 421 F. 2d 92 (9th Cir. 1970); Oil Shale Corp. v. Morton, 370 F. Supp. 108 (D. Colo. 1973); United States v. 31.45 Acres of Land, 376 F. Supp. 1277 (E. D. Wash. 1974). In any event, the necessary requirements of estoppel must be present including a knowing misrepresentation of a material fact, upon which the opposing party innocently relies to his detriment.

Under the Internal Revenue Code, 26 U. S. C. §6502, an assessed tax may be collected in an action brought within six years after the assessment. When suit is filed against the taxpayer within the statutory period, the later addition of a transferee as a party and a claim to set aside a fraudulent conveyance is timely even though the transferee was joined after the expiration of the six-year period. Hall v. United States, 403 F. 2d 344 (5th Cir. 1968), cert. den. 394 U. S. 958, 89 S. Ct. 1306, 22 L. Ed. 2d 560; United States v. Besase [70-2 USTC ¶9626], 319 F. Supp. 1064 (N. D. Ohio 1970).

The following material facts are undisputed. The defendants Margaret Dryden and Sam Alta Dryden were citizens of Haralson County, Georgia, and husband and wife during all relevant times herein and are subject to the jurisdiction of this court. In 1955, Sam Alta Dryden was convicted and sentenced to prison for the criminal violation of internal revenue laws relating to distilled spirits. Upon his release on April 15, 1960, all his property was impressed with federal tax liens filed October 24, 1951, and September, 1957, in the Superior Court of Haralson County, Georgia. These liens were subsequently released on July 29, 1963.

Dryden was again indicted for violation of federal liquor laws in 1962 and 1964, but in one case he was acquitted and the charges were dismissed in the other. Nontax-paid distilled spirits were seized August 21, 1967, October 6, 1967 and November 21, 1967. On October 15, 1967, the Internal Revenue Service began an audit of Dryden's taxes and delinquencies were subsequently filed on April 10, 1968 and June 5, 1969.

On September 5, 1968, Dryden was indicted in the United States District Court for the Middle District of Alabama for violation of distilled spirits tax laws, and a warrant for his arrest was issued on September 9, 1968. He was arrested on September 15, 1968, tried November 13, 1968 and convicted on November 15, 1968. The conviction was subsequently affirmed by the Court of Appeals for the Fifth Circuit on March 23, 1970. United States v. Dryden, 423 F. 2d 1175 (5th Cir. 1970), cert. den. 398 U. S. 950, 90 S. Ct. 1869, 26 L. Ed. 2d 290 (June 8, 1970). Dryden began serving a five-year sentence on June 29, 1970.

On November 6, 1968, he was also indicted in the Northern District of Georgia for a liquor violation. He was found guilty March 26, 1970 and sentenced to two years in federal prison.

Tax assessments were made between November 25, 1968, and October 9, 1970, for distilled spirits excise taxes, wholesale distributor taxes, income taxes and penalties and interests for the tax years 1965 through 1968. These assessments arose out of seizures which occurred on August 21, 1967, October 6, 1967, and November 21, 1967. Corresponding tax liens were filed in the Superior Court of Haralson County, Georgia on May 14, 1969, November 24, 1970 and December 10, 1970. It is stipulated by the parties that he is indebted to the United States in the amount of $137,503.76 as a result of these assessments. This action was filed on November 9, 1973.

In seeking to foreclose the tax liens, the government discovered that Sam Alta Dryden was insolvent which resulted from several transfers of property which occurred between his release from prison in 1960 and his reincarceration June 29, 1970. It is undisputed that these transactions took place, but the government seeks to set them aside as fraudulent, and their effect and the intent of the parties is therefore at issue.

I. Findings of Fact

Upon his release from prison on April 15, 1960, and up to and including July 29, 1963, when the 1951 and 1957 federal tax liens against his property were released and at times thereafter, Sam Alta Dryden conducted his business, borrowed funds, and placed title to property and bank accounts in the name of his wife, Margaret Dryden.

At all relevant times herein Margaret Dryden was self-employed as a beauty shop operator and supported Sam Alta Dryden's two children by a prior marriage whom she claimed as dependents on federal income tax returns. From 1960 through 1968, Mrs. Dryden's reported income for federal tax purposes never exceeded $7,500.00.

Sam Alta Dryden reported no taxable income for the years 1960 and 1961. From 1962 through 1965, his reported taxable income was as follows:

1962 ....         $ 5,220.46

1963 ....         $ 4,567.73

1964 ....                -0-

1965 ....         $11,753.35

 

On July 15, 1961, a tract of land located at 10th Street and Alta Vista, Laguna Beach, Florida, was purchased from Gulf Properties of Alabama, and a warranty deed made to Margaret Dryden ³ (hereinafter referred to as the "Florida property"). At the time of this transaction, the United States was a creditor of Sam Alta Dryden.

A structure located on the Florida property was damaged by fire in 1970, and Margaret Dryden received the insurance proceeds in the amount of $6,359.85. On October 16, 1970, she sold the Florida property to a third party for $6,000.00 after spending $250.00 for repairs. A net gain in the amount of $359.85 was reported on her 1970 income tax returns, the reported basis in the property being $11,750.00.

On February 15, 1966, Sam Alta Dryden applied for a loan of $20,000.00 and submitted a financial statement to the First Federal Savings and Loan Association of Bremen, listing assets in the total amount of $282,804.00. Included among those holdings was the Florida property valued at $15,000.00. Between 1961 and 1970, Margaret Dryden did not report any rental income from the Florida property although the defendants' depositions and evidence at the trial indicated that it was rented. Moreover, evidence of Margaret Dryden's annual income and earning capacity failed to show that she had sufficient assets in her personal estate to purchase the Florida property. It must be concluded, then, that the Florida property was an asset belonging to Sam Alta Dryden.

In 1962, Dryden began a construction business which he operated in the name of Margaret Dryden, borrowing funds and placing legal title to assets in her name. On April 26, 1963, in conjunction with his construction business, Dryden caused savings account Nos. 3013, 3014, 3015 and 3016 to be opened in the First Federal Savings and Loan Association of Bremen and pledged the accounts as collateral for loans by the bank to a third party to acquire property constructed by him (hereinafter referred to as the "construction accounts"). These accounts and the funds deposited therein were actually the property of Dryden. ⁴ At the time the accounts were opened, the United States was a creditor of Dryden.

In 1963, Dryden acquired an interest in the Dryden Funeral Home in Heflin, Alabama. Capital contributions were made by him and his brother Carl T. Dryden, and on July 1, 1963, the funeral home was incorporated as Dryden, Brown Service, Inc. (hereinafter referred to as the "Dryden Funeral Home"). Margaret Dryden was named vice-president of the corporation and 480 shares of stock were issued in her name and 260 shares each in the names of Carl T. Dryden and his wife. At the time of incorporation, the United States was a creditor of Sam Alta Dryden. Margaret Dryden made no capital contribution to the corporation, and the shares of stock were actually the property of Sam Alta Dryden.

On July 29, 1963, the federal tax liens filed October 24, 1951 and September 7, 1957, were released by the filing of a Certificate or Release of Federal Tax Lien in the Superior Court of Haralson County, Georgia. Thereafter, Dryden began conducting business and acquiring property in his own name rather than that of Margaret Dryden. But on September 5, 1968, upon his indictment in the Middle District of Alabama and his subsequent arrest on September 15, 1968, he began transferring assets and control of property from his name to that of Margaret Dryden.

On January 31, 1968, Carl T. Dryden and his wife purchased the defendant's interest in the Dryden Funeral Home by executing a security deed to the property and a note in the amount of $37,500.00 payable to Sam Alta Dryden in monthly installments of $314.46 beginning February 10, 1968. ⁵ On October 29, 1968, Dryden transferred and assigned his interest in the note and mortgage on the Dryden Funeral Home to Margaret Dryden. ⁶ On the date of the assignment, the United States was a creditor of Sam Alta Dryden.

On November 18, 1968, Dryden was the owner of and had an interest in savings account Nos. 3515, 3520, 4080, 4414, 4415, 4456, 4607, 4617, 4632, 4706 and 4891 in the Haralson Federal Savings and Loan Association, Bremen, Georgia (hereinafter referred to as the "savings accounts"). On that date, he transferred the savings accounts to Margaret Dryden. ⁷ On the date of the transfer, the United States was a creditor of Sam Alta Dryden.

On March 3, 1964, Dryden became the owner of a tract of land containing lots Nos. 1, 2, 3, 4 and 7 and the Bertha Dryden property located in the 8th District, 5th Section of Haralson County, Tallapoosa, Georgia ⁸ (hereinafter referred to as the "Bertha Dryden property"). By warranty deed dated September 1, 1968, ⁹ he conveyed one lot of the Bertha Dryden property with a brick dwelling thereon to Gary Warner, and on September 19, 1968, he caused a note in the principal amount of $11,500.00 and a security deed on the Warner lot to be executed by Gary Warner to Margaret Dryden. ¹⁰ At the time of the note and security deed, the United States was a creditor of Sam Alta Dryden.

Dryden also conveyed a second lot with a dwelling situated thereon to Bobby Daniel and Patsy Daniel and received in return a security deed. ¹¹ By warranty deed dated September 1968 and recorded November 18, 1968, Bobby Daniel and Patsy Daniel conveyed their tract of the Bertha Dryden property to Margaret Dryden, at which time the United States was a creditor of Sam Alta Dryden. ¹² On November 11, 1968, Dryden transferred his interest in all of the Bertha Dryden property to Margaret Dryden, ¹³ at which time the United States was a creditor of Sam Alta Dryden.

On November 11, 1968, Sam Alta Dryden was the owner of an undeveloped piece of real property on Reiman Place in Tallapoosa, Georgia (hereinafter referred to as the "Reiman Place lot"). On that date he conveyed his interest in the Reiman Place lot to Margaret Dryden ¹⁴ at a time when the United States was a creditor of Sam Alta Dryden.

On November 18, 1968, Dryden owned four apartment buildings situated on three tracts of land located on Reiman Place and Taliaferro Street in the City of Tallapoosa, Georgia (hereinafter referred to as the "Reiman-Taliaferro apartment"). At that time, the United States was a creditor of Sam Alta Dryden, and he conveyed the Reiman-Taliaferro apartments to Margaret Dryden. ¹⁵

On December 31, 1968, and for some time prior thereto, Dryden had an interest in four notes and security deeds in the original amount of $10,000.00 each from Clellan and Myric Hicks, Merrill D. Kilgore, C. B. Shultz, and William Archie Allen and Catherine Allen (hereinafter referred to as the "Hicks, Kilgore, Shultz and Allen notes"). The notes and security deeds were each originally executed in favor of Margaret Dryden in 1962 when the United States was a creditor of Sam Alta Dryden by virtue of the federal tax liens filed in 1951 and 1957 and released in 1963. The defendants acknowledge that Dryden actually owned the notes and deeds on January 1, 1969 when he transferred his interest to Margaret Dryden.

On December 31, 1968, Dryden was the holder of a note from Lucille Campbell in the original amount of $2,500.00 and a note from Charles R. Ray and Mrs. Charles Ray in the amount of $6,325.00 (hereinafter referred to as the "Campbell note" and the "Ray note"). As collateral for the Ray note, Dryden required that a security deed be executed by the Rays to Margaret Dryden although he was the actual owner of any interest therein. On January 1, 1969, or sometime thereafter Dryden conveyed his interest in the Ray note and security deed to Margaret Dryden. On January 1, 1970 or later Dryden conveyed his interest in the Campbell note to Margaret Dryden.

The value of Sam Alta Dryden's net equity in the real and personal property transferred to Margaret Dryden after his indictment on September 5, 1968, was in excess of $150,000.00. As a result of those conveyances, Dryden became insolvent. The defendants insist that the transfers were made pursuant to an oral agreement and in consideration of Margaret Dryden's supporting and raising Dryden's children, her promise not to divorce him, and her agreement to pay certain of his debts in the future. The defendants also claim that the transactions and acquisitions of real and personal property between 1960 and 1964 by Dryden in his wife's name were not made with the intention of delaying or defrauding creditors or avoiding the federal tax liens filed in 1951 and 1957, but were compelled by Dryden's lack of credit in the business community. The evidence at the trial does not support these contentions.

The overall pattern of conduct whereby assets were placed in Margaret Dryden's name while the tax liens were in effect and then transferred overtly or impliedly to Dryden once the liens were lifted in 1963, followed by the reshuffling of property in 1967 and thereafter when audits and seizures took place with indictments to follow, leads to the inevitable conclusion that the transactions were designed to avoid creditors. Margaret Dryden stated in her deposition that Dryden conducted business in her name "before he got his record cleared up . . . that whiskey record . . . [H]e did this in my name because . . . they were . . . coming to an agreement, I guess, on that old tax. [I]f he put the property in his name, I guess it would be subject to the lien, and he was attempting to avoid it being subject to the lien." ¹⁶ As for the transfers in 1967 and thereafter, both Dryden and his wife stated to others that he had "given" certain property to his wife, ¹⁷ and the property conveyed in 1967 and thereafter was income producing property ¹⁸ which sufficiently covered the debts owed by Sam Alta Dryden to others. In view of the pattern of conduct in the early 1960's which Margaret Dryden understood to be necessary because of the existence of tax liens and the subsequent involvement of her husband in alleged violations of internal revenue laws, it is obvious that she had, at a minimum, ground for reasonable suspicion of her husband's intent in conveying property to her. Furthermore, there is no showing that the transfers were supported by adequate consideration.

Two of the four Reiman-Taliaferro apartment buildings were pledged by Sam Alta Dryden to the First Federal Savings and Loan Association of Bremen as security for two notes in the principal amount of $20,000.00 each on September 20, 1966. On March 15, 1968, he executed a note for $40,000.00 to the First Federal Savings and Loan Association, secured by the remaining two Reiman-Taliaferro apartment buildings.

Margaret Dryden received $12,359.85 in 1970 from the insurance proceeds and sale of the Florida property. During the year 1970, the Hicks note was paid in full in the amount of $7,605.48, the Shultz Note was paid up in the amount of $7,602.00 and the Kilgore obligation was sold by Margeret Dryden for $7,500.00 in credit.

After the transfer of Sam Alta Dryden's interest in the Bertha Dryden property to his wife, she received a total of $2,049.72 in rent for two dwellings on that property during the years 1969 and 1970. In 1970, Margaret Dryden sold the two rental dwellings and lots for $11,500.00 each to Clinton Willie McNeese and Amanda Ortrud McNeese ¹⁹ and to Robert Arnold and Louise Arnold ²⁰ respectively and took a note and security deed on each lot for which she was paid $96.20 a month. She also received $89.17 a month on the Gary Warner note.

II. Conclusions of Law

This court has jurisdiction of the parties and the subject matter of this action. 28 U. S. C. §§ 1340 and 1345; 26 U. S. C. §§ 7402 and 7403.

The United States was a creditor of Sam Alta Dryden between 1951 and 1963, and from August 21, 1967, when seizures of nontax-paid spirits were made, until the present. United States v. Hickox [66-1 USTC ¶15,679], 356 F. 2d 969 (5th Cir. 1966); Hartman v. Lauchli [57-1 USTC ¶9571], 238 F. 2d 881 (8th Cir. 1956), cert. den. 353 U. S. 965. Sam Alta Dryden is indebted to the United States in the amount of $137,503.76.

This action was brought November 9, 1973, within six years of the earliest assessment sought to be enforced which occurred on November 25, 1968. The action is timely under 26 U. S. C. §6502 as against both the taxpayer and his transferee, and the government is not estopped to assert its liens having made no representations by conduct or otherwise on which the defendants innocently relied to their detriment. Hall v. United States, 403 F. 2d 344 (5th Cir. 1968), cert. den. 394 U. S. 958, 89 S. Ct. 1306, 22 L. Ed. 2d 560; United States v. Besase, supra.

The property conveyed to Margaret Dryden was self-sustaining, income producing property and foreclosure would not unjustly enrich the plaintiff.

The burden of proof was upon the United States to establish that property purchased by Margaret Dryden from third parties was actually purchased with the assets of Sam Alta Dryden and belonged to him. Otherwise, the burden of proof was on the defendants, Sam Alta Dryden and Margaret Dryden, to show that transactions between them were fair. Ga. Code Ann. §53-505; United States v. Hickox, supra; United States v. McMahan, supra; Spiegel v. Ross [60-2 USTC ¶9749], 188 F. Supp. 812 (N. D. Ga. 1960); United States v. Phillips, supra.

Between 1960 and 1963, when the United States was a creditor of Sam Alta Dryden, the defendants placed the title to the Florida property, the construction accounts, the Hicks, Kilgore, Shultz and Allen notes, and the interest in the Dryden Funeral Home in the name of Margaret Dryden with the intent to delay or defraud creditors of Dryden and to avoid federal tax liens. Margaret Dryden knew of this intent or had grounds for reasonable suspicion of the intent to defraud creditors. These transactions are therefore null and void as against the United States and title to the property is vested in Sam Alta Dryden. United States v. Hickox, supra; United States v. McMahan, supra; 28 Ga. Code Ann. §201(2).

Transfers between August 21, 1967 and 1971 by Dryden to Margaret Dryden of his interest in the Bertha Dryden property, the Reiman Place lot, the Reiman-Taliaferro apartments, the savings accounts, the Ray note, the Campbell note, the Dryden Funeral Home mortgage, as well as his interest in the Florida property, the construction accounts, and the Hicks, Kilgore Shultz and Allen notes were made when the United States was a creditor of Sam Alta Dryden. These transfers were without consideration and were voluntary conveyances which left Sam Alta Dryden insolvent and are null and void as against the United States. The transfers were also made with the intent to delay and defraud creditors, and Margaret Dryden knew of such intent or had grounds for reasonable suspicion. They are null and void and the title to the property is vested in Sam Alta Dryden. United States v. Hickox, supra; United States v. McMahan, supra; Spiegel v. Ross, supra; United States v. Phillips, supra.

The federal tax liens of the United States, having attached to the interest of Sam Alta Dryden in the property transferred to Margaret Dryden are entitled to be foreclosed to the extent such property is still owned by Margaret Dryden. The property should be sold in accordance with law, with the proceeds of the sale distributed to the United States for application to the unpaid tax liabilities of Sam Alta Dryden subject to prior security interests in favor of First Federal Savings and Loan Association of Bremen, Georgia. 26 U. S. C. §§ 6321, 7403.

The security deeds on the Reiman-Taliaferro apartments held by First Federal Savings and Loan Association of Bremen are first liens on the real property described therein and are entitled to be paid first from the proceeds of sale of such property to the extent of the present unpaid balances of indebtedness of Sam Alta Dryden secured thereby. 26 U. S. C. §6323.

The estate of Margaret Dryden has a duty to account for the real and personal property which was fraudulently conveyed to her by Sam Alta Dryden and, in the event the estate fails to so account, the United States is entitled to judgment against Margaret Dryden for such amount. Leachman v. Cobb Development Co., 226 Ga. 103, 172 S. E. 2d 688 (1970); Edwards v. United Food Brokers, Inc., 195 Ga. 1 (1942).

The plaintiff is directed to prepare a proposed judgment for entry by the clerk in compliance with Rule 58, Fed. R. Civ. P.

¹ Margaret Dryden died testate on December 1, 1975. References herein to Margaret Dryden shall therefore apply in all respects to her personal representative, Sam Alta Dryden, as executor of the estate of Margaret Dryden.

² To the extent that Florida or Alabama law applies to property located in those states, it is essentially the same as that in Georgia. See Code of Ala., Tit. 20 §7; Roddam v. Martin, 285 Ala. 619, 235 So. 2d 654 (1970); F. S. A. §726.01; Thomas v. Burke, 146 Fla. 5, 200 So. 69 (1941); Foster v. Thornton, 131 Fla. 277, 179 So. 882 (1938); Harkins v. Holt, 124 Fla. 774, 169 So. 481 (1936); Hummell v. Harrington, 92 Fla. 87, 109 So. 320 (1926); cf. Scott v. Dansby, -- Fla. App. --, 334 So. 2d 331 (1976).

³ Deed of July 15, 1961, from Gulf Properties of Alabama to Margaret Dryden, filed July 28, 1961, File No. 3828, Book 45, pp. 251-252, Circuit Court of Bay County, Florida. See Government Exhibits 69 and 70.

⁴ Government Exhibit #85.

⁵ Mortgage dated January 31, 1968 from Carl T. Dryden and wife, Gedea M. Dryden, to Sam A. Dryden, recorded June 17, 1968, Mortgage Book 145, pages 698-702, Probate Court of Cleburne County, Alabama.

⁶ Mortgage assignment filed November 1, 1968, Mortgage Book 146, page 259, Probate Court of Cleburne County, Alabama.

⁷ Government Exhibit #39.

⁸ Government Exhibit #26.

⁹ Government Exhibit #31, warranty deed, Alta Dryden to Gary Warner, dated September 1, 1968, Book 124, page 136, Superior Court of Haralson County.

¹⁰ Government Exhibit #32 and 33, Deed from Gary Warner to Margaret Dryden, Book 125, page 312, Superior Court of Haralson County.

¹¹ Government Exhibit #36.

¹² Government Exhibit #37.

¹³ Government Exhibit #28, Book 125, page 308.

¹⁴ Government Exhibit #19, Deed of November 11, 1968, Alta Dryden to Margaret Dryden, Book 125, page 309, Superior Court of Haralson County, Georgia.

¹⁵ Government Exhibit #25, Deed recorded in Book 125, page 310, Superior Court of Haralson County, Georgia.

¹⁶ Deposition of Margaret Dryden, August 15, 1974, pp. 21-22.

¹⁷ Trial Transcript pages 192-194 and 376-378.

¹⁸ The various notes were paid monthly and the apartment buildings and houses on the Bertha Dryden property produced rent.

¹⁹ Government Exhibits #64 and 65.

²⁰ Government Exhibits #66, 67 and 68.

 

 

 

United States of America, Plaintiff-Appellee v. H. Barry Ressler and Oscar M. Williams, Defendants-Appellants

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 77-2837, Summary Calendar ^*, 576 F2d 650, 7/14/78, Aff'g District Court, 77-1 USTC ¶9459, 433 FSupp 459

[Code Sec. 6502--result unchanged by 1976 Tax Reform Act]

Statute of limitations: Collection after assessment: Extension: Offer of compromise: Criminal proceedings: Effect.--Assessments were timely made pursuant to an offer in compromise that extended the limitations period. A criminal conviction of the defendant did not determine the termination date of the offer--the government can both prosecute for fraud and still consider a civil offer.

Jack V. Eskenazi, United States Attorney, Miami, Fla. 33132, M. Carr Ferguson, Acting Assistant Attorney General, Gilbert E. Andrews, Jonathan S. Cohen, Department of Justice, Washington, D. C. 20530, for plaintiff-appellee. Sidney A. Soltz, 19 West Flagler St., Miami, Fla. 33130, for defendants-appellants.

Before RONEY, GEE and FAY, Circuit Judges.

PER CURIAM:

On August 1, 1975, the United States filed this civil suit to collect unpaid taxes and to set aside as fraudulent certain conveyances of real property made by defendant Ressler. After a nonjury trial, the district judge found that the conveyances of the real property were fraudulent as to the United States and therefore rendered null and void by Florida law, and that defendant Ressler is indebted to the United States for tax liabilities in the amount of $33,619.01 plus statutory additions. Defendants appealed.

The sole issue which we discuss on this appeal is whether this suit is barred by the Internal Revenue Code's six-year statute of limitations for collection after assessments, 26 U. S. C. A. §6502(a), since the bulk of the assessments involved were assessed more than six years prior to the commencement of this action. We hold that the action was timely, because the statute of limitations was extended by an agreement between defendant Ressler and the Government to beyond the date on which the complaint was filed.

The earliest assessment involved in the present suit was made on April 8, 1965. Thus, without more, the statute of limitations on collecting such assessments would have run six years later on April 8, 1971.

On December 8, 1969, defendant Ressler made an offer of compromise of his tax liabilities. The offer, set forth on the Internal Revenue Service's standard Form 656, contained the following provision extending the statute of limitations:

6. The undersigned proponent waives the benefit of any statute of limitations applicable to the assessment and/or collection of the liability sought to be compromised, and agrees to the suspension of the running of the statutory period of limitations on assessment and/or collection for the period during which this offer is pending, or the period during which any installment remains unpaid, and for 1 year thereafter.

The purpose of giving a waiver, in connection with an offer of compromise, is to enable the Government to consider the offer without suffering prejudice because of the running of the statute of limitations against the collection of the tax while the offer is being considered. United States v. Harris Trust & Savings Bank [68-1 USTC ¶12,512], 390 F. 2d 285, 287-288 (7th Cir. 1968); United States v. Havner [39-1 USTC ¶9286], 101 F. 2d 161, 163 (8th Cir. 1939). The District Director of the IRS signed the form, thereby accepting the waiver, on January 6, 1970. It is on that date that the suspension of the running of the limitations period commenced. United States v. Cook [74-1 USTC ¶9457], 494 F. 2d 573, 575 (5th Cir. 1974).

The running of the statutory period is suspended until the offer of compromise is terminated, withdrawn, or formally rejected. See Myrick v. United States [62-1 USTC ¶9112], 296 F. 2d 312 (5th Cir. 1961). In addition, it is suspended for one additional year, as provided by the terms of the offer.

In this case, the offer of compromise was rejected by the Government on May 3, 1973. Thus, the offer of compromise was pending from January 6, 1970 until May 3, 1973, a period of 3 years, 3 months and 27 days. In addition, the agreement calls for an extension of one additional year, for a total extension of 4 years, 3 months and 27 days. As noted earlier, since the earliest assessment was that of April 8, 1965, the six-year statute of limitations would have expired on April 8, 1971. That was extended by the offer of compromise, however, by 4 years, 3 months and 27 days, or until August 4, 1975. Suit was commenced by the Government on August 1, 1975, within the period of the statute of limitations as extended by the parties' agreement. The suit was therefore timely commenced. See United States v. Moyer [70-1 USTC ¶9235], 308 F. Supp. 754 (W. D. Pa. 1968), aff'd per curiam [70-1 USTC ¶9182], 420 F. 2d 375 (3d Cir.), cert. denied, 400 U. S. 819, 91 S. Ct. 36, 27 L. Ed. 2d 46 (1970).

Defendant Ressler contends, however, that an earlier date must be set as the termination date of the offer. Defendant was indicted in 1972 for filing a false financial statement in connection with this offer of compromise. He pled guilty and was sentenced on February 26, 1973. Defendant contends that this date, rather than May 3, 1973 when the Government officially rejected his offer, should determine the termination date of the offer of compromise. If the date of sentencing is chosen, the statute of limitations as extended would have expired on May 28, 1975.

Defendant's computation is as follows: the offer of compromise was made on January 6, 1970, and terminated when defendant was sentenced, on February 26, 1973, for an extension period of 3 years, 1 month and 20 days, plus the additional one year granted by the agreement. When that period is added to the normal expiration date of April 8, 1971, the statute of limitations would expire on May 28, 1975. Since the complaint was not filed until some two months later, on August 1, 1975, the Government's suit would be untimely.

In support of his position, defendant cites Coy v. United States [67-2 USTC ¶9494], 377 F. 2d 925 (9th Cir. 1967), where the Ninth Circuit so held. We decline to adopt the Coy decision as the rule in this Circuit. We find no reason why proceedings in a criminal matter should have any effect on whether even a related civil matter can be compromised. There is nothing necessarily inconsistent from the Government's standpoint in prosecuting for fraud and still considering an offer of compromise of the civil liability for tax. The prosecuted taxpayer is not left unprotected: if he thinks that his prosecution is inconsistent with acceptance of his offer of compromise, he can withdraw the offer upon notice to the Government, and thus terminate the toll on the statute of limitations. Accordingly, we reject Coy's reasoning.

The complaint in this suit was, therefore, not time barred. Defendants' other contentions are meritless.

AFFIRMED.

^* Rule 18, 5 cir.; see Isbell Enterprises, Inc. v. Citizens Casualty Co. of New York et al., 5 Cir. 1970, 431 F. 2d 409, Part I.

 

 

United States of America, Plaintiff v. H. Barry Ressler, et al., Defendants

U. S. District Court, So. Dist. Fla., Civil No. 75-1524-Civ-SMA, 433 FSupp 459, 5/25/77

[Code Sec. 6321--result unchanged by '76 Reform Act]

Assessment and collection of taxes: Federal tax liens: Fraudulent conveyances of property: State law.--Even though all of the taxpayer's property had not been subjected to Federal tax liens until after February of 1961, he became liable for Federal taxes due and owing for the years 1958 and 1959 on April 15, 1960 and 1961. Therefore, the court determined that certain transfers of property made by the taxpayer after these dates were fraudulent conveyances under Florida law. Consequently, the transfers were voided, Federal tax liens did attach to the property and it was subject to foreclosure.

Robert W. Rust, United States Attorney, John S. Berk, Assistant United States Attorney, Miami, Fla. for plaintiff. Sidney A. Soltz, 19 West Flagler St., Miami, Fla. 33130, Shevin Shapo & Shevin, 2699 S. Bayshore Dr., Miami, Fla. 33133, for defendants.

Findings of Fact and Conclusions of Law

ARONOVITZ, District Judge:

This cause having been heard by this Court, Honorable Sidney M. Aronovitz, Presiding, the Court having considered the stipulation of the parties, the evidence offered at trial, and the argument of counsel, and having considered the applicable law, the Court finds as follows:

Findings of Facts

1. This is an action brought by the United States under Sections 7401, 7402 and 7403 of the Internal Revenue Code of 1954 (26 U. S. C.), in which the United States seeks to set aside as having been in fraud of creditors conveyances of a certain parcel of real property by defendant H. Barry Ressler and Oscar M. Williams. The United States also seeks to reduce to judgment certain unpaid federal tax liabilities of defendant Ressler and to foreclose certain federal tax liens outstanding against defendant Ressler on the subject property.

2. Federal jurisdiction is based upon 28 U. S. C. Sections 1340 and 1345.

3. The federal tax assessments against defendant Ressler which plaintiff seeks to reduce to judgment and collect upon by foreclosure are income and Section 6672 100% penalty tax assessments as set forth in the Pretrial Stipulation, which is incorporated herein by reference. The income tax assessments are for the years 1958-1965, 1967-1971 and 1973-1974. The "trust fund" 100% penalty assessments are for quarters in 1961, 1962, and 1970-1972. The total unpaid balance of the assessments is $33,619.01, plus statutory additions.

4. Defendant Ressler does not contest the merits of the various assessments, and has conceded that the tax assessments against him are correct and valid. Plaintiff's tax liens, which were filed and refiled as indicated in the above Pretrial Stipulation, were duly and properly filed and refiled with the Clerk of the Court of Dade County, Florida.

5. By warranty deed of August 25, 1960, defendant Ressler purchased property from a John E. and Pauline H. Laffey. Said property is described as "Lot 5 of Sun Grove Estate, according to the Plat therefor recorded in Plat Book 64, at p. 14 of the Public Records of Dade County, Florida," and is a house and lot located at 11920 S. W. 89th Avenue, Miami, Florida. The exact purchase price is unclear. The documentary stamps on the warranty deed indicate a purchase price of $35,000, while defendant Ressler contends that the purchase price was $30,000.

6. In conjunction with the purchase of the subject property, defendant Ressler executed a mortgage on the subject property to Keyes-Penn Mortgage Company. Said mortgage is dated September 12, 1960, and was recorded on September 14, 1960. The mortgage has been assigned to defendant Provident Mutual Life Insurance Company of Philadelphia. The mortgage was in the original amount of $27,000.

7. On February 13, 1961, Ressler conveyed an undivided one-half interest in the subject real property to his sister, Roberta Tavel, by warranty deed recorded on February 16, 1961. The warranty deed does not state that the conveyance was made subject to the mortgage on the property. There was no consideration paid by Roberta Tavel for the conveyance to her of the undivided one-half interest in the subject property. Further, Roberta Tavel was not advised of the conveyance or otherwise made aware of it on or about the time of the conveyance.

8. At the time of the conveyance, Ressler was president of Public Mortgage Company and its affiliates. According to testimony given by Ressler in a prior proceeding, the transfer was made to his sister, Roberta Tavel, as security for monies Ressler's parents had invested in Public Mortgage Company. Ressler stated in the prior proceeding that he was concerned with protecting the subject property "from judgment or attachment or anything else" with respect to claims of creditors arising from the financial difficulties of the various Public Mortgage Companies.

9. Roberta Tavel remains to this date the legal owner of an undivided one-half interest in the subject property. However, defendant Ressler has continuously, from the date of purchase of the property to the present time, occupied the subject property as his residence. Ressler treats the property as his own. Roberta Tavel does not consider the property to be hers.

10. Also on February 13, 1961, Ressler conveyed the remaining undivided one-half interest in the subject property to Oscar M. Williams by warranty deed of that date, which deed was recorded on February 16, 1961. The deed did not make the conveyance subject to the existing mortgage. Ressler remained personally liable on the mortgage. At the time of the conveyance, Oscar Williams was associated with Ressler in Public Mortgage Company.

11. Ressler and Williams were close friends at the time of the conveyance, and were residing together in the subject property when the convenyances were made by Ressler to Williams and Tavel. Ressler and Williams had been residing together in a different house at the time Ressler purchased the subject property. From the purchase of the subject property by Ressler in August of 1960 through the present day, Ressler and Williams have both continuously occupied the property as their residence. Both men remain in occupancy as of this date.

12. Williams did not pay any part of the cash downpayment on the subject property at the time Ressler purchased it, nor did Williams provide any actual consideration for Ressler for the conveyance to Williams of the one-half interest in the property. Some furnishings owned by Williams may have been used in furnishing the subject property. The value of those furnishings was minimal, however.

13. The mortgagee of the subject property was not advised of either of the conveyances until January of 1964. From 1960 through 1963 Ressler had a series of dealings with the mortgagee with respect to delinquent payments. In January of 1964, Ressler visited the offices of the mortgagee in an attempt to prevent foreclosure of the mortgage. At that time, Ressler stated that it was his desire to continue to occupy the house as his home.

14. From 1960 through 1963 Ressler was solely responsible for the mortgage payments which were made. During 1964 through 1966, Ressler made the mortgage payments out of his personal checking account. Subsequent to 1966, mortgage payments on the property were made by Williams, who was reimbursed, in whole or in part, by Ressler. Williams began making the mortgage payments in 1966 because Ressler had discontinued use of checking accounts because of seizure of the accounts by the Internal Revenue Service for unpaid taxes.

15. On September 15, 1969, defendant Williams conveyed by deed his undivided one-half interest in the subject property to his sister, Harriet Williams, which deed was recorded on the same date. Defendant Harriet Williams remains to this date the legal owner of an undivided one-half interest in the subject real property. Harriet Williams was not advised of the conveyance to her at the time of the conveyance. There was no consideration paid by Harriet Williams for the conveyance to her of the undivided one-half interest. The conveyance was made at the time that Williams was considering filing with the Internal Revenue Service an offer to compromise certain unpaid tax liabilities and was, according to Williams, suggested by Williams' accountant. The offer in compromise entailed submitting a financial statement to the Internal Revenue Service. At all times subsequent to the conveyance by Oscar Williams to his sister Harriet Williams, Oscar Williams has occupied the subject property as his residence.

16. In November of 1970, Ressler, during an interview with Special Agent Hampton of the Intelligence Division, Internal Revenue Service, Miami, Florida, stated that since he occupied the subject property, he considered the property to be his. Ressler attempted later to modify that statement by stating that title to the house was "so confused that he did not know who owned it." Ressler is a graduate of Princeton University and the University of Miami School of Law.

17. Defendant Ressler forged the name of Roberta Tavel to the 1970 Homestead Exemption Renewal Application of Dade County, Florida. Said application was required to be signed by the owners of the property.

18. At the time of the conveyances by Ressler in February of 1961, Ressler claimed, in answer to interrogatories, to have had assets, other than the subject property, with an equity value of some $35,000. The evidence at trial cast considerable doubt upon that allegation, since it was shown that some of the listed assets were pledged as collateral for loans, and Ressler was unsure of whether other assets had already been pledged as collateral or lost to creditors prior to the February, 1961 conveyances. Ressler also owned a 30 percent interest in Public Mortgage Company and its subsidiaries. That interest was of dubious value at that time however, because of the impending financial difficulties of the company, of which Ressler was aware. At the trial of this matter, Ressler, who was present and was represented by counsel, chose to rest without presenting any evidence. There was no evidence offered by Ressler concerning his financial situation at the time of the conveyances in 1961. Evidence presented by the plaintiff established that Ressler's parents contributed substantially to his support and maintenance throughout the 1960's, subsequent to the conveyances. Therefore, the United States made out a prima facie case, which went unrebutted, that the conveyance by Ressler of the subject property, while retaining the $27,000 mortgage liability, substantially reduced Ressler's net worth and had the effect of defeating or hindering Ressler's creditors.

19. In 1972, Ressler was indicted in the United States District Court for the Southern District of Florida for a violation of Section 7206 of the Internal Revenue Code of 1954, in that Ressler filed with the Internal Revenue Service, in connection with an offer to compromise delinquent tax liabilities, a false financial statement. According to the indictment, one of the assets which Ressler fraudulently failed to list as his own asset was the property involved in this matter.

20. Ressler pled guilty to a violation of Section 7207 of the Internal Revenue Code of 1954 in that the financial statements submitted to the Internal Revenue Service which formed the basis of the indictment was known by him to be fraudulent or false as to a material matter. The Judgment of Guilt in the case of United States of America v. H. Barry Ressler, No. 72-913-CR- SD Fla., as described above, was filed on February 26, 1973.

21. At the time of the conveyances by Ressler in February of 1961, plaintiff United States of America was creditor of Ressler by virtue of federal income tax liabilities for the years 1958, 1959 and 1960. At the time of the conveyance, Ressler was aware that he had failed to file forms 1040, Federal Income Tax Returns, for the years 1958 and 1959. It was subsequently determined that Ressler did owe income taxes for 1958 and the subsequent years. At the time of the conveyances by Ressler in February of 1961, mortgagee Provident Mutual Life Insurance Company of Philadelphia was also a creditor of defendant Ressler.

22. Subsequent to the conveyances by Ressler in February of 1961, Ressler incurred additional federal tax liabilities, as listed above. The United States has been unable to collect the unpaid taxes. Therefore, the conveyances by Ressler have had the effect of hindering and delaying legal creditors of Ressler.

Conclusions of Law

1. This Court has jurisdiction over the parties hereto and over the subject matter of this action.

2. Federal tax liens did not come into existence with respect to all property and rights to property belonging to defendant Ressler until the dates of assessment and notice and demand for payment, subsequent to February, 1961. Therefore, federal tax liens did not attach to the legal title to the subject property. In such a situation, where a taxpayer disposes of property prior to the existence of federal tax liens, the United States may seek relief under the applicable fraudulent conveyance laws of the particular state in which the property and taxpayer are located. Commissioner v. Stern [58-2 USTC ¶9594], 357 U. S. 29 (1958); United States v. Kaplan, 277 F. 2d 405 (5th Cir. 1960).

3. 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. Hartman v. Lauchli [57-1 USTC ¶9571], 238 F. 2d 881 (8th Cir. 1958); United States v. Adams Building Co. [76-1 USTC ¶9221], 531 F. 2d 342, fn. 2 (6th Cir. 1976); United States v. Hickox [66-1 USTC ¶15,679], 356 F. 2d 969 (5th Cir. 1966). Because of federal income tax liabilities of Ressler which had accrued for his tax years 1958 and 1959 (which became liabilities on April 15, 1960 and 1961, respectively, by operation of Sections 6151 and 6072 of the Internal Revenue Code of 1954), the United States was an existing creditor at the time of the transfer of the subject property by Ressler in 1961, although the United States had no outstanding federal tax liens. See United States v. Hickox, supra; Leon Papineau v. Commissioner [CCH Dec. 22,333], 28 T. C. 54 (1957); and Sidney Kreps v. Commissioner [CCH Dec. 26,864], 46 T. C. 560 (1954).

4. The applicable local law in this matter is Florida Statute Section 726.01 et seq. Under Fla. Stat. Sec. 726.01, a conveyance in fraud of creditors is void as to creditors. Under Fla. Stat. Sec. 726.07, a fraudulent conveyance is void against subsequent purchasers except bona fide purchasers for value.

5. In order for the conveyance to be fraudulent as to creditors, the transferor must intend to hinder and delay the creditors. There must be a "design of the debtor to prevent his creditor from satisfying his debt." See 15 Fla. Jur. "Fraudulent Conveyance" Section 7. An evil motive is not required. The requirement is merely "an intentional act prejudicial to creditors."

6. With respect to creditors existing at the time of the conveyance under attack, under Florida law a conveyance without consideration by one who is indebted is presumptively fraudulent, regardless of the actual intent of the transferor. Ostend Realty Co. v. Biscayne Realty and Insurance Co., 128 So. 643 (Fla. 1930).

7. As in other jurisdictions, the courts in Florida have fashioned "badges of fraud" the existence of which will justify the inference of the requisite intent to hinder or delay creditors. See Banner Construction Corp. v. Arnold, 128 So. 2d 893 (Fla. App. 1961); Frell v. Frell, 154 So. 2d 706 (Fla. App. 1963). Factors indicating the actual fraudulent intent are absence of consideration, family relationship of the parties to the transfer; retention of possession of the property by the transferor; failure to notify the transferee of the transfer; and the financial condition of the transferor after the transfer.

8. Retention of possession of the property after the transfer creates a prima facie presumption of fraud. Jones v. Wear, 149 So. 2d 345 (Fla. 1933). The close relationship of the transferee to the transferor tends to establish a prima facie case of a fraudulent conveyance which must be then met by the defendant. Money v. Powell, 139 So. 2d 702 (Fla. App. 1962).

9. Applying the above legal principles to the instant case, the Court concludes that plaintiff has met its burden of proof in all respects. The evidence was, at the very least, sufficient to make out a prima facie case of fraud, thus shifting to the defendants the burden of proving that the conveyances were not fraudulent. See United States v. Hickox, supra, and the cases cited in paragraphs 6, 7, and 8 above. Since defendants Ressler, Oscar Williams, Harriet Williams and Roberta Tavel did not present any evidence, plaintiff's case was not rebutted. With respect to the transfer to Roberta Tavel, the transfer having been to a family member and without consideration, the transfer is presumptively fraudulent. Additionally, the facts that Ressler did not advise his sister of the transfer; that he has continued to this date to occupy the property as his residence; and that he made mortgage payments and in other respects treated the property as his own, as described more specifically in the foregoing Findings of Fact, all lead to the inescapable conclusion that the transfer to Roberta Tavel was fraudulent within the meaning of the Florida statutes, was void as to creditors and thus may be set aside by the United States.

10. With respect to the transfer by Ressler to Oscar Williams, defendant Ressler has not rebutted the prima facie case established by the United States. The apparent close relationship between Ressler and Oscar Williams, the retention of possession of Ressler, Ressler's continuing after the transfer to make mortgage payments and otherwise deal with the property as his own, combined with Ressler's admission in prior testimony that he was concerned with protecting the subject property "from judgment or attachment or anything else" with respect to claims of creditors arising from financial difficulties of Public Mortgage Company and its affiliates, all establish that the transfer to Oscar Williams was a fraudulent conveyance within the meaning of the Florida statutes. Defendant Ressler has not rebutted the case proven by the United States.

11. Since the conveyance to Oscar Williams was void as to creditors, the subsequent conveyance by Oscar Williams to his sister, Harriet Williams, without consideration, was also void. Harriet Williams was not a bona fide purchaser who could receive the property free of the fraudulent taint.

12. The United States has thus proven that the conveyances by Ressler of the subject property are void and must therefore be set aside. Since the conveyances are void, the federal tax liens attach to the subject property by operation of Section 6321 of the Internal Revenue Code, and may therefore be foreclosed by a sale of the property in accordance with Section 7403 of the Internal Revenue Code. Proceeds from the sale of the property will be divided among plaintiff and the other creditor-defendants according to their priorities as determined under Section 6323 of the Internal Revenue Code of 1954.

13. To the extent that proceeds from the sale of the property are insufficient to satisfy the claims of the United States against Ressler, since Ressler has not contested, and in fact has stipulated to, the correctness and validity of the various tax assessments, judgment will be issued in favor of the the amount of the unpaid tax assessments, plus statutory additions according to law. Plaintiff shall recover its costs.

Final Judgment and Order of Sale

In accordance with the Findings of Fact and Conclusions of Law entered in this matter, the Court finds that defendant H. Barry Ressler is indebted to plaintiff, United States of America, for unpaid federal taxes, plus statutory additions thereto. The Court further finds that the subject conveyances of real property on February 13, 1961 by defendant Ressler to defendants, Tavel and Williams, and on September 15, 1969 by defendant Williams to Harriet Williams, were fraudulent as to plaintiff, United States of America, and are therefore rendered null and void by operation by the law of the State of Florida.

It is therefore ORDERED, ADJUDGED and DECREED that defendant H. Barry Ressler is indebted to plaintiff, United States of America, for tax liabilities as alleged in the Complaint in the amount of $33,619.01, plus statutory additions thereto.

It is further ORDERED, ADJUDGED and DECREED that the United States of America has a valid and subsisting lien upon the real property which is the subject matter of this action, the house and lot located at 11920 S. W. 89th Avenue, Miami, Dade County, Florida, the legal description of which is "lot 5 of Sun Grove Estate, according to the Plat thereof recorded in Plat Book 64, at p. 14 of the Public Records of Dade County, Florida".

It is further ORDERED, ADJUDGED and DECREED that the federal tax lien attaching to the above-described property be foreclosed and the property be sold at auction in accordance with Sections 2001 and 2002, Title 28, United States Code, in the manner hereinafter set forth, and that the above-described property shall be sold free and clear of all liens and claims of all the parties to this action.

It is further ORDERED, ADJUDGED and DECREED that the United States Marshal in and for the Southern District of Florida be and hereby is authorized to offer for sale at public auction the property described herein; that such public sale shall be held in Dade County, Florida, on September 1, 1977, at an hour and place to be announced by the United States Marshal, after first being advertised at least once each week for four consecutive weeks preceding September 1, 1977, in a daily newspaper of general circulation in Dade County, Florida, and by such other notice as the United States Marshal in his discretion shall deem appropriate; that no bids (except as to the United States) shall be accepted unless the same is accompanied by a certified check or cash deposit of at least ten (10%) percent of the amount of the bid; that the balance of the purchase price shall be tendered to the United States Marshal by the successful bidder within seven (7) days following the date of sale in the form of a certified check or cash, and that upon a default by the purchaser in fulfilling this requirement, the deposit made by him shall be forfeited and retained by the Marshal as part of the proceeds of sale, and the property shall again be offered for sale in the same manner as set forth above. The property shall be offered for sale subject to confirmation by this Court, and upon such confirmation and receipt of the balance of the purchase price, the United States Marshal shall deliver to the purchaser of the real property a deed conveying said property to the successful purchaser.

It is further ORDERED, ADJUDGED and DECREED that the proceeds of the sale, less the expenses thereof, shall be remitted by the Marshal to the Clerk of this Court. The liens and claims of the parties to this action shall attach to the proceeds of the sale with the same validity, priority and rights which said liens and claims enjoyed upon the subject real property. The proceeds of sale shall be held by the Clerk for distribution to the parties hereto in accordance with further orders of this Court.

It is finally ORDERED, ADJUDGED and DECREED that plaintiff, United States of America, have a judgment against the defendant H. Barry Ressler, for any portion of the indebtedness of defendant Ressler which remains unpaid after disposition of the proceeds from the sale of the aforementioned property.

 

 

United States of America, Plaintiff v. Walter C. Briggs, Lillian Briggs; Lorenzo C. White, Trustee; L. P. Barbour, Trustee; George W. Clarke, Trustee, Defendant

U. S. District Court, East. Dist. Va., Newport News Div., Civil Action No. 75-73-NN, 4/9/76

[Code Secs. 6321 and 7403]

Lien for taxes: Foreclosure: Disposition of proceeds: Tenants by the entirety: Virginia.--U. S. was entitled to foreclose its tax liens on the property of the delinquent taxpayer. Proceeds from sale of the property were ordered to go first, toward satisfaction of an unpaid balance on a deed in trust, second, to the inchoate dower interest of taxpayer's wife to be set aside and paid to her if she survived her husband and to the U. S. if she predeceased him and, third, to the U. S. in satisfaction of its tax liens. The conveyance of certain real property by taxpayer and his wife to themselves as tenants by the entirety was made with actual intent to defraud creditors and was, therefore, null and void.

United States Attorney, James A. Oast, Jr., Assistant United States Attorney, Norfolk, Va., Paul D. Barker, Department of Justice, Washington, D. C. 20530, for plaintiff. William A. Smith, Walker, Smith, Felton & Scott, 1715 25th St., Newport News, Va., Lorenzo C. White, 2281/2 East Pembroke Ave., Hampton, Va., for defendants.

Judgment

CLARKE, District Judge:

This action came on for trial before the Court, Honorable J. Calvitt Clarke, Jr., United States District Judge, presiding, and the issues having been duly tried and the findings of fact and conclusions of law having been orally made in open Court

It is ORDERED, ADJUDGED and DECREED:

1. That the defendant Walter C. Briggs is indebted to the plaintiff United States of America in the amount of $42,941.46 with interest thereon as provided by law at the rate of $5.69 per day from March 11, 1976, until this judgment is entered plus interest thereafter as provided by law, and its costs in this action.

2. That the conveyance of real property situated in the City of Hampton and State of Virginia more specifically described below on November 21, 1969, from defendants Walter C. Briggs and wife, Lillian Briggs, to themselves as tenants by the entirety was made with actual intent to defraud creditors including the United States, at a time when defendant Walter C. Briggs was insolvent, and constituted a fraudulent conveyance within the meaning of Va. Code Ann. §55.80 (1950); that said conveyance of real property was also a voluntary conveyance without consideration deemed valuable in law within the meaning of Va. Code Ann. §55.81 (1950). Said real property situated in the City of Hampton and State of Virginia is described as follows:

"All that certain lot, tract or parcel of land, situate, lying and being in the City of Hampton, Virginia on the Easterly side of North King Street in the said City (formerly Langley Field Road), leading from Hampton to Langley Field, and fronting thereon a distance of 86.9 feet and extending back therefrom in an easterly direction between lines parallel, or nearly parallel, a distance of 840 feet to the land now or formerly owned by W. C. Morgan. The said land being more particularly shown and designated on a certain plat entitled "Plat of Thomas Alexander's Estate, made by Girard Chambers and Son, Civil Engineers and Surveyors, which said plat is duly of record in Deed Book 109, at page 53 in the Office of the Clerk of the Circuit Court for the City of Hampton, Virginia, the said land hereby described being shown on the said plat as Lot Number 3, and being bounded as follows: on the North by Lot No. 2 on the said plat, on the East by property now or formerly belonging to W. C. Morgan, on the South by property now or formerly belonging to Mary C. Rowe and Beulah S. Rowe, and on the West by the said North King Street.

Being the same property conveyed to the said W. C. Briggs by deed of Thomas Harrod, et ux., et al., dated October 8, 1957 and of record in Deed Book 267 at page 84 in the Clerk's Office aforesaid.

that the conveyance of said real property described above on November 21, 1969, except as to that portion of said real property consisting of approximately 1.085 acres which was conveyed on January 22, 1974, from defendants Walter C. Briggs and wife, Lillian Briggs, to Moses Easter, Jr. and Willie B. Easter, his wife, as tenants by the entirety and more specifically described below, was and is null and void and of no effect as to the rights of the United States of America as a creditor of Walter C. Briggs. The portion of said real property consisting of approximately 1.085 acres which was conveyed on January 22, 1974, is more specifically described as follows:

All that certain lot, tract, piece or parcel of land situate, lying and being in the City of Hampton, Virginia, and shown and designated as Parcel "C", containing 1.085 acre, more or less, as shown on a certain plat entitled "PLAT SHOWING PROPERTY OF I. BLAIRYNE PERRY, LAWSON S. RANDALL, WALTER C. BRIGGS, WILLIAM L. JONES BEING LOCATED ON N. KING STREET CITY OF HAMPTON, VIRGINIA", made by S. J. Glass & Associates, Engineering Services, dated May 15, 1973 and revised January 15, 1974, a copy of which said plat is hereto attached and to which reference is here made.

Together with all and singular the tenements, hereditaments and appurtenances thereunto belonging or in anywise appertaining.

Being a part of the same property conveyed to Walter C. Briggs by Thomas Harrod et ux., et als., by deed dated October 8, 1957 and recorded in the Clerk's Office of the Circuit Court for the City of Hampton, Virginia, on November 18, 1957, in Deed Book 267, page 84; and also being a part of the same property conveyed to Walter C. Briggs and Lillian Briggs, husband and wife, by Walter C. Briggs and Lillian Briggs, his wife, by deed dated November 21, 1969 and recorded in the Clerk's Office aforesaid on November 21, 1969, in Deed Book 425, page 707.

3. That the plaintiff United States of America has valid tax liens on all property and rights to property of Walter C. Briggs to the extent of $42,941.46, plus interest thereon as provided by law at the rate of $5.69 per day from March 11, 1976, until this judgment is entered, plus interest thereafter as provided by law and specifically on Walter C. Briggs' interest in the aforesaid real property legal title to which is presently in the name of Walter C. Briggs and his wife, Lillian Briggs, as tenants by the entirety.

4. That the plaintiff United States of America is entitled to foreclosure of its tax liens on all property and rights to property of the defendant Walter C. Briggs including the real property title to which is presently in the names of Walter C. Briggs and his wife Lillian Briggs as tenants by the entirety to the extent of $42,941.46 plus interest thereon as provided by law at the rate of $5.69 per day from March 11, 1976, until this judgment is entered plus interest thereafter as provided by law.

5. That said real property described in paragraph 2 of this judgment be sold by the United States Marshal free and clear of the liens and claims of all parties to this action in accordance with the law and practice of this Court and the net proceeds after the ordinary and necessary expenses of said sale be paid as follows:

(a) First, to defendants L. P. Barbour and George W. Clarke, Trustees, in satisfaction of the Deed of Trust in favor of the People's Building and Loan Association to the extent of the unpaid balance of the said Deed of Trust in the amount of $5,190.12 plus $0.72 interest per day from March 11, 1976, less any intervening payments applied to said indebtedness after March 11, 1976, plus costs incurred in this action.

(b) Second, that the inchoate dower interest of Lillian Briggs in said real property be set aside in an amount computed in accordance with Va. Code Ann. §55-275 (1950). Said amount of money is to be deposited by the Clerk in an interest bearing account with the principal and interest thereon to be paid, upon proper application to the Court, to the United States and applied to the aforesaid unpaid tax liabilities if Lillian Briggs predeceases defendant Walter C. Briggs, or to Lillian Briggs if she survives defendant Walter C. Briggs.

(c) Third, to the United States in satisfaction of the tax liens of the plaintiff to the extent of $42,941.46 plus interest at the rate of $5.69 per day from March 11, 1976, until this judgment is entered, plus interest thereafter as provided by law.

6. It is further ORDERED and ADJUDGED that defendant Lorenzo C. White has no interest in said real property.

 

 

 

United States of America, Plaintiff v. Thomas J. Piscopo, Alice L. Piscopo, Gail R. Hynes, Diane L. DiMento, and Union Federal Savings and Loan Association of Boston, Defendants.

U. S. District Court, Dist. Mass., Civil Action No. 72-3869-C, 6/19/75

[Code Sec. 6321]

Lien for taxes: Transferred assets.--Transfers by deed of two parcels of real estate were found to be fraudulent and were set aside. The transfers were found to have been made without any consideration given in return for the deeds and were made to delay, hinder and defraud the U. S. as creditor. The taxpayer had transferred the property to his daughters only after the IRS had made an initial assessment of taxes owed by the taxpayer.

Memorandum Order

MACKENZIE, District Judge:

This matter was before the Court for trial without a jury on October 14, 1974. After the evidence had been heard, the United States asked for and was given sixty days, until December 14, 1974, to file a brief. That brief was not filed. At the request of the Assistant United States Attorney, the time for filing was extended on at least three occasions, well into January, 1975. Nothing was filed. In April 1975, upon telephone inquiry from the Court, we were advised that a memorandum from the government would be forthcoming immediately. Such memorandum has never been filed.

Since the case might involve Massachusetts law, and this judge, from Virginia, was sitting in Boston in aid of the Boston docket, a brief from the attorney representing the United States would have been helpful.

It being apparent that the United States had no interest in the outcome of this income tax case, we are inclined to dismiss the United States' claim for failure to properly present the same. More than forty exhibits were offered by the United States, only about half of which have any apparent relevance. The testimony of the allegedly delinquent taxpayer, whom the United States called as its principal witness, is incoherent, inconsistent, and badly in need of some sort of interpretation. Yet nothing is offered by the United States to explain why certain exhibits were offered or what was intended to be shown by its examination of Mr. Piscopo.

In spite of this, we must find that the United States must prevail. The claims of Mr. Piscopo, who, himself, is an attorney, as regards the real property here involved, are preposterous. The deeds dated January 20, 1966 (Exhibit 24) and March 14, 1966 (Exhibit 25), from Piscopo and wife, Alice, to their two daughters, Gail R. Hynes and Diane L. DiMento, we find were not in furtherance of any trust, but clearly were given without consideration and to delay, hinder and defraud the United States as a creditor, and must be set aside.

[Transfers in Trust]

Involved here are two pieces of real property which we will refer to as the Piscopo home in Winthrop (Lot 8, Block G, Plan of Winthrop Shore Land Co.) and the Saugus gasoline station (made up of two parcels, one located in Revere in Suffolk County and an immediately adjacent parcel located in Saugus, Essex County).

Thomas J. Piscopo, a Boston attorney, and his wife, Alice L. Piscopo, conveyed the Piscopo home and the gasoline station property to William M. Bagley, as trustee for the benefit of Piscopo's two daughters, Diane L. DiMento and Gail R. Hynes. The two deeds were dated June 28, 1954 and duly recorded.

Each deed to Bagley, Trustee, recited the trust to be for the benefit of the Piscopo daughters, and bestowed certain powers on the Trustee, particularly:

"2. The Trustee shall have the power to buy, sell, or mortgage real estate . . . to sign, seal and acknowledge deeds. . . ."

Acting under his authority to sell and give deeds and specifically so stating that authority in the two subsequent deeds, Bagley, Trustee, conveyed the Piscopo home in Winthrop to Alice L. Piscopo by deed (Exhibit D) dated November 12, 1957, reciting a consideration, and recorded, and he conveyed the Saugus gasoline station to Thomas J. Piscopo and Alice L. Piscopo, husband and wife, as tenants by the entireties, by deed dated May 26, 1958, and recorded (Exhibit E).

[Treatment of Property]

The record discloses that thereafter the Piscopos treated the two parcels as their own. Mr. Piscopo, an attorney, would claim that they held the home and the service station under a "trust" for their daughters, but this is without any substantiation. We find, without equivocation, that the Piscopos' protestations that he was acting as a trustee, or that there was an oral trust or a constructive trust, and his testimony generally, were not worthy of belief.

For instance, on August 20, 1964, Thomas J. Piscopo and Alice L. Piscopo, his wife, mortgaged the service station to Union Federal Savings and Loan Association of Boston for $25,000 (Plaintiff's Exhibits 28 and 29a). The net proceeds of that loan, some $12,701.64, were used by Piscopo for his own personal business.

On October 7, 1965, Piscopo and wife borrowed $10,000 from Union Federal Savings and Loan Association of Boston on the Winthrop property (the Piscopo home) and used the net loan proceeds for Piscopo's own personal business. (Plaintiff's Exhibits 32 and 33.)

Piscopo agrees that he and his wife have occupied the Winthrop property for more than 28 years. The only evidence he could offer of its use incident to the trust for his daughters (they did not live there) was that while he paid no rent, he did keep it in good repair--for the girls' benefit (the trust would expire in 1974). Also, said Piscopo, the home was maintained in good shape so his young granddaughters could have the run of it when they came for a visit.

Furthermore, on his personal income tax returns for 1961 through 1966 (Exhibits 11-17) Piscopo claimed all rental income from the service station lease, and deducted all the real estate taxes, interest paid, and depreciation (more than $1000 annually) against his personal income tax liability. No trust accountings or trust tax returns were ever filed.

[Transfers after Assessments]

In early 1966, in face of the IRS having closed in on Piscopo after unsuccessfully negotiating with him since 1960 over his understatement of income as reported for taxation (and for which understatement he now admits his liability), he and his wife conveyed the home and service station to his two daughters. He does not testify that he received any consideration therefor. The deeds do not recite any consideration. The two daughters who testified only desultorily offered no explanation though they had the opportunity to do so. On the other hand, Piscopo agrees that as late as 1971 he was receiving personally the monthly rental payments from Mobile Oil, more than $300 per month.

The deed to the daughters came only a few days after the first assessment of $9,399.21 in back taxes against him by IRS for the years 1961 through 1964 had been agreed to by Piscopo on February 18, 1966 (Exhibit 10) and so held in a decision of the Tax Court of the United States on February 16, 1966, in Piscopo v. Commissioner, Docket No. 3308-64.

His explanations were frankly not given much weight by this Court. It was manifest that the conveyances were without consideration and for the purposes of hindering, delying and defrauding his creditors, chiefly the Internal Revenue Service.

[Assessments Agreed To]

The parties agreed in open court that the assessments for income against the Piscopos were correct as follows:
Judgment will therefore be granted to the United States against Thomas J. Piscopo and Alice L. Piscopo as is now due and reflected by those assessments. The correct total amount and the calculations thereof will be set forth in the proposed order which the United States Attorney is directed to prepare and submit.

The deeds dated January 20, 1966 and March 14, 1966 from the Piscopos to Hynes and DiMento will be set aside as without consideration and as having been made for the purpose of hindering, delaying and defrauding creditors. The proposed order will also so direct.

As agreed to in the stipulation entered by the parties herein by agreement, Exhibit 26, the position of priority of Union Federal Savings and Loan Association of Boston, in the property described in a mortgage dated October 8, 1965, recorded in Book 7987, page 564, will be protected in the said proposed order.

The United States Attorney is directed to prepare an Order in accordance with this Memorandum and submit the same to this Court within fifteen (15) days from this date.

It is so Ordered.

 

 

United States of America, Plaintiff v. Arnold J. Werner, Lucille W. Werner, et al., Defendants

U. S. District Court, East. Dist. Wis., 68-C-58, 6/27/75

[Code Sec. 6672]

Penalties, civil: Failure to collect and pay over tax: Corporate officer.--The taxpayer was liable for the 100% penalty for unpaid withholding taxes. The taxpayer, as president of the company, was a responsible party who failed to pay the taxes. An agreement reached between the taxpayer and the IRS, for payment of withholding taxes, did not excuse the taxpayer from liability for the penalty. Further, the IRS could apply funds from a settlement made with another creditor of the taxpayer to the unpaid income taxes, especially since the taxpayer failed to make any directions as to how the funds shold be applied.

[Code Sec. 6321]

Lien for taxes: Fradulent transfer of real estate: Transferor's interest.--The taxpayer's transfer of his personal residence and real estate to his wife was a fraudulent conveyance and all proceeds from the sale of the property were applicable to the taxpayer's tax liability. The court found that the taxpayer had provided the sole consideration for the purchase of the residence. Prior to transferring the property, the taxpayer knew that he would incur debts that he would be unable to pay. Thus, the transfer was void and the government, by virtue of its tax lien, stepped into the taxpayer's shoes. Since the wife had provided no personal funds to purchase the property, all the proceeds of the sale could be applied to satisfy the lien.

Jeffrey D. Snow, Department of Justice, Washington, D. C. 20530, for plaintiff. John Burke, Burke & Schoetz, Suite 464, IBM Bldg., 611 E. Wisconsin Ave., Milwaukee, Wis., Ronald L. Wallenfang, Quarles & Brady, 780 N. Water St., Milwaukee, Wis., Jack Werner, 250 E. Wisconsin Ave., Milwaukee, Wis., for defendants.

Plaintiff's Proposed Findings of Fact and Conclusions of Law

REYNOLDS, District Judge:

This action, in which the United States seeks to obtain a judgment with respect to an assessment made against Arnold J. Werner pursuant to 26 U. S. C. 6672 and seeks foreclosure of its tax lien upon a parcel of real property in which it claims Arnold J. Werner has an interest, having come on for trial on April 7, 1975, and upon all the testimony and evidence submitted at the trial, the Court now enters the following Findings of Fact and Conclusions of Law.

Findings of Fact

1. Plaintiff is the United States of America and defendants are Arnold J. and Lucille W. Werner, husband and wife, Briggs and Stratton Corporation, First Federal Savings and Loan Association of Wisconsin, and Farm Rite Implement Company, the latter which did not appear or plead at the time of trial.

2. Arnold J. and Lucille W. Werner have been married for over 40 years (Tr. 126) and, since that time, Lucille W. Werner has not been employed until, at the earliest, 1963. (Tr. 242.) In fact Lucille W. Werner has curtailed her activities since 1954 because of poor health. (Tr. 423.)

3. In 1942 Arnold J. Werner bought a fifty percent interest in Wagner Iron Works, a Wisconsin corporation. (Tr. 276.) In 1954 he became president of that company (Tr. 393) and subsequent to that date but before 1962 he gained complete ownership of it. (Tr. 24.) During at least the years 1960 through 1962 Arnold J. Werner served the company not only as its president but also as its treasurer. (Tr. 148.)

[Purchase of Residence]

4. In 1951 the residence on the parcel of real property described in Paragraph VII of the complaint was built for a cost of approximately $130,000 (Tr. 234) and title to it was placed in the name of the Brinsmere Investment Company (Tr. 146) which was owned by Arnold J. and Lucille W. Werner. (Tr. 24.) The residence was paid for in the following manner: Arnold J. Werner let out individual contracts in the construction of the residence which were paid by Arnold J. Werner (Tr. 126) in cash upon completion of each contract on an architect's certificate. (Tr. 236.) Additionally Arnold J. Werner paid for all furniture and appurtenances concerning the residence from and after 1951. (Tr. 246 and Ex. 7.) Even if it is assumed that Brinsmere Investment Company was used by Arnold J. Werner to make some or all of the payments toward construction of the residence, the evidence at trial clearly shows that Lucille W. Werner never furnished any consideration, monetary or otherwise, for her ownership interest in Brinsmere Investment Company. (See Par. 2, supra.) On or about April 30, 1957, the Brinsmere Investment Company deeded the residence property to Arnold J. and Lucille W. Werner as joint tenants. (Tr. 24. )

[Income Tax Settlement]

5. During the years 1944 through 1953 Wagner Iron Works incurred alleged Federal income tax liabilities in a sum in excess of $1,000,000. (Ex. 34 and Tr. 310.) On June 22, 1959, Arnold J. Werner, as president of Wagner Iron Works, agreed on its behalf to an interim settlement with Internal Revenue which agreement, among other things, provided that he should continue to be the operating head of the company (Ex. 34 at p. 2) and that the company and Internal Revenue would enter into a stipulation in the United States Tax Court as to its agreed liability. Thereafter, on October 20, 1959, the Tax Court having entered a decision against Wagner Iron Works in the sum of $1,258,842.03 (Ex. 35 at p. 1), Arnold J. Werner, again on behalf of Wagner Iron Works, entered into a settlement agreement with the Internal Revenue Service with regard to the aforesaid income tax liabilities. Again on the company's behalf, Arnold J. Werner agreed to keep all Federal tax liabilities current as they accrued. (Ex. 35 at p. 5.) On October 20, 1960, a final agreement was entered into by the parties (Ex. 36) which again reflected the company's obligation to keep all taxes current. This agreement was also executed by Arnold J. Werner as president of Wagner Iron Works. With regard to the aforesaid agreement, the United States agreed not to file any Notices of Federal tax lien on the unpaid income tax liability. (Tr. 225 and Exs. 35 (at p. 4) and 36 (at p. 3).)

6. On March 21, 1960, Wagner Iron Works, in consideration of a loan to it of $500,000 from Central Standard life Insurance Company, made a mortgage on certain real property in favor of that company. [Ex. 37.) Arnold J. Werner, as president of Wagner Iron Works, executed the mortgage. (Tr. 223.)

7. On December 27, 1960, in consideration for a note and mortgage (Exs. 201 and 202) placed on the residence premises titled in the names of Arnold J. and Lucille W. Werner (Tr. 147), described in Paragraph VII of the complaint, First Federal Savings and Loan Association of Wisconsin made available to the Werners the sum of $50,000. This money was used by Arnold J. Werner to purchase all of the stock in the Federal Steel Products Corporation (Tr. 238) which stock was issued solely in the name of Arnold J. Werner.

8. During and before the year 1962, Wagner Iron, Works was factoring its accounts receivable with Mercantile Finance Corporation. (Tr. 30 and 148-149.) The financial difficulties of Wagner Iron Works increased during the years 1955 through 1962 (Tr. 148-149) and Mercantile accordingly reduced its payments to Wagner Iron Works on the accounts receiveable it collected from eithty percent of collection to fifty percent of collection. Mercantile, to secure its loan to Wagner Iron Works, which exceeded $1,700,000 as of December 11, 1962 (Ex. 45 at p. 2), had a security interest in all accounts receivable, contract rights, machinery, equipment (Ex. 40), inventory and work in progress (Tr. 148) of that company. Mercantile filed at least one financing statement with regard to its aforesaid security. (Ex. 40.)

9. On or around April 30, 1962, Federal Steel Products Corporation and Wagner Iron Works were merged under the name Orbitronics, Inc. (Tr. 25 and 220.) Arnold J. Werner owned the surviving company and continued as its president. (Ex. 133.)

10. By June of 1962, the surviving company, Orbitronics, Inc., was not able to meet all of its obligations to its creditors, a fact which was well understood by Arnold J. Werner. (Tr. 29, 30, 40, 46, 49, 50 and 250.) Furthermore, because of its financial situation, Orbitronics, Inc., through Arnold J. Werner, tried to arrange a merger with at least one outside company. (Tr. 60.)

[Personally Guaranteed Obligations]

11. During 1962 Arnold J. Werner personally guaranteed several obligations of Wagner Iron Works--Orbitronics, Inc. Besides giving a guarantee to the Farm Rite Implement Company (Tr. 149), he executed a personal guarantee to Mercantile Finance Corporation on June 11. (Ex. 19.) Thereafter, on June 20, he executed a personal guarantee in favor of Briggs and Stratton (Tr. 149 and Ex. 133) which was to supplement earlier guarantees. (Exs. 141 and 142.) It is noted that Briggs and Stratton had requested its new guarantee on May 25. (Ex. 133.) During the month of June, 1962, Arnold J. and Lucille W. Werner entertained a representative of the Philadelphia National Bank from whom Orbitronics, Inc., was seeking a loan of $250,000. (Tr. 127.) Shortly after this visit, on June 26, the Philadelphia National Bank loaned Orbitronics, Inc., $250,000 and Arnold J. Werner personally guaranteed that loan. (Tr. 127 and 150 and Ex. 12.) The money obtained from that loan was used for operating expenses of Orbitronics, Inc. (Tr. 150.)

[Recognition of Insolvency]

12. No later than June 11, 1962 (Ex. 19) Arnold J. Werner realized that creditors of Wagner Iron Works--Orbitronics, Inc., to whom he had issued personal guarantees, could make demand upon those guarantees. (Tr. 157 and 159-160.) No later than this date Arnold J. Werner, in view of the foregoing, believed that he would or had incurred debts beyond his ability to pay as they matured. (Ex. 7).

13. In July, 1962, having realized that the projected cash receipts of Orbitronics, Inc., were not sufficient to cover its overhead, Arnold J. Werner decided to pass upon all payables of the company. (Tr. 52.) On September 17, 1962 (Ex. 1), the company's bank account finally having been reconciled (Tr. 53), Arnold J. Werner realized that Orbitronics, Inc., had a negative cash position of $50,000. At this time he als gained knowledge that no payments had been made by the company on its employees' weekly (Tr. 199 and Ex. 22) Federal withholding tax liabilities to the United States for the fourth quarter of 1961 and the first quarter of 1962. (Tr. 54.) The aforementioned tax liabilities were satisfied, before December 5, 1962, by a voluntary payment of Orbitronics, Inc., to the United States.

14. Also during September, 1962, Orbitronics, Inc., received a payment of $40,000 due it on a contract with Kelsey-Hayes Company. (Tr. 58.) Under the direction of Arnold J. Werner, this money was paid in its entirety to a company known as Wagner Engineering. (Tr. 59.) At this time Arnold J. Werner was passing upon all disbursement checks issued by Orbitronics, Inc. (Tr. 56.) During this period of time Arnold J. Werner requested his younger brother, John Werner, to sign as witness a deed concerning the parcel of real property described in Paragraph VII of the complaint. (Tr. 254.) John Werner did this and Arnold J. Werner then submitted this deed (Ex. 6) along with another document entitled "Assignment" (Ex. 5) to Lucille W. Werner. (Tr. 184.) These documents purport to convey the entire interest of Arnold J. Werner in all real and personal property belonging to him. (The documents are dated June 19, 1962, but Lucille W. Werner did not receive them before some time in September, 1962.) Thus Lucille W. Werner testified (Tr. 131 and 133) that she received both documents at the same time; Arnold J. Werner testified that the deed document was drafted by a Mr. Leslie Gault (Tr. 161); John Werner (Tr. 251) and John Gaff (Tr. 61), both of whom were employed by Orbitronics, Inc., during this period, testified that Leslie Gault was only in the Milwaukee area during the fall of 1962; John Werner further testified that he did not witness the deed (Ex. 6) until some time in late summer or early fall (Tr. 254). These transfers were made by Arnold J. Werner with the intent to hinder, delay or defraud either his present or future creditors. No Federal or State gift tax was ever filed concerning these transactions. (Tr. 163-164.) After Lucille W. Werner received the "transfer" documents they were placed in a safe at the Werner residence, the combination being known only by Arnold J. and Lucille W. Werner. (Tr. 136.)

15. On October 31, 1962, John Gaff signed a Federal withholding tax return of Orbitronics, Inc., for the third quarter of 1962. (Tr. 56 and 65 and Ex. 2.) That return was filed with Internal Revenue on November 7, 1962, indicating a liability of $94,754.66. The return was accompanied with a payment from Orbitronics, Inc., of $23,782.52. (Tr. 25.) At the time the return was prepared by John Gaff he asked Arnold J. Werner whether the obligation should be paid in its entirety. Although monies were available to accomplish this (Tr. 59 and 66), Mr. Werner stated that only a portion of the amount due should be paid in order that the remainder of the monies could be used by Orbitronics, Inc., to keep that company going. (Tr. 98 and 99.)

16. At a point in November, 1962, Arnold J. Werner began steps to place Orbitronics, Inc., and its subsidiary companies into a bankruptcy arrangement. John Werner (Tr. 251) was assigned to retain a lawyer to handle a New York subsidiary of Orbitronics, Inc., namely Steelex (Tr. 219), and was further assigned to file a petition for an arrangement as concerned this subsidiary in New York, New York, on December 5, 1962 (Tr. 252) on which date Arnold J. Werner also determined that Orbitronics, Inc., would file a petition for an arrangement in Milwaukee.

[Agreement for Payment]

17. On November 26, 1962 (Tr. 292 and Ex. 22), after Arnold J. Werner had determined the plan of action described in the preceding paragraph (Tr. 253), he and other individuals representing Orbitronics, Inc., met with representatives of the Internal Revenue Service in order to work out a payment plan for the company's withholding tax liabilities which were overdue (Tr. 291), i. e., those liabilities remaining unpaid for the third quarter of 1962 and the fourth quarter of 1962. No mention at that meeting was made by Arnold J. Werner concerning his personal holdings (Tr. 292) and there was no evidence presented to the Court that any representative of Internal Revenue or the United States at that meeting or any other meeting ever indicated to Arnold J. Werner that it was waivering its potential rights to proceed against him under 26 U. S. C. 6672 as a responsible officer. Basically the arrangement called for employee withholding taxes to be kept current and for an additional payment of 30 percent of the current amount to be deposited into a special checking account. It in noted that before this time Orbitronics, Inc., never maintained a segregated account at any bank for retention of its employees' portion of Federal withholding taxes. (Tr. 31 and 59.)

18. On December 5, 1962, Orbitronics, Inc., filed a petition in Bankruptcy Court in the Eastern District of Wisconsin under the provisions of Section XI of the Bankruptcy Act and was thereafter allowed to operate as a debtor in possession. (Tr. 25 and 219.) As of December 5, 1962, Orbitronics, Inc., had in various corporate bank accounts the sum of $96,705.75. (Tr. 208 and Ex. 129.) It is noted that five days later Orbitronics, Inc.'s cash in banks had been reduced to the sum of $32,186. (Ex. 45.)

19. On December 7, 1962, the Federal withholding tax return of Orbitronics, Inc., for the fourth quarter of 1962 up until december 5, 1962, was filed. (Ex. 3 and Tr. 57 and 65); that return indicated a liability of $49,178.70 in toto. No payment was submitted with that return. (Tr. 25 and 77.)

20. On December 19, 1962, the Referee in Bankruptcy refused to sign an order sought by Orbitronics, Inc., which would have allowed that debtor in possession to carry out the arrangement of November 26, 1962, with Internal Revenue. (Tr. 298 and Exs. 8 and 26.) Also on that same date the deed to the Werner residence referred to in Paragraph 14, supra, was filed with the Recorder of Deeds for Milwaukee County. (Ex. 6.)

21. On January 11, 1973, a representative of the Internal Revenue Service, by letter (Ex. 28), confirmed that the November 26, 1962, arrangement "is and has been considered null and void and of no effect since December 5, 1962."

22. On January 25, 1963, at a meeting called at the request of Arnold J. Werner (Tr. 293), Mr. Werner told John Pedrick, the Regional Counsel of Internal Revenue who had been involved in dealings with Wagner Iron Works--Orbitronics, Inc., for several years (Tr. 288), that he had transferred all of his assets to his wife in the preceding year to make himself judgment proof. (Tr. 296 and Ex. 8.)

[Lien Filed]

23. On April 19, 1963, Internal Revenue made an assessment against Arnold J. Werner, which assessment concerned the unpaid withholding tax liabilities of Orbitronics, Inc., for the third and fourth quarters of 1962 up until December 5, 1962. The amount of the assessment was $97,441.79. (Tr. 26.) Notices of Federal tax lien were duly filed and refiled concerning the said assessment. (Tr. 328 and Ex. 10.) With interest the amount of the assessment due as of April 25, 1975, is $162,282.28. (Ex. 9 and Aff'd of District Director of Internal Revenue filed in conjunction with Lucille W. Werner motion for turn over to her of certain proceeds.)

24. On December 3, 1962, in accordance with the arrangement entered into on November 26, 1972, with Internal Revenue (see Par. 17, supra), Orbitronics, Inc., set up a special checking account for employee withholding taxes with the Marine National Exchange Bank. On November 18, 1963, there was $43,088.46 in that account. (Tr. 83.) But all of that money had gone into the account after December 17, 1962. (Tr. 83 and 107 and Ex 110.) None of the sum of $43,088.46 was used by Orbitronics, Inc., to make any payments upon the withholding tax liabilities in issue here. Rather those monies were used in part to satisfy Federal withholding tax liabilities accruing subsequent to the periods in issue and much of the money was in fact withdrawn by Orbitronics, Inc., for its own use. (Ex. 120.)

25. On June 9, 1964, Orbitronics, Inc., was adjudicated a bankrupt and a trustee was appointed and given authority to operate the business, and a written order was entered on June 30, 1964. (Tr. 26.)

26. On October 3, 1967, Mercantile Finance Corporation and the Internal Revenue Service consummated an offer in compromise concerning their claims upon all of the assets of Orbitronics, Inc. (See Par. 8, supra, for the claims of Mercantile and Par. 5, supra, for the Federal claims.) Note that none of the Federal claims involved concerned the trust fund taxes in issue here. (Re. 290). By the compromise the United States received the sum of $146,311.38 from the Orbitronics, Inc., bankruptcy (Ex. 42); all of this money was credited to the back due income tax liability of Wagner Iron Works. (Ex. 31.) It is noted that Arnold J. Werner had solicited such a settlement as far back as 1963. (Exs. 38 and 39.)

27. On April 25, 1975, the parcel of real property described in Paragraph VII of the complaint was sold for $290,000. (See Accounting Pursuant to Order of Court filed on April 28, 1975.) After closing costs, in the amount of $12,099.75 were paid, a distribution of $23,158.58 was made to defendant First Federal Savings and Loan Association terminating its interest in this case. Also the sum of $226,417.38 was paid into the Clerk of Court pending the outcome of this cause.

Conclusions of Law

A. This Court has jurisdiction over this action pursuant to 28 U. S. C. 1340 and 1345 and 26 U. S. C. 7402 and 7403 for the reason that this is a civil action brought under the Internal Revenue laws of the United States and is brought by the United States.

B. Arnold J. Werner was a person required to collect, truthfully account for, and pay over the Federal withholding and FICA taxes due and owing from Orbitronics, Inc., for the third and fourth quarters of 1962, ending on December 5, 1962. He was president and owner of the company and had the power to and did decide what creditors were to be paid and when, during the third and fourth quarters of 1962 up until December 5, 1962. Consequently he is a responsible person within the definition of 26 U. S. C. 6672. Monday v. United States [70-1 USTC ¶9205], 421 F. 2d 1210 (C. A. 7, 1960). This is true even if it is assumed that he was not the disbursing officer. Bloom v. United States [59-2 USTC ¶9772], 272 F. 2d 215 (C. A. 9, 1959), cert. denied 363 U. S. 803 (1960).

C. Arnold J. Werner willfully failed to collect and pay over the taxes due and owing from Orbitronics, Inc., for the third and fourth quarters of 1962, ending on December 5, 1962, within the meaning of 26 U. S. C. 6672. He knew that the Federal withholding--FICA taxes were owing and that there were sufficient funds in the control of Orbitronics, Inc., for payment of these taxes notwithstanding the fact that other funds of the company were paid to non-Governmental creditors at the direction of Arnold J. Werner. Monday v. United States, supra. Also see Kalb v. United States [74-2 USTC ¶9760], 34 AFTR 2d 6104 (C. A. 2, 1974) in which the Court points out that the obligation to hold the withheld Federal employment taxes in trust arises each time the payroll is made and such obligation continues until the date of payment. Thus each time the payroll is met, in this case weekly, the law presumes that the necessary employment taxes have been withhold. United States v. Abrahams [70-1 USTC ¶9416], 312 F. Supp. 1035 (SD NY, 1970).

[Arrangement No Excuse]

D. Nor does the so-called arrangement of November 26, 1962, between Orbitronics, Inc., and Internal Revenue justify the actions of Arnold J. Werner and excuse him from the consequences of 26 U. S. C. 6672. The facts here have no similarity whatsoever to the facts found in the case of McCarty v. United States [71-1 USTC ¶9232], 437 F. 2d 961 (C. Cls., 1971), where the United States Navy took over the operation of the company involved for a long period of time. The Navy directed that other creditors of that company be paid to the detriment of the Internal Revenue Service which had claims for unpaid Federal withholding taxes. The Service in McCarty acquiesced in Nevy's action. Subsequently the Court held that this acquiescence released Mr. McCarty from what otherwise would have been his liabilities under Section 6672. Here the arrangement of November 26, 1962, cannot be considered such an acquiescence. Notwithstanding the fact that Orbitronics, Inc., did not carry out the arrangement and despite the fact that Arnold J. Werner had already decided to place Orbitronics, Inc., into bankruptcy before meeting with Internal Revenue on November 26th (a fact which he did not point out at that meeting), the arrangement simply has no relevance to the facts in the McCarty case. See Burack v. United States [72-2 USTC ¶9490], 461 F. 2d 1282 (C. Cls., 1972).

[Direction of Funds]

Furthermore as concerns the offer in compromise between the United States and Mercantile Finance Corporation, the claim by Arnold J. Werner that the monies received by the Internal Revenue Service should have been applied to the taxes in issue here has no merit. In the first place the uncontradicted evidence demonstrated that the sole basis for any claim by the Service involved unpaid Federal income taxes, on which Notices of Federal tax liens had never been filed, due from Wagner Iron Works for years well prior to the time that the taxes in issue here accrued. Secondly, even if it is assumed that there did exist some possible basis for the Service to apply the money received from the offer in compromise to the instant taxes, it is well established that when there is no direction given by a taxpayer as to where its fund should be applied, the Internal Revenue Service can allocate those funds to whatever tax liabilities it pleases. Liddon v. United States [71-2 USTC ¶7591], 448 F. 2d 509 (C. A. 5, 1971) and Moloney v. United States [70-2 USTC ¶9613], 26 AFTR 2d 70-5549 (ND Ohio, 1970).

E. The entire proceeds received from the sale of the parcel of real property described in Paragraph VII of the complaint and its appurtenances is available for payment of the responsible officer liability of Arnold J. Werner to the United States and payment of the debt owed by him to Briggs and Stratton.

[Fraudulent Conveyance]

Even if it is assumed that the transfer by Arnold J. Werner of all his real and personal property to Lucille W. Werner took place on June 19, 1962, Arnold J. Werner, no later than June 11, 1962, believed that he would or had incurred debts beyond his ability to pay as they matured. Wisc. Stat. Anno. 204.06 states that every conveyance made without a fair consideration is fraudulent as to present and future creditors when the person making the conveyance intends or believes that he will incur debts beyond his ability to pay as they mature. Additionally Wisc. Stat. Anno. 242.07 applies to the so-called transfer. That section provides that when a person, Arnold J. Werner in this case, conveys his property in order to hinder, delay and defraud either present or future creditors, that conveyance is fraudulent as to both present and future creditors.

Since the referred-to transfer constitutes either a constructive or an actual fraud upon present or future creditors, one of whom is the United States, the transfer is void and it is necessary to determine what interests Arnold J. Werner had in the subject premises prior to the transfer.

[Taxpayer's Interest]

This determination, under the principle set forth in Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960), rests on Wisconsin law. Thus the Wisconsin Supreme Court, in the case of Jezo v. Jezo, 23 Wisc. 2d 399 (1964) states as follows:

The rule is, therefore, that the interests of joint tenants being equal during their lives, a presumption arises that upon dissolution of the joint tenancy during the lives of the cotenants, each is entitled to an equal share of the proceeds. This presumption is subject to rebuttal, however, and does not prevent proof from being introduced that the respective holdings and interests of the parties were unequal. The presumption may be rebutted by evidence showing the source of the actual cash outlay at the time of acquisition, [or] the intent of the contenant creating the joint tenancy to make a gift of the half interest to the other cotenant, [or] unequal contribution by way of money or services, [or] unequal expenditures in improving the property or freeing it from encumbrances and clouds, or other evidence raising inferences contrary to the idea of equal interest in the joint estate. Jezo involved a partition action between a husband and wife who were having marital problems. Since a husband and wife, such as Arnold J. and Lucille W. Werner here, can have the type of contest in Wisconsin discussed in Jezo, it follows that the United States, which steps into the shoes of Arnold J. Werner in that it has a lien upon all of his "property and rights to property" (26 U. S. C. 6321-6322), is not foreclosed from submitting proof on unequal contributions. This Court, in Priebe v. Svehlek, 245 F. Supp. 743 (1965) followed the principles stated in Jezo in a situation where a parcel of real property was held in joint tenancy by a husband and wife. The wife had furnished no personal funds for purchase of that property or construction of the home thereon. She did assist her husband in his business. Subsequently the property in Priebe was sold and the husband turned over half of the sales proceeds to his wife. Thereafter that transfer was set aside as being in fraud of creditors despite the fact that the property had been placed in joint tenancy well before the husband had had any problem whatsoever with his creditors.

Here the undisputed facts are that Lucille W. Werner, both at the trial and after the trial, was unable to demonstrate that she furnished any consideration for the acquisition of the land and the building of the residence described in Paragraph VII of the complaint. Thus the only difference between the instant situation and the factual setting in Priebe is that this Court froze the proceeds of the sale of the Werner residence before Arnold J. and Lucille W. Werner could dispose of or otherwise use those proceeds for their own continuing benefit.

F. Plaintiff may submit an appropriate order.

 

 

 

United States of America v. Louise F. Livingstone et al.

U. S. District Court, Dist. Mass., Civil Action No. 71-2993-C, 381 FSupp 607, 9/18/74

[1939 Code Sec. 294--Result Changed by 1954 Code Sec. 6601]

Interest on upaid taxes: Interest on interest.--Taxpayers' claim that they were entitled to recover interest that was charged on interest stemming from unpaid taxes for the years 1952 and 1953 was denied. The 1939 Code was applicable for the two years even though the 1954 Code was enacted before the assessments were made. Thus, the government was entitled to recover interest on interest as a matter of law.

[Code Sec. 6321]

Liens for taxes: Conveyance in trust after assessment.--Taxpayers were found liable for assessed but unpaid taxes, penalties and interest. The conveyances of real estate and stock to a trustee were found to be fraudulent since they were made after the tax assessments. Thus, tax liens attached to the real estate and the stock and the liens were ordered foreclosed and the property sold to satisfy the liens.

Joseph L. Tauro, United States Attorney, Wayne B. Hollingsworth, Assistant United States Attorney, Boston, Mass., for plaintiff. Samuel Livingstone, 10 Post Office Sq., Boston, Mass., Melvin J. Dangel, City Solicitor, Judith Poteus, Assistant City Solicitor, Howard A. Levine, Newton City Hall, 1000 Commonwealth Ave., Newton Centre, Mass., for defendants.

Memorandum

CAFFREY, District Judge:

This is a civil action for recovery of unpaid income taxes, penalties, and interest alleged to be due and owing to the United States from defendants Louise F. and M. Eli Livingstone. The complaint also seeks an order setting aside an allegedly fraudulent transfer of a parcel of real property by defendant Louise F. Livingstone to defendant Maurice Fine, as Trustee of the Continental Investment Trust, and to set aside a subsequent transfer of the real property to Maurice Fine as Trustee of the Webb Trust, as well as foreclosure of a federal tax lien on said real property. In addition, the complaint seeks an order setting aside an allegedly fraudulent transfer of stock to Continental Investment Trust, which stock was allegedly owned by defendants Louise F. and M. Eli Livingstone. Foreclosure of a federal tax lien on this stock is also requested.

The case was continued on several occasions on the basis of representations by counsel that a settlement was imminent. However, a point in time arrived at which no settlement having been forthcoming the Court ordered the case to trial.

A non-jury trial was held which consisted merely of the introduction into evidence by the plaintiff United States of eight documents. Counsel for defendants made no objection to the admission in evidence of these eight documents, which consisted of seven duly certified Internal Revenue Service "Certificates of Assessments and Payments," of taxpayers Louise F. and M. Eli Livingstone for the years 1952, 1953, 1954, 1957, 1959, 1960 and 1961, and an eighth document, the certification of the foregoing seven Certificates of Assessments and Payments. The Government rested after the admission into evidence of the eight documents and the defendants rested without proffering any testimony or evidence. Counsel were then instructed by the Court to file requests for findings of fact and conclusions of law.

Very detailed requests for findings of fact and conclusions of law were filed by counsel for the Government on June 26, 1974. No requests were filed by counsel for any defendant. However, the Court received a letter dated July 3, 1974 from counsel of record for the defendants advising that he had received the Government's requests for findings and conclusions, and on July 15, 1974 counsel for defendants wrote to the Court and advised that he had no objection to any of the proposed findings of fact and conclusions of law save that portion thereof which he said charged Louise F. Livingstone "with interest on interest, contrary to the present status of the tax laws, 26 U. S. C. 6601(f)(2), and contrary to the pleadings and evidence in the case which fail to mention anything about interest being charged on interest."

Treating, first, defendants' objection to interest on interest, I rule that 26 U. S. C. §6601(f)(2), which is the portion of the Internal Revenue Code of 1954 relied on by counsel for defendants, does not apply to the tax years in issue in this case. The assessments for the years 1952 and 1953 were made pursuant to the Internal Rovenue Code of 1939, and Section 294(b) of the 1939 Code does provide for assessments of interest on unpaid interest. I rule that the 1939 Code controls in the instant case, despite the fact that the assessments in issue were made subsequent to the enactment of the 1954 Code. See Ginsburg v. United States [60-1 USTC ¶9411], 278 F. 2d 470 (1 Cir. 1960), cert. denied 364 U. S. 878; United States v. Glasser [61-1 USTC ¶9284], 287 F. 2d 433 (7 Cir. 1961); Ingannamorte v. United States [61-1 USTC ¶9201], 189 F. Supp. 341 (D. N. J. 1960). Therefore, as a matter of law the Government is entitled to recover interest on the interest assessed against and unpaid by Louise F. Livingstone for the calendar years 1952 and 1953.

I likewise rule that there is no merit to the objection contained in the letter of defendants' counsel to recovery of interest on interest on the grounds that such recovery would be "contrary to the pleadings and evidence in the case which fail to mention anything about interest being charged on interest." I rule that the statement contained in Count One of the complaint, that the Government seeks recovery for unpaid "income tax and interest . . . plus accrued interest according to law," is an adequate disclosure of the fact that the Government was seeking the interest allowed by the then state of the law, i. e., interest on unpaid interest.

The Court is fully aware that the Court of Appeals for this Circuit in an ordinary case looks with disfavor on the verbatim adoption by a trial court of requests for findings and conclusions filed by prevailing counsel. In re Las Colinas, Inc., 426 F. 2d 1005, 1008-09 (1 Cir. 1970). Nyyssonen v. Bendix Corp., 342 F. 2d 531, 532 (1 Cir. 1965), cert. denied 382 U. S. 347. However, this Court has in mind that the Court of Appeals recognized, in the Las Colinas opinion, that extraordinary circumstances in a complex case may justify adopting counsel's proposed findings. Id. at 1009-1010. I believe that the instant case may properly be characterized as a complex case. See dissenting opinion of Mr. Justice Douglas in Commissioner of Internal Revenue v. Idaho Power Co., [74-2 USTC ¶9521] 42 U. S. L. W. 5067, 5072 (June 24, 1974). I am further of the opinion that since the "trial" consisted merely of the Government's unobjected to proffer of the operative tax documents, that kind of a trial takes this case out of the ordinary rule. There is no issue of credibility to be resolved, there is no conflicting evidence, and a careful review of the Government's proposed findings establishes that they are, in fact, supported by and keyed to the documents introduced in evidence. Consequently, the following findings of fact and conclusions of law, which are substantially the same as those requested by counsel for the Government, are adopted as this Court's findings and conclusions herein.

Findings of Fact

1. A delegate of the Secretary of the Treasury made assessments against the defendants Louise F. and M. Eli Livingstone for unpaid income taxes and interest as follows:

2. On the respective dates of assessment of the liabilities described in paragraph 1 above, a delegate of the Secretary of the Treasury gave to the defendants Louise F. and M. Eli Livingstone notice of those assessments and made demand upon them for payment thereof.

3. By reason of agreements for the suspension of the statutory periods of limitation on collection of the liabilities described in paragraph 1 above, stated in offers in compromise submitted by defendant Louise F. Livingstone to the Commissioner of Internal Revenue, the statutory periods of limitation for instituting actions to collect such liabilities were extended to dates subsequent to December 15, 1971.

4. On and before October 27, 1964, Louise F. Livingstone was the owner of the land with the building thereon known as 50 Chestnut Hill Road, in that part of Newton known as Chestnut Hill, Middlesex County, Massachusetts, bounded and described as stated in paragraph XI of the complaint herein.

5. On October 27, 1964, defendant Louise F. Livingstone conveyed the property referred to in Finding 4 to defendant Maurice Fine, as Trustee, the Continental Investment Trust.

6. The conveyance referred to in Finding 5 was made for less than a fair conveyance and such transfer rendered defendant Louise F. Livingstone insolvent or was made while said Louise F. Livingstone was insolvent.

7. Defendant Louise F. Livingstone made the conveyance described in Finding 5 above with the intent to hinder, delay or defraud either present or future creditors.

8. On June 9, 1966, defendant Maurice Fine, as Trustee, the Continental Trust, conveyed the property referred to in Finding 4 to defendant Maurice Fine, as Trustee, The Webb Trust.

9. The defendant Maurice Fine, as Trustee, The Webb Trust, was not, with respect to the conveyance described in Finding 8, a purchaser for fair consideration without knowledge of the fraud described in Findings 6 and 7 as those terms are used in Chapter 109A, Section 9, Annotated Laws of Massachusetts (Michie, 1967).

10. A delegate of the Secretary of the Treasury made assessments against the defendant M. Eli Livingstone for unpaid federal income taxes, penalties and interest as follows:

11. On the respective dates of assessment of the liabilities described in Finding 10, above, a delegate of the Secretary of the Treasury gave to the defendant, M. Eli Livingstone, notice of those assessments and made demand upon him for payment thereof.

12. In the action entitled Maurice Fine, Trustee v. Trimount Clothing Co., Inc., et al., C. A. No. 67-914-C (USDC D Mass.), the Court, on April 23, 1969, awarded to the United States a judgment against the defendant, M. Eli Livingstone, in the amount of $316,646.45 plus interest from the date of judgment for the liabilities described in Finding 1, above, and other liabilities and in the amount of $4,470,008.83 plus interest from the date of judgment for the liabilities described in Finding 10, above, and other liabilities.

13. On and before July 14, 1964, the defendant, M. Eli Livingstone, owned 550 shares of the common stock of Webb's Inc. The fair market value of those 550 shares on July 14, 1964, was $55,000.00.

14. On and before July 14, 1964, the defendant, Louise F. Livingstone, owned 13 shares of the common stock and 900 shares of the preferred stock of Webb's Inc. The fair market value of those 13 shares of common stock on July 14, 1964, was $1,300.00 and the fair market value of those 900 shares of preferred stock on July 14, 1964, was $9,000.00.

15. On July 14, 1964, the defendants, M. Eli Livingstone and Louise F. Livingstone, conveyed to the Continental Investment Trust all of the Webb's, Inc. stock they owned.

16. The conveyances described in Finding 15, above, were made for less than fair consideration and such conveyance rendered the defendants, M. Eli Livingstone and Louise F. Livingstone, insolvent or were made while the defendants, M. Eli Livingstone and Louise F. Livingstone, were insolvent.

17. The defendants made the conveyances described in Finding 15, above, with the intent to hinder, delay or defraud either present or future creditors.

18. The Chief Counsel of the Internal Revenue Service, a delegate of the Secretary of the Treasury, authorized and requested the filing of this action.

19. On December 15, 1971, the United States Attorney for the District of Massachusetts, under the direction of the Attorney General of the United States, filed the complaint in this action.

20. Defendants Louise F. and M. Eli Livingstone, Maurice Fine, as Trustee, The Continental Investment Trust, and Maurice Fine, as Trustee, The Webb Trust, appeared in this action by their attorney, Samuel Livingstone, Esq.

21. The complaint herein states that defendant Joseph M. Greenberg may have a claim against the property referred to in Finding 5, but the Clerk of this court on July 15, 1974, entered a default herein against the defendant Joseph M. Greenberg for his failure to plead or otherwise defend as to the complaint herein.

22. The complaint states that the defendant City of Boston may have a claim against the property referred to in Finding 4. The City of Boston filed an answer in which it asserted a lien on that property but on February 25, 1974 the City of Newton, by its attorney, advised the Court that its liens had been satisfied. The City of Newton introduced no evidence at trial.

Conclusions of Law

From the foregoing facts, the Court concludes:

1. This Court has jurisdiction over this action under Sections 1340 and 1345, Title 28, United States Code, and Section 7402 of the Internal Revenue Code of 1954.

2. The filing of this action on December 15, 1971 was within the period provided by statute with respect to the liabilities described in Finding of Fact 1. See Section 6502, Internal Revenue Code of 1954.

3. The filing of this action on December 15, 1971 was within the period provided by statute with respect to the liabilities described in Finding of Fact 10. See United States v. Hodes [66-1 USTC ¶9232], 335 F. 2d 746 (2 Cir. 1966), cert. denied 386 U. S. 901 (1967); Moyer v. O'Donnell, [71-1 USTC ¶9411], 27 A. F. T. R. 2d 71-1482 (USDC MD Fla. 1971).

4. The defendant Louise F. Livingstone is liable to the United States for unpaid income tax and interest assessed against her for the years 1952 and 1953 in the sum of $128,785.40 and judgment should be entered against her for that sum.

5. Defendant Louise F. Livingstone is liable to the United States in the sum of $79,164.04 for accrued interest from August 14, 1965 to June 28, 1974, on the tax and interest assessed against her for the year 1952, plus interest thereafter at $3.02 per day, and judgment should be entered against her in that sum.

6. The defendant Louise F. Livingstone is liable to the United States in the sum of $58,316.27 for accrued interest from Sept. 4, 1965 to June 28, 1974, on the tax and interest assessed against her for the year 1953, plus interest thereafter at $18.14 per day and judgment should be entered against her in that sum.

7. The Internal Revenue Code of 1939 provides for interest on assessed interest in every case where an assessment is not promptly paid. Ginsburg v. United States, supra. Section 249(b) [294(b)], Internal Revenue Code of 1939. If liabilities assessed after the effective date of the Internal Revenue Code of 1954 are liabilities imposed by the 1939 Code, then the taxpayer is liable for interest on assessed interest under the 1939 code. Ingannamorte v. United States, supra. The liabilities assessed against the defendants M. Eli Livingstone and Louise F. Livingstone for 1952 and 1953, described in Finding of Fact 1, were assessed under the Internal Revenue Code of 1939 and so interest accrues on the interest assessed for those years.

8. The defendant, M. Eli Livingstone, is liable to the United States of America for unpaid tax, a penalty and interest assessed against him for the year 1957 in the sum of $3,775,772.02.

9. The defendant, M. Eli Livingstone, is liable to the United States of America in the sum of $1,451,252.19 for accrued interest from September 4, 1965, to June 28, 1974, on the tax and penalty assessed against him for the year 1957 plus interest thereafter at the rate of $450.87 per day.

10. The defendant, M. Eli Livingstone, is liable to the United States of America in the sum of $24,558.51 for accrued interest from November 7, 1964 to March 22, 1973, on the penalty assessed against him for the year 1960.

11. The conveyance described in Finding of Fact 5, above, is fraudulent as to the United States of America under Chapter 109A, Section 4, Annotated Laws of Massachusetts (Michie, 1967).

12. The conveyance in Finding of Fact 5, above, is fraudulent as to the United States of America under Chapter 109A, Section 7, Annotated Laws of Massachusetts (Michie, 1967).

13. The conveyances described in Finding of Fact 15, above, are fraudulent as to the United States of America under Chapter 109A, Section 7, Annotated Laws of Massachusetts.

15. The conveyances described in Findings of Fact 5, 8 and 15, above, should be set aside. Chapter 109A, Section 9, Annotated Laws of Massachusetts (Michie, 1967).

16. By reason of the failure of the defendants, M. Eli Livingstone and Louise F. Livingstone, to pay the assessed taxes and interest described in Finding of Fact 1, above, subsequent to receipt of notice and demand for payment thereof, federal tax liens securing payment of those assessed liabilities and accrued interest thereon should arise and affix to all the property and rights to property of the defendant, Louise F. Livingstone, Section 6321, Internal Revenue Code of 1954. Federal tax liens attach to after-acquired property. Glass City Bank v. United States [45-2 USTC ¶9449], 326 U. S. 265 (1945).

17. After the conveyances described in Findings of Fact 5, 8 and 15 above, are set aside, federal tax liens securing payment of the defendant, Louise F. Livingstone's assessed liability to the United States for $128,785.40, plus accrued interest of $137,564.95 to June 28, 1974, and accrued interest of $21.16 per day thereafter should attach to the real property described in Finding of Fact 4, above, and the shares of stock described in Finding of Fact 14, above.

18. By reason of the defendant, M. Eli Livingstone's failure to pay the assessed taxes, penalties and interest described in Finding of Fact 10, above, subsequent to receipt of notice and demand for payment thereof, federal tax liens securing payment of those assessed liabilities and accrued interest thereon should arise and affix to all the property and rights to property of the defendant, M. Eli Livingstone.

19. After the conveyances described in Finding of Fact 15, above, are set aside, federal tax liens securing payment of the defendant, M. Eli Livingstone's assessed liability to the United States of $3,775,772.02, plus accrued interest of $1,475,810.70 to June 28, 1974, and accrued interest of $450.87 per day thereafter should attach to the shares of stock described in Finding of Fact 13, above.

20. The liens of the United States and the defendant, Joseph M. Greenberg, on the real property described in Finding of Fact 4, above, the liens of the United States on the shares of stock described in Finding of Fact 14, above, and the interest of the defendant, Louise F. Livingstone, in both the real property described in Finding 4, above, and the shares of stock described in Finding 14, should be foreclosed and the aforesaid real property and shares of stock should be sold with the proceeds paid to the United States to satisfy the liabilities of the defendant Louise F. Livingstone of the United States in the sum of $266,340.35, plus interest of $21.16 per day after June 28, 1974.

21. The liens of the United States on the shares of stock described in Finding of Fact 13, and the interest of the defendant M. Eli Livingstone in those shares, should be foreclosed and the aforesaid shares of stock should be sold with the proceeds paid to satisfy the liabilities of defendant M. Eli Livingstone to the United States in the sum of $4,251,532.72, plus $450.87 per day after June 28, 1974.

22. The various motions submitted for filing by defendant M. Eli Livingstone, pro se, subsequent to the Court's taking this case under advisement, are denied, both on their merits and because untimely filed without leave of Court.

JUDGMENT accordingly.

 

 

 

United States of America, Plaintiff v. Walter F. Biddle et al., Defendants

U. S. District Court, So. Dist. Fla., Miami Div., Civil Action No. 72-261-CIV-CA, 1/12/73

[Code Secs. 6321, 6501, 6502, 6651, 6653, 7401 and 7403]

Liability for tax: Wilful failure to file: Neglect or refusal to pay assessment: Fraudulent transfer of property: Lien for taxes: Enforcement of lien.--The taxpayer was indebted to the U. S. for federal taxes, penalties and interest assessed against him. State law rendered conveyance of property made by the taxpayer to his son null and void since it was fraudulent as to the U. S. as creditor. The property was to be offered for sale at public auction to satisfy the tax lien arising from the unpaid tax liability.

Robert W. Rust, United States Attorney, Miami, Fla., Michael B. Andoline, Department of Justice, Washington, D. C. 20530, for plaintiff. Sidney Soltz, 19 W. Flagler St., Miami, Fla., for defendants.

Findings of Fact and Conclusions of Law

CHOATE, District Judge:

This cause having come on for hearing before the Court on the 24th day of October, 1972, and the trial having proceeded to a conclusion with the Court having heard the evidence of the witnesses and having considered the exhibits and stipulations of the parties and the arguments of counsel, and further having considered the applicable law, finds as follows:

Findings of Fact

1. That the present action has been authorized and requested by the Chief Counsel of the Internal Revenue Service, a delegate of the Secretary of the Treasury of the United States, and is brought under the direction of the Attorney General of the United States pursuant to the provisions of Sections 7401 and 7403 of the Internal Revenue Code of 1954.

2. That the defendant-taxpayer herein, Walter F. Biddle, presently resides at 2351 N. Federal Highway, Dania, Florida.

3. That a delegate of the Secretary of the Treasury of the United States of America made assessments for federal tax liability against Walter F. Biddle on the dates and for the amounts and periods set forth in Paragraph VII of the Government's Complaint.

4. That the assessments made against the defendant-taxpayer, Walter F. Biddle, were based upon an investigation conducted by a delegate of the Secretary of the Treasury which disclosed that the said defendant-taxpayer failed to file federal income and quarterly excise tax returns for the subject periods.

5. That on October 28, 1964, the defendant-taxpayer, Walter F. Biddle, was indicted under the provisions of Section 7203 of the Internal Revenue Code of 1954 for the willful failure to file quarterly excise cabaret tax returns (Forms 720) for the periods involved in this suit.

6. That Walter F. Biddle was subsequently convicted of willful failure to file quarterly excise cabaret tax returns for the first quarter of 1960 and as a result was sentenced, on September 17, 1965, to six months' imprisonment.

7. That although notices of the aforementioned assessments were given and demands for payment thereof were made upon him, the defendant-taxpayer, Walter F. Biddle, has neglected or refused to pay over the amounts assessed against him and owing to the plaintiff, United States of America.

8. That the "Certificates of Assessments and Payments" introduced by the Government herein reflect that, after application of all payments made by Walter F. Biddle, the outstanding balance on the assessments made against Walter F. Biddle is $53,534.00, plus interest as accrued by law.

9. That on April 23, 1966, the defendant-taxpayer, Walter F. Biddle, executed a Form 870, "Waiver of Restrictions on Assessment and Acceptance of Overassessment," thereby agreeing to the acceptance of the assessments asserted against him.

10. That at a time prior to 1945 the defendant-taxpayer, Walter F. Biddle, resided at 2351 N. Federal Highway, Dania, Florida.

11. That in 1945 Walter F. Biddle constructed a night club, known as "Club Aloha" at his residence at 2351 N. Federal Highway, Dania, Florida.

12. That the aforementioned night club, "Club Aloha," was an establishment open to the public which served liquor and provided live entertainment.

13. That at all times during the period from 1945 to April 25, 1963, the defendant-taxpayer, Walter F. Biddle, was the owner of the real property located at 2351 N. Federal Highway, in Broward County, Florida, which real property is more particularly described in Paragraph IX of the plaintiff's complaint.

14. That on April 25, 1963, Walter F. Biddle executed a "Warranty Deed" conveying the subject real property to the defendant, Charles G. Biddle.

15. That the consideration recited on the aforementioned Warranty Deed was stated to be "$10.00 and other good and valuable consideration."

16. That it was the intention of the parties to the said transfer that the subject property was conveyed to the defendant, Charles G. Biddle, as an inter-vivos gift.

17. That at the time of the transfer or real property, the said real property had an approximate fair market value of $21,000.00.

18. That at the time of the subject transfer, Walter F. Biddle was insolvent in that he did not have sufficient assets with which to pay his legal obligations as they matured.

19. That the defendant, Charles G. Biddle, is the son of Walter F. Biddle, the defendant-taxpayer herein.

20. That at all times from the date of the alleged conveyance of the subject real property, April 25, 1963, to the present, the defendant-taxpayer, Walter F. Biddle, has continuously resided on the property.

Conclusions of Law

1. That this Court has jurisdiction over the parties and the subject matter of this action pursuant to Sections 1340 and 1345 of Title 28, United States Code, and Sections 7402 and 7403 of the Internal Revenue Code of 1954 (26 U. S. C., §§ 7402, 7403).

2. That the assessments made against the defendant-taxpayer, Walter F. Biddle, for the federal income tax liability and interest incurred by him, were made in accordance with the procedure established by the Commissioner of Internal Revenue Service, and are presumptively correct. Estate of Broadhead v. Commissioner of Internal Revenue [68-1 USTC ¶9249], 391 F. 2d 841 (C. A. 5, 1968); Eagle v. Commissioner of Internal Revenue [57-1 USTC ¶9543], 242 F. 2d 635 (C. A. 5, 1957).

3. That the presumptive correctness of these assessments made against the defendant-taxpayer establishes a prima facie case for the liability reflected thereby. Bowden v. Commissioner of Internal Revenue, [56-2 USTC ¶11,626], 234 F. 2d 937 (C. A. 5, 1956); Adams v. United States, 358 F. 2d 986 (Ct. Claims, 1966).

4. That in order to rebut the prima facie case established by these assessments made against him, it is necessary for the defendant-taxpayer to illustrate, by a preponderance of the evidence, that the assessments were incorrect. United States v. Lease [65-2 USTC ¶9478], 346 F. 2d 696 (C. A. 2, 1965); Liddon v. United States [71-2 USTC ¶9591], 448 F. 2d 509 (C. A. 5, 1971). $5. That the defendant-taxpayer has failed to meet the burden of proof placed upon him by law to show that, by a preponderance of the evidence, these assessments made against him were incorrect, and his mere general denial of liability, unsupported by any substantial evidence, is insufficient to rebut the prima facie case against him. United States v. Prince, [65-2 USTC ¶9552], 348 F. 2d 746 (C. A. 2, 1965).

6. That the certified copies of "Certificates of Assessments and Payments" (Form 4340) introduced by the Government in this proceeding establish that the federal income tax liability and interest assessed against the defendant-taxpayer are legally due and owing and provide a valid basis for judgment in favor of the United States. United States v. Strebler [63-1 USTC ¶9278], 313 F. 2d 402 (C. A. 8, 1963); United States v. Ridley [54-2 USTC ¶9665], 127 F. Supp. 3 (N. D. Ga., 1955).

7. That with respect to the federal excise tax liability incurred by the defendant-taxpayer, it is the conclusion of this Court that 75 per cent of the gross income received in the operation of the "Club Aloha" was subject to such tax rather than 90 per cent as contended by the United States and therefore the correct amount of the defendant-taxpayer's federal excise tax liability is $33,536.78, as illustrated by Exhibit "A" attached hereto.

8. That the penalty assessments made against the defendant-taxpayer were properly made pursuant to the provisions of Section 6653(b) of the Internal Revenue Code of 1954 (26 U. S. C., §6653(b)) since the defendant-taxpayer Walter F. Biddle, failed to file tax returns as required by law, failed to provide adequate books and records, deliberately omitted income and admitted to a voluntary underpayment of taxes. United States v. Kamineiecki [67-1 USTC ¶9133], 261 F. Supp. 683 (D. N. H., 1966); Bowes v. Philpott, 68-2 USTC ¶9453 (S. D. Ill., 1968); Webb v. Commissioner of Internal Revenue [68-1 USTC ¶9341], 394 F. 2d 366 (C. A. 5, 1968); United States v. Factor [60-2 USTC ¶9551], 281 F. 2d 100 (C. A. 9, 1960).

9. That the fact that the defendant-taxpayer was found guilty of willfully failing to file quarterly excise tax returns for the period covering first quarter of 1960 is further evidence of fraud.

10. That the clear and convincing weight of the evidence sustains the validity of the civil fraud penalties assessed against the defendant-taxpayer herein.

11. That the assessments asserted herein are not barred by the three year limitation period provided by Section 6501(a) of the Internal Revenue Code of 1954 (26 U. S. C., §6501(a)) since where, as in this case, the taxpayer fails to file returns as required by law, assessment for the tax liability, including interest and penalties, incurred by the taxpayer may be made at any time and is not subject to any limitation period. Birmingham Business College, Inc. v. Commissioner of Internal Revenue [60-1 USTC ¶9371], 276 F. 2d 476 (C. A. 5, 1960); Camien v. Commissioner of Internal Revenue [70-1 USTC ¶9179], 420 F. 2d 283 (C. A. 8, 1970). Section 6501(c)(3) of the Internal Revenue Code of 1954 (26 U. S. C., §6501(c)(3)).

12. That the present suit, as an effort to collect taxes after assessment, is not barred by the six year limitation provided by Section 6502(a)(1) of the Internal Revenue Code since the complaint herein was filed prior to the expiration of six years from the earliest assessment. United States v. Harris [64-1 USTC ¶9276], 223 F. Supp. 309 (S. D. Fla., 1963), affirmed [64-2 USTC ¶9838] 337 F. 2d 856 (C. A. 5, 1964).

13. That accordingly the United States has established its case for the federal tax liability assessed against Walter F. Biddle and is entitled to judgment against the said defendant in the amount of $60,862.47, which represents tax and interest due from the taxpayer up to and including October 24, 1972, plus interest which accrues at the rate of $6.23 daily.

14. Under the law of the State of Florida , every transfer of property made for the purpose of fraud, or made with intent to delay, hinder or defraud creditors, shall be void as to the creditors so defrauded. First State Bank v. Fitch, 141 So. 299 ( Fla. , 1932). Section 726.01, FSA.

15. That the United States was a creditor of the defendant-taxpayer at the time of the alleged fraudulent conveyance, even though formal assessments against him had not as yet been made, since the federal tax liability was due prior to the alleged conveyance. Hartman v. Lauchli [57-1 USTC ¶9571], 238 F. 2d 881 (C. A. 8, 1956).

16. That the real estate which is the subject of this action was owned by Walter F. Biddle at the time the United States was a creditor of his and is subject to the collection activities of the United States as such a creditor. Bay View Estates Corp. v. Southerland, 154 So. 894 ( Fla. , 1934).

17. That although fraudulent intent cannot be presumed under Florida law, the Florida courts have established certain indicia--"badges of fraud"--which, if proved, create a presumption of fraud. Barrett v. Quesnel, 90 So. 2d 706 ( Fla. , 1956); Stelle v. Dennis, 140 So. 194 (Fla., 1932).

18. That the following "badges of fraud" have been proved in this case, and establish a presumptive case of fraudulent intent: (1) transfer of valuable property without fair and adequate consideration (Gyorok v. Davis, 183 So. 2d 701 [Fla. App., 1966]); (2) transfer of property to a person related by blood or marriage (Fisher v. Grady, 178 So. 852 [Fla., 1937]); (3) insolvency at the time of the transfer (Hollingsworth v. Arcadia Citrus Growers Asso., 165 So. 369 [Fla., 1935]); and (4) continued retention of control over the premises (Jones v. Wear, 149 So. 345 [Fla., 1933]).

19. That accordingly, the conveyance by Warranty Deed dated April 25, 1963, was fraudulent as to the United States of America by virtue of Section 726.01, Florida Statutes Annotated, and is therefore void as to the United States and is hereby set aside.

20. That by virtue of the assessments made against the defendant-taxpayer, a lien arises in favor of the United States in the amount of the unpaid balance of the assessments, which lien attaches to all property and rights to property belonging to Walter F. Biddle, including the real property which is the subject of this section. Section 6321 of the Internal Revenue Code of 1954 (26 U. S. C., §6321).

21. That the lien existing in favor of the United States and attaching to the subject property shall be foreclosed and the property sold. Section 7403 of the Internal Revenue Code of 1954 (26 U. S. C., §7403).

22. That the amount realized from the foreclosure of the federal tax lien shall be distributed to the United States and applied towards satisfaction of the federal tax indebtedness of Walter F. Biddle.

23. That if, after application of the proceeds of the sale of the subject property toward the outstanding federal tax liability of the defendant-taxpayer, there remains an excess due and owing to the United States , the United States shall have a deficiency judgment in the amount of such excess, plus statutory interest.

24. That the United States shall recover its costs expended as a result of this proceeding.

Final Judgment

This cause having come on for trial on October 24, 1972, before the Court, Honorable Emett C. Choate, Senior United States District Judge, presiding, the Court upon hearing the argument of counsel and reviewing the evidence presented and memoranda submitted by counsel, does find that the defendant, Walter F. Biddle, is indebted to the plaintiff, United States of America, for federal taxes, penalties and interest assessed against him. This Court does further find that the conveyance of real property dated April 25, 1963, from the defendant, Walter F. Biddle, to the defendant, Charles G. Biddle, was fraudulent as to the plaintiff, United States of America, and is therefore rendered null and void by operation of the law of the State of Florida.

It Is Therefore Ordered and Adjudged that the plaintiff, United States of America, have and recover of the defendant, Walter F. Biddle, judgment in the amount of $60,862.47, plus interest which accrues at the rate of $6.23 per day from October 24, 1972 to the date of this judgment, with interest on said total amount thereafter according to law;

It Is Also Ordered and Adjudged that the federal tax lien arising from the unpaid federal tax liability of the defendant, Walter F. Biddle, attaches to the real property which is the subject of this action, located at 2351 N. Federal Highway, Dania, Florida, more particularly described as follows:

Lot Two (2) in Block "A" of Richland Little Farms, according to the plat thereof recorded in Plat Book 1, page 33, of the Public Records of Broward County, Florida;

It Is Further Ordered and Adjudged that the federal tax lien attaching to the above-described property be foreclosed and the property sold at auction, pursuant to Sections 2001 and 2002 of Title 28, United States Code, in the manner hereinafter set forth and that the above-described property shall be sold free and clear of all liens and claims of all the parties to this action;

It Is Further Ordered and Adjudged that the United States Marshal in and for the Southern District of Florida be and hereby is authorized to offer for sale at public auction the property described herein; that such public sale shall commence at a time and place within the County of Broward, State of Florida, to be announced by the United States Marshal, after first being advertised at least once each week for four consecutive weeks preceding the date fixed for such sale in a daily newspaper of general circulation in the County of Broward, State of Florida, and by such other notice as the United States Marshal in his discretion shall deem appropriate; that no bids (except as to the United States) shall be accepted unless the same accompanied by a certified check or cash deposit of at least ten (10%) per cent of the amount of the bid; that the balance of the purchase price shall be tendered to the United States Marshal by the successful bidder within seven (7) days following the date of sale in the form of a certified check or cash, and that upon a default by the purchaser in fulfilling this requirement, the deposit made by him shall be forfeited and retained by the Marshal as part of the proceeds of sale, and the property shall again be offered for sale in the same manner as set forth above. The property shall be offered for sale subject to confirmation by the Court, and that upon such confirmation and receipt of the balance of the purchase price the United States Marshal shall deliver to the purchaser of the real property a quitclaim deed to the property.

It Is Further Ordered and Adjudged that the proceeds of such sale, less the expenses thereof, be distributed to the plaintiff, United States of America, to be applied towards the satisfaction of the unpaid federal tax liability of the defendant, Walter F. Biddle;

It Is Finally Ordered and Adjudged that the plaintiff, United States of America, have a judgment against the defendant, Walter F. Biddle, for any portion of the indebtedness of Walter F. Biddle, remaining unsatisfied after disposition of the proceeds of the sale of the property aforesaid.