Fraudulent Conveyances Part1 page2

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MEMORANDUM OPINION AND ORDER

INTRODUCTION

REINHART, District Judge:

The United States of America filed this action to reduce to judgment federal income tax assessments against Robert E. Hatfield. The United States also seeks to set aside Robert Hatfield's transfer of real property to the Victorian Trust of Jo Daviess County (Trust) and subject his interest in the property to the federal tax liens arising out of the unpaid assessments. Wanda Mae Hatfield, the spouse of Robert Hatfield, is named as a defendant because she is the trustee of the Trust and may have an interest in the property upon which the United States seeks to foreclose. This court has jurisdiction pursuant to 28 U.S.C. §§1340 and 1345, and venue is proper as all defendants reside in the Western Division of the Northern District of Illinois. Pending before the court are the Trust's motion for summary judgment and the United States ' cross-motion for summary judgment.

PRELIMINARY MATTERS

Before reaching a discussion of the facts, the court must briefly note some of the procedural aspects of this case. The Trust (and Wanda Mae Hatfield as trustee), represented by counsel, filed a motion for summary judgment. Shortly thereafter, the United States filed a response in opposition to the Trust's motion for summary judgment and, in addition, filed a cross-motion for summary judgment against the Trust, Robert Hatfield, and Wanda Mae Hatfield. Robert Hatfield and Wanda Mae Hatfield, both proceeding pro se as individuals, filed a response in opposition to the United States ' motion. In their response, the Hatfields raised a number of evidentiary deficiencies in the United States ' motion. Conceding some of these deficiencies in its reply, the United States withdrew a portion of its motion, converting it to a motion for partial summary judgment. The United States also stated in its reply that it would shortly move to file a supplemental motion addressing the issues withdrawn. The Hatfields then filed a motion seeking leave to file a surreply in response to certain new matters raised by the United States in its reply. The Trust and Wanda Mae Hatfield (as trustee) have not filed any response to the United States ' motion, nor have they filed a reply with respect to their own motion for summary judgment. On February 14, 1996, this court entered an order stating that the Hatfields' motion for leave to file a surreply would be taken under advisement, and it was further ordered at that time that no party will be granted leave to file "anything" until the court disposes of the pending motions. While these procedural aspects have independent significance with respect to issues of waiver, they are highlighted here for the purpose of expressing this court's dissatisfaction with the patchwork way in which this case has been litigated. Such piecemeal litigation is not favored and is particularly wasteful of the court's resources.

FACTS

The operative facts in this case are not in dispute. ¹ Since 1957, Robert Hatfield has been a practicing chiropractor. In 1971, Robert and Wanda Mae Hatfield purchased a house as joint tenants. The house is located at 318-320 South Main Street (South Main property) in Elizabeth , Illinois . In addition to being used by the Hatfields (and their three children) as a residence, the South Main property is used as an office wherein Robert Hatfield conducts his practice. Robert Hatfield pays all of the plumbing, electrical, and telephone bills. Between 1974 and 1978, Robert Hatfield received correspondence from the U.S. Internal Revenue Service (IRS) regarding his failure to file federal income tax returns. On or about March 29, 1978, the Hatfields transferred their interests in the South Main property to the Trust. The transfer was made for consideration of one-hundred dollars or less. Wanda Mae Hatfield is one three trustees for the Trust, and the Hatfield's three children are the Trust's beneficiaries. It is disputed whether the trustees have ever held any meetings.

At the time of the transfer, Robert Hatfield owned no other property of significant value. While Robert Hatfield admits that he did not file income tax returns for the tax years 1974 through 1985, he claims he was not a person required to file such returns. On December 21, 1984, the U.S. Secretary of the Treasury made assessments for unpaid tax against Robert Hatfield for the tax years 1974 through 1977, and on March 1, 1989, the Secretary made assessments for the tax years 1978 through 1985. These assessments amount to approximately $270,844.

DISCUSSION

Summary judgment is appropriate when the pleadings and supplemental materials present no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Serfecz v. Jewel Food Stores, 67 F.3d 591, 596 (7th Cir. 1995). The non-moving party cannot rest on the pleadings alone, but must identify specific facts to establish that there is a genuine triable issue. Wallace v. Batavia Sch. Dist. 101, 68 F.3d 1010, 1011 (7th Cir. 1995). In addition, the non-moving party must make a showing sufficient to establish every essential element of the cause of action for which he or she will bear the burden of persuasion at trial. Id. at 1012.

A. The Trust's Motion for Summary Judgment

The Trust contends that the complaint raises allegations of a transfer in violation of the Illinois Uniform Fraudulent Transfer Act (Illinois UFTA), 740 ILCS 160/1 et seq. The Trust argues that section 160/10 of the Illinois UFTA extinguishes not only the interest of the transferor four years after the cause of action has accrued, but the cause of action itself. Thus, the Trust contends that the United States ' action to set aside the 1978 conveyance is time-barred. In response and in support of its cross-motion for summary judgment, the United States contends that the Illinois UFTA is not applicable to the transfer at issue in this case because it was enacted after the transfer and does not operate retrospectively. The United States further contends that even if the Illinois UFTA is applicable to the transfer, the timeliness of a suit brought by the United States is not governed by state statutes of limitations, rather, the United States is subject only to statutes of limitations enacted by Congress.

Section 160/10 states:

A cause of action with respect to a fraudulent transfer or obligation under this Act is extinguished unless action is brought:

(a) under paragraph (1) of subsection (a) of Section 5 , within 4 years after the transfer was made or the obligation was incurred or, if later, within one year after the transfer or obligation was or could reasonably have been discovered by the claimant;

(b) under paragraph (2) of subsection (a) of Section 5 or subsection (a) of Section 6 , within 4 years after the transfer was made or the obligation was incurred; or

(c) under subsection (b) of Section 6 , within one year after the transfer was made or the obligation was incurred.

740 ILCS 160/10. The Trust, relying in part on the commentary to the Uniform Laws Annotated version of the UFTA, argues that the extinguishment provision was specifically designed to prevent actions from being filed by the United States after the end of the specified time period. That commentary states:

(1) This section is new. Its purpose is to make clear that lapse of the statutory periods proscribed by the section bars the right and not merely the remedy. See Restatement of Conflict of Laws 2d §143 Comments (b) & (c) (1971). The section rejects the rule applied in United States v. Gleneagles Inv. Co., 565 F. Supp. 556, 583 (M.D. Pa. 1983) (state statute of limitations held not to apply to action by United States based on Uniform Fraudulent Conveyance Act).

Unif. Fraudulent Transfer Act §9, comment (1). For further support, the Trust relies upon United States v. Vellalos [92-1 USTC ¶50,227 ], 780 F. Supp. 705 (D. Hawaii 1992), appeal dismissed, 990 F.2d 1265 (1993), for the proposition that the United States is not exempt from the extinguishment provision contained in the Illinois UFTA.

The U.S. Supreme Court has long-held that "[w]hen the United States becomes entitled to a claim, acting in its governmental capacity and asserts its claim in that right, it cannot be deemed to have abdicated its governmental authority so as to become subject to a state statute putting a time limit upon enforcement." United States v. Summerlin [40-2 USTC ¶9633 ], 310 U.S. 414, 417, 60 S. Ct. 1019, 1020 (1940); Chesapeake & Delaware Canal Co. v. United States, 250 U.S. 123, 125, 39 S. Ct. 407, 408 (1919). This principle is derived from the rule quod nullum tempus occurrit regi (that the sovereign is exempt from the consequences of its laches), a rule which has its origins in the prerogative of the Crown and has continuing vitality in a deeply-rooted public policy. See Guaranty Trust Co. of New York v. United States , 304 U.S. 126, 132, 58 S. Ct. 785, 788 (1938). Under this rule, the United States is not bound by state statutes of limitations or subject to the defense of laches in enforcing its rights absent a clear manifestation of intent by Congress that the government be so bound. Summerlin [40-2 USTC ¶9633 ], 310 U.S. at 416, 60 S. Ct. at 1020; United States v. Nashville C. & St. L. Ry. Co., 118 U.S. 120, 125, 6 S. Ct. 1006, 1008 (1886).

The Trust contends that the rule of nullum tempus has no efficacy where the United States seeks to take advantage of a state statutory cause of action, as distinguished from a state common law action. Although this distinction can be found in Vellalos, such distinction finds little support elsewhere. The Trust has not submitted any U.S. Supreme Court decision recognizing this distinction, nor is the court aware of any such decision. Moreover, a majority of federal courts refuse to apply state statutes of limitations where the United States seeks to set aside a fraudulent conveyance based on a statutory cause of action. See, e.g., United States v. Moore, 968 F.2d 1099, 1100 (11th Cir. 1992); United States v. Wurdemann [81-2 USTC ¶9757 ], 663 F.2d 50, 51 (8th Cir. 1981); United States v. Fernon [81-1 USTC ¶9287 ], 640 F.2d 609, 612 (5th Cir. 1981); United States v. Neidorf, 522 F.2d 916, 920 (9th Cir. 1975), cert. denied, 423 U.S. 1087 (1976). In addition, at least two federal courts have explicitly rejected the Trust's argument in the context of applying similar versions of the UFTA. See United States v. Bantau, 907 F. Supp. 988, 991 (N.D. Tex. 1995); Stoecklin v. United States, 858 F. Supp. 167, 168 (M.D. Fla. 1994); but see United States v. Perrina, 877 F. Supp. 215, 218 n.5 (D. N.J. 1994) (expressing doubts that the United States is not subject to the limitations period under the UFTA). Although our circuit has not addressed this issue in the context of the Illinois UFTA's extinguishment provision, it has applied the rule of nullum tempus in other contexts. See United States v. Tri-No Enter., Inc., 819 F.2d 154, 158 (7th Cir. 1987). Thus, the court is not inclined to recognize the distinction the Trust seeks to establish. In any event, the court need not reach this issue with respect to the extinguishment provision in the Illinois UFTA, as the United States raises a substantial question of the statute's retroactive application. The Trust does not advance any arguments concerning the statute's retroactive application.

The question of whether an Illinois statute operates retrospectively, or prospectively only, is one of legislative intent. Moore v. Jackson Park Hosp., 447 N.E.2d 408, 413, 69 Ill.Dec. 191, 196 (1983). Illinois courts apply a strict rule of construction against retrospective application, and presume that the legislature intended statutes to operate prospectively only, and not retroactively. Id. In addition, Illinois courts also consider whether justice, fairness, and equity militate for or against the retroactive application of the statute to a particular class of persons. Farm Credit Bank of St. Louis v. Lynn , 561 N.E.2d 1355, 1357, 149 Ill.Dec. 659, 661 (Ill.App. 3d Dist. 1990). The Illinois UFTA does not specifically address whether it is to be applied retroactively, and the court is aware of only two Illinois appellate decisions which have applied the Illinois UFTA retroactively. See Farm Credit, supra; Cannon v. Whitman Corp., 569 N.E.2d 1114, 1118, 155 Ill.Dec. 503, 507 (Ill.App. 5th Dist.), appeal denied, 580 N.E.2d 109, 162 Ill.Dec. 483 (1991). The retroactive application in each case, however, was considered only for purposes of whether injunctive relief could be granted against pre-enactment fraudulent conveyances.

Federal courts in this district have uniformly considered these cases to be limited to situations involving equitable relief and generally find the Illinois UFTA to apply prospectively only. See, e.g., United States v. Brown [93-2 USTC ¶50,375 ], 820 F. Supp. 374, 382 n.9 (N.D. Ill. 1993); In re Sevko, Inc., 143 B.R. 167, 173 (N.D. Ill. 1992) (expressing doubt that the Illinois Supreme Court would adopt Cannon); In re Aluminum Mills Corp., 132 B.R. 869, 885 n.14 (N.D. Ill. 1991); United States v. Kitsos, 770 F. Supp. 1230, 1235 n.13 (N.D. Ill. 1991), aff'd, 968 F.2d 1219 (7th Cir. 1992); see also In re Martin, 113 B.R. 949, 956 n.2 (N.D. Ill. 1990), vacated on different grounds, 124 B.R. 69 (N.D. Ill. 1991). Notably, Brown and Kitsos involved actions brought by the United States to set aside fraudulent conveyances in order to satisfy unpaid tax liabilities.

Because there is a strong presumption against retroactive application of the Illinois UFTA, and this case does not involve the type of equitable relief sought in Cannon and Farm Credit, the court finds the Illinois UFTA to be prospective in operation. Thus, the Illinois UFTA is not applicable in this case, since the conveyance at issue occurred in 1978, well before the effective date of the Illinois UFTA. The applicable statute, therefore, is the Illinois Fraudulent Conveyance Act, Ill. Rev. Stat. ch.59, para. 4, which, in pertinent part, provides:

Every gift, grant, conveyance, assignment or transfer of, or charge upon any estate, real or personal ... made with the intent to disturb, delay, hinder or defraud creditors or other persons ... shall be void as against such creditors, purchasers and other persons.

Ill. Rev. Stat. ch. 59, para. 4 (1978). Although there is no limitation or extinguishment provision in paragraph 4, actions based on paragraph 4 are subject to a general five-year statute of limitations contained in Ill. Rev. Stat. ch. 110, para. 13-205. See In re Heartland Chem., Inc., 103 B.R. 1012, 1015 (C.D. Ill. 1989). For reasons articulated earlier, however, the rule of nullum tempus exempts the United States from being subject to state statutes of limitations absent an express directive by Congress. See Brown [93-2 USTC ¶50,375 ], 820 F. Supp. at 382 (citing Tri-No Enter., Inc., 819 F.2d at 158). Instead, the applicable statute of limitations governing this action is 26 U.S.C. §6502(a)(1) , which requires the United States to initiate suit within ten years after the assessment of the tax. ² See United States v. Denlinger, No. 3:93cv94 AS, 1994 WL 774557, at *6 (N.D. Ind. Dec. 16, 1994) (finding section 6502 to be the applicable statute of limitations where the United States seeks to set aside a fraudulent conveyance), aff'd [93-1 USTC ¶50,040 ], 982 F.2d 233 (7th Cir. 1992). The United States filed suit on December 14, 1994, within ten years of the December 21, 1984 assessment. Therefore, this suit is timely, and the Trust's motion for summary judgment is denied.

B. The United States ' Motion for Summary Judgment

The United States requests the court to enter a judgment against Robert Hatfield in the amount of the unpaid tax assessments, to declare that the South Main property is subject to its tax liens, and to enter an order of foreclosure against Robert Hatfield's interest in the property. The court shall consider each of these matters in turn.

In its motion and initial brief, the United States contended that once an assessment for unpaid tax liabilities is made, it enjoys a "presumption of correctness which must be overcome by a preponderance of the evidence that the assessment is incorrect," relying on Welch v. Helvering [3 USTC ¶1164 ], 290 U.S. 111, 54 S. Ct. 8 (1933) and Ruth v. United States [87-2 USTC ¶9408 ], 823 F.2d 1091 (7th Cir. 1987). The United States then argued that by submitting certificates of assessments and payments for the relevant tax years to the court, it established a prima facie case of tax liability against Robert Hatfield, relying on Psaty v. United States [71-1 USTC ¶9346 ], 442 F.2d 1154, 1159-60 (3d Cir. 1971). On this basis, the United States sought judgment against Robert Hatfield for the total amount of the assessments, including civil fraud penalties and statutory interest.

Robert Hatfield, relying principally upon United States v. Janis [76-2 USTC ¶16,229 ], 428 U.S. 433, 441, 96 S. Ct. 3021, 3026 (1976), contends in response that the United States' evidentiary submissions are nothing more than "naked" assessments which lack a foundation, and that the lack of such foundation precludes the United States from establishing a prima facie case. He further contends that because the assessments lack foundation, the assessments are "arbitrary and erroneous," and the burden rests on the United States to prove the correct amount of taxes owed. Similarly, Robert Hatfield contends that the burden of proof with respect to the civil fraud penalties rests on the United States , and that the United States fails to submit any proof on this issue.

In its reply, the United States now concedes that the certificates of assessments it submitted are indeed "naked" assessments to which the presumption of correctness does not attach. The United States , however, submits additional evidence in support of the validity of the assessments. As to the assessments for the tax years 1974 through 1977, the United States now contends that Robert Hatfield is barred by res judicata from contesting those assessments because a decision was entered against him in the U.S. Tax Court for those years. In support of this contention, the United States submits an order of dismissal and decision from the U.S. Tax Court dated July 31, 1984. As to the remaining assessments for the tax years 1978 through 1985, the United States submits an investigative audit report prepared by the IRS in an attempt to provide an adequate foundation for these remaining assessments. Finally, the United States concedes that it bears the burden of proof with respect to the civil fraud penalties. Because it failed to include any evidence with respect to these penalties in its Rule 12M statement of facts, the United States withdraws its motion in part, to the extent it seeks such penalties.

Generally, deficiency assessments are entitled to a presumption of correctness, and this presumption applies both in refund suits initiated by taxpayers and civil collection suits initiated by the United States . Janis [77-1 USTC ¶16,252 ], 428 U.S. at 440, 96 S. Ct. at 3025. In order to be entitled to such presumption, however, there must be some kind of foundation, otherwise the assessment will be deemed to be "arbitrary and erroneous." Gold Emporium, Inc. v. C.I.R. [90-2 USTC ¶50,443 ], 910 F.2d 1374, 1378 (7th Cir. 1990). This foundation is established when evidence is submitted linking the taxpayer with "tax-generating activity." Id. (citing Anastasato v. C.I.R. [86-2 USTC ¶9529 ], 794 F.2d 884, 887 (3d Cir. 1986)). Where an assessment has no foundation whatsoever, it is considered to be a "naked" assessment to which the presumption of correctness does not apply. Janis [77-1 USTC ¶16,252 ], 428 U.S. at 441, 96 S. Ct. at 3026. This occurs when the records supporting an assessment are excluded from evidence or are nonexistent, so that the basis upon which the assessment is calculated is beyond the knowledge of the court. United States v. Schroeder [90-1 USTC ¶50,250 ], 900 F.2d 1144, 1149 (7th Cir. 1990).

As the United States now concedes, the evidentiary submissions which accompanied its motion for summary judgment were nothing more than naked assessments. In order to be entitled to the presumption of correctness, the United States was required to at least provide evidence linking Robert Hatfield with tax generating activity. While it does appear that Robert Hatfield is barred by res judicata from relitigating the validity of the assessments for the tax years 1974 through 1977, see Baptiste v. Commissioner [94-2 USTC ¶60,178 ], 29 F.3d 1533, 1539 (11th Cir. 1994); United States v. Shanbaum [94-1 USTC ¶50,032 ], 10 F.3d 305, 314 (5th Cir. 1994), the United States failed to submit this evidence with its motion and initial brief. Likewise, while the United States also offers evidence which might link Robert Hatfield with tax-generating activity for the remaining tax years, see Gold Emporium, Inc. [90-2 USTC ¶50,443 ], 910 F.2d at 1378-79, the United States also failed to submit this evidence with its motion and initial brief. This supporting evidence was necessary in order for the United States to establish a prima facie case of tax liability, and by improperly waiting until its reply brief to submit such evidence, the United States waived its arguments based on this evidence for purposes of its motion. See Doe v. Board of Educ. of Hononegah Community High Sch. Dist. No. 207, 833 F. Supp. 1366, 1380 n.4 (N.D. Ill. 1993); United States v. 105,800 Shares of Common Stock of Firstrock Bancorp, Inc., 830 F. Supp. 1101, 1133 n.52 (N.D. Ill. 1993). Accordingly, the court will not consider the additional evidence submitted by the Untied States in its reply brief for purposes of this motion. ³ Because the foundation for all of the assessments is not properly before the court, the United States is not entitled to a judgment with respect to those assessments.

As to the issue of whether the South Main property is subject to the tax liens against Robert Hatfield, the United States advances two alternative legal theories. First, the United States contends that the Trust is merely an alter ego or nominee of Robert Hatfield and is subject to the liens; and second, the United States contends that Robert Hatfield's transfer of the property to the Trust should be set aside based on the law of fraudulent conveyance. No defendant responds to these theories, except that Wanda Mae Hatfield contends that she is entitled to a portion of the proceeds in the event of any foreclosure or sale of the property.

Property of the nominee or alter ego of a taxpayer is subject to the collection of the taxpayer's tax liability. See G.M. Leasing Corp. v. United States [77-1 USTC ¶9140 ], 429 U.S. 338, 351, 97 S. Ct. 619, 627-28 (1977). In determining whether an entity is an alter ego of a taxpayer, it is appropriate to apply the law of the forum state. Towe Antique Ford Found. v. I.R.S. [93-2 USTC ¶50,430 ], 999 F.2d 1387, 1391 (9th Cir. 1993). Thus, the court applies Illinois law in making this determination.

No party has cited an Illinois decision addressing this particular issue, and the court has not uncovered any such cases which are directly on point. By analogy, however, Illinois cases addressing the notion of piercing the corporate veil appear to be most appropriate. In order to prevail under this related doctrine, one must show that "(1) there is such a unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist; and (2) circumstances are such that adhering to the fiction of a separate corporate existence would promote injustice or inequity." Snyder v. Dunn, 638 N.E.2d 744, 748, 202 Ill.Dec. 876, 880 (Ill.App. 1st Dist. 1994). A court must look to a number of variables, and where such variables are coupled with some element of injustice or fundamental unfairness, the corporation will be considered as an aggregate of person both in equity and at law. McCracken v. Olson Cos., Inc., 500 N.E.2d 487, 491, 102 Ill.Dec. 594, 598 (Ill.App. 1st Dist. 1986).

The evidence in this case does not support a finding as a matter of law that the Trust is an alter ego of the Hatfields. While it may be reasonable to make such a finding, it is also reasonable to conclude otherwise. While the fact that Robert Hatfield continues to pay the utility bills and use the property as a residence and place of business is highly relevant and supports an inference that the Trust is merely his nominee or alter ego, other evidence exists which supports a contrary inference. The Trust's beneficiaries reside at the property and it is disputed whether the trustees have held meetings. Thus, it is not shown that Robert and Wanda Mae Hatfield exercise complete dominion and control over the property. Accordingly, the court cannot conclude as a matter of law that the Trust is an alter ego of Robert Hatfield.

The United States, however, advances an alternative theory based on the Illinois Fraudulent Conveyance Act, Ill. Rev. Stat. ch. 59, para. 4 (1978). Illinois recognizes two categories of fraudulent conveyances: those which are fraudulent in fact and those which are fraudulent in law. Gendron v. Chicago and N.W. Transp. Co., 564 N.E.2d 1207, 1214, 151 Ill.Dec. 545, 552 (1990). In fraud-in-fact cases, a specific intent to "disturb, delay, hinder or defraud" must be proved." Id. In fraud-in-law cases, on the other hand, a conveyance may be presumed fraudulent based on certain circumstances surrounding the conveyance, and intent is immaterial. Id. at 1215, 151 Ill.Dec. at 553. Three elements are required to establish fraud-in-law: "(1) there must be a transfer made for no or inadequate consideration; (2) there must be existing or contemplated indebtedness against the transferor; and (3) it must appear that the transferor did not retain sufficient property to pay his indebtedness." Id. These elements are clearly established in this case.

As Robert Hatfield admits, the transfer was made for consideration of one hundred dollars or less. Under the circumstances, this consideration is inadequate. Likewise, Robert Hatfield admits that he had received correspondence from the IRS concerning his failure to file tax returns and pay tax for the years 1974 through 1977 prior to the transfer. Such tax liabilities became due and owing on the date that the returns were required to be filed and not on the date of assessment. Brown, 820 F. Supp. at 383. Hence, this evidence sufficiently establishes that Robert Hatfield had at least a contemplated indebtedness at the time of the transfer. Finally, Robert Hatfield admits that at the time of the transfer, he did not retain any property of significant value. Thus, a presumption exists that the conveyance was fraudulent in law, and since Robert Hatfield has not submitted any evidence to overcome this presumption, the United States is entitled to judgment as a matter of law. Accordingly, the court sets aside Robert Hatfield's conveyance of his interest in the South Main Property and finds that his one-half interest in the property is subject to the tax liens of the United States arising out of Robert Hatfield's tax liabilities. ⁴ Although Wanda Mae Hatfield's transfer to the Trust remains valid, she has an interest in the property as co-trustee of the Trust. Because she raises a substantial question as to whether, as trustee, she is entitled to more than one-half of the proceeds from any sale of the property, and the United States has not provided any authority for its position, the court leaves this issue to another day should the United States seek a foreclosure and sale of the South Main property.

CONCLUSION

For the foregoing reasons, the motion for summary judgment by the Victorian Trust of Jo Daviess County is denied, and the United States' motion for partial summary judgment is granted in part and denied in part. Robert and Wanda Mae Hatfield's motion for leave to file a surreply brief is denied as moot.

¹ The Trust admits to the factual allegations in the complaint for purposes of its motion for summary judgment, and the facts contained in the United States' motion for summary judgment are deemed admitted due to the Trust's failure to respond pursuant to Northern District of Illinois Local General Rule 12N. Similarly, the Hatfield's Rule 12N statement admits most facts and primarily contests the validity of the assessments.

² As the United States correctly notes, although section 6502 was amended in 1990 to increase the limitations period from six to ten years, the amendment applies to assessed taxes for which the period of collection has not expired as of November 5, 1990. Because the taxes at issue here were assessed no earlier than December 21, 1984 and the period of collection had not expired as of November 5, 1990, the action is subject to the ten-year period of limitation. See United States v. Wright [95-2 USTC ¶50,334 ], 57 F.3d 561, 562 (7th Cir. 1995).

³ Of course, the United States is not barred from relying on such evidence at a later stage in this case or at trial.

⁴ The court notes that because only Robert Hatfield's transfer is void, Wanda Mae Hatfield's transfer of her interest in the South Main property to the Trust had the effect of severing the joint tenancy. See Dompke v. Dompke, 542 N.E.2d 1222, 1224, 134 Ill.Dec. 715, 717 (Ill.App. 2d Dist.), appeal denied, 548 N.E.2d 1068, 139 Ill.Dec. 512 (1989).

 

 

 

United States of America, Plaintiff-Appellee v. Floyd Wright, Defendant-Appellant

(CA-9), U.S. Court of Appeals, 9th Circuit, 95-17311, 6/14/96, Affirming a District Court decision, 96-1 USTC ¶50,005

[Code Sec. 6321 ]

Tax liens: Interests in property: Homestead rights.--The IRS met its burden of proof on a motion to foreclose on tax liens against the property of an individual. The taxpayer who held the property in joint tenancy with his first wife was sole owner of the property upon his first wife's death. Further, the taxpayer and his second wife signed and recorded a transmutation agreement in which they intended that the property remain the taxpayer's separate property. The second wife did not assert an interest in the property, and a homestead declaration had not been filed.

[Code Sec. 6322 ]

Tax liens: Statute of limitations: State law: Fraudulent conveyances: Interests in property.--Even though the IRS's claim to set aside the conveyance of property from a religious organization to an individual's second wife was time-barred under state (California) law, the transfer was ineffectual and void since the religious organization had no interest to convey. The taxpayer actually held all interest in the property.

[Code Sec. 7403 ]

Tax liens: Jurisdiction: District court: Frivolous arguments.--A taxpayer's contention that the district court did not have jurisdiction because the taxing authority of the United States does not extend to individuals residing within any of the fifty states was rejected as frivolous.

Gary R. Allen, Regina S. Moriarty, Department of Justice, Washington, D.C. 20530, for plaintiff-appellee. Floyd Wright, 1240 E. Main St., Grass Valley, Calif. 95945, pro se.

Before: CANBY, NOONAN, and LEAVY, Circuit Judges. ^*

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

MEMORANDUM ^**

Floyd Wright appeals pro se the district court's summary judgment in favor of the United States in the government's action pursuant to 26 U.S.C. §7402(a) and 7403 to reduce to judgment federal income tax assessments made against Wright for the years 1973 through 1975 and 1985 through 1989, to set aside as fraudulent certain conveyances of real property owned by Wright, and to foreclose federal tax liens against that property.

Wright does not allege error in any of the district court's rulings on the merits. Rather, Wright's assignments of error rest on his contention that the district court lacked jurisdiction over the action because the taxing authority of the United States does not extend to individuals residing within any of the fifty states. The district court properly rejected Wright's frivolous contentions. See In re Becraft, 885 F.2d 547, 548 (9th Cir. 1989); Carter v. Commissioner [86-1 USTC ¶9279 ], 784 F.2d 1006, 1009 (9th Cir. 1986).

AFFIRMED.

^* The panel unanimously finds this case suitable for decision without oral argument. Fed. R. App. P. 34(a); 9th Cir. R. 34-4.

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

 

 

 

United States of America, Plaintiff v. Floyd A. Wright, Ruth M. Wright, Mary C. Christopher (Nee Wright), Micaela Eileen Christopher and Norbertine Fathers of Csorna, Inc., Defendants

U.S. District Court, East. Dist. Calif., CIV-S-94-1183 EJG/GGH, 11/6/95, On motion for reconsideration of a District Court decision, 94-2 USTC ¶50,599

[Code Secs. 6321 and 6322 ]

Conveyance: Fraudulent: Statute of limitations: Property ownership: Liens: Foreclosure.--Even though the IRS's claim to set aside the conveyance of property from a religious organization to the taxpayer's second wife was time-barred under state (California) law, the transfer was ineffectual and void since the religious organization had no interest to convey. The taxpayer actually held all interest in the property. In addition, the IRS met its burden of proof on the motion to foreclose on its liens. The taxpayer who held the property in joint tenancy with his first wife was sole owner of the property upon his first wife's death. Further, the taxpayer and his second wife signed and recorded a transmutation agreement in which they intended that the property remain the taxpayer's separate property. The second wife did not assert an interest in the property, and a homestead declaration had not been filed.

Jeffrey R. Meyer, Department of Justice, Washington, D.C. 20530, for plaintiff. Floyd Wright, P.O. Box 323, Grass Valley, Calif. 95945, pro se.

MEMORANDUM OF DECISION

GARCIA, District Judge:

This matter is before the court on defendant Floyd Wright's motion to reconsider the court's orders of October 25, 1994, and May 16, 1995, granting partial summary judgment to plaintiff on its first and second causes of action to reduce tax liens to judgment, and to set aside fraudulent conveyances, and on plaintiff's motion for partial summary judgment to foreclose on tax liens. After reviewing the record and documents submitted in connection with the motions, the court determined that oral argument would not be of material assistance. Accordingly, the hearing set for July 7, 1995 was vacated and the motions were taken under submission. See Local Rule 230(h). Now, after carefully considering the record, the court enters the following order.

BACKGROUND

The United States filed this civil action on May 12, 1994, seeking payment of outstanding federal income taxes, interest and penalties. The complaint set forth two causes of action: 1) to reduce federal tax assessments against Floyd Wright (hereafter referred to as "Wright" or "defendant") to judgment; and 2) to set aside fraudulent conveyances and foreclose on Wright's property in order to secure payment. On October 25, 1994, the court denied numerous motions filed by Wright and granted the plaintiff partial summary judgment on its first cause of action to reduce Wright's federal tax liabilities to judgment. (October 25, 1994 Memorandum Decision.) The defendant now seeks reconsideration and reversal of that order as well as dismissal of the complaint.

On May 16, 1995, the court granted the plaintiff partial summary judgment on a portion of its second cause of action to set aside fraudulent conveyances of property, invalidating all conveyances of the property in question, which were pled in the complaint and which occurred after September 1, 1970, and denied Wright's cross-motion for summary judgment. (May 16, 1995 Memorandum Decision.) However, the court denied without prejudice plaintiff's motion to foreclose on tax liens. Plaintiff now renews its motion for summary judgment on this same matter. On May 24, 1995, Wright filed an Amendment to his Motion to Reconsider, Reverse and Dismiss seeking reconsideration of the court's May 16, 1995 decision as well.

DISCUSSION

I. Wright's "Motion to Reconsider, Reverse and Dismiss"

Defendant Wright contends that the October 25, 1994 order reducing his tax liabilities to judgment and the May 16, 1995, order setting aside fraudulent conveyances should be reconsidered and reversed, and the complaint dismissed. To prevail on a motion for reconsideration the moving party must show: 1) a change in the law; 2) new evidence; or 3) clear error. See Kern-Tulare Water District v. City of Bakersfield, 634 F.Supp. 656 (E.D. Cal. 1986), rev'd on other grounds, 828 F.2d 514 (9th Cir. 1987). See also, Local Rule 230(k) (reconsideration requires showing of new or different facts and circumstances that did not exist at the time prior motion decided).

The defendant's motion recycles numerous arguments that have been addressed and rejected by this court in its previous decisions. The jurisdiction of this court (October 1994 Decision, p.5), the United States' right to lay and collect income taxes (October 1994 Decision, p.17), whether or not the United States is a creditor (May 1995 Decision, p.12), Wright's alleged insolvency (May 1995 Decision, p.12), and the plaintiff's admissions (May 1995 Decision, p.14-15) are issues this court has already considered. Defendant has failed to advance any basis for reconsideration of these issues. See Local Rule 230(k).

However, the defendant raises one issue that does warrant reconsideration and requires reversal of a portion of the court's prior orders. Defendant maintains that plaintiff's cause of action to set aside fraudulent conveyances, which is admittedly brought pursuant to the California Civil Code, is barred by the statute of limitations. Although this argument was raised previously by the defendant, he now cites statutory and case authority for his position, not previously brought to the court's attention which compels a different result. In order to avoid clear error, portions of the court's prior orders must be reconsidered and reversed.

In its second cause of action, plaintiff seeks to set aside seven conveyances of property occurring between 1970 and 1989, pursuant to former Civil Code section 3439.07 and present Civil Code section 3439.04. Prior to 1986, California operated under the Uniform Fraudulent Conveyances Act ("UFCA"). The portion of the law applicable to this lawsuit was codified at section 3439.07 of the Civil Code. The UFCA was repealed in 1986 when California adopted the Uniform Fraudulent Transfers Act ("UFTA"). The relevant portion of the UFTA under which plaintiff seeks relief is codified in Civil Code section 3439.04.

The UFTA contains a statute of limitations not present in the former code. See Cal. Civ. Code §3439.09. When a cause of action with respect to a fraudulent transfer is brought under subdivision (a) of section 3439.04, the claim is extinguished "within four years after the transfer was made or the obligation was incurred or, if later, within one year after the transfer or obligation was or could reasonably have been discovered by the claimant." Cal. Civ. Code §3439.09(a). When a cause of action is brought under subdivision (b) of section 3439.04 the claim is extinguished "within four years after the transfer was made or the obligation was incurred." Cal. Civ. Code §3439.09(b).

Based on this statute, and a recent district court opinion interpreting a similar statute, Wright contends plaintiff's entire second cause of action is time-barred. However, by its terms the UFTA is only applicable to transfers of property occurring on or after January 1, 1987. See Cal. Civ. Code §3439.12. Of the seven transfers within the second cause of action that plaintiff seeks to set aside, only one occurred after that date. Therefore, the statute applies, if at all, only to the purported transfer of a life estate from the Norbertine Fathers of Csorna to defendant Ruth Wright, on May 11, 1989. ¹ Since the instant complaint was not filed until May 12, 1994, five years and one day after the transfer, and since plaintiff could have reasonably discovered the conveyance since it was recorded on June 6, 1989, the claim to set it aside is time-barred if the statute of limitations within California's version of the UFTA applies to actions brought by the United States.

The Ninth Circuit has not ruled on the issue. However, the Legislative Committee Comment clearly indicates that the state statute of limitations was intended to apply to a situation like the present case. See Cal. Civ. Code §3439.09 Comment 1 (rejecting rule that United States not bound by statute of limitations contained in UFTA). Only one published case within the Ninth Circuit has discussed this issue. See United States v. Vellalos, 780 F.Supp. 705 (D. Haw. 1992). Hawaii's version of the UFTA also has a provision which bars all causes of action which are not brought "within four years after the transfer ... or, if later, within one year after the transfer or obligation was or could reasonably be discovered by the claimant." Haw.Rev.Stat. §651C-9(1).

In its decision, the Vellalos court relied on this statute and the Commentary by the Commission on Uniform Laws which provides that the limitations provision was intended to avoid the result of prior judicial decisions which held state statutes of limitation inapplicable to actions by the United States. Vellalos, 780 F.Supp. at 707. The court noted that if the federal government desired an unlimited statute of limitations it could create one. See id. at 708. A summary procedure by which the IRS can collect taxes from transferees who are found to be fraudulent transferees under state law is available through 26 U.S.C. section 6901(c) . However, that section provides that the initial transferee remains liable for a period of only one year after the period of limitation for assessment against the transferor. See 26 U.S.C. §6901(c) . The Vellalos court noted that since the government failed to meet its own statute of limitations, it was seeking to take advantage of rights created by Hawaiian statute while at the same time avoiding limitations imposed by the statute. See United States v. Vellalos, 780 F.Supp. at 707-08. The Ninth Circuit affirmed Vellalos in part, but declined to decide the statute of limitations issue because of the interlocutory nature of that part of the decision. See United States v. Vellalos, 990 F.2d 1265 (table) (9th Cir. 1993).

In spite of Vellalos and the legislative history of the UFTA, plaintiff argues that the statute of limitations does not preclude its action because a state statute cannot operate to bar a cause of action brought by the United States, citing United States v. Summerlin [40-2 USTC ¶9633 ], 310 U.S. 414 (1940), and its progeny. Summerlin and the cases on which plaintiff relies are clearly distinguishable from the instant case in light of the specific directive from the California legislature that one of its purposes in enacting the statute of limitations was to avoid the result reached in Summerlin. The court finds that plaintiff's claim within its second cause of action to set aside the May 11, 1989 transfer is time-barred by Civil Code section 3439.09.

Based on the foregoing, the court reconsiders and reverses, in part, that portion of its October 25, 1994, decision which denied Wright's motion to dismiss the second cause of action based on the statute of limitations. ² In addition, the court reconsiders and reverses its May 16, 1995 decision to the extent it set aside as fraudulent the May 11, 1989 transfer of the property at issue. It should be noted that this ruling only affects the last of the seven transfers contained within the second cause of action. Since the statute of limitations in the UFTA only applies with respect to transfers occurring on or after January 1, 1987, the plaintiff's attempts to set aside the first six transfers, all of which occurred prior to that date, are not time-barred and the court's prior ruling setting them aside as fraudulent is affirmed.

Alternatively, plaintiff argues that even if its attempt to set aside this latter transfer is time-barred, the conveyance--which purports to transfer a life estate from the Norbertine Fathers to Ruth M. Wright--cannot be valid because defendant Floyd Wright had a life estate in the property at the time of the transfer. This argument is persuasive. Having set aside the conveyances occurring on September 2, 1970, April 11, 1974, April 22, 1974, November 29, 1976, and two on January 26, 1983, the property and Wright are returned to the position they occupied prior to the first fraudulent transfer.

On September 1, 1970, the property was held by Wright and his former wife, Violet, in joint tenancy (May 1995 Decision, p.14 n.5). When Violet died in 1987, Wright, as the surviving spouse, became the sole owner of the property. Therefore, on May 11, 1989, the date of the seventh transfer, Wright held all interest in the property. Thus, the purported transfer from the Norbertine Fathers to Ruth M. Wright was ineffectual and void. Since the property belonged to Wright, the Norbertine Fathers had no interest to convey. This is bolstered by the Norbertine Fathers disclaimer of any interest in the property, filed in this action on January 18, 1995. In sum, while the court sets aside its prior ruling that the May 11, 1989 transfer was fraudulent, that is not an impediment to the government's case. The May 1, 1989 transfer falls of its own accord.

II. Plaintiff's Motion for Partial Summary Judgment

Plaintiff seeks summary judgment on the remaining issue in this case--foreclosure of its tax liens on Wright's property. The court denied summary judgment without prejudice on this issue in the May 1995 decision because of plaintiff's failure to present evidence establishing the extent of Wright's property interest. The court is now satisfied that the plaintiff has met its burden of proof on the motion to foreclose its liens, for the reasons set forth below.

Prior orders of this court have determined that Wright owes the plaintiff $30,683, plus interest and penalties. In order to collect that debt, the plaintiff placed a lien on defendant's property. If any person fails or refuses to pay taxes, the United States may place a lien on all property and property rights of the delinquent taxpayer. See 26 U.S.C. §6321 ; Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265, 267 (1945) (noting that lien reaches all property and property rights of taxpayer and continues in effect until tax debt is satisfied or becomes unenforceable).

To foreclose on the liens and order a sale of defendant's property, the court must first determine the defendant's property rights. As noted in the court's May 1995 decision, and confirmed above, setting aside the fraudulent conveyances has the effect of returning Wright and his property to the status they occupied on September 1, 1970, prior to the first fraudulent transfer. At that time the property was held in joint tenancy by Wright and his former wife, Violet. (May 1995 Decision, at p. 14 n.5)

California law permits a husband and wife to hold property as joint tenants, tenants in common, or as community property. See Cal. Family Code §750. California law presumes that property acquired by a married couple is taken as community property. See In re Rhoads, 130 B.R. 565, 567 (Bankr. C.D. Cal. 1991). Here, it is undisputed that defendant and his first wife held the property as joint tenants. (May 1995 decision, p.14 n.5) By taking property as joint tenants, Wright and his first wife have destroyed the general presumption that property acquired by married couples is taken as community property. Id.

The survivor of joint tenancy holds the full estate. See Tooley v. Commissioner of Internal Revenue [41-2 USTC ¶9540 ], 121 F.2d 350, 354 (9th Cir. 1941). Therefore, at the time of his first wife's death in 1987, Wright became sole owner of the entirety by right of survivorship. Since the court has determined that no effective transfers of the property were made by Wright prior to the filing of this complaint by the plaintiff, Wright's second wife, Ruth, has no legally recognizable interest in the property.

Additional support for this conclusion is found in the transmutation agreement filed by Floyd and Ruth Wright on May 14, 1991. By recording this agreement, they intended that the property remain Wright's separate property. California law permits married couples to transmute community property to separate property without consideration. See Cal. Family Code §850. This transmutation agreement effectively terminated any interest Ruth Wright may have had in the property. See Roosevelt v. Finalco, Inc., 176 B.R. 534, 537 (Bankr. 9th Cir. 1995) (effect of agreement is to convey the transmutor's entire interest). Accordingly, Floyd Wright has sole interest in the property.

In the May 1995 Decision, the court expressed concern that Ruth Wright might also be able to assert an interest in the property if a declaration of homestead has been filed. Subject to a few exceptions, a judgment lien on real property does not attach to a declared homestead if two conditions are met. First, the homestead declaration must have been filed prior to the filing of the federal tax lien, and second, the declaration must name the debtor or the debtor's spouse as a declared homestead owner. See Cal. Civ. Pro. §704.950 (West Supp. 1995). Wright candidly admits in his opposition to the motion for summary judgment, that he "has never filed a Homstead [sic] on any property he has owned." Defendant's Objection to Motion for Summary Judgment, at p. 3.

Finally, Ruth Wright has never affirmatively demonstrated an interest in the property although given the opportunity to do so in this litigation. Had she any interest, she could have come forth and asserted it. For all these reasons--Ruth Wright's failure to assert an interest in the property, Wright's insistence that the property has not been homesteaded, and the transmutation agreement--the court concludes that defendant Floyd Wright has sole interest in the property.

CONCLUSION

1. Wright's motion for reconsideration is granted in part.

2. The government's motion for partial summary judgment, to foreclose on the property is granted. Accordingly, the court orders foreclosure on the property at issue. All proceeds from the sale, up to the amount of judgment, minus the costs of sale, shall be applied to the outstanding tax indebtedness of Floyd A. Wright.

3. The Clerk of Court is directed to enter judgment in favor of the plaintiff.

IT IS SO ORDERED.

¹ While plaintiff maintains that the court's May 16, 1995 order also set aside a purported transfer from Mary and Micaela Christopher to the Norbertine Fathers, the transfer occurred June 28, 1994, more than a month after the filing of the complaint. Therefore, since it was not part of the complaint, it was not before the court.

² In the October 25, 1994 decision, the court relied on Chevron, U.S.A., Inc. v. United States [83-1 USTC ¶13,523 ], 705 F.2d 1487 (9th Cir. 1983) to reject defendant's statute of limitations argument. However, Chevron is distinguishable for the same reasons plaintiff's out-of-circuit cases fail. It was decided prior to California's enactment of the Uniform Fraudulent Transfer Act and the Ninth Circuit did not have before it the legislative history surrounding enactment of the Act in this state.

 

 

 

John C. Alden, M.D., Plaintiff/Appellant v. United States of America, Defendant/Appellee Amy Timacheff, Plaintiff v. United States of America, and California Franchise Tax Board, Defendant/

/Appellees v. John C. Alden, M.D., Counter-claimant/Appellant


(CA-9), U.S. Court of Appeals, 9th Circuit, 94-16793, 96-16262, 7/31/97, Affirming a District Court decision, 94-2 USTC ¶50,610

[Code Sec. 7403 ]

Tax liens: Forced sale of property: Summary judgment.--The trial court properly granted summary judgment in favor of the IRS and ordered the sale of a doctor's residence in satisfaction of his outstanding federal and state (California) tax liabilities. The state tax board's right to collect the delinquent taxes was not subject to res judicata because the issue had not been adjudicated in a prior proceeding. In addition, the trial court did not abuse its discretion in admitting the testimony of a state tax board employee regarding the inadvertent recording of lien releases and the subsequent re-recording of the lien certificates in an effort to correct the mistake. Even if the testimony should have been excluded, allowing it would have constituted harmless error because it did not form the basis of the court's decision. The state tax board had not released a lien certificate relating to substantial deficiencies, and the doctor's liability was subject to a statutory lien, which could not have been released until he paid the taxes due.

Glen L. Moss, 1297 "B" St., Hayward, Calif. 94541, Donald L. Feurzeig, Titchell, Maltzan, Mark, Bass, Ohleyer & Mischela, 650 California St., San Francisco, Calif. 94108, for plaintiffs-appellants. Jack Newman, Oakland, Calif. 94612-3049, Gary R. Allen, Annette M. Wietecha, Department of Justice, Washington, D.C. 20530, for defendants-appellees.

Before: NELSON and FERNANDEZ, Circuit Judges, and MOLLOY, District Judge. ¹

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

MEMORANDUM ²

John C. Alden (Alden) appeals from a grant of summary judgment awarded in favor of the United States. The judgment ordered the sale of Alden's residence in Berkeley, California, to satisfy various outstanding state and federal tax liens. His position is not well taken. As a consequence, the judgment of the district court is affirmed.

DISCUSSION

Alden argues that the FTB used this action to reverse the decision rendered by Judge

Karlton in the case involving the Rumsey ranch. We have carefully reviewed the record and can find nothing in Judge Karlton's opinion to support the contention that Judge Karlton ruled against the State of California's right to collect taxes from Alden. The district court correctly determined the issue of Alden's California tax liability was not subject to res judicata based on Judge Karlton's opinion. ³

Alden next argues that in determining the priorities for distribution of proceeds from the sale of the Berkeley property, the district court erred by relying on an IRS rule allegedly promulgated in violation of the Administrative Procedure Act. This issue is raised for the first time on appeal. An issue raised for the first time on appeal is subject to review "only under certain narrow circumstances," namely, to prevent a miscarriage of justice; when a change in the law raises a new issue while the appeal is pending; and when the issue is purely one of law. Parks School of Business, Inc. v. Symington, 51 F.3d 1480, 1488 (9th Cir. 1995). Alden has failed to show how the district court made an error of law. None of the exceptions apply in this case. Accordingly, we decline to visit this issue.

We also decline to consider Alden's contention, raised for the first time at oral argument, that the district court should have determined the exact amount of the state's lien rather than simply deciding the question of whether the lien existed.

We find the magistrate judge did not abuse his discretion by considering testimony from a FTB employee at the hearing on Alden's motion for reconsideration. The FTB employee testified that the FTB had recorded the pertinent lien releases in error. He further testified that the FTB corrected its error by re-recording the lien certificate at a later date. Admission of such relevant testimony does not rise to an abuse of discretion.

Even if the court had abused its discretion in admitting the testimony, the error would be harmless because the testimony did not form the basis of the court's decision in the matter. In rejecting Alden's argument that the two lien releases had nullified his tax obligation to the FTB, the court relied on two factors. First, the FTB had not released lien certificate number 83040-000079, which shows an amount of $152,495.58 due in tax, penalties and interest for the period 1977-83. Second, Alden, as the delinquent taxpayer, was subject to a statutory lien, which could not have been released because he had not paid the taxes owed. We find no fault in the court's reasoning.

Finally, Alden argues that the district court erred in adopting the magistrate's finding that the new evidence did not warrant a modification of the summary judgment. In this, Alden does no more than doggedly restate his argument that the two lien releases entirely extinguished his FTB tax liability. As noted above, the magistrate relied upon substantial evidence that other FTB tax liens, both statutory and recorded, remained in full force and effect against Alden. Thus, the district court did not commit error in adopting the Findings and Recommendation of the magistrate judge.

CONCLUSION

Alden has failed to identify any material issues of fact for trial. He has similarly failed to identify any errors of law or clearly erroneous findings of fact that would warrant reversal of summary judgment. The judgment of the district court is affirmed in all respects.

AFFIRMED.

¹ The Honorable Donald W. Molloy, United States District Judge for the District of Montana, sitting by designation.

² This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by Ninth Circuit Rule 36-3.

³ Alden also challenges the Stipulation Agreement on the grounds of res judicata. The Stipulation provided that the FTB would receive fourth priority on the proceeds of sale of the Berkeley residence against its lien claim of $125,672.70. We agree with the district court that nothing in Judge Karlton's opinion warrants the application of res judicata to negate the Stipulation Agreement.

 

 

 

Amy Alden, a/k/a Amy Timacheff, Mary Alden, Laurie Alden and John Alden, Jr., Plaintiffs v. United States of America, Defendant

U.S. District Court, No. Dist. Calif., C-88-4306 SBA, 9/13/94

[Code Secs. 6321 , 6334 and 7403 ]

Lien for taxes: Action to enforce lien: Foreclosure: District Court: Discretion to preclude sale: Third-party interest.--The government was entitled to reduce its lien on the property of a doctor who owed employment and income taxes to judgment. The federal district court could not exercise its limited discretion to decline to order the sale of the delinquent taxpayer's property to preclude collection of the taxes. The purported interests of third parties in the property did not block a forced sale because they were merely co-tenants with the doctor, did not assert any separate property interest and were not parties to the action. Further, the priority of the lien claimants had been established by stipulation in a prior proceeding, and thus the amount of state taxes owed could not be addressed in the present case. In addition, the doctor was not permitted to designate how the sale proceeds should be distributed. Finally, the new rules regarding exempt property applicable to levies imposed on or after July 1, 1989, did not apply since the levy was issued prior to that date.

ORDER GRANTING DEFENDANT UNITED STATES' SUMMARY JUDGMENT MOTION

ARMSTRONG, District Judge:

Defendant and counterclaimant United States of America ("the Government") presently moves for summary judgment on its counterclaims to secure a decree, pursuant to 26 U.S.C. §7403 , authorizing the sale of Dr. John C. Alden's real property located in Berkeley, California, and the distribution of the resulting proceeds to the various tax lienholders. After having read the papers submitted and considered the arguments of counsel, the Court grants the Government's motion.

BACKGROUND

A. Overview of the Instant Litigation

Plaintiffs Amy Alden, Mary Alden, Laurie Alden, and John Alden, Jr. (collectively "plaintiffs" or "the Alden children") are the children of Dr. Alden. On August 20, 1988, plaintiffs were served with a Notice of Seizure relating to property located at 828 Indian Rock Avenue, Berkeley, California ("the Berkeley property") due to Dr. Alden's tax delinquency. (Compl. ¶6.) ¹ Plaintiffs then commenced the instant action against the Government on October 27, 1988, alleging that they, not Dr. Alden, owned the Berkeley property, and therefore, the levy was wrongful. (Id. ¶7.) ²

On January 7, 1989, the Government filed its Answer and Counterclaims against plaintiffs and various other additional defendants. ³ In its Counterclaims, the Government seeks to: (1) reduce to judgment the unpaid tax liabilities of Dr. Alden; (2) have Dr. Alden declared the beneficial owner of the Berkeley property; (3) have the transfer of the Berkeley property declared fraudulent and set aside; and (4) to foreclose the federal tax liens on the Berkeley property.

On March 21, 1994, this Court approved a Stipulation Agreement signed by plaintiffs, the Government, and all additional defendants, except Dr. Alden, in which plaintiffs admitted that the conveyance of the Berkeley property was fraudulent. (See Stipulation ¶6(A)(1).) The Stipulation Agreement also sets forth the priorities of the lien claimants with respect to the disbursement of the proceeds from the forthcoming sale of the Berkeley property. (Id.) ⁴

B. The Eastern District Action

The issue of whether Dr. Alden's tax lien should be reduced to judgment was resolved in a parallel action in the Eastern District of California. Plaintiffs and the Government were parties to two suits in that District styled as Amy Alden, et al. v. United States, No. CIV-S-88 1377-LKK, and United States v. John C. Alden, et al., No. CIV-S89-0382-LKK.

The Eastern District cases involved an IRS lien against a ranch located in Rumsey, California, ("the Rumsey property"), which was originally purchased by Dr. Alden and then transferred to his children. As in the case of the Berkeley property, plaintiff brought an action for relief from an alleged wrongful levy by the IRS on the Rumsey property. (Id.) The Government responded by claiming that the transfer was a fraudulent transfer, or alternatively, that the children held title to the Rumsey property as nominees for their father. The Government also brought a claim to reduce certain employment and income tax assessments to judgment and to foreclose its tax liens against the ranch. The Government alleges that the employment and income tax assessments in those assessments are the same tax assessments that are involved in the instant case. (Gov't Mot. at 3.) ⁵

The Eastern District cases were consolidated and tried before Judge Lawrence K. Karlton. ⁶ On April 29, 1991, Judge Karlton issued his Findings of Fact and Conclusions of Law in which he concluded that "John C. Alden is liable for $788,606.67 in federal taxes, plus penalties, interest, and accruals as described in paragraph 5 of the Second Amended Complaint of the United States." (Denier Decl. Ex. A at 21:18.)

Dr. Alden and CFTB then moved Judge Karlton to assess Dr. Alden's liability for Dr. Alden's unpaid California state income taxes. Judge Karlton denied the motion and omitted any affirmative findings to that effect. (Id. at 7-10.) Judge Karlton did find, however, that the State of California had a lien against the subject property for unpaid taxes and "[a]s of April 19, 1982 it appears that Dr. Alden had the following liabilities: . . . [a]ccrued liability for California state taxes--$48,732.65. . . ." (Id. at 7 & 61.)

C. The Instant Motion

In the instant action, the Government now moves for summary judgment regarding its counterclaims to foreclose its federal tax liens against the Berkeley property. The Government also seeks a Court Order adopting the schedule of priorities among tax lien creditors as set forth in the Stipulation Agreement.

Dr. Alden is the only party that opposes the Government's motion. He premises his opposition on the following grounds: (1) the sale of the Berkeley property will impose a severe hardship on Ms. Patricia Griffin and her three children, all of whom reside with Dr. Alden; (2) summary judgment is improper because the amount of taxes he owes to California, if any, remains in dispute; (3) if the Berkeley property is sold at foreclosure, he should be able to direct the distribution of the proceeds; and (4) the property should not be sold at this time because the IRS has not complied with Section 6334 of the Internal Revenue Code. ⁷ As the Court will set forth below, none of these arguments raise a material issue of fact sufficient to preclude summary judgment.

DISCUSSION

A. Legal Standard for Summary Judgment

Under Federal Rule of Civil Procedure 56, summary judgment is warranted against a party who "fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). There is no issue for trial unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986).

In opposing a summary judgment motion, the nonmoving party must come forward with specific facts demonstrating a genuine factual issue for trial. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). Thus, an opposition which fails to identify and reference triable facts is insufficient to preclude the Court's granting of a properly supported summary judgment motion. See Nillson, Robbins, Dalgarn, Berliner, Carson & Wurst v. Louisiana Hydrolec, 854 F.2d 1538, 1545 (9th Cir. 1988). Nonetheless, any inferences to be drawn from the facts must be viewed in a light most favorable to the party opposing the motion. T.W. Elec. Serv. v. Pacific Elec. Contractors, 809 F.2d 626, 631 (9th Cir. 1987).

B. The Tax Lien on the Berkeley Property Should Be Reduced to Judgment

The Internal Revenue Code ("the Code") provides that the Government may properly impose a lien on a taxpayer's property when he or she is "liable to pay any tax" and "neglects or refuses to pay the same after demand, . . ." 26 U.S.C. §6321 (1989). The Code further permits the Government to commence a civil action to have the lien reduced to judgment and to seek a decree for the sale of the entire property in which the delinquent taxpayer has an interest. 26 U.S.C. §7403(a) (1989). ⁸

Here, Dr. Alden does not dispute the Eastern District Court's finding that he owes the Government $788,606.67 for unpaid back taxes. ⁹ It is also uncontroverted that Dr. Alden owns the Berkeley property. Thus, pursuant to 42 U.S.C. §7403(c) , the Government is entitled to an order permitting the sale of the Berkeley property.

C. Dr. Alden's Reasons for Opposing the Sale of the Berkeley Property Are Unavailing

The district court has only limited discretion to decline to order the forced sale of a delinquent taxpayer's property. United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 709-710 (1983). When third parties with an interest in the subject property are involved, the court's discretion is limited to the following:

The four factors which the court may consider are: (1) the extent to which the government's financial interests would be prejudiced if it were relegated to a forced sale of the taxpayer's partial interest, (2) whether the third party with a nonliable separate interest in the property has a legally recognized expectation that his or her separate property will not be subject to a forced sale by the taxpayer's creditors, (3) the likelihood of prejudice to the third party, both personal dislocation costs and practical undercompensation, and (4) the relative character and value of the interests held in the property.

United States v. Gibson [87-2 USTC ¶9494 ], 817 F.2d 1406, 1407-408 (9th Cir 1987) (citing Rodgers [83-1 USTC ¶9374 ], 461 U.S. at 709-711). Significantly, the Supreme Court has emphasized "that the limited discretion afforded by §7403 should be exercised rigorously and sparingly, keeping in mind the Government's paramount interest in prompt and certain collection of delinquent taxes." Rodgers [83-1 USTC ¶9374 ], 461 U.S. at 711.

1. The Purported Interests of Dr. Alden's Co-Tenants Do Not Preclude the Sale of the Berkeley Property

Dr. Alden first contends that the Court should not permit the sale of the Berkeley property because it would unduly burden his co-tenants; namely, Ms. Patricia Griffin and her three children by Dr. Alden. ¹⁰ Specifically, Dr. Alden asserts that one of the three children has dyslexia and receives treatment at a local school through special programs. Dr. Alden maintains that the child's treatment would be adversely affected if the Government is permitted to follow through with the sale of the Berkeley property, thereby disrupting the child's therapeutic setting. The emotional impact from moving the child allegedly would be especially severe to all family members. (See Alden Decl. at 1-2 (filed Oct. 15, 1993).)

Dr. Alden's argument is misplaced. Ms. Griffin and her children have not asserted any separate property interest in the Berkeley property nor are they parties to this action. They are merely co-tenants with Dr. Alden. Thus, the Court's limited discretion to preclude a forced sale under Rodgers is unavailable.

Moreover, even if Ms. Griffin and her children could assert a legitimate property interest, the Court finds that the considerations advanced by Dr. Alden are far from compelling. Dr. Alden fails to explain how the sale of the Berkeley property would prevent Ms. Griffin and her children from living in another residence in or near the city of Berkeley. Ms. Griffin and her children's ability to remain in their area would allow the dyslexic child to attend the same school and retain the same therapist, thereby obviating the concerns expressed by Dr. Alden.

2. Dr. Alden's State Tax Liability is a Non-Issue

The Stipulation Agreement provides that the CFTB is to receive fourth priority for its lien claim of $125,672.70. Dr. Alden disputes the amount of taxes owed to the state of California, and hence, objects to the order of priorities set forth in the Stipulation Agreement. Dr. Alden avers that Judge Karlton found that Dr. Alden had no tax liability to the CTFB. (See Alden Mem. at 5 (filed April 25, 1994).) As such, Dr. Alden claims that the Government is entitled to priority over the CFTB. (See id. at 3.)

As a threshold matter, Dr. Alden has previously admitted the validity of the CFTB's interest in the Berkeley property. ¹¹ In its fourth counterclaim, the Government alleged that it was impleading CFTB as a party which "may claim an interest" in the Berkeley property. (Gov't Answer and Counterclaims ¶¶44, 45.) In response to these allegations, Dr. Alden's averred in his Answer that "[i]n answer to paragraph 45, this answering cross-defendant is willing to accept the speculations of the United States regarding the positions of said defendants listed in paragraphs 41 through 44." (See Answer of Dr. John C. Alden to Counterclaim of United States of America ¶18.)

Dr. Alden's failure to specifically deny the material allegations regarding the existence of CFTB's interest in the Berkeley property renders them "admitted" for purposes of this action. Fed. R. Civ. P. 8(d); Legal Aid Soc'y of Alameda County v. Granny Goose Foods, 608 F.2d 1319, 1334 (9th Cir. 1979), cert. denied, 447 U.S. 921 (1980) ("The allegations are to be admitted since not denied, Fed. R. Civ. P. 8(d)"). Thus, Dr. Alden is estopped from now challenging the validity of CFTB's lien on the Berkeley property.

Aside from the above, Dr. Alden's argument is fatally defective in light of his complete failure to provide any supporting evidence. Nowhere in his memorandum of points and authorities of April 25, 1994 (or any other briefs, for that matter), does Dr. Alden cite to any evidence or portions of the record in the Eastern District consolidated action to corroborate his claim that Judge Karlton concluded that Dr. Alden had no tax liability to CFTB. See Nissho-Iwai Am. Corp. v. Kline, 845 F.2d 1300, 1307 (5th Cir. 1988) (rejecting notion that "the entire record must be searched and found bereft of a genuine issue of material fact before summary judgment may be properly entered"); see also Nillson, Robbins, Dalgarn, Berliner, Carson & Wurst v. Louisiana Hydrolec, 854 F.2d 1538, 1545 (9th Cir. 1988) (noting that an opposition brief which failed to identify and reference triable facts was insufficient to preclude grant of properly supported summary judgment motion). Indeed, Judge Karlton did conclude that "[t]he State of California has a lien against the Rumsey Property for unpaid taxes." (Dernier Decl. Ex. A at 29:7-8 (emphasis added).) Thus, Judge Karlton necessarily found that Dr. Alden owed some amount of delinquent state taxes.

Finally, Dr. Alden's concerns regarding the amount of taxes he may (or may not) owe to the CTFB and the CTFB's priority in the Stipulated Agreement are collateral issues which do not impact on the resolution of the Government's counterclaims. The priority of the lien claimants in the present case is not disputed by any of the parties which actually have a lien on the Berkeley property. Since Dr. Alden has not brought any claims for relief in this action, there is no justiciable controversy regarding the amount of Dr. Alden's unpaid state taxes. ¹²

3. Dr. Alden Has No Right to Dictate the Distribution of the Foreclosure Proceeds

Dr. Alden asserts, without citation to any authority, that the proceeds from the sale of the Berkeley property should be used to discharge his other obligations (i.e., the capital gains tax on the sale of the Berkeley property) as opposed to the lien claims. This contention is without merit. Dr. Alden has no right to designate how the property sale proceeds should be distributed. See In re Technical Knockout Graphics, Inc. [87-2 USTC ¶9645 ], 833 F.2d 797, 799 (9th Cir. 1987) (noting that when payment of tax is involuntary, "the IRS allocates payments as it sees fit") (citing Muntwyler v. United States [83-1 USTC ¶9275 ], 703 F.2d 1030, 1033 (7th Cir. 1983)).

4. Dr. Alden's Reliance on Recent Amendments to the Internal Revenue Code are Misplaced

Dr. Alden raises a new argument in his supplemental brief that the Government's failure to comply with sections 6334(a)(13) and 6334(e) of the Internal Revenue Code preclude the sale of the Berkeley property. (See Alden Mem. at 7 (filed April 25, 1994).) These sections apply to levies imposed on or after July 1, 1989. See 26 U.S.C. §6334 (Supp. 1994), Historical and Statutory Notes. The Government's levy in this case was issued on August 30, 1988. (See Compl. Ex. 1.) Thus, the provisions cited by Dr. Alden are inapplicable.

CONCLUSION

Dr. Alden's efforts to stall the sale of his property must come to an end, as he has avoided the consequences of his failure to pay income taxes for too long. Thus, for the reasons set forth above,

IT IS HEREBY ORDERED THAT the Government's motion for summary judgment is GRANTED. Judgment is entered in favor of the Government on its federal tax lien in the amount of $788,606.67, plus penalties, interest and accruals, on the real property of Dr. John C. Alden located at 828 Indian Rock Avenue, Berkeley, California (Assessor's Parcel Nos. 61-2572-25 and 61-2581-26). The federal tax liens which have attached to the property described above shall be foreclosed, and the property shall be sold at a foreclosure sale. The distribution of the sale proceeds shall be in accordance with the Stipulation Agreement filed with the Court on March 21, 1994.

IT IS SO ORDERED.

¹ Dr. Alden has refused to pay his federal income taxes since 1974.

² Plaintiffs claimed that they had purchased the Berkeley property from Dr. Alden on February 18, 1981. (Compl. ¶7.)

³ The defendants on the Government's counterclaim are Dr. Alden, The Northwestern Mutual Life Insurance Company ("Northwestern"), County of Alameda ("The County"), and the State of California Tax Franchise Board ("CTFB"). The Government impleaded these parties because of the possibility that they could claim an interest in the Berkeley property.

⁴ These priorities are as follows: (1) County of Alameda is entitled to first priority with respect to any unpaid real property taxes; (2) Northwestern Mutual Life Insurance Company is entitled to second priority for the unpaid balance in the first deed of trust; (3) The Alden Children are entitled to third priority for reimbursement of the $10,000.00 ($2,500.00 each); (4) State of California Franchise Tax Board is entitled to fourth priority for unpaid income taxes for the tax years 1977 through 1982 (alleged balance due as of February 1, 1994 is $125,672.70); and (5) The United States is entitled to fifth priority for unpaid federal employment taxes for the years 1975 through 1980 and 1982, in accordance with the judgment for $788,606.67, plus statutory penalties, interest and accruals, entered on May 7, 1991 (balance due as of March 1, 1994 is $1,512,226.62). (Id. at 5-6.)

⁵ Dr. Alden admits that he owes the United States the alleged back taxes. (Def. Alden's Mem. at 4:16-18.)

⁶ Trial commenced on January 8, 1991, and concluded on February 6, 1991.

⁷ In his opposition, Dr. Alden argued that the conveyance of the subject property was not fraudulent. At oral argument, however, Dr. Alden conceded that he presently owns the property and thus the Court does not need to reach a determination as to whether or not there was a fraudulent transfer.

⁸ Section 7403(c) states that:

"The court shall, after the parties have been duly notified of the action, proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property, by the proper officer of the court, and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the United States."

26 U.S.C. §7403(c) (1989) (emphasis added).

⁹ Dr. Alden stated in his opposition that "[a] review of the decision as a whole establishes that the United States is clearly entitled to a judgment for money as requested in the answer." (Alden's Opp'n at 4:16-18.)

¹⁰ Dr. Alden does not have standing to raise Ms. Griffin or her children's interest in this action. Standing requires a showing of (1) personal injury or threat of injury (2) fairly traceable to the defendant's illegal conduct and (3) which is likely to be addressed by judicial relief. Allen v. Wright, 468 U.S. 737 [84-2 USTC ¶9611 ], reh'g denied, 468 U.S. 1250 (1984); Idaho Conservation League v. Mumma, 956 F.2d 1508, 1513 (9th Cir. 1992). Dr. Alden fails to meet this standard, as he has not demonstrated he has suffered an "injury in fact," nor articulated any right to bring a claim on behalf of Ms. Griffin. Therefore, she must bring her own claim regarding what interest, if any, she has in the property.

¹¹ Curiously, this matter was raised by none of the parties.

¹² At oral argument, Dr. Alden consented to the allocation of the proceeds, in accordance with the Stipulation Agreement, with respect to the plaintiffs and third-party defendants the County and Northwestern.

 

 

 

United States of America, Plaintiff v. Anna Mae Mayfield, Deborah Carpenter, Robert G. Senn, Inc., and First National Bank of Indiana, Defendants

U.S. District Court, So. Dist. Ind., New Albany Div., NA 92-72-C, 12/22/94

[Code Secs. 6321 , 6323 and 7121 ]

Closing agreements: Finality: Lien for taxes: Fraudulent conveyances: Funds: Real property: Property subject to lien.--An individual who transferred real property and cash to her daughter despite having been assessed taxes and interest was liable for the taxes at issue and was the true owner of the property. A closing agreement entered into by the individual on the advice of and with her now deceased husband and the IRS was final and conclusive, and the assessments made in accordance with the agreement could not be modified absent a showing of fraud on the part of the IRS. The individual was found to be the true owner of the property transferred to the daughter due to the inadequate consideration paid by the daughter, the individual's continued control and enjoyment of the property, and their close relationship. In addition, the transfer of the property was fraudulent under state (Indiana) law. Thus, the tax liens attached to the property. The daughter also was liable under state law as a transferee of the cash.

Steven E. Cole, Department of Justice, Washington, D.C. 20530, Jeffrey L. Hunter, Assistant United States Attorney, 5th Floor U.S. Courthouse, 46 E. Ohio St., Indianpolis, Ind. 46204, for plaintiffs. Larry L. Saunders, Suite 2014, One Riverfront Plaza, Louisville, Ky. 40202, for defendants.

MEMORANDUM DECISION

 

I. Undisputed Facts

 

1. Plaintiff United States of America ("United States") brought this action to reduce to judgment assessments made against defendant Anna Mae Mayfield ("Mayfield"); for a declaratory judgment that defendant Deborah Carpenter ("Carpenter") holds title to certain real property solely as nominee for defendant Mayfield, or alternatively to set aside a fraudulent conveyance of that real property; to foreclose on federal tax liens which have attached to the real property; and to obtain a judgment against defendant Carpenter as a transferee of funds by defendant Mayfield.

2. A delegate of the Secretary of the Treasury of the United States of America made assessments in accordance with law against defendant Mayfield for federal income taxes, and gave notice of the assessments and made demand for payment thereof, as follows: ¹

                                                                Unpaid

                           Date of Assessment                  Assessed

                               and Notice       Amount of       Balance

Tax Year                       and Demand       Assessment      Due * 

1982 .....................       9/20/89      $19,875.00 (T)  $ 53,825.86

                                               28,595.61 (I)

1983 .....................       9/20/89      $ 3,456.00 (T)  $  8,296.90

                                                3,926.75 (I)

(T) - Tax

(I) - Assessed Interest

 *  Plus accrued statutory additions as allowed by law from the date of

assessment.

(Government Exhibit A1-A6.)

 

3. Although notice of these assessments and demand for payment thereof were made upon defendant Mayfield on September 20, 1989, she has neglected, failed and refused to pay the assessments, and she remains indebted to the United States in the amount of $53,825.86 for 1982 and $8,296.90 for 1983, plus statutory additions from the date of the assessments. (Government Exhibit A1-AG.)

4. The assessments of tax set forth above were made after an Internal Revenue Service examination of defendant Mayfield's 1982 and 1983 federal income tax returns, which were filed jointly with her former husband, William Orville Mayfield, who is now deceased.

5. On or about December 16, 1986, defendant Mayfield and William Mayfield (who is deceased), executed an IRS Form 906, Closing Agreement On Final Determination Covering Specific Matters, which contained the following prefatory language:

Whereas, a dispute has arisen between the parties as to the amount, if any, of the income, gain, loss, deduction, or credits arising from the purchase, investment in, acquisition of an interest in, and subsequent activity involving a videotape acquired from, promoted or relating to Metcon Productions, Inc. or The Producers Brokerage Company, Inc., involving one or more episodes from the series known as the Fabulous Follies (videotape);

WHEREAS, the parties wish to determine with finality, the items of or the taxpayers' share of income, gain, loss, deductions or credits relating to the videotape[.]

(Government Exhibit B.) In the closing agreement, the parties agreed to the tax treatment of the Mayfields' videotape investment relating to the years 1980 through 1983. The closing agreement was subsequently executed on behalf of the Internal Revenue Service by a delegate of the Commissioner of Internal Revenue. The clos ing agreement provides the amount of income, gain, loss, deductions or credits relating to the videotape investment that must be included in computing her liability, and it does not leave those issues open for later redetermination.

6. Defendant Mayfield signed the closing agreement without reading the document on the advice of her husband, who normally handled all family business matters. There is no evidence that any agent of the Internal Revenue Service caused her not to read the document, or coerced her signature upon the document.

7. On May 1, 1989, based in part upon the closing agreement, the Internal Revenue Service issued a notice of deficiency to the Mayfields, which proposed to assess additional tax and interest, based partly upon adjustments made to the Mayfields' reporting of the tax consequences of their investment in the videotape investment covered by the closing agreement. (Government Exhibit C.)

8. On November 30, 1990, notice of the federal tax liens which arose by virtue of the assessments described above was filed with the office of the Recorder of Deeds, Floyd County, New Albany, Indiana. (Government Exhibit D.) On January 17, 1991, a second notice of the federal tax liens described above was filed with the Floyd County Recorder of Deeds, against defendant Carpenter, as nominee, agent or trustee for defendant Mayfield. (Government Exhibit E.)

9. The property sought to be foreclosed upon in this action ("subject property") is described as follows:

Lot Number Eight (8), Alice Subdivision, Plat Number Six Hundred and Twenty-eight (628) of the Floyd County, Indiana Records.

10. Between March 24, 1987, and June 28, 1988, defendant Mayfield deposited funds totalling at least $62,449.29 in savings account no. 240267-2 at Mutual Trust Bank, New Albany, Indiana, which account was in the name of defendant Carpenter, Mayfield's daughter. (Government Exhibit F; Mayfield Depo. at 41-42, 49.)

11. On July 18, 1988, defendant Carpenter tendered a certified check in the amount of $40,075.50, drawn on the savings account described above, to Robert G. Senn, Inc. (Government Exhibit G), who executed a deed conveying the subject property to defendant Carpenter (Government Exhibit H). This deed was recorded by the Floyd County Recorder on July 19, 1988.

12. After transferring the $62,449.29 in funds to defendant Carpenter, and placing the title to the subject property in Carpenter's name, defendant Mayfield was insolvent. (Government Exhibit I.)

13. Despite the fact that title to the subject property is held by defendant Carpenter, both Mayfield and Carpenter concede that Mayfield is the true owner of the property. (See Mayfield Depo. at 37; Carpenter Depo. at 19.)

14. With respect to the subject property, defendant Mayfield pays the mortgage, utilities, insurance and real estate taxes, and owns the furnishings inside. (Mayfield Depo. at 47; Carpenter Depo. at 23.) Mayfield lives there, and Carpenter does not. (Mayfield Depo. at 4; Carpenter Depo. at 4.)

15. Defendant Carpenter purchased and holds title to said real property solely as a nominee for defendant Mayfield.

16. The conveyance of the subject property was a conveyance from defendant Mayfield to defendant Carpenter without adequate or fair consideration at a time when defendant Mayfield was insolvent, or the conveyance rendered her insolvent, and the conveyance impaired the rights of the creditors of defendant Mayfield, including the United States.

17. The conveyance of the subject property was a voluntary gift made at a time when there was an existing or contemplated indebtedness against the donor, defendant Mayfield, and the donor failed to retain sufficient property to pay the existing or contemplated indebtedness.

18. The conveyance of the subject property was made with the intent to disturb, hinder or defraud the creditors of defendant Mayfield, including the United States.

19. Defendant Mayfield's transfers of funds totalling at least $62,449.29 described above, were made without adequate or fair consideration at a time when defendant Mayfield was insolvent, or the conveyance rendered her insolvent, and the conveyance impaired the rights of the creditors of defendant Mayfield, including the United States.

20. The transfers of funds described above were voluntary gifts made at times when there was an existing or contemplated indebtedness against the donor, defendant Mayfield, and the donor failed to retain sufficient property to pay the existing or contemplated indebtedness.

21. The transfers of funds described above were made with the intent to disturb, hinder or defraud the creditors of defendant Mayfield, including the United States.

22. Defendant Robert G. Senn, Inc., claims an interest in the subject property by virtue of a mortgage dated July 18, 1988, and filed in the Floyd County Recorder's office on July 19, 1988. (Government Exhibit J.)

23. First National Bank may claim an interest in the subject property by virtue of a judgment against defendant Mayfield dated December 28, 1988, and recorded on the same date with the Floyd County Court Clerk.

II. Conclusions of Law

 

1. Rule 56(c) of the Federal Rules of Civil Procedure provides that a party is entitled to summary judgment if:

the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.

2. "[T]he plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

(a) Mayfield's Liability for Tax and Interest

 

3. The existence or the making of an assessment pursuant to the internal revenue laws of the United States is ordinarily established by offering a "Certificate of Assessments and Payments" (Form 4340) as evidence of those facts. The 4340 reflects data which is contained in the Internal Revenue Service computers (or other records of accounts) which are public records admissible under Fed.R.Evid. 803(8). Schmidt v. IRS [89-2 USTC ¶9529 ], 717 F.Supp. 763, 764 (D. Kan. 1989).

4. Under Fed.R.Evid. 1005, the contents of those records may be proved by a properly authenticated copy. A 4340 is self-authenticating under Fed.R.Evid. 902(4) and is sufficient to establish the government's prima facie case and to shift the burden of proof to the taxpayer to show both that the assessment is incorrect and what the correct amount of the liability is. See United States v. Hart, 89-1 USTC ¶9255 (C.D. Ill. 1989), citing United States v. Janis [76-2 USTC ¶16,229 ], 428 U.S. 433 (1976).

5. Defendant Mayfield is precluded from arguing that she is not taxable on the additional income arising from the disallowance of the deductions and credits related to the videotape investment by virtue of the closing agreement she executed with respect to her 1982 and 1983 federal income tax liability.

6. Form 906 closing agreements are used where there is an agreement as to a specific matter affecting tax liability. See J. Mertens, Law of Federal Income Taxation, §52.10 at 21, 24.

7. Pursuant to 26 U.S.C. §7121(b) , closing agreements are final and conclusive, and except upon a showing of fraud or malfeasance, or misrepresentation of a material fact--

(1) the case shall not be reopened as to matters agreed upon or the agreement modified by any officer, employee, or agent of the United States, and

(2) in any suit, action, or proceeding, such agreement, or any determination, assessment, collection, payment, abatement, refund, or credit made in accordance herewith, shall not be annulled, modified, set aside, or disregarded.

8. A closing agreement involves mutuality, is steeped in finality by its nature and by the statute; its purpose is to dispose of tax controversies, to wipe out obligations, if any remain, on the part of both the taxpayer and the government. It has all the qualities of a mutual release that the statute says cannot be set aside except on the grounds stated there. Proctor v. White [39-2 USTC ¶9566 ], 28 F.Supp. 161, 167 (D. Mass. 1939) (addressing §606(b) of the Revenue Act of 1928, predecessor to §7121 ).

9. Because the assessments at issue in this case were made in accordance with the closing agreement signed by defendant Mayfield with respect to the tax treatment of Mayfield's videotape investment, pursuant to §7121(b)(2) , those assessments may not be annulled, modified, set aside or disregarded absent a showing of fraud, malfeasance or misrepresentation of a material fact--the occurrence of which has not been alleged by the defendants. The innocent spouse defense (26 U.S.C. §6013(e)) to this claim cannot be applied because there has been no showing of any act of fraud or malfeasance on the part of any agent of the Internal Revenue Service. This is required under Hyde v. United States [3 USTC ¶956 ], 59 F.2d 302 (Ct. Cl. 1932), and Johnston v. McLaughlin [3 USTC ¶875 ], 55 F.2d 1068 (9th Cir. 1932). Even if fraud on the part of William Mayfield existed, there is no showing that any agent of the Internal Revenue Service took any action which defrauded defendant Mayfield.

10. The Court concludes that defendant Mayfield has failed to demonstrate the existence of any material fact that would preclude summary judgment on the issue of her liability for the taxes at issue.

11. As a result of defendant Mayfield's neglect, refusal or failure to pay the assessments at issue in this case, federal tax liens in the amount of the assessments, plus statutory interest and other statutory additions, arose pursuant to the provisions of 26 U.S.C. §§6321 and 6322 and attached to all property and rights to property of defendant Mayfield, as of the date of the assessments. Those statutory liens remain in effect until the tax liability is satisfied or becomes unenforceable by reason of lapse of time. 26 U.S.C. §6322 .

12. In order to protect its statutory liens, as against certain persons, §6323 requires the United States to file a Notice of Federal Tax Lien. ² Such notices were duly filed as set forth in the findings of fact.

13. Section 7403 of the Internal Revenue Code authorizes the United States to bring an action, such as the instant case, to enforce federal tax liens against specific property to collect the tax. 26 U.S.C. §7403 .

(b) Mayfield's Interests in Subject Property

 

14. The factors to be considered in determining whether or not property is held by a person as a nominee of the taxpayer are as follows:

(1) No consideration or inadequate consideration paid by the nominee;

(2) Property placed in the name of the nominee in anticipation of a suit or occurrence of liabilities while the transferor continues to exercise control over the property;

(3) Close relationship between transferor and the nominee;

(4) Failure to record conveyance;

(5) Detention of possession by the transferor; and

(6) Continued enjoyment by the transferor of benefits of the transferred property.

See Towe Antique Ford Foundation v. IRS, Dept. of Treasury [92-1 USTC ¶50,115 ], 791 F.Supp. 1450, 1454 (D. Mont. 1992).

15. In this case, five of the six factors (nos. 1-3 and 5-6) to be considered are clearly present, and the defendants concede that defendant Mayfield is the true owner of the subject property. (Mayfield Depo. at 37; Carpenter Depo. at 19.) Based upon the Court's findings of fact, the Court concludes that defendant Carpenter holds title to the subject property solely as the nominee of defendant Mayfield.

16. Because the Court has concluded that defendant Mayfield owns the subject property, the federal tax liens attach to that property and should be foreclosed. See United States v. Miller Bros. Constr. Co. [74-2 USTC ¶9817 ], 505 F.2d 1031, 1036 (10th Cir. 1974); United States v. Williams [84-2 USTC ¶9936 ], 581 F.Supp. 756, 759 (N.D. Ga. 1982), aff'd 729 F.2d 1340 (11th Cir. 1984). See also, Arth v. United States [84-2 USTC ¶9601 ], 735 F.2d 1190 (9th Cir. 1984); Al-Kim, Inc. v. United States [81-2 USTC ¶9573 ], 650 F.2d 944 (9th Cir. 1979); Towe Antique Ford Foundation v. IRS, Dept. of Treasury, supra (wrongful levy cases).

(c) Fraudulent Conveyance

 

17. Ind. Code §30 -1-9-6 provides as follows:

When a conveyance for a valuable consideration is made to one (1) person, and the consideration therefor paid by another, no use or trust shall result in favor of the latter; but title shall vest in the former, subject to the provisions of the next two (2) sections.

18. Ind. Code §30 -1-9-7 provides, in part, as follows:

Presumption of fraud.--Every such conveyance shall be presumed fraudulent, as against the creditors of the person paying the consideration therefor, and where a fraudulent intent is not disproved, a trust shall, in all cases, result in favor of prior creditors, to the extent of their just demands[.]

19. The purpose of these sections, and Ind. Code §30 -1-9-8, is "to prevent the grantor or the person materially interested in the real estate from defrauding third parties by hiding assets." See Melloh v. Gladis, 309 N.E.2d 433, 438 (Ind. 1974). ³

20. Thus, even if defendant Carpenter is not merely the nominee of defendant Mayfield with respect to ownership of the subject property, based upon the facts found above, the Court concludes that the conveyance of the subject property was fraudulent under Ind. Code §§30 -1-9-6 and 30-1-9-7, and served to create a trust in favor of the United States. Thus, the federal tax liens which have arisen against defendant Mayfield attach to the subject property, which liens should be foreclosed.

(d) Transferee Liability

 

21. Under Indiana law, "[a] grantee of property conveyed by a debtor to defraud creditors is liable for the value of the property conveyed to him if he actively participates in the fraud, and subsequently disposes of the property." Doherty v. Holiday, 137 Ind. 282, 32 N.E. 315, 317 (1892).

22. The Court concludes that by receiving $62,449.29 from defendant Mayfield for no consideration, subsequently disbursing those funds, and participating in the fraud perpetrated by defendant Mayfield, defendant Carpenter became liable to the United States, a creditor of defendant Mayfield, as a transferee of those funds. Doherty v. Holiday, supra. The United States is thus entitled to judgment against defendant Carpenter in the amount of the funds transferred (minus the amount paid by Carpenter toward the purchase of the subject property).

(e) Other Defendants

 

23. The United States concedes that the claims of Robert G. Senn, Inc., and First National Bank, for principal and interest, have priority over the federal tax liens, to the extent that they can establish amounts due on such claims.

III. Conclusion

 

While this Court is sympathetic to Mrs. Mayfield's plight, it is constrained by the legal principles listed above to recognize the closing agreement she signed on December 16, 1986, as binding on her. There is no evidence that anyone from the Internal Revenue Service committed any fraudulent act towards her for which this agreement can be set aside. Though she may have improvidently relied upon Dr. Mayfield's advice in signing the closing agreement, that reliance is of no avail to Mrs. Mayfield against the Internal Revenue Service.

It is likewise clear that Mrs. Mayfield's conduct in structuring her financial dealings with her daughter, Deborah Carpenter, is a "constructive fraud" under Indiana law. Though she may not have specifically intended to defraud the Internal Revenue Service, this Court must recognize that Deborah Carpenter holds title to the subject property as nominee for Mrs. Mayfield, and that the tax liens do, under Indiana law, attach to the subject property. The ultimate amount of the tax liens remain to be litigated when the 1981 tax liability is resolved.

Finally, it is clear that defendant Carpenter received some $22,373.79 in funds from Mrs. Mayfield beyond those funds used to purchase the subject property. Carpenter received no consideration for this transfer, and although she has undoubtedly considered this to be her mother's money, she is liable to return those funds to make payment on these liens.

ORDER GRANTING MOTION FOR SUMMARY JUDGMENT, IN PART

 

This matter is before the Court on the Motion for Summary Judgment filed by the plaintiff, United States of America, on July 26, 1993. The defendants filed a response on September 15, 1993. The plaintiff filed a reply memorandum on September 24, 1993, and a supplemental memorandum in support on October 19, 1993.

The Court, being duly advised, now GRANTS, in part, the plaintiff's summary judgment motion and, pursuant to Fed.R.Civ.P. 56(d), the following facts appear without substantial controversy and the following relief is not in controversy:

1. Defendant Anna Mae Mayfield is liable to the United States of America for 1982 and 1983 federal income taxes in the amount of $62,122.76, plus statutory interest and other statutory additions from September 20, 1989. The United States of America shall submit an affidavit establishing the amount of the judgment within thirty (30) days.

2. The United States of America has valid federal tax liens on all property and rights to property of defendant Anna Mae Mayfield, including her interests in the real property described as follows:

Lot Number eight (8), Alice Subdivision, Plat Number Six Hundred and Twenty-eight (628) of the Floyd County, Indiana Records.

3. Defendant Deborah Carpenter's interest in real property described above is solely as nominee for defendant Anna Mae Mayfield.

4. The federal tax liens on Anna Mae Mayfield's interest in the real property described above shall be foreclosed, and that said property will be sold at a foreclosure sale according to law, free and clear of any right, title, lien, claim or interest of any of the defendants herein.

5. The United States Marshal is hereby directed to sell the property at a public sale in accordance with the provisions of 28 U.S.C. §2001 , et seq., and giving notice of the sale in accordance with §2002 . The United States Marshal is directed to deposit the proceeds of the sale with the Clerk of the Court, to be distributed in accordance with a further order of the Court.

6. Defendant Deborah Carpenter is liable to the United States of America as transferee of amounts fraudulently conveyed to her by defendant Anna Mae Mayfield without consideration, in the amount of $22,373.79.

7. Defendants Robert G. Senn, Inc., and First National Bank of Indiana may submit an accounting of their claims, under oath, no later than thirty (30) days from the date of this order. The accounting shall specifically delineate (1) the amount of the original claim, (2) the date and amounts of all payments towards the claim, (3) a current breakdown of principal, interest and any other charges constituting its claim. Any party may object to the amount of the claim within fifteen (15) days, and, if any objection is filed, a hearing will be set by the Court prior to disbursal of the proceeds of sale to determine the correct amount of the claim or claims for which objections were filed. The sale of the property will not be postponed for this purpose.

8. This case remains pending for a determination of the liabilities, if any, of defendant Anna Mae Mayfield for the tax year 1981.

IT IS SO ORDERED.

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

¹ In its supplemental memorandum filed October 19, 1993, the United States withdrew its motion with respect to the issue of Mayfield's 1981 tax liability.

² Specifically, §6323(a) provides that "[t]he lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary."

³ Ind. Code §30 -1-9-8 provides as follows:

When resulting trust.--The provisions of the section before last [30-1-9-6], shall not extend to cases where the alienee shall have taken an absolute conveyance in his own name, without the consent of the person with whose money the consideration was paid; or where such alienee, in violation of some trust, shall have purchased the land with moneys not his own; or where it shall be made to appear that, by agreement, and without any fraudulent intent, the party to whom the conveyance was made, or in whom the title shall vest, was to hold the land or some interest in trust for the party paying the purchase-money or some part thereof.

 

 

 

James P. Veigle, Charles Veigle, Vernon D. Hysell and Sandra D. Hysell, Plaintiffs v. United States of America, Defendant v. Steven F. Mead, Vernon D. Hysell, Sandra D. Hysell and Orange Bank, Third-Party Defendants. Vernon D. Hysell and Sandra D. Hysell, Third-Party Defendants/Cross-Plaintiffs v. United States of America, James P. Veigle, Charles Veigle and Orange Bank, Third-Party Defendants/Cross-Defendants

U.S. District Court, Mid. Dist. Fla., Orlando Div., 93-713-CIV-ORL-22, 10/14/94, 872 FSupp 823

[Code Secs. 6321 and 6672 ]

Lien for taxes: Attempt to evade or defeat tax: Fraudulent conveyances.--A real estate owner who purportedly transferred property to his parents in satisfaction of personal loans, fraudulently transferred the property in order to avoid impending tax liabilities attributable to his failure to collect and pay over employment taxes. The transfer was fraudulent under state (Florida) law, because the real estate owner, who retained control over the property, admitted that he transferred the property to his parents to avoid paying the IRS. The government was thus able to avoid the transfer to the extent necessary to satisfy its claim. Although the government's motion for summary judgment was granted on the issue of whether the conveyance constituted a fraudulent transfer, numerous factual and legal issues remained unresolved and could not be decided on a summary judgment motion regarding what interest the parents had in the property and whether such was superior to that of the government and what interests in the property were held by a third-party purchaser and by the bank.

ORDER

CONWAY, District Judge:

This cause comes before the Court on four motions for summary judgment: (1) Third-Party Defendants Sandra Hysell's and Vernon Hysell's ("Hysells") Motion for Partial Summary Judgment (Dkt. 113); (2) Third-Party Defendant AmSouth Bank of Florida's (formerly known as "Orange Bank") Motion for Summary Judgment (Dkt. 109) and Counter-motion for Summary Judgment (Dkt. 126); and (3) Defendant/Third-Party Plaintiff United States of America's ("United States") Motion for Summary Judgment (Dkt. 100).

INTRODUCTION

In August of 1991 the Internal Revenue Service began an audit of Labor-Rite, a company operated by Third-Party Defendant Steven Mead ("Mead"). In October of 1991 agents of the Internal Revenue Service met with Mead to discuss Mead's potential tax liability for Labor-Rite's failure to account for employee withholding taxes.

Third-Party Defendant Vernon Hysell is Mead's step-father. Between 1986 and 1991 Mead engaged in business dealings with Vernon Hysell. As a result of these dealings, Mead owed his father thousands of dollars by the winter of 1991. ¹ In December, 1991, Vernon Hysell was concerned about the amount of money Mead owed him, and asked Mead to cover his obligations or provide some insurance against the money which his son owed him. Deposition of Vernon Hysell, p. 26-28.

On January 31, 1992 Mead conveyed by quitclaim deed three properties to his mother and step-father, Third-Party Defendant Sandra Hysell and Vernon Hysell. Nothing was given by the Hysells to Steven Mead in exchange for the transfer. Deposition of Steven Mead, p. 51. Neither Vernon Hysell nor Sandra Hysell were present when Mead executed the quitclaim deed. Deposition of Vernon Hysell, p. 64; Deposition of Sandra Hysell, p. 23-24. Mead had these conveyances recorded. Deposition of Steven Mead, p. 52. Mead did not deliver the quitclaim deed to the Hysells, but told the Hysells about the conveyance at a later date. ²

The three properties which Mead deeded to the Hysells on January 31, 1992 are the subjects of the current litigation. The properties are: (1) an automotive garage at 2046 West Washington Street ("Parcel 1"); (2) a residence located at 11375 Willow Garden Drive ("Parcel 2"); and (3) an office building located at 17 North Summerlin Avenue ("Parcel 3").

After the conveyance to the Hysells in January, 1992, Mead continued to manage the properties. Mead paid the mortgage on the properties and collected the rents from the commercial properties. Deposition of Vernon Hysell, p. 41-42. Mead paid the real estate taxes and the insurance on the properties. Deposition of Vernon Hysell, p. 39, 40, 68. Mead did not pay the Hysells rent for his use of the properties, Deposition of Vernon Hysell, p. 39, and the Hysells did not report any income or deduct on expenses related to these properties in their 1992 or 1993 income tax returns. Deposition of Vernon Hysell, p. 40, 70.

On July 22, 1992, in a three-way transaction closed at Third-Party Defendant Orange Bank, Mead gave the Veigles a quitclaim deed for Parcel 3 purportedly signed by both Sandra and Vernon Hysell. ³ Orange Bank then took a security interest in Parcel 3, and in exchange gave the Veigles a check for approximately $150,000. The Veigles then gave Mead a personal check for approximately $150,000, with the additional understanding that Mead would be entitled to occupy one-half of the commercial space at Parcel 3 rent-free for one year.

On July 23, 1993, the Secretary of the Treasury made an assessment against Mead pursuant to 26 U.S.C. §6672 for $1,499,950.50 for liabilities incurred for taxable periods in 1988, 1989, and 1990. On that same date a Notice of Tax Lien was filed against Steven Mead in Orange County. On July 27, 1993, a Notice of Tax Lien was filed in Orange County against the Veigles as nominees of Mead for Parcel 3 and against the Hysells as nominees of Mead for Parcels 1, 2, and 3. The Veigles then instituted a wrongful levy action against the United States in this Court, and the United States joined the remaining parties as Third-Party Defendants in an action to resolve the rights of the all the parties with respect to the three parcels at issue. The Hysells then filed cross-claims and counterclaims against the Veigles, the United States, and Orange Bank in order to establish their rights with respect to the properties.

ANALYSIS

Summary judgment is appropriate only when the Court is satisfied "that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Rule 56(c), F. R. Civ. P. In making this determination, the Court must view all of the evidence in a light most favorable to the non- moving party. Samples on Behalf of Samples v. Atlanta, 846 F.2d 1328, 1330 (11th Cir. 1988).

United States' Motion for Summary Judgment

Under 26 U.S.C. §6151 , taxes are legally due and owing and constitute a liability, regardless of when they are assessed, no later than the date the tax return for the particular period is required to be filed. United States v. Ressler [77-1 USTC ¶9459 ], 433 F.Supp. 459, 463 (S.D.Fla. 1977), aff'd [78-2 USTC ¶9571 ], 576 F.2d 650 (5th Cir. 1978), cert. denied, 440 U.S. 929 (1979).

Mead was assessed a tax liability pursuant to 26 U.S.C. §6672 for failure to collect, account, or pay over taxes past due. The IRS found Mead liable for unpaid unemployment taxes dating back to 1989. These taxes should have been reported on Mead's payroll tax return Form 941, and the payroll taxes were due every quarter. See 26 U.S.C. §6011(a) ; Treas. Reg. 31.6011(a)-1 , 31.6071(a) . The Form 941 is required to be filed no later than the end of the month following each quarter. Treas. Reg. 31.6071(a)(1) .

Since the tax liability arises as of the date the tax return for the period is due, Mead became a debtor of the United States in 1989 when the tax liabilities were due to be reported on Mead's Form 941. ⁴

Under 26 U.S.C. §6321 , a lien in favor of the United States arises upon all of a taxpayer's property and rights to property upon notice and demand for payment of taxes. Where a taxpayer has fraudulently disposed of property prior to the existence of a federal tax lien, the United States may seek relief under the applicable state fraudulent conveyance statute. Commissioner v. Stern [58-2 USTC ¶9594 ], 357 U.S. 39 (1958). Under Florida's fraudulent conveyance statute, a transfer is fraudulent as to present creditors if the debtor made the transfer [w]ith actual intent to hinder, delay, or defraud any creditor of the debtor . . ." Fla. Stat. Ann. §726.105(1)(a) (West 1988).

The Court concludes that Mead's transfer of the three disputed parcels to the Hysells falls within the purview of the Uniform Fraudulent Transfer Act, Fla. Stat. Ann. §726.101 et seq. Mead is a Florida resident, the transfer involved Florida realty, and the quitclaim deed was signed in the State of Florida. The following excerpts from Mead's deposition are dispositive on the question of Mead's intent:

Q: Can you explain to me how this document [the quitclaim deed from Mead to Sandra and Vernon Hysell of Parcels 1, 2, and 3] came to be created, sir?

Mead: I went to my attorney and told him to draw it up.

Q: Under what circumstances did you go to your attorney? Why did you do this?

Mead: The truth because the IRS guy, Bruce Montgomery that came to me to audit me thought that the right amount of Social Security hadn't been taken out of the people's checks cause my accountant had messed it up or whatever."

Deposition of Steven Mead, p. 43.

And further:

Q: You made this transfer [of Parcels 1, 2, and 3] to your parents [Sandra and Vernon Hysell]. I'm asking you what did you intend it to be? Did you intend to sell the property to your parents? Did you intend it to pay off any outstanding loans that you may have owed or was it to act as a lien in the event that you were unable to pay off your loan obligation? Was it a gift? I mean what was this? It had to be something?

Mead: The truth, the real truth, I was probably a little paranoid about the IRS telling me I might owe $1,000,000. I didn't want it all in my name.

Q: Your intent was not to give this property to your parents?

Mead: No, it wasn't to give it to them. . . .

Deposition of Steven Mead, p. 50.

And further:

Q: When you conveyed the three parcels of property to [Sandra and Vernon Hysell] referenced in Government Exhibit 13 [the quitclaim deed], the deed prepared by John Engelhardt, it's your testimony that was conveyed to your step-father and mother in order to protect the property from being seized by the IRS?

Mead: The truth in my eyes when the IRS came, it scared me. I never dealt with the IRS before in my life. I wanted to do anything I could legally to protect anything that I had. I went to my attorneys.

Q: You never intended for Vernon Hysell and your mother to keep it? Actually own that property fee simple?

Mead: Never, ever.

Deposition of Steven Mead, p. 164.

The Court notes that Mead's intent to defraud his creditors through the conveyance of his properties can also be gleaned from other evidence in the record. The Uniform Fraudulent Transfer Act provides that a court, in determining whether a debtor has actually intended to defraud a creditor, may consider a number of listed factors. Fla. Stat. Ann. §726.105(2). The record reveals that several of these factors are present here. Mead transferred the disputed properties to his parents, who are "insiders" for the purposes of Florida's fraudulent conveyance statute. See Fla. Stat. Ann. §726.102(7)(a) (West 1988). Mead retained control of the properties after the conveyance--he collected the rents, paid the taxes and insurance, and occupied the parcels without paying rent. Furthermore, Mead was aware when he transferred the parcels that the IRS was in the process of making an accounting of Mead's tax liability and could be seeking a substantial judgment against him. Deposition of Steven Mead, p. 45.

The record in this case clearly demonstrates that Mead's transfer of his rights in Parcels 1, 2, and 3 by quitclaim deed to the Hysells was fraudulent as to the United States of America. Florida's fraudulent conveyance statute provides that a creditor who seeks relief from a transfer that falls within the fraudulent transfer provisions is entitled to avoid the transfer to the extent necessary to satisfy the creditor's claim. Fla. Stat. Ann. §726.108(1)(a) (West 1988). Thus Mead's transfer of Parcels 1, 2, and 3 is voidable by the United States.

Notwithstanding the Court's determination that the transfer from Mead to the Hysells of Parcels 1, 2, and 3 are voidable for fraud, unresolved factual and legal issues remain which must be determined at trial, namely:

(1) Does Vernon Hysell own a one-half interest in Parcel 1 outright, so that this interest is superior to the lien imposed by the United States?

(2) Did the Hysells take Parcels 1, 2, and 3 in good faith and for reasonably equivalent value?

(3) If the Hysells did not take Parcels 1, 2, and 3 in good faith and for reasonably equivalent value, what interests, if any, do the Hysells have in Parcels 1, 2, and 3?

(4) Did Orange Bank breach a duty of care to the Hysells in engaging in the transaction involving Parcel 3 on July 22, 1992?

(5) Does Orange Bank have a lien interest in Parcel 3 superior to the interest of the United States?

Subsidiary issues related to this last question include:

(a) Was the exchange involving Parcel 3 from Mead to the Veigles a fraudulent conveyance as to the United States?

(b) Should the Court impose a constructive trust as to the conveyance of Parcel 3 from Mead to the Veigles?

(c) Were the Veigles and Orange Bank bona fide purchasers of Parcel 3?

(d) Were the Veigles and Orange Bank on notice of an intent, if any, on the part of Mead to defraud creditors by transferring Parcel 3 to the Veigles?

Accordingly it is ORDERED that the United States' Motion for Summary Judgment (Dkt. 100) is GRANTED on the issue of whether Mead's conveyance to Vernon Hysell and Sandra Hysell was a fraudulent conveyance as to the United States, and DENIED as to judgment against Third-Party Defendants Vernon Hysell and Sandra Hysell, Third-Party Defendant Steven Mead, and Third-Party Defendant Orange Bank.

It is FURTHER ORDERED that Third-Party Defendants Sandra Hysell's and Vernon Hysell's Motion for Partial Summary Judgment (Dkt. 113) is DENIED.

It is FURTHER ORDERED that Third-Party Defendant Orange Bank's Motion for Summary Judgment (Dkt. 109) is DENIED.

It is FURTHER ORDERED that Third-Party Defendant Orange Bank's Counter-motion for Summary Judgment (Dkt. 126) is DENIED.

DONE AND ORDERED.

¹ There is a dispute amongst the parties as to exactly how much Mead owed Vernon Hysell as of the January 1992. The figure is certainly no less than fifty thousand dollars, and Vernon Hysell argues that the figure is in the hundred thousands of dollars.

² It is unclear how much time transpired between the time of the conveyance and Mead's informing the Hysells of the transfer. Compare Deposition of Vernon Hysell, p. 84 (one or two weeks after the conveyance) with Deposition of Steven Mead, p. 48, 53 (a couple of months after the conveyance).

³ There is deposition testimony that Mead represented to the Veigles that he owned Parcel 3. Both Sandra Hysell and Vernon Hysell deny ever signing a quitclaim deed to the Veigles for Parcel 3, authorizing another to sign such a deed on their behalf, or ratifying their signatures on the deed. Deposition of Sandra Hysell, p. 22; Deposition of Vernon Hysell, p. 45.

⁴ Steven Mead has not presented any evidence in this action contesting his tax liability. Thus for the purposes of this motion his tax liability will be presumed.

 

 

 

United States of America, Plaintiff v. William J. McCullough, Angela McCullough, Matthew J. McCullough, and Derrick W. McCullough, Defendants

U.S. District Court, So. Dist. Ill., 92-4074-JPG, 5/17/94

[Code Sec. 6321 ]

Lien for taxes: Fraudulent conveyance.--The IRS held a valid tax lien on property that was conveyed by the parents of delinquent taxpayers to the taxpayers' children because the property was conveyed for the sole purpose of defrauding the taxpayers' creditors. The transfer was contrived by the taxpayers, was carried out by them using their unwitting parents, and was designed as a scheme to defraud the IRS. The taxpayers paid the real estate taxes, utility bills and homeowners insurance on the property. They also lived on the property, did not pay rent to their children and exercised dominion and control over the property, even though they were unable to borrow money against it. The conveyance to the grandchildren was in reality a conveyance to the taxpayers and the grandchildren stood in as their nominees

Memorandum Opinion

GILBERT, Chief Judge:

This matter is before the Court following a one-day bench trial on the United States of America's claim against William, Angela, Matthew and Derrick McCullough seeking foreclosure of certain property in order to satisfy federal income tax liens accrued by William and Angela McCullough. This Court has jurisdiction in this matter pursuant to 28 U.S.C. §§1340 and 1345 and 26 U.S.C. §7402 .

It has been said that from the age of the Roman Empire through today two things have been certain about life--death and taxes. Many people through the ages have tried to beat death. Ponce de Leon found what he thought was the fountain of youth and some people believe that they can put themselves into suspended animation and later come back to life. But in the end one's earthly death is certain.

It also seems to be a common desire of most people no matter how much or how little their income to try to avoid or lessen one's tax burden. It's not wrong to take every advantage of the tax laws in this country since they are complicated and complex and various provisions are subject to different interpretations. There is an old saying that when in doubt--deduct. However, a taxpayer trying to take advantage of a confusing and at times contradictory tax code to lessen one's tax burden is one thing; a taxpayer who deliberately, wilfully and intentionally takes steps to completely avoid the impact of tax laws in contradiction of our laws is another. For the reasons set forth below, this Court finds that the defendants, William and Angela McCullough, set into motion a plan or course of action designed to defraud the IRS, and therefore, this Court finds in favor of the plaintiff and against the defendants.

After considering the testimony, exhibits, arguments of counsel and the pro se defendant, William McCullough, and supporting memorandum, the Court makes the following Findings of Fact and Conclusions of Law pursuant to Federal Rule of Civil Procedure 52(a).

I. Findings of Fact

1. The property in question, the Bridgeport property, was passed down from William McCullough's great grandfather to his grandmother, and from his grandmother to his father, Clyde McCullough, to whom it was conveyed jointly with his wife Beulah, in 1953. The property remained in their names until October 1983, when it was conveyed to Matthew and Derrick McCullough, their grandchildren.

2. William McCullough lived on the Bridgeport property from his childhood until age 23. William then returned to the Bridgeport property in 1969 or 1970. December 23, 1971, Angela McCullough moved into the Bridgeport property. In 1980, William and Angela tore down the original home on this property and constructed a new home which cost approximately $90,000.00. The funds for this new home came from their savings and investments. At this time, the property was still in the names of Clyde and Beulah McCullough.

3. Beginning in 1980, William and Angela began paying the real estate taxes for the Bridgeport property.

4. William and Angela McCullough have paid the utilities, obtained homeowner's insurance for the home on the Bridgeport property, arranged for appraisals of the property and have exercised all incidents of ownership over the Bridgeport property since 1980, up to and including the date of trial.

5. In the years 1980, 1981, 1982, 1983 and 1984, William and Angela did not pay federal income taxes. William McCullough was found guilty on criminal charges for these deficiencies and has been sentenced. William and Angela owe assessed federal income tax and statutory additions in the amount of $73,887.22 for 1980, $23,982.85 for 1981, $12,958.50 for 1982 and $2,810.57 for 1984, plus statutory additions from the dates of assessment. William and Angela are in agreement with the Government concerning the amount of back taxes currently due to the government. Plaintiff's Exhibit 7.

6. After William and Angela McCullough were informed in early 1983 that the IRS would be investigating them, they transferred large sums of money into custodial accounts for the benefits of their children. However, these sums were later liquidated to pay part of William and Angela's tax debt.

7. On March 2, 1993, the U.S. Tax Court determined that William and Angela were liable for additions to tax for fraud pursuant to Section 6653 of the Internal Revenue Code with respect to the years 1980 through 1984. Plaintiff's Exhibit 10.

8. In 1983, the Government assigned Vonnie Hinesley, an IRS agent, to investigate the assets of William and Angela McCullough. William and Angela McCullough were interviewed in June of 1983. Ms. Hinesley also searched the court's records in order to determine what property was owned by William and Angela. The Bridgeport property was recorded as being owned by Clyde and Beulah McCullough.

9. On October 25, 1983, Ms. Hinesley and Patrick Calhoun, another IRS agent, interviewed Clyde and Beulah McCullough concerning the ownership of the Bridgeport property. Plaintiff's Exhibit 2.

10. It was the testimony of Ms. Hinesley that during this interview Clyde McCullough stated that he had given William the deed to the Bridgeport property. Beulah added that she remembered the time this transaction occurred because her grandson, Derrick, was an infant. Plaintiff's Exhibit 2.

11. Clyde McCullough testified that he never told the IRS agents that he had given William a deed to the property and that at the time of the IRS agent's visit in 1983, he and Beulah still owned the property.

12. William and Angela McCullough both testified that they never received a deed to the Bridgeport property which transferred ownership from Clyde and Beulah to William and Angela.

13. The Court finds that even with the testimony of Ms. Hinesley and her memorandum of the interview with Clyde and Beulah McCullough, the plaintiff has failed to prove by the preponderance of the evidence that Clyde and Beulah had a deed prepared which transferred the property to William and Angela McCullough.

14. The Court also finds, based upon all of the evidence that the plaintiff has failed to prove by a preponderance of the evidence that, even if such a deed was prepared and executed, it was ever delivered to William or Angela McCullough.

15. William McCullough testified that he thought that his parents would eventually convey the property to him.

16. Beulah testified that the reason that the property was not transferred to William and Angela was because of personal feelings that Clyde and Beulah had for Angela.

17. The Court finds that the testimony concerning why Clyde and Beulah chose not to convey the property to William and Angela was not credible. This conclusion is based in part on the fact that Beulah and Clyde conveyed the property to Matthew and Derrick only two days after the IRS interviewed them concerning the ownership of the property.

18. The Court finds that the true intent of Clyde and Beulah in the conveyance of their property was to give the property to William and Angela, however, to avoid William and Angela's creditors reaching the property, the property was instead transferred to William and Angela's children, Matthew and Derrick.

19. In October of 1983, Angela McCullough, at the request of Beulah McCullough, typed a deed which conveyed the Bridgeport property to Matthew and Derrick McCullough.

20. This deed that was prepared by Angela McCullough was recorded on October 27, 1983, at 12:05 p.m. Plaintiff's Exhibit 4.

21. At the time of the transfer of ownership from Beulah and Clyde to Matthew and Derrick, the Court finds that Matthew and Derrick were not aware of the conveyance to them of the property by their grandparents.

22. The Court finds that sometime prior to the typing of this deed by Angela, either William, Angela, Clyde or Beulah went to the County Clerk's office and sought information as to how to prepare the deed. Defendant's Exhibits 1 and 2.

23. Subsequent to October 27, 1983, William and Angela McCullough attempted on two occasions to obtain loans by listing the Bridgeport property as property that they owned that could be used as collateral.

24. Subsequent to October 27, 1983, William and Angela McCullough remained living in the home they built on the Bridgeport property, along with their children. At no time did William and Angela pay rent to Matthew and Derrick for the use of their property.

25. In 1992, Angela McCullough completed a financial aid form for her son Matthew McCullough. On this form at question 45, Angela stated that Matthew did not own any real estate. Plaintiff's Exhibit 9.

26. William McCullough believes that he is a part owner, along with Angela, Matthew and Derrick, of the house located on the Bridgeport property. However, William believes that Matthew and Derrick own the land on which the house is located.

27. Matthew and Derrick McCullough are the record title holders of the Bridgeport property.

28. Finally, the Court finds that the testimony of William and Angela McCullough concerning the circumstances surrounding the transfer of this property to their children was not credible. When one looks at the timing of the transaction and all of the circumstances surrounding the transaction, including William and Angela's pattern of deceit with the IRS in their failure to pay taxes for a number of years, their explanations as to how and why the transfer occurred as it did and their apparent noninvolvement in the motivation behind the transfer is not believable.

II. Conclusions of Law

1. In order to make a gift of property from one individual to another the following elements are necessary: execution of a deed with intent to convey, donor's parting with exclusive dominion and control over the subject of the gift and delivery to the donee. In re Estate of Kelly, 181 Ill. Dec. 350,60 8 N.E.2d 423 (Ill. App. 1 Dist. 1992); Moniuszko v. Moniuszko, 179 Ill. Dec. 636 , 606 N.E.2d 468 (Ill. App. 1 Dist. 1992).

2. Based upon the Court's findings of fact that the plaintiff has failed to prove by a preponderance of the evidence that a deed from Beulah and Clyde which transferred the property to William and Angela was properly executed and that such a deed was delivered, the Court must find that in 1983, the Bridgeport property was still owned by Clyde and Beulah McCullough.

3. Based upon the foregoing conclusion, the Court also must find that since Clyde and Beulah McCullough owned the Bridgeport property in 1983, they had the right to transfer this piece of land to anyone they wanted, including Matthew and Derrick.

4. Based upon the foregoing conclusion that Clyde and Beulah properly transferred the Bridgeport property to Matthew and Derrick, the question now becomes do Matthew and Derrick hold this property merely as nominees for William and Angela and if so what effect would this conclusion have on the ability of the Government to foreclose the property.

5. The factors to be considered in determining whether or not property is held by a person as a nominee of the taxpayer are as follows:

(a) whether the taxpayer expended personal funds for the property; (b) whether the taxpayer enjoys the benefits of the property;

(c) the close family relationship between the taxpayer and the titleholder;

(d) whether the taxpayer exercises dominion and control over the property; and

(e) whether the record titleholder interferes with the taxpayer's use of the property.

Simpson v. United States [89-1 USTC ¶9285 ], 63 A.F.T.R.2d 89-1132, 89-1136 (M.D. Fla. 1989).

6. William and Angela definitely meet the first criteria in that they both admitted that they paid the real estate taxes, the utilities and keep current homeowners insurance-on the Bridgeport property. Matthew also denies ever accepting rent from his parents.

7. William and Angela also certainly meet the second criteria as William has lived on the property almost his whole life, and he and Angela have lived there during the entire length of their marriage. Also, in 1980, William and Angela built a $90,000.00 home on this property.

8. William and Angela are the parents of Matthew and Derrick and therefore, the third criteria for determination of whether a person is a nominee is met.

9. Derrick McCullough asserts that William and Angela were not able to exercise dominion and control over the property because they were not even able to borrow money against it. Derrick asserts that it is noteworthy that when William and Angela were informed as to the steps they would have to take in order to avoid this interference, i.e. legal guardianship of the children, they chose not to take those steps.

10. This Court holds that William and Angela did exercise dominion and control over the property, for all of the reasons previously stated, even though they were unable to borrow money against the property. They built a new home on the property, they pay all expenses related to the property, and they express no desire to leave the property when Matthew and Derrick are grown and have families themselves.

11. And finally, Matthew testified that he never collected rent from his parents for their use of "his" property. Matthew did testify that when he completed college and had a job, he expected to take over payment of the expenses related to the property, but he did realize that he owned the property jointly with his brother. At no time did Matthew state that he would ask his parents to leave the property when he was ready to have a family. William also testified that he may not own the land, but that he and his family owned the house jointly. Therefore, this Court finds that the final criteria, that is that Matthew and Derrick do not interfere with his parent's use of the property, is met. Accordingly, just as the old adage states, "A rose by any other name is still a rose," the fact that Matthew and Derrick are record titleholders of this property does not change the fact that William and Angela are the "real" owners of this property. Therefore, Matthew and Derrick must be considered nominees.

12. Derrick McCullough asserts that there is a significant difference between the instant case and the caselaw cited by the Government. This difference is that in the cases cited by the Government, the taxpayers themselves were the people conveying the property to the nominees. Derrick asserts that since this is not the situation here, that this is a difference that should make a difference because in the instant case, as the Court has previously concluded, Clyde and Beulah were free to convey this property to anyone they chose and since the IRS was not a creditor of theirs, the conveyance could not have been to defraud the IRS.

13. The Court finds that this is inconsequential because all the facts indicate that Beulah and Clyde were in fact conveying the property to William and Angela, but in order to keep the IRS away from the property Clyde and Beulah conveyed the property to Matthew and Derrick. Whether the IRS would have been able to take the property from Clyde and Beulah is irrelevant.

14. Up until October 1983, when the IRS interviewed Clyde and Beulah, all facts point to William and Angela having ownership of the property, except record title. William and Angela paid all of the expenses for the property, they built a home on the property and insured the property. Based upon all of the facts presented, the Court concludes that the conveyance to Matthew and Derrick was in reality a conveyance to William and Angela, but Matthew and Derrick stood in as their nominees.

15. This Court finds that Clyde and Beulah had intended to convey the property to William and Angela and when the trouble with the IRS began, either by their own volition or by the suggestion of William or Angela, the decision was made to instead deed the property to Matthew and Derrick so that the IRS would not be able to foreclose.

16. Although this is not a situation in which the taxpayers originally owned the property and conveyed it themselves to avoid taxes, the same premise is present here. William and Angela were to receive property from Beulah and Clyde, and instead it was transferred to Matthew and Derrick, their children. This Court finds that this situation is also covered by the law concerning nominees.

17. The Court must now determine what is the effect of the finding that Matthew and Derrick are nominees. The finding that Matthew and Derrick hold the property as nominees deems the conveyance to them as fraudulent, and specifically done so to defraud William and Angela's creditors. Accordingly, this conveyance must be deemed in fact a conveyance to William and Angela and therefore, it defrauds William and Angela's creditors. Cramer v. Bode, 24 Ill. App. 219 (1887).

18. In such a case, a successful plaintiff, is entitled to levy its claim on the property as if William and Angela were record titleholders. See generally I.L.P. Fraudulent Conveyances §141 and cases cites therein.

19. The judgment, however, may not order the remainder of the property or the remainder of the funds after the sale of the property to be returned to the grantor. This is so because although the transfers' purpose was to defraud creditors it is still valid between the grantor and grantee. Therefore, any remaining property or funds after the sale of the property are to be returned to the grantee.

III. Conclusion

When examining the totality of circumstances in this case, the only conclusion that this Court is able to reach is that the conveyance of the Bridgeport property by the taxpayers' parents, Beulah and Clyde, to their grandchildren was at the behest of the taxpayers, for the sole purpose of defrauding their creditors. The transfer was contrived by the taxpayers, carried out by the instance of the taxpayers using their unwitting parents, and was designed as a scheme to defraud the IRS. Therefore, based on the foregoing, the Court hereby finds that judgment should be entered in favor of the plaintiff United States of America for the total unpaid assessed balance plus statutory interest and other statutory additions; judgment that the United States has a valid tax lien on the Bridgeport property; judgment that Matthew and Derrick McCullough merely hold the Bridgeport property as nominees for William and Angela McCullough; and finally that the federal tax liens be foreclosed and the Bridgeport property be sold free and clear of any right, title, lien, claim or interest of any of the defendants and that the proceeds shall be distributed in accordance with the general practice in federal tax lien foreclosure sales.

The plaintiff is directed to submit to this Court a proposed judgment which to be entered by this Court which encompasses the above findings and sets forth the procedure for distribution of the proceeds from the foreclosure sale. This proposed judgment is to be submitted to this Court within fourteen days of the date that this Order is entered on the docket.

IT IS SO ORDERED.

 

 

United States of America, Plaintiff v. Robert Mantarro, Defendant

U.S. District Court, No. Dist. Ohio, East. Div., 88CV871, 6/19/92

[Code Sec. 6321 ]

Lien for taxes: Fraudulent conveyances.--Properties transferred from a decedent to his son after the decedent had failed to file or pay employment taxes were fraudulently conveyed and were therefore subject to federal tax liens for the unpaid taxes. The transfers were made for inadequate consideration, and the decedent transferred what amounted to his entire estate to the son. Further, the transfer occurred between family members where the parent could continue to control, manage and benefit from all of the transferred property.

 [Code Sec. 6212 ]

Notice of deficiency: Right to contest: Third party.--A son who received property subject to federal tax liens from his deceased father did not have standing to contest the validity of the assessments underlying the liens. The father could have contested the earlier liability, but chose not to do so.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

WHITE, District Judge:

This is an action to foreclose federal tax liens pursuant to 26 U.S.C. §§7401 and 7403 . The case came on for trial before the Court and the Court, having heard testimony of witnesses, having examined the exhibits and having reviewed proposed findings of fact and conclusions of law submitted by counsel, makes the following findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure.

Findings of Fact

1. Robert Mantarro is the son of Nick Mantarro.

2. Nick Mantarro was the owner and operator of an unincorporated business known as Shaker Discount Auto Sales at 3898 Lee Road, Cleveland, Ohio for several years prior to his death.

3. Shaker Discount Auto Sales was "a going concern up through and including the date of Nick Mantarro's death, and with the death of Nick Mantarro, the business ceased operating."

4. Robert Mantarro assisted his father in the Shaker Discount Auto Sales business and was on the company's payroll for four or five years prior to his father's death.

5. Robert Mantarro signed tax returns as manager of Shaker Discount Sales for the following forms and periods:

a. Form 941--1978.

b. Form 941--1st quarter of 1980

c. Form 941--2nd quarter of 1980

6. Sometime in 1980, Robert Mantarro stopped filing federal tax returns on behalf of Shaker Discount Auto Sales and Nick Mantarro stopped paying federal taxes for this business.

7. The Internal Revenue Service ("IRS") sent Notices of Assessment and made demands for payments of his tax liability to Nick Mantarro in 1980 and 1981. Specifically, the IRS made assessments for federal unemployment taxes for 1978, and social security and withholding taxes for the first two quarters of 1980. The unpaid balances due as of December 5, 1983 is set forth in the Notice of Federal Tax Lien which is Government's Exhibit 9.

8. Nick Mantarro transferred the following properties for $0 cash consideration to Robert Mantarro on or about April 5, 1982:

a. 3898 Lee Road, Cleveland Ohio;

b. 5088 New Hudson Road, Windsor Township, Ohio;

c. 3428 East 66th Street, Cleveland, Ohio; and

d. 3435 East 70th Street, Cleveland, Ohio.

9. The 66th Street property was transferred pursuant to a quit-claim deed.

10. The 70th Street property was transferred pursuant to a quit-claim deed.

11. Robert Mantarro subsequently sold the Lee Road property for approximately $110,000.

12. The amount of Nick Mantarro's total unpaid federal tax liability was $7,461.98 on April 5, 1982.

13. Nick Mantarro died on April 29, 1982.

14. Nick Mantarro was residing at 3428 East 66th Street at the time of his death.

15. An Application to Relieve Estate from Administration was signed by Robert Mantarro and filed in the Probate Court of Cuyahoga County to settle the Estate of Nick Mantarro.

16. In the Application, the sole asset of Nick Mantarro's estate was listed to be a bank account containing $5,291.21. The sole liabilities of the estate totalled $1,191.21 and did not include the debt to the United States.

17. As a result of the transfer of virtually all of his property on April 5, 1982, Nick Mantarro's remaining assets were valued at $5,291.21.

18. The IRS contacted Nick Mantarro regarding his unpaid taxes prior to April 5, 1982.

19. As of January 31, 1992, Nick Mantarro's total unpaid tax liability was $19,749.03.

Conclusions of Law

1. The Court has jurisdiction over this matter pursuant to 26 U.S.C. §7402(a) and 28 U.S.C. §§1340 and 1345.

2. The Defendant lacks standing to contest the merits of the taxpayer's federal tax liability. At trial, defendant's testimony focused on the validity of the IRS' assessments against his father, the taxpayer. Defendant maintains that his father's business was not operating for part of 1981 and that the tax assessment for the business should, therefore, be lower than it is. However, because the defendant does not have standing to contest the merits of his father's tax liability, this Court lacks jurisdiction to hold that the assessments or their amounts (as set forth in the Certificates of Assessments and Payments) are invalid. It is well settled that "only the taxpayer may question the assessment." United States v. Formige [81-2 USTC ¶9563 ], 659 F.2d 206, 208 (D.C. Cir. 1981); Al-Kim, Inc. v. United States [81-2 USTC ¶9573 ], 650 F.2d 944 (9th Cir. 1979); Myers v. United States [81-2 USTC ¶9490 ], 647 F.2d 591 (5th Cir. 1981); Moyer v. Mathas [72-1 USTC ¶9342 ], 458 F.2d 431, 434 (5th Cir. 1972); and Graham v. United States [57-1 USTC ¶9645 ], 243 F.2d 919, 922 (9th Cir. 1957). The evidence shows that Nick received notice of certain federal tax debts in 1980 and 1981 (well before the time that he conveyed the properties to his son). ¹ The taxpayer could have contested, but chose not to contest, the earlier tax debts.

3. It is undisputed that the business was operating for the third and fourth quarters of 1980, but that no returns were filed and no payments were made by the taxpayer for those periods. Nor were returns filed for the first and second quarters of 1981. Certainly, Nick Mantarro must have known that his failure to file returns and pay taxes owed would generate additional tax liability.

4. Because the taxpayer failed to file returns, the IRS was forced to file returns on his behalf, pursuant to 26 U.S.C.§6020(b), and make assessments in 1983. ²

5. Even if the Court determines that Robert Mantarro has standing to contest his father's tax liability, no credible evidence was presented to refute the IRS assessments. ³ Moreover, federal tax liens arose with the making of the assessments and attached to all property or rights to property of the taxpayer, including the properties involved in this action. See 26 U.S.C. §§6321 and 6322 . The testimony of IRS Group Manager Miles Wright supported the assessments and demonstrated that, at the time of the transfers, the taxpayer owed the United States $7,461.98.

6. The United States is not a subsequent creditor and, therefore, will prevail upon a showing of either actual or constructive fraud. The tax liabilities involved in this suit (FICA taxes for the third and fourth quarters of 1980 and the first and second quarters of 1981 and FUTA taxes for the 1981 tax year) arose on the dates the returns for the tax liabilities were required to have been filed. Since the dates the returns were due was before the date of the transfers in question (April 5, 1982), the tax liability arose before the transfers and the United States is not a subsequent creditor.

7. "For the purposes of a fraudulent conveyance action, the United States is deemed a creditor with standing to institute such an action from the date the taxes become due and owing." Simpson v. United States, 89-1 USTC ¶9285 ; (MD Fla 1989), citing, inter alia, United States v. Hickox [66-1 USTC ¶15,679 ], 356 F.2d 969, 972 (5th Cir. 1966); United States v. Kaplan, 267 F.2d 114 (2nd Cir. 1959).

8. The liability for federal withholding taxes is payable on the due date of the return, which is, at the latest, on the thirtieth day following the end of the quarter. Treas. Reg. 31.6302(c)-1(a)(1) (iv). It becomes payable without the necessity of assessment or of notice and demand. 26 U.S.C. §6151(a) . ⁴ First National Bank v. United States [79-1 USTC ¶9286 ], 591 F.2d 1143, 1148 (5th Cir. 1979); citing United States v. Adams Building Co. [76-1 USTC ¶9221 ], 531 F.2d 342, 343 n. 2 (6th Cir. 1976). The FUTA tax return (Form 940) is due by January 31st of the year following the tax year (i.e., the 1981 FUTA tax return was due by January 31, 1982). ⁵ Therefore, because the United States is not a subsequent creditor, the United States need only show that there was actual intent or constructive intent to defraud the United States.

9. Fraudulent conveyances occurred if the transfers from Nick to Robert Mantarro were either actually or constructively fraudulent pursuant to state law. If the United States is to prevail on the issue of whether the transfers of the 66th and 70th Street properties were fraudulent conveyances, it must be shown that the conveyances were fraudulent under state law. Commissioner v. Stern [58-2 USTC ¶9594 ], 357 U.S. 39, 78 S.Ct. 1047, 2 L.Ed.2d 1126 (1958). In Ohio, the Uniform Fraudulent Conveyance Act was adopted by the legislature in 1961. Under that act, the following conveyances are fraudulent and may be set aside by creditors under O.R.C. Section 1336.09: ⁶

ORC §1336.97 Intent to defraud.

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

ORC §1336.04 Conveyances resulting in insolvency.

Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration.

10. At trial, the United States raised a presumption of fraud that shifted the burden of proof to the defendant. In order to set aside a conveyance for actual intent to defraud, the complainant or creditor must prove by clear and convincing evidence the debtor's actual intent to "hinder, delay, or defraud" the creditor. Stein v. Brown, 18 Ohio St.3d 305, 480 N.E.2d 1121, 1124 (Ohio 1985); In re Poole, 15 Bankr. 422, 431 (Bankr. N.D. Ohio 1981). However, the courts have recognized that, under Section 1336.07, the existence of actual intent is rarely capable of direct proof. E.G., United States v. Leggett, 292 F.2d 423, 426 (6th Cir. 1961). Thus, the courts may resort to surrounding circumstances to determine whether sufficient fraud exists to set aside a conveyance. Stein, 480 N.E.2d at 1124; In re Poole, 15 Bankr. at 431-32; In re Betz, 84 Bankr. 470, 472 (Bankr. N.D. Ohio 1987).

11. Ohio Courts have held that certain circumstances are "badges" or "indicia" of fraud. Cardiovascular & Thoracic Surgery, Inc. v. DiMazzio, 37 Ohio App.3d 162, 524 N.E.2d 915, 918 (Ohio Ct. App. 1987); In the Matter of Maston, 44 Bankr. 880, 882-83 (Bankr. S.D. Ohio 1984); In re Poole, 15 Bankr. at 431-32. A "badge of fraud" has been defined as a circumstance from which courts are warranted in presuming that a transaction is fraudulent. Barr v. Hatch, 3 Ohio 527, 532-33 (1829). Some of the badges of fraud that Ohio Courts have considered in fraudulent conveyance cases include inadequacy of consideration, transactions between members of the same family, the threat or pendency of litigation, the transfer of the debtor's entire estate, and the reservation of an interest, benefit or control in the transferred property. In re Poole, 15 Bankr. at 431-32; Cardiovascular, 524 N.E.2d at 918, In the Matter of Maston, 44 Bankr. at 882; and Barr v. Hatch, 3 Ohio at 532-33 (1829).

12. These "badges of fraud" constituted sufficient evidence at trial for this Court to presume that Nick Mantarro conveyed his property to Robert with the intent to hinder, delay or defraud the IRS. See Stein v. Brown, 480 N.E.2d at 1124. As a result, the Court finds that the United States had met its burden of showing badges of fraud at a time when the transferor was indebted to the United States. The defendant then had the burden of proving (1) no actual intent to defraud, (2) fair consideration, and (3) solvency. (See Cardiovascular, 524 N.E.2d at 919) (where the Court shifted the burden of proving fair consideration to appellee/debtor.) ⁷ The evidence shows that the defendant failed to meet his burden of proof.

13. The defendant did not meet his burden of showing no actual intent to defraud the United States. Where, as in the instant case, the presumption of fraud arises, the burden shifts to the defendant to explain away the badges of fraud. Cardiovascular, 524 N.E.2d at 918. In Cardiovascular, the Ohio Court of Appeals explained:

Although the ultimate burden of proof in an action to set aside a fraudulent conveyance rests upon the party who has the affirmative, the proof of indicia or badges of fraud may give rise to an inference or presumption which 'shifts' the burden of proof--that is, which makes it incumbent upon the transferee or defendant to go forward with the proof and explain the transaction. * * *" (Footnotes omitted.) 24 Ohio Jurisprudence 3d (1980) 559, Creditors' Rights, Section 884 . See, also, 37 American Jurisprudence 2d (1968) 873, Fraudulent Conveyances, Section 217 .

14. The evidence showed that the instant case is rife with "badges" sufficient to demonstrate actual fraud. To begin with, the transfer was made for inadequate consideration. Robert testified that Nick Mantarro transferred four properties to his son, including 3898 Lee Road, 5088 New Hudson Road, 3428 East 66th Street and 3435 East 70th Street, for $0 cash consideration. Moreover, the quit-claim deeds filed in the County Recorder's Office for the 66th Street and 70th Street properties show a conveyance fee of $0, indicating that no cash exchanged hands when the property was transferred. Robert also testified that he later sold the Lee Road property for approximately $110,000.

15. Second, the defendant stipulated to the fact that Nick Mantarro continued to enjoy the benefits of the 66th Street property after the transfer in the same manner and degree that he had before the transfer. Both before and after the transfer, Nick used this property as his residence. Robert did not move into the 66th Street home until sometime after his father's death.

16. Third, it is suspect that the transfer of property occurred between a parent and child, such that Nick could continue to control, manage and benefit from all of the transferred property. Transfers "between family members are suspect and subject to the strictest scrutiny, particularly when the consideration supporting the transfer is inadequate." In re Poole, 15 Bankr. at 432.

17. The fourth significant badge of fraud is that Nick Mantarro transferred what amounted to his entire estate to Robert. In Government's Exhibit 7, Robert listed his father's assets after the conveyance as $5,291.72. At trial, he testified that his father had an unspecified car and some unvalued equipment at his place of business. At a time when the IRS was pursuing the payment of his liabilities, Nick had every reason to believe that the transfer of all of his real property and substantially all of his estate would preclude the IRS from collecting what it was due.

18. The fact that Nick Mantarro was sent notice of tax liabilities by the Internal Revenue Service, prior to the property transfers in April, 1982, is uncontroverted. The defendant testified that he never discussed his father's debts with him. Thus, he could not have known if his father transferred the properties, at least in part, to defraud the United States.

19. In addition to being sent at least 3 communications from the IRS regarding taxes owed for 1978 and 1980, Nick had failed to file or pay taxes for the tax periods that are at issue in the instant case. Given these circumstances, it was Nick's responsibility to communicate with the IRS regarding his taxes. He could have contested the amount of or basis for these liabilities at any time prior to his death. Instead he chose to convey his property to his son, placing the property where his creditors would have to expend significant time and resources to obtain it.

20. The defendant did not meet his burden of showing no constructive intent to defraud the United States. According to Section 1336.04, the transfers of real property involved in this case were fraudulent regardless of intent if Nick Mantarro transferred the real property without receiving fair consideration, and if he was either insolvent at the time of the transfer or thereby rendered insolvent. Cardiovascular, 524 N.E.2d at 918.

21. The defendant failed to show that the properties were transferred for fair consideration. Pursuant to Section 1336.03, fair consideration is given for property:

(A) When in exchange for such property, or obligation, as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied; or

(B) When such property or obligation is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the value of the property or obligation obtained.

As admitted by Robert, Nick Mantarro received zero cash consideration in exchange for the four properties that he quit-claimed to his son. Robert subsequently sold the Lee Road property for approximately $110,000. Robert claimed at trial that in exchange for the property he promised to care for his sister and his father.

22. In Ohio, conveyances of property made in exchange for agreements for future support of a debtor "cannot stand at the expense of the assignor's creditors, for the assignor must pay her creditors before she provides for her own future." Akron Bldg. & L. Assoc. v. Foltz, 36 Ohio C.C. 572, 574-75 (Summit (8th) C.C. 1908). See Schmitt v. Morgan, 471 N.Y.S.2d 365, 98 A.D. 2d 934 (N.Y. App. Div. 1983). It follows by analogy that conveyances that render a debtor insolvent based on consideration for future support and maintenance for the debtor's family should also be fraudulent as to creditors. See Rush v. Rush, 244 N.Y.S.2d 673, 19 A.D. 2d 846 (N.Y. App. Div. 1963) (where a court held that love and affection and promise of future support of transferor's child were not fair consideration).

23. In any case, the defendant introduced no evidence which would show that the value of the property received by Robert was a "fair equivalent" to the obligation which he incurred. In fact, one of the four properties was sold for about $110,000. There was absolutely no testimony or other evidence introduced to show the value of the care that Robert provided for his father and sister.

24. The defendant failed to show that the transfers did not render Nick Mantarro insolvent. Section 1336.02 defines insolvency as follows:

A person is insolvent when the present fair salable value of his assets is less than the amount that will be required to pay his probable liability on his existing debts as they become absolute and matured.

The evidence showed that when Nick Mantarro transferred all of his real property to Robert, he no longer had enough assets to pay his existing debts. On the Application to Relieve Estate From Administration, Robert Mantarro stated that the sole asset of Nick's estate was a savings account containing $5,291.72. The indisputable testimony of Group Manager Miles Wright demonstrated that Nick Mantarro owed the United States $7,461.98 on the date of the conveyance. Accordingly, Nick Mantarro did not have enough assets to pay his debts when he conveyed virtually his entire estate to his son.

25. Robert testified that at the time of his father's death his father owned a car and other unspecified, unvalued equipment. Significantly, however, none of these "assets" were listed on the probate filing made by the defendant. The burden was on the defendant to show that these assets existed and were of sufficient value to support a claim of solvency. The defendant did not testify as to, inter alia, the year or make of the car, its value, or as to the age of and type of equipment left at Shaker Discount Auto Sales. Not one scintilla of evidence was presented to show the value of any of these alleged items. Depending on the level of disrepair of the alleged car and equipment, these possessions could even have had a negative value.

26. Moreover, Robert testified that he had no idea what his father's debts were at the time of the conveyances. Yet, Government's Exhibit 9 shows that Nick Mantarro did not pay his tax bills that were assessed in 1980 and 1981. Furthermore, Robert testified that he and his father never talked about his father's debts, thus Nick Mantarro may have had numerous other unsatisfied obligations at the time of the conveyances. The truth of the matter is that Robert Mantarro just did not know the state of his father's financial affairs. Accordingly, defendant has not overcome his burden of showing solvency and the United States must prevail on this issue.

27. In sum, defendant did not introduce sufficient evidence to overcome the burden of showing that Nick Mantarro (1) received fair consideration for the property that he transferred to Robert and (2) was solvent following such transfers. Therefore, the Court must find that the transfers in question were fraudulent.

28. The United States federal tax liens, therefore, remain on the properties in question and the United States is entitled to foreclose those tax liens. Although not relevant to the fraudulent conveyance issue, the defendant contests the amount presently due and owing. Robert Mantarro testified at trial that the Internal Revenue Service levied on rents from two tenants in the amounts of $1,200 and $600 per month for several months (i.e., that $5,400 was paid to the IRS). He maintains that his father's tax liability should be reduced by the amounts that were paid. However, other than his unsupported testimony the defendant did not produce any evidence that these alleged payments were actually made or that these payments, if made, were not properly credited to Nick Mantarro's tax liabilities. Surely, if the defendant had lost $5,400 to the IRS, as he contends, he would have retained some supporting documentary evidence.

29. Defendant's Exhibit 3, Notice of Levy, was apparently served on James Herford, a tenant at the Lee Road property in 1986. Robert Mantarro testified that this tenant paid his $600 rental payment to the IRS for January, February and March of 1986. Accordingly, so the defendant's argument goes, approximately $1,800 should have been credited towards Nick Mantarro's account during this period. Miles Wright testified that approximately $1,820.71 was received and credited to Nick's delinquent accounts in February and March of 1986. Accordingly, there is no reason to believe that other payments actually received by the IRS during this time period would not have also been credited towards the taxpayer's tax liabilities.

30. The defendant did not substantiate his claim that another tenant's rents were levied in the amount of $1,200 per month for January, February, and March of 1986. For the above reasons, the Court finds that there is no evidence to support the contention that all payments made for Nick Mantarro's tax debts were not properly credited to his account.

31. Accordingly, judgment is for plaintiff. The transfers of the properties listed in Paragraph 8 of the Findings of Fact are set aside and it is ordered that the properties proceed to foreclosure sale to allow the United States to collect the money currently due and owing by Nick Mantarro.