Fraudulent Conveyances Part1 page3

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IT IS SO ORDERED.

¹ Specifically, the Notice of Federal Tax Lien, Government Exhibit 9, indicates that tax liabilities of Nick Mantarro were assessed on July 14, 1980 (for the first quarter of 1980), November 10, 1980 (for the first quarter of 1980), November 10, 1980 (for the second quarter of 1980), and July 20, 1981 (1978 FUTA taxes). According to the uncontroverted testimony of Miles Wright, notices of the assessments and demands for payment thereof were sent to Nick Mantarro on the date of each assessment. Therefore, the IRS sent the taxpayer at least three written communications in 1980 and 1981 alone. It was after these communications were made that the Mantarros stopped filing and paying the business taxes. It was also after these communications that Nick transferred his property to Robert.

² Internal Revenue Code Section 6020(b) grants the IRS the authority to file returns on behalf of a taxpayer and provides that such a return "shall be prima facie good and sufficient for all legal purposes."

³ As set forth more fully in the United States ' memorandum submitted on this issue, the Certificates of Assessments and Payments (Form 4340s) (Government's Exhibits 4(a), 4(b) and 4(c)) constitute presumptive proof of valid assessments and demonstrate the amount of the tax liability owed. United States v. Chila [89-1 USTC ¶9299 ], 871 F.2d 1015, 1018 (11th Cir. 1989); United States v. Dixon [87-2 USTC ¶9485 ], 672 F.Supp. 503 (M.D. Ala. 1987).

⁴ 26 U.S.C. Section 6151 states: Except as otherwise provided in this subchapter, when a return of tax is required under this title or regulations, the person required to make such return shall, without assessment or notice and demand from the Secretary, pay such tax to the internal revenue officer with whom the return is filed, and shall pay such tax at the time and place fixed for filing the return (determined without regard to any extension of time for filing the return).

⁵ As stated in Federal Deposit Insurance Corporation v. United States [87-1 USTC ¶9332 ], 654 F.Supp. 794, 806 (N.D. Ga. 1986): Under Section 6151 of the Internal Revenue Code, regardless of when federal taxes are actually assessed, the taxes are considered as due and owing, and constitute a liability as of the date the tax return for the particular period is required to be filed. [case citations omitted].

⁶ Unless otherwise noted, all statutory citations are to the Ohio Revised Code. Although the statutory sections cited herein were repealed in 1990, they were in effect at the time this suit was brought in 1988 and when the fraudulent transfers at issue occurred in 1982.

⁷ Cf. Massey- Ferguson , Inc. v. Finocchiaro Equip. Co., 496 F.Supp. 655, 659 (E.D. Pa. 1980), aff'd, 649 F.2d 859 (3d Cir. 1981) (under Pennsylvania law, once creditor shows transfers by debtor, burden shifts to transferee to show both fair consideration and solvency of transferor); In re Colandrea, 17 Bankr. 568, 579 (Bankr. Md. 1982) (where transaction is prima facie fraudulent, Maryland law shifts burden of proof of transferor's solvency to transferee).

 

 

 

United States of America , Plaintiff v. Therese C. Brown, Defendant

U.S. District Court, No. Dist. Ill. , East. Div., 91 C 2771, 4/27/93, 820 FSupp 374, 820 FSupp 374

[Code Sec. 6321 ]

Fraudulent conveyances: Lien for taxes: Illinois land trust: Transfer of beneficial interest.--The transferee of the beneficial interest in an Illinois land trust was personally liable for the transferor's unpaid tax debts to the extent of the net proceeds from the sale of the land that was the subject of the trust, plus interest. The transferee's ex-husband had conveyed his beneficial interest in a land trust to her for no consideration three months before he died. At the time of the transfer, both parties knew that the husband was indebted to the United States for unpaid federal taxes in a substantial amount and that the transfer would render him insolvent. The transferee sold the property after the death of her former spouse. Because the transfer had been fraudulent in fact and in law, the IRS was entitled to the net proceeds received by the transferee from the sale of the property that was the subject of the land trust.

Charles J. Cannon, Department of Justice, 555 Fourth St., N.W. , Washington , D.C. 20002 , for plaintiff. Paul Michael Sheridan, 121 N. LaSalle St., Chicago, Ill. 60602, John J. Jiganti, Theodore A. Sinars, Joseph S. Capitani, Madden, Jiganti, Moore & Sinars, 135 S. LaSalle St., Chicago, Ill. 60603, for defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

SHADUR, Senior District Judge:

This Court has conducted a bench trial in this action, following which counsel for each of the parties has submitted revised proposed findings of fact and conclusions of law. In accordance with Fed. R. Civ. P. ("Rule") 52(a), this Court makes the following findings of fact ("Findings") and states the following conclusions of law ("Conclusions"). To the extent (if any) that the Findings as stated may be deemed conclusions of law, they shall also be considered conclusions. In the same way, to the extent (it any) that matters later expressed as Conclusions may be deemed findings of fact, they shall also be considered Findings. In both those respects, see Miller v. Fenton, 474 U.S. 104, 113-14 (1985).

Findings of Fact

1. This action involves a claim by the United States that on September 8, 1984 the late Edward J. Brown ("Edward") fraudulently conveyed his interest in an Illinois land trust to Therese Brown Rubey ("Therese") at a time when Edward was indebted to the United States and was left insolvent by the transfer. If the United States is correct in its claim, Edward's transfer to Therese is voidable under Ill.Rev.Stat. ch. 59, ¶4 ("Act ¶4").

2. Edward and Therese were married to each other twice, the first time on October 26, 1957. They had four children: Victoria Ann (born July 26, 1959), Vallerie Jo (born March 21, 1961), Vivienne Marie (born September 8, 1963) and Edward, Jr. (born July 19, 1965). That first marriage ended in a divorce decree that was entered on June 29, 1976. During that marriage Edward and Therese and their children lived in the marital home in Des Plaines , Illinois , title to which was held in an Illinois land trust.

3. Therese was a high school graduate and attended Mundelein College and Loyola University , although the record does not reflect that she received a degree from either institution. (Tr. 42). Throughout her childhood and high school years Therese participated in the operation of various family-owned enterprises that operated one or more newsstands and a newspaper distributorship in the Chicago area (Tr. 42-43). In 1965 or 1966 Therese and her sister Roseanne Hudson acquired the Des Plaines News Agency (Tr. 43-44).

4. From 1960 and at various times during his marriage to Therese, Edward was self-employed in a variety of enterprises: a landscape business, a janitorial business, a security company and ultimately the business of establishing and operating the predecessors to health maintenance organizations (Tr. 43-47). During that same period Therese continued to be employed in the operation of her family's businesses.

5. In 1975 Therese filed an action against Edward in the Circuit Court of Cook County for separate support on the ground that he had deserted her on or about November 10, 1974. In that action Therese was represented by Ralph Goren ("Goren") (Tr. 47), who had been Edward's lawyer in the past (Goren Dep. 11).

6. On February 10, 1976 Edward and Therese entered into a property settlement (the "Settlement Agreement," J. Ex. 8 ¹) in connection with the pending support action, which was thereafter converted by agreement to a divorce action (Tr. 49-50). Under the terms at the Settlement Agreement:

(a) Edward agreed to pay Therese $1500 per month in alimony and to transfer to her (1) his interest in the marital home, (2) any interest he may have had in a partnership known as "The Paper Mill" and (3) the life insurance policies upon his life (on which he agreed to pay the premiums).

(b) Therese agreed to transfer to Edward her shares of stock in a corporation known as National Health Corporation and to accept the provisions of the Settlement Agreement in full satisfaction of her and her children's rights to support and maintenance.

7. At the time that the Settlement Agreement was signed, neither Edward nor Therese had any interest in a parcel of improved commercial real estate located at 985 Graceland Avenue , Des Plaines , Illinois (the "Graceland Property"). It is the later-acquired Graceland Property that is the subject matter of the alleged fraudulent conveyance that is in turn the subject of this litigation. ²

8. On April 30, 1976 Therese and Edward filed a stipulation with the Circuit Court of Cook County stating that Therese's previously-filed complaint for separate support could be heard as a divorce action. On the same day Therese filed an Amended Complaint for Divorce (J. Ex. 4) in that court as Docket No. 75 D 27994, seeking a divorce from Edward on the ground of desertion. At that time neither Edward nor Therese had yet acquired any interest in the Graceland Property. Therese continued to be represented by Goren in the divorce proceedings, while Edward did not have legal counsel representing him.

9. On that same April 30, 1976 date Therese and Goren appeared before the Circuit Court of Cook County for a hearing on her divorce complaint (that date was some 41/2 months after the signing of the Settlement Agreement, nearly 2 months after the divorce hearing and about a week before entry of the divorce decree). Edward was not present at the hearing and had executed a stipulation waiving his presence. Therese testified at the hearing (J. Ex. 6) about her marriage to Edward, about his desertion (she stated that he was then living in Minneapolis , Minnesota ) and about the terms of the Settlement Agreement.

10. At the hearing the Circuit Court Judge reviewed the terms of the Settlement Agreement with Therese, inquiring specifically about Edward's agreed-upon monthly payment of $1500 and the parties' understanding that the amount would constitute unallocated child support and alimony. As the result of the hearing the court approved the Settlement Agreement (except for its Paragraph 1, which had stated that the $1500 monthly payments were to be considered alimony alone). When the divorce decree was formally entered by the court on June 29, 1976, the Settlement Agreement was incorporated into the decree (J. Ex. 7).

11. On June 21, 1976 Edward entered into a contract (the "Purchase Contract," J. Ex. 48-2) to purchase the Graceland Property, agreeing to pay the $175,000 purchase price to the sellers 985 First Avenue Building Corp. Under the Purchase Contract the seller agreed to take back, representing part of the purchase price, a $20,000 note from Edward payable in or within two years, to be secured by a second mortgage. Only Edward was identified in the Purchase Contract as the purchaser of the Graceland Property, and only Edward signed that document. Neither Therese's name nor her signature appears anywhere in the Purchase Contract. Indeed, Therese testified at trial that she had never seen the Purchase Contract before (Tr. 67).

12. On July 6, 1976 (well after the Settlement Agreement had been approved by the court and a week after the final decree of divorce had been entered) Edward entered into a land trust agreement (the "Trust Agreement," J. Ex. 21) with the First National Bank of Des Plaines ("Bank") to take title to the Graceland Property on the closing of the Purchase Contract. Under the Trust Agreement (Bank's Trust No. 61711574), Edward was named as the sole beneficiary of the land trust and the solo bolder of the power of direction as to the Graceland Property. Under the terms of the Trust Agreement, no assignment of any beneficial interest was binding upon Bank as Trustee until the original or a duplicate of the assignment was lodged with Trustee and until its acceptance was indicated thereon.

13. On July 19, 1976 the closing with respect to the Graceland Property took place, with title being conveyed to Bank as Trustee of its Trust No. 61771574. Bank as Trustee executed two installment notes in bearer form (one for $130,000 and the other for $20,000), as well as a deed of trust in favor of Chicago Title & Trust Company to secure the payment of the $130,000 note. In addition the seller took back a $20,000 purchase money second mortgage. Only the seller and Edward (who alone was identified as the buyer) signed the closing statement executed in connection with the transaction (J. Ex. 22). Neither Therese's name nor her signature appears anywhere on the closing statement, nor did she sign any contract, note or mortgage in connection with the 1976 acquisition of the Graceland Property. Therese testified that she came up with the cash required for the closing with funds from the Des Plaines News Agency, while Edward contributed no money to the purchase (Tr. 148). But she produced no supporting documentary evidence whatever, and the closing statement credits Edward with both the, $17,500 earnest money deposit and the cash to balance. This Court cannot and does not credit Therese's testimony.

14. Therese testified that she and Edward executed a guaranty (J. Ex. 20) in connection with the 1976 acquisition of the Graceland Property. That purported guaranty is on blank paper and is undated, and it recites that they guarantee the payment of "the attached note, which bears Chicago Title and Trust Company identification number ______." In fact neither of the notes executed by Bank in connection with the purchase of the Graceland Property bears a Chicago Title & Trust Company identification number. Although the purported guaranty refers to a "note," the identity of the note to which the guaranty refers cannot be determined because of the blank space where an identification number is normally inserted. Finally, Therese could not recall at trial when or where she signed the guaranty (Tr. 145-46).

15. On balance this Court is unpersuaded that the purported guaranty was in fact executed and delivered to Bank at or near the time of the acquisition of the Graceland Property. ³ But even if it had, that would not call for the conclusion that Therese rather then Edward purchased the Graceland Property in 1976. Such a guaranty, like the addition of Therese's signature to the mortgage disbursement statement referred to in Finding 16(b), would be entirely consistent with customary lender practices. In light of the proximal time relationship between the final divorce decree (as well as Edward's noninvolvement in the divorce proceedings), coupled with the facts that (1) Edward and Therese continued their business relationship through Therese's management of the Graceland Property (and her business' occupancy of a substantial part of that property) for years thereafter and (2) they apparently continued an amicable personal relationship until Edward's death, ⁴ it would not be surprising if Bank had been wholly unaware of the existence of the final divorce decree and had thus viewed the requirement that Therese's signature also be obtained as the kind of documentation that is normally secured from the spouse of a purchaser. But these Findings are not based on any speculation in that respects Instead any inference favorable to Therese that might arguably be drawn from her signature (if, that is, she had in fact signed and delivered the guaranty--an unproved assumption) is far outweighed by the evidence indicating that she was not the purchaser of the Graceland Property.

16. Therese testified that Edward had no interest in the Graceland Property in 1976 (Tr. 105-06). In that and other respects she was not a credible witness. Moreover, her testimony in that regard is belied by more than one aspect of the record:

(a) Although Goren testified that he was representing both Edward and Therese at the closing (Goren Dep. 18), that revisionist reconstruction of the situation is also not really credible. For the most part Goren had no real recollection of the events of that period, such as the terms of the Settlement Agreement and what transpired during the divorce proceedings (id. 12-16). What is clear is that Goren was really Edward's lawyer, having represented him before Goren was called on to handle the marital dissolution (id. 11). ⁵ Perhaps most telling is Goren's description of his typical lawyer-client relationship with Edward--and of how that also applied to the acquisition of the Graceland Property (id. 17-18):

If I recall correctly, this building was purchased after the divorce was final.

Mrs. Brown at that time executed guarantees and signed various documents required by the lender. Mr. Brown, as was his normal course of business, would have called me the day before and said come to the closing. And I would say what closing and what's happening. "Show up" is what he would say.

Mr. Brown was not long on giving specific directions for information. So, I went to a closing. There was a closing. I did not prepare the trust document, all I did was attend the closing.

(b) What has been set out in Findings 15 and 16(a) explains the existence of the mortgage disbursement statement prepared on Goren's letterhead end produced from his files. That document does contain both Edward's and Therese's signatures. But over and above the document's patent inconsistency with Therese's current assertion that Edward had no interest in the Graceland Property in 1976, it is entirely consistent with this Court's determination that Edward and not Therese was the purchaser of the property and that Therese was no more than an accommodation party to any papers that she was called upon to sign.

17. In summary, this Court finds no credible evidence that Therese purchased the Graceland Property in 1976 for value as she has claimed. Instead this Court finds that Edward was the sole purchaser of that property, as is reflected in all of the operative documents (the Purchase Contract, the Trust Agreement and the closing statement). ⁶

18. After Edward acquired the Graceland Property in 1976, Therese managed it. In connection with that operation, she established a checking account under the name "The Building Company" on which she and on employee of the Des Plaines News Agency were signatories. Therese testified that she thought but wasn't positive that Edward was also a signatory on the account (Tr. 79-80).

19. Rents from the various tenants, including the businesses operated both by Therese and by Edward, were deposited into the Building Company account. Therese used those rents to pay the expenses associated with the operation of the building, including such items as real estate taxes, snow removal and utility expenses (Tr. 78-79).

20. It was not until the preparation and filing of her individual tax return for the year 1979 (some four years after Edward's 1976 purchase of the Graceland Property) that Therese sought to claim the income and expenses associated with that Property (J. Ex. 11). ⁷ That return was prepared by accountant Leonard Blatt (Tr. 86-87), who has written a memorandum to Therese stating that the 1979 return was the first return in which Therese claimed any expenses associated with the Property (J. Ex. 26). That 1979 return contained a handwritten Schedule E reporting that Therese acquired the Graceland Property in 1979 (not 1976). Another part of the return was a depreciation schedule on the Graceland Property claiming $5,833 per year on a straight-line method (J. Ex. 11, Tr. 89-90).

21. Therese's income tax returns filed for the years 1980 (when she sold the Des Plaines News Agency) through 1982 continued to report that she had acquired the Graceland Property in 1979, not in 1976 as she now claims (J. Exs. 12-14). That 1982 return was filed in 1983, some seven years after Edward's 1976 purchase of the Graceland Property.

22. In 1982 Therese's 1979 income tax return was audited by the Internal Revenue Service, and she engaged attorney Eugene Mahoney ("Mahoney") to represent her (Tr. 100-01). Mahoney then prepared and Therese filed an amended 1979 income tax return dated April 6, 1982 (Form 1040X) as a claim for refund with respect to the tax year 1979 (Tr. 90-91, 97; J. Ex. 50-7).

23. On August 13, 1982 Mahoney wrote to the IRS (J. Ex. 28), stating that Edward had made a gift of the Graceland Property to Therese after he acquired the Graceland Property (without specifying when the claimed gift had taken place) and that Therese had not purchased the property in 1979. Then as now Therese was presenting whatever version of events would put the best face on what her current interests appeared to call for. Certainly the letter is contrary both (a) to Therese's current claim that she purchased the Graceland Property in 1976 and (b) to the Schedule E acquisition date of 1979 that she had represented on her income tax returns for the years 1979 through 1982.

24. In April 1982, also in connection with the ongoing audit of Therese's 1979 tax return, Edward purportedly executed an assignment of his beneficial interest in the Land Trust (J. Ex. 29). That assignment, prepared by Mahoney, was never lodged with Bank as trustee. Indeed, the whereabouts of the original document is unknown (Tr. 119). During her deposition Therese testified as to that purported assignment, "I don't know if that first one really had been done" (Tr. 120). Moreover, on April 5, 1982 Bank as Trustee of Trust No. 61771574, certified--at Edward's request--that Edward was the sole beneficiary of the Land Trust (J. Ex. 30).

25. In an August 15, 1984 affidavit submitted to the IRS in connection with the ongoing audit of her 1979 income taxes, Therese stated that Edward "intended to convey the premises [Graceland Property] to the transferee [identified as Therese] on or about the time of their divorce on June 29, 1976" (J. Ex. 32). That statement too is contrary to Therese's present claim that she purchased the Graceland Property for value in 1976, and is thus still another manifestation of her willingness to assert any version of events that serves her best interests at the time that she advances such an assertion. It was only beginning with her income tax return filed in 1983 (the first return that she filed after Mahoney had sent the August 13, 1982 letter referred to in Finding 23) that Therese for the first time represented that she had acquired the Graceland Property in 1976 (J. Exs. 15, 16, 17).

26. On June 29, 1984 Therese executed an exclusive authorization to a real estate firm to lease space in the Graceland Property (J. Ex. 33). Although that form spoke of the "Owner" and Therese signed on the "Owner" line, that usage simply reflected the terminology of the broker's pre-prepared printed form, in which the party granting the exclusive authorization "warrants he is the Owner of record or has the authority to execute this Agreement." No weight is ascribed to the execution of that form by Therese, who was unquestionably managing the Graceland Property at the time--the document is not probative evidence that she was then in fact the owner.

27. Some time in mid to late 1984 Edward became seriously ill with cancer. According to his death certificate, the disease had an onset approximately five months prior to his death on December 11, 1984 (J. Ex. 43). As later Findings reflect, that illness restored the relationship between Edward and Therese to the extent that they actually remarried shortly before his death.

28. In September 1984 Edward made an assignment of his 100% beneficial interest in the Land Trust to Therese (J. Ex. 34). Therese acknowledges that she paid no consideration to Edward for that transfer (Tr. 121). Unlike the purported assignment that had assertedly been signed some time in April 1982 in Mahoney's office, the September 1984 assignment was acknowledged by Bank on September 8, 1984 (J. Ex. 34). ⁸ Before September 1984 no assignment by Edward of any beneficial interest in the Land Trust or of the power of direction as to the Graceland Property was ever lodged with or acknowledged by Bank (J. Exs. 21, 30, 34). Based on the clear weight of the evidence, this Court finds that before September 8, 1984 Edward was the sole owner of the beneficial interest in the Land Trust.

29. On October 15, 1984 Therese (who was now the solo beneficiary of the Land Trust) entered into an exclusive agency agreement with Wm. L. Kunkel & Co. of Des Plaines, Illinois under which she offered the Graceland Property for sale at a price of $245,000 (J. Ex. 72). Therese testified that she assumed she had arrived at the offering price as the result of an appraisal by that real estate firm (Tr. 125).

30. Not long after he had executed the September 1984 assignment of his beneficial interest in the Land Trust (more precisely, in late October 1984), Edward was hospitalized. On November 16, 1984 Therese and Edward were remarried in a ceremony performed in Edward's hospital room (J. Ex. 42), and on that same day Edward executed his last will and testament (J. Ex. 45).

31. On December 11, 1984 Edward died of cancer at the age of 52 (J. Ex. 43). That was only three months after he had executed the assignment of beneficial interest in the Land Trust to Therese and the assignment had been lodged with and acknowledged by Bank as trustee.

32. On July 30, 1985 Therese was appointed the personal representative of Edward's estate by the Circuit Court of Cook County (J. Ex. 45). On the petition for probate that Therese filed with the Circuit Court, she did not list any assets of Brown's as having any value (id.).

33. During the course of the probate proceedings, a number of claims were presented to the Circuit Court by parties asserting themselves to be Edward's creditors (J. Ex. 45):

(a) By agreement of Therese in her capacity as Executrix, on December 2, 1985 the Circuit Court allowed the claim of Marine Bank, N.A. ("Marine Bank") for $65,266.75, based on Edward's February 25, 1981 guaranty to Marine Bank of lease payments of $2,228 per month for 60 months by Delaware Professional Services, Inc. ("Delaware") under an equipment lease of the same date. On September 8, 1984 Edward was liable to Marine Bank on that guaranty.

(b) Union Bank & Trust Company of Minneapolis , Minnesota ("Union Bank") filed a claim in the amount of $81,508.94, which was neither allowed nor denied by the Circuit Court. Union Bank predicated liability for that claim on Edward's execution of a July 1, 1982 guaranty of a promissory note in the amount of $90,000 executed by Delaware on the same date. On September 8, 1984 Edward was potentially liable to Union Bank on that guaranty as well.

34. On September 8, 1984 Edward was also indebted to the United States for substantial amounts of unpaid federal taxes in addition to the amount later referred to in Finding 36:

(a) income taxes for the year 1981 in the amount of $32,800 plus statutory accruals (as of September 23, 1992 the unpaid balance of the 1981 tax year assessments against Edward was $67,154.90, as set forth on the Certificate of Assessments and Payments (IRS Form 4340) (J. Ex. 1));

(b) income taxes for the year 1982 in the amount of $10,130 plus statutory accruals (as of September 23, 1992 the unpaid balance of the 1982 tax year assessments against Edward was $15,324.15, as set forth on the Certificate of Assessments and Payments (J. Ex. 2)); and

(c) a 100% penalty assessed pursuant to 26 U.S.C. §6672 in the amount of $72,492.82 for unpaid federal withholding taxes due from National Health Corp. of Michigan for the quarters ended March 31, 1983 and March 31, 1984, plus statutory accruals to the date of transfer (as of December 18, 1992, the unpaid balance of the assessments against Brown for the 100% penalty was $74,993.71, as set forth on the Certificate of Assessments and Payments (J. Ex. 3).

None of those tax liabilities has ever been paid.

35. On September 11, 1985 Therese, in her capacity as the Executrix of Edward's estate, filed a federal estate tax return (Form 706) with the IRS (J. Ex. 44). That return reported that Edward's debts totaled $334,820, of which $274,820 represented a judgment that had been obtained by the United States against Brown, but that return did not reflect Edward's tax liabilities referred to in Finding 34.

36. What the estate tax return referred to was a judgment entered by this Court in Civil Action No. 80 C 5620 on motion of the United States for summary judgment. That liability arose out of assessments against Edward as a person responsible pursuant to 26 U.S.C. §6672 for unpaid federal withholding taxes for the second and third quarters of 1970 and for all four quarters of 1982. Judgments in the respective amounts of $239,184.41 for 1970 and $35,635.57 for 1982 had been entered by this Court on October 31, 1983, less than ten months before Edward transferred his interest in the Land Trust to Therese on September 8, 1984. Those judgments have also never been paid.

37. After Therese first listed the Graceland Property for sale in October 1984 at a $345,000 listing price (see Finding 29), the property remained on the market until September 15, 1985, when Therese signed an agreement to sell the property for $220,000 (J. Ex. 60). On November 19, 1985 Therese closed the sale of the Graceland Property to Frederick T. and Carol A. Mosiman for that $220,000 price (J. Ex. 63). After payment of various liens, mortgages, taxes and charges, Therese received the net sum of $105,709.70 as a result of the sale (id.).

38. On September 8, 1984 the fair market value of the Graceland Property was not less than $220,000. Edward's transfer of his 100% interest in the Graceland Property to Therese on that date was made for no consideration (Tr. 121) and rendered Edward insolvent, leaving him with insufficient assets with which to pay his creditors. Edward made the September 8, 1984 transfer to Therese of his 100% beneficial interest in the Land Trust with the intent to disturb, delay, hinder or defraud the United States with respect to the collection of the tax liabilities that Edward owed on that date.

39. Before Therese executed the agreement to sell the Graceland Property on September 18, 1985 she knew (as evidenced by the federal estate tax return that she had signed one week earlier) that Edward's unpaid indebtedness was at least in the amount referred to in Finding 35 (including on indebtedness to the United States in an amount not less than $274,820) and that Edward's transfer to her of the Graceland Property held in the Land Trust on September 8, 1984 had rendered Edward insolvent (J. Ex. 44).

Conclusions of Law

1. This Court has jurisdiction of this action under 28 U.S.C. §1345.

2. In this action to set aside a conveyance on September 8, 1984 as fraudulent as to the United States as a creditor, the applicable statutory provision is the now-repealed Ill. Rev. Stat. ch. 59 ¶4 ("Section 4 "):

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

See this Court's opinion in United States v. Kitsos, 770 F.Supp. 1230, 1235 & n.13 (N.D. Ill. 1991). ⁹

3. There is no limitations period specified in Section 4 . But in any event the United States would not be barred by any applicable Illinois statute of limitations by reason of the rule quod nullum tempus occurrit regi (United States v. Tri-No Enterprises, Inc., 819 F.2d 154, 158 (7th Cir. 1987) and cases cited there).

4. When a conveyance is rendered void as to creditors under Section 4 (which is, the statutory equivalent of the equitable remedy for conveyances in fraud of creditors of the transferor), a creditor may set aside the transfer and may elect to recover either the property itself or its cash value in satisfaction of the debt (Tcherepnin v. Franz, 489 F.Supp. 43, 45 (N.D. Ill. 1980); and see 19A I.L.P. Fraudulent Conveyances ("I.L.P.") §123 , at 441 (1991)).

5. Section 4 , which requires a showing of specific intent on the transferor's part, represents only one branch of the Illinois law of fraudulent conveyances--covering those categorized as fraudulent in fact. But there is another category that leads to the same result--that covering conveyances that are deemed fraudulent in law. As stated in Gendron v. Chicago & N.W. Transp. Co., 139 Ill.2d 422, 438, 564 N.E.2d 1207, 1215 (1990):

In order to establish that a conveyance is fraudulent in law, three elements must be present: (1) there must be a conveyance mode for no or inadequate consideration; (2) there must be an existing or contemplated indebtedness against the transferor; and (3) it must appear that the transferor did not retain sufficient property to pay his indebtedness.

6. For fraudulent conveyance purposes, the United States is of course a creditor as to any unpaid tax liabilities. Such liabilities become due and owing on the date that the returns are required to be filed and not on the date of assessment (Indiana Nat'l Bank v. Gamble [84-2 USTC ¶9884 ], 612 F.Supp. 1272, 1276 (N.D.Ill. 1984); Kitsos, 770 F.Supp. at 1234-35). Indeed, for purposes of a fraudulent conveyance action a "creditor" becomes such when its claim arises, even if its claim is contingent and regardless of the fact that the claim has not matured or been reduced to judgment until after the conveyance (Menconi v. Davison, 80 IIl.App.2d 1, 4-5, 225 N.E.2d 139, 141-42 (1st Dist. 1967); and see I.L.P. §133 , at 451).

7. Assessments of tax liabilities as evidenced by IRS Forms 4340 are presumed to be correct. It is the taxpayer's burden to overcome that presumption by persuading the finder of fact by a preponderance of the evidence that the assessment is incorrect (United States v. Dixon [87-2 USTC ¶9485 ], 672 F.Supp. 503, 507 (M.D. Ala. 1987), aff'd mem., 849 F.2d 1478 (11th Cir. 1988)). No such proof was offered by Therese, and this Court concludes that the amounts set out in Findings 34 and 36 (together with then-accrued interest) were due and owing from Edward to the United States on September 8, 1984.

8. In this instance the weight of the credible evidence leads to the conclusion that the transfer to Therese took place in September 1984 and not earlier. That transfer was fraudulent both in fact (because the circumstances show that Edward's intent was to prevent the United States, and perhaps other creditors, from collecting a just debt (Till v. Till, 87 Ill.App.2d 358, 361, 231 N.E.2d 641, 643 (1st Dist. 1967)) and in law (because all three factors set out in Gendron were unquestionably present). In light of Edward's fraudulent intent and Therese's knowledge of the circumstances (see Alan Drey Co. v. Generation, Inc., 22 Ill.App.3d 611, 317 N.E.2d 673, 680 (1st Dist. 1974)), the transfer must be set aside in full even if Therese were considered to have contributed some value to the Graceland Property at the time of acquisition or during the period of its ownership (Svalina v. Saravana, 341 Ill. 236, 250, 173 N.E. 281, 286 (1930); Cook v. Tedrick, 338 Ill.App. 573, 579, 88 N.E.2d 515, 518 (4th Dist. 1949)).

9. In this instance the transfer involved the beneficial interest in an Illinois land trust, a real estate title-holding arrangement in which the only attribute of ownership that the beneficiary does not have is title (In re Gladstone Glen, 628 F.2d 1015, 1018 (7th Cir. 1980)), retaining absolute control of the management and receiving all the earnings, avails and proceeds of the real estate (People v. Chicago Title & Trust Co., 75 Ill.2d 479, 485-86, 389 N.E.2d 540, 542 (1979)).

10. Because the assignee of a beneficial interest in an Illinois land trust acquires all of the assignor's interest in the transferred property and stands in the shoes of the assignor, the assignee takes the assignor's interest subject to all legal and equitable defenses existing at the time of the assignment (Montgomery Ward & Co. v. Wetzel, 98 Ill.App.3d 243, 248, 423 N.E.2d 1170, 1175 (1st Dist. 1981)).

11. Here (as in true in every Illinois land trust with a bank or other institutional trustee) the specific terms of the Trust Agreement required any assignment of a beneficial interest to be lodged with the trustee, with the trustee's acceptance indicated thereon, before the assignment would become binding upon the trustee. In that situation the assignment is not considered completed until those two things take place (St. Charles Sav. & Loan Ass'n v. Estate of Sundberg, 150 Ill.App.3d 100, 107-08, 501 N.E.2d 322, 327 (2d Dist. 1986)). That being so, Therese as assignee did not acquire the status of a beneficiary of the trust until the assignment was lodged with and accepted by Bank on September 11, 1984 (Larkin v. Bank of Ravenswood 91 Ill.App.3d 803, 805, 415 N.E.2d 15, 16 (1st Dist. 1980)).

12. Any purported assignment by Edward to Therese of his beneficial interest in the Land Trust in April 1982, which claimed assignment was unquestionably not lodged with nor accepted by Bank as trustee, was never completed. Therese could not and did not acquire the status of a beneficiary under the Land Trust pursuant to any such assignment. In any event, any purported assignment by Edward to Therese of his beneficiary interest in the Land Trust in April 1982 would also have constituted a fraudulent conveyance under Illinois law as to the United States .

13. As for the properly lodged and accepted assignment by Edward to Therese of his interest in the Land Trust (that in September 1984), for the reasons stated in these Conclusions that clearly constituted a fraudulent conveyance under Illinois law as to the United States . That being the case, it has long been established that a court of equity will follow the property into the hands of the assignee and subject it to the payment of the assignor's debt (Coale v. Moline Plow Co., 134 Ill. 350, 358, 25 N.E. 1016, 1018 (1890)). In that event the assignee is liable to the assignor's creditors for the value of the property and will be held to account for any money received on its sale (id.; Best v. Fuller & Fuller Co., 185 Ill. 43, 51, 56 N.E. 1077, 1079 (1900) (per curiam)).

14. Therese, having knowledge of at least $274,820 owed by Brown to the United States before Therese entered into a contract to sell the Graceland Property, and also having knowledge that Edward had owned (and that his Estate owned) no other assets with which to satisfy that liability, was a fraudulent grantee. Therese therefore held the Graceland Property in trust for the benefit of the United States and is personally liable to the United States to the extent of the net proceeds of $105,709.70 that she received from the sale of that property on November 19, 1985, plus interest on that sum until paid to the United States .

* * *

It is hereby ordered that judgment shall be entered in favor of the United states and against Therese Brown in the amount of $105,709.70, plus interest on that amount at the rate of 5% per annum from November 19, 1985 (the date of her sale of the Graceland Property) to the date of judgment.

¹ All exhibits in the record have been given joint designations by the parties and are referred to here as "J. Ex.--."

² To be more precise, the allegedly fraudulent conveyance involved the beneficial interest in the land trust holding title to that real estate.

³ In response to a subpoena duces tecum requesting all documents relating to the Land Trust, Bank responded that it had none (Tr. 146-48). Again the record is devoid of any documentary evidence--any objective facts--to corroborate Therese's unsupported testimony.

⁴ Indeed, over the post-divorce years Therese received very substantial salaries from Edward's businesses. At least after she sold the Des Plaines News Agency in 1980, those salaries and her $18,000 a year alimony provided by far the largest part of her not inconsiderable income (see, e.g., J. Ex. 12-14).

⁵ It is not at all unusual in a friendly uncontested divorce for the lawyer for one spouse (frequently for the husband) to act nominally for the other spouse. That arrangement (remember that Goren had been Edward's lawyer in the past) in entirely consistent with Edward's total noninvolvement in the divorce proceedings--either personally or through counsel--after the Settlement Agreement bad been worked out.

⁶ It is true that the Graceland Property was acquired to house Therese's and her sister's business as its principal tenant, as well as providing a business location for unrelated tenants (and later for Edward's business). But that too was all of a piece with the way in which Edward and Therese continued their relationship (including his provision of financial support for her and the children) after the amicable divorce.

⁷ For that year the real estate generated a net taxable loss (after the depreciation charge referred to later in this Finding) of over $4,500.

⁸ J. Ex. 34 is somewhat confusing as to its date, in that the assignment by Edward and the acceptance by Therese both carried a typewritten date of September 11, 1984 while Bank's acknowledgement of receipt (which must of course take place after the assignment and acceptance are completed) shows a typewritten date of September 8 (three days earlier). Because the difference in dates makes no difference in the result, these Findings will use the Bank's date as presumptively reliable.

⁹ As Kitsos points out, the superseding statute (Ill. Rev. Stat. ch. 59, ¶¶101-112) has been applied retroactively by the Illinois courts in terms of granting equitable relief. But it makes no difference whether the same principle would apply in a suit such as this for money damages, because the result here would be the same under the new statute as under Section 4 .

 

 

 

United States of America , Plaintiff v. William B. Freeman, et al., Defendants

U.S. District Court, Dist. N.J., Civ. 92-255, 3/3/93

[Code Secs. 6321 and 7401 ]

Tax protestors: Fraudulent conveyance: Tax liens.--The conveyance of a tax protestors' residence to the protestors' church was set aside as a fraudulent conveyance and the property was foreclosed in satisfaction of their tax liens. The conveyance rendered the taxpayers insolvent, which under state law ( New Jersey ) fits the definition of a fraudulent conveyance. The transaction was also made with the intent to defraud the taxpayers' creditors since the conveyance was made immediately after they became tax debtors. In addition, the taxpayers, who were deemed trustees of the church because of unanswered requests for admissions, remained in possession and control of the property. Further, the tax protestors' constitutional objections to the federal taxation of income were deemed frivolous and without merit. A motion to dismiss the complaint was denied because the taxpayers received copies of the authorization letter and the liens.

I. INTRODUCTION

RODRIGUEZ, District Judge:

This is a civil action brought by the United States to foreclose on tax liens against defendants William and Clara Freeman and the Better Life Center Church . In December 1988, the court entered judgment against defendants William and Clara Freeman and the Better Life Church in the amount of $131,978.75 for delinquent taxes. ¹ Plaintiff comes now to foreclose its tax liens against what appears to be the Freemans' only distrainable asset, the house in which the Freemans live.

Currently before this court are plaintiff's motion for summary judgment and three motions by defendants. In its motion for summary judgment, plaintiff seeks an order (1) setting aside the Freemans' conveyance of the house to defendant Better Life Center Church; and (2) directing the foreclosure and sale of the home to satisfy the tax judgment. Defendants move to stay or dismiss the proceedings and challenge the court's jurisdiction in this matter on several grounds. For the reasons stated below, the court denies defendants' motions, and grants plaintiff's motion for summary judgment, setting aside the conveyance as fraudulent. The court further orders the sale of defendants' home to satisfy the tax lien against defendants.

II. FACTS

Sometime around 1978, William Freeman, a resident of New Jersey , joined the tax protestor movement and stopped paying federal income taxes. The United States filed tax liens against Mr. Freeman for tax years 1978 through 1983 amounting to $167,156.05, and against the Better Life Center Church as Mr. Freeman's nominee in the amount of $19,244.57. In March 1988, the United States commenced an action against Mr. Freeman to reduce its assessments for these tax years to judgment. The court, Bissell, J., presiding, entered judgment for the United States in the amount of $152,634.37, plus statutory interest. Mr. Freeman has paid no part of these judgments and failed to respond to post-judgment discovery requests.

The relevant facts are not in dispute. ² In 1971, Mr. Freeman bought a lot with a house in Newfield , New Jersey ("the Newfield property") for $26,000, and he and Mrs. Freeman have resided there since. (Pl.'s Mem. Supp. Mot. Summ. J., Ex. 12.) On April 14, 1979, Mr. Freeman filed a tax return for tax year 1978, in which he claimed tax exempt status as an ordained minister who had taken a vow of poverty within the Better Life Center Church , Chapter 101488 ("BLCC"). (Pl.'s Mem. Supp. Mot. Summ. J., Ex. 28.) Two days later, Mr. Freeman conveyed the Newfield property to the BLCC for one dollar, while he and his wife remained trustees of the BLCC. (Pl.'s Mem. Supp. Mot. Summ. J., Ex. 14.) The Freemans continue to live in the home on the Newfield property, apparently paying no rent to the BLCC, of which they remain in control. ³ Beginning in tax year 1979, Mr. Freeman stopped filing tax returns altogether. ⁴

III. DISCUSSION

A. Clara Freeman's Motion to Stay the Proceedings

Around August 17, 1992, Mrs. Freeman requested a stay of proceedings pending a response to her request, made under the Freedom of Information Act (FOIA), upon the District Director of the Internal Revenue Service (IRS) for copies of the liens and judgments entered against her in this action (Civil Action No. 92-255). Mrs. Freeman received a reply from the IRS dated August 24, 1992, requesting additional time to respond to her FOIA request. She then moved from a stay, ostensibly on the ground that the United States somehow cannot pursue this matter until she receives the documents she has requested. The United States did not respond to this motion. For the reasons stated below, the court denies defendant Clara Freeman's motion to stay the proceedings.

The decision whether to grant is generally within the discretion of the court, which should weigh the value of a stay against the interests of proceeding with the case. Landis v. North American Co., 299 U.S. 248, 254-55 (1938); Bechtel Corp. v. Local 215, Laborers International Union , 544 F.2d 1207, 1215 (3d Cir. 1976), Chrysler Corp. v. Fedders Corp., 519 F.Supp. 1252, 1265 (D.N.J. 1981), rev'd on other grounds, 670 F.2d 1316 (3d Cir. 1982). The interests of proceeding in this case outweigh the value of the requested stay.

First, the materials Mrs. Freeman requests from the IRS have no probative value. The terms of her FOIA request are limited to liens and judgments entered against her name as a result of this civil action, which is merely an action to set aside a conveyance and to execute on a judgment previously entered by Judge Bissell in Civil Action No. 88-1119 against Mr. Freeman. The IRS therefore might have difficulty responding to her request, as the relevant documents would be referenced to Civil Action No. 88-1119 rather than No. 92-255.

Second, the Freemans received, but returned unopened, a copy of the requested judgment against Mr. Freeman along with the request for admissions. The request for admissions put the Freemans on notice that tax liens against Mr. Freeman and the Better Life Center Church were filed with the Gloucester County Clerk's Office. Third, although it is not clearly stated in Mrs. Freeman's motion to stay, it is apparent from her motion to dismiss and her opposition to plaintiff's motions that she assumes the production of liens and judgments against her name is a prerequisite to the commencement of a civil collection action under §7401 of the Internal Revenue Code. ⁵ As she admits that she and her husband control the BLCC's property interests in the Newfield property, this argument is without merit.

The tax judgment in this case is more than four years old. This Court sees no value in delaying a decision on whether and how to execute this judgment, and denies plaintiff's request for a stay.

B. Clara Freeman's Motion to Dismiss Complaint

As stated above, Mrs. Freeman moves to dismiss the complaint against her in this case, apparently alleging that the United States has failed to fulfill certain procedural requirements under I.R.C. §7401 . Specifically, Mrs. Freeman states that she has received neither a copy of the authorization by the Secretary of the Treasury to the Attorney General to commence a civil action against her, nor copies of any liens against her name. Therefore, she argues, the United States cannot properly name her as a defendant. The court finds that this argument completely lacks merit. Not only does the United States attach to its Memorandum copies of the §7401 authorization letter and copies of the liens, but Mrs. Freeman in her motion to dismiss admits that she is a trustee of the BLCC, against which the United States has shown its lien. Again, these liens were mailed to the Freemans with the requests for admission. The court denies Mrs. Freeman's motion to dismiss.

C. William Freeman's Challenge to Jurisdiction

Mr. Freeman has filed several papers with the court in opposition to the United States' action, essentially arguing three defenses: (1) that the United States failed to effect proper service of either the complaint or the requests for admission; (2) that the United States lacks both the power to tax him and jurisdiction over him; and (3) that his conveyance of the Newfield property to the BLCC is not fraudulent, because he is no longer a trustee of the "Church," and there is an outstanding lien in favor of a third party on the Newfield property. Each of these arguments lacks merit for the reasons stated below.

1. Improper Service of Process

Mr. Freeman admits he was served with the complaint in this action on or about February 12, 1992, and in fact names the three IRS officials who served him. Mr. Freeman argues, however, that he is not amenable to service of process by federal officials. It appears to be a fundamental tenet of the tax protestor movement that the federal government exercises virtually no legitimate power over residents of states. Relying on this unique theory of federalism, Mr. Freeman has attempted to void the service of process on him. ⁶ Under the Territorial Limits of Effective Service rule, "[a]ll process other than a subpoena may be served anywhere within the territorial limits of the state in which the district court is held. . . ." Fed. R. Civ. P. 4(f). Aside from the substantive jurisdictional issues in this case, Mr. Freeman's service of process argument fails on its face.

1. Lack of Jurisdiction

Relying on a notion of separation of powers between the federal and state governments that harkens back to the days of the benighted Dred Scott decision, ⁷ the tax protestor movement encourages its members to deny that the taxation power of the federal government exists, and to resist the enforcement and collection actions taken by the federal government against them in pursuit of those tax revenues. Mr. Freeman argues that because he is not a member of any of a few specific, narrowly delineated groups (such as a resident of the District of Columbia or a member of the military), he is not subject to federal taxation of income or to the jurisdiction of federal courts. Federal courts have never accepted these arguments, holding instead that the federal government has the power to tax the income of all citizens in the United States . Brushaber v. Union Pacific R.R. [1 USTC ¶4 ], 240 U.S. 1, 12-19 (1916) (federal income tax imposed on citizens throughout nation); United States v. Sloan, 939 F.2d 499, 501 (7th Cir. 1991) (all individuals, freeborn and nonfreeborn, natural and unnatural alike, must pay federal income tax on their wages, regardless of whether they have requested, obtained or exercised any privilege from federal Government), cert. denied, 112 S. Ct. 940 (1992). Courts summarily reject arguments to the contrary as frivolous. United States v. Collins [91-2 USTC ¶50,554 ], 920 F.2d 619, 629 (10th Cir. 1990) (citing Brushaber, supra), cert. denied, 111 S. Ct. 2022 (1991); Wilcox v. Commissioner [88-1 USTC ¶9387 ], 848 F.2d 1007 (9th Cir. 1988); Connor v. Commissioner [85-2 USTC ¶9598 ], 770 F.2d 17 (2d Cir. 1985); United States v. Slater [82-2 USTC ¶9571 ], 545 F.Supp. 179 (D. Del. 1982), aff'd, 709 F.2d 1496 (3d Cir. 1983). The court is no more convinced by these arguments today in 1993 than it was in 1988 when Mr. Freeman raised the same arguments in defense to the United States ' original action for the delinquent taxes. The court denies Mr. Freeman's motion contesting jurisdiction and venue.

2. Mr. Freeman's Factual Allegations That He is No Longer a Trustee of BLCC and That There is an Outstanding Lien on the Newfield Property

Throughout their filings with this court, Mr. and Mrs. Freeman both allege that Mr. Freeman rescinded and terminated his trusteeship in the BLCC, apparently to rebut the government's argument that he remained in effective control of the Newfield property. In addition, the Freemans allege that there is an outstanding lien on the Newfield property to a third trustee of the BLCC, Anna Holliday. These arguments fail to persuade the court that the government's motion for summary judgment should be denied. Plaintiff properly served the Freemans with its requests for admission that they continued to exercise complete control over the assets of the BLCC and that the federal tax liens were the only encumbrances upon the Newfield property. (Pl.'s Mem. Supp. Mot. Summ. J., Ex. 2, Adm. 2, 13). Under Fed. R. Civ. P. 36(a), unanswered requests for admissions are deemed admitted. Under Fed. R. Civ. P. 8(d), the Freemans are bound by their defaulted admissions.

D. United States ' Motion for Summary Judgment

The United States asks the court to set aside the 1979 conveyance of the Newfield property to the BLCC as fraudulent, and to foreclose the property in satisfaction of Mr. Freeman's tax liabilities. For the reasons stated below, the court sets aside the conveyance and grants the foreclosure request.

1. Fraudulent Conveyance

For purposes of federal tax cases, state law determines a taxpayer's legal interest in property. 26 U.S.C.A. §6321 (1992); Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512 (1960). The New Jersey Uniform Fraudulent Transfer Act (UFTA), N.J. Stat. Ann. §25 :2-20 et seq. (West 1992), permits a creditor to defeat a debtor's conveyance of property by showing fraud, actual or constructive. Here, the court finds both actual and constructive fraud in defendants' conveyance of the Newfield property.

a. Constructive Fraud

From facts both uncontested and admitted by default, it is clear that the Freemans' transfer of the Newfield property falls under the rubric of the UFTA. The Act provides in relevant part:

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

N.J. Stat. Ann §25 :2-27(a) (Supp. 1992). The government shows that Mr. Freeman was rendered insolvent at the time of the transaction, and that he was not paid value for the transaction. Under the UFTA, the court finds that the Freemans fraudulently conveyed the Newfield property.

The transaction rendered Mr. Freeman insolvent. On April 15, 1979, he became liable to the United States for his income taxes in the amount of $7,148.72. On the next day, Mr. Freeman transferred the Newfield property to the BLCC. There is no evidence in the record that Mr. Freeman had at the time any other assets than the Newfield property. In statements filed with the court, Freeman states that he has no savings account, stocks or bonds. Thus, because the consideration received for the property, one dollar, was less than his liabilities of $7,148.72, the transaction rendered him insolvent under the "balance sheet" test of the UFTA. ⁸ As for the one dollar of consideration, this court takes judicial notice under Fed. R. Evid. 201 that one dollar is not "reasonable equivalent value" for purposes of the Act. ⁹ The court finds that Freeman's conveyance of the Newfield property to the BLCC was constructively fraudulent.

b. Actual Fraudulent Intent

The UFTA also provides that conveyances made with intent to defraud a debtor's creditors are fraudulent. The Act states in relevant part that:

A transfer made . . . by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made, . . . if the debtor made the transfer. . . .:

a. With actual intent to hinder, delay, or defraud any creditor of the debtor. . . .

N.J. Stat. Ann §25 :2-25(a) (Supp. 1992). Factors the court may consider in assessing actual fraudulent intent include the following: (1) whether the transfer was to an insider; ¹⁰ (2) whether the debtor retained control of the transferred property after the putative transfer; ¹¹ (3) whether the property transferred represented substantially all of the debtor's assets; ¹² (4) whether the value received in consideration was reasonably equivalent to the value of the transferred property; ¹³ and (5) whether the debtor became insolvent after the debt was incurred. ¹⁴ The evidence on each of these factors weights heavily in the government's favor.

First, the transfer to the BLCC may be considered an "inside" transfer for purposes of the Act. The Freemans have admitted by default their continuing control over the BLCC, to which the Newfield property was transferred. Although the BLCC is not clearly a corporation or a partnership as those terms are legally defined, the situation here is sufficiently analogous. The Freemans formed the BLCC in 1979 and remain its trustees.

Second, the Freemans remain in possession and control of the Newfield property and continue to enjoy all the benefits of ownership. They have continued to live in the house for almost fourteen years since the transfer to the BLCC. There is no indication that they pay rent. Were the Newfield property free of liens, and if the Freemans wished it sold, it is highly doubtful that the BLCC would prevent its sale.

Third, the Newfield property represented substantially all of the Freemans' assets. Fourth, they received only one dollar in exchange, which, by any stretch, is not "reasonably equivalent" to the value of the Newfield property. Finally, by transferring the assets for one dollar, Mr. Freeman rendered himself insolvent in the face of his already-incurred tax liabilities. In light of these facts, and the fact that this transfer occurred immediately after Mr. Freeman became a tax debtor, this court concludes that the conveyance was intentionally fraudulent.

IV. CONCLUSION

For the reasons stated above,

IT IS HEREBY ORDERED on this 2nd day of March, 1993, that plaintiff's motion for summary judgment is GRANTED.

IT IS FURTHER ORDERED that defendants Clara Freeman's motion to stay the proceedings and to dismiss the complaint are DENIED.

IT IS FURTHER ORDERED that the conveyance of the Newfield property to the BLCC is set aside as fraudulent and that William Freeman, together with the BLCC, is declared the legal owner of the Newfield property.

IT IS FURTHER ORDERED that the federal tax liens against Mr. Freeman's interest in the Newfield property be foreclosed, and the property be sold.

¹ Order Granting United States ' Mot. for Summ. J., United States v. Freeman, (D.N.J. Dec. 2, 1988) (No. 88-1119) (Bissell, J.).

² On July 7, 1992, plaintiff served by mail upon William Freeman a request for admissions pursuant to Fed. R. Civ. P. 36(a), to which Mr. Freeman did not properly respond. Unanswered requests for admissions are deemed admitted. See, e.g., United States v. Kasuboski, 834 F.2d 1345, 1349-50 (7th Cir. 1987) (delinquent taxpayers held to facts contained within admissions to which they neither responded nor requested to withdraw). In addition, defendants have made no motion to have such defaulted admissions withdrawn or amended. Fed. R. Civ. P. 36(b). The facts as stated herein come from the deemed admissions of the defendants.

³ Mr. Freeman has attempted to introduce evidence that he rescinded and terminated his trusteeship in BLCC on July 21, 1979, in the form of a document apparently printed on a dot-matrix printer and registered with the county clerk's office on March 30, 1992. This document, purportedly executed on July 21, 1979, attempts to transfer Mr. Freeman's interest to Anna Holiday but leaves Mrs. Freeman as the other trustee of BLCC. For reasons stated below, this Court cannot accept this evidence.

⁴ It is unclear whether Mr. Freeman resumed filing or paying taxes for tax years 1984 forward. In any event, plaintiff has obtained a judgment only for taxes owed from 1979 to 1983.

⁵ Section 7401 provides: "No civil action for the collection or recovery of taxes, or of any fine, penalty, or forfeiture, shall be commenced unless the Secretary authorizes or sanctions the proceedings and the Attorney General or his delegate directs that the action be commenced." I.R.C. §7401 (1988). It is not clear from where Mrs. Freeman gets authority for the proposition that §7401 requires the Secretary to supply her with copies of liens or judgments.

⁶ Mr. Freeman also uses a similar argument to explain why he returned unopened, unread and unanswered the United States ' request for admission. As part of his attempted rejection of the powers of the federal government, Mr. Freeman eschews the use of two-letter postal code abbreviations for states and the use of zip codes in his own address. In a letter dated July 25, 1992, Mr. Freeman explained to the Department of Justice that he has returned and will continue to return mail that, by using his zip code and the abbreviation "NJ," fails to conform to his proper address.

⁷ Dred Scott v. Sandford, 60 U.S. (19 How.) 393 (1857).

⁸ Insolvency is defined for purposes of the Act as where "the sum of the debtor's debts is greater than all of the debtor's assets, at a fair valuation." N.J. Stat. Ann. §25 :2-23(a) (Supp. 1992).

⁹ The UFTA provides that "[v]alue is given for a transfer . . . if, in exchange, . . . property is transferred . . . ." N.J. Stat. Ann. §25 :2-24(a) (Supp. 1992).

¹⁰ N.J. Stat. Ann. §25 :2-26(a) (Supp. 1992). The UFTA defines "insider" as a partnership or corporation of which the debtor has control. N.J. Stat. Ann. §25 :2-22(a) (Supp. 1992).

¹¹ N.J. Stat. Ann §25 :2-26(b) (Supp. 1992).

¹² Id. at 2-26(e).

¹³ Id. at 2-26(h).

¹⁴ Id. at 2-26(i).

 

 

 

United States of America , Plaintiff v. LaVern Scherping, Loren Scherping, Jane Scherping, C.J.S. Ranch and Epsilon Company, Defendants

U.S. District Court, Dist. Minn., 4th Div., CIV. 4-89-825, 5/26/92

[Code Secs. 6321 , 6322 , 6502 and 7403 ]

Foreclosure of lien for taxes: Statute of limitations: Joinder of parties.--Failure to join all parties in the chain of title who owned and transferred property did not warrant dismissal of the IRS's action to set aside fraudulent conveyances and foreclose tax liens. The property was owned by a mother and two adult children who transferred it to a business trust that transferred ownership to a ranch, another business trust of which the mother and children were beneficial owners. The action did not join the mother. Joinder of the first business trust to which the property was transferred by the mother and children, which was dissolved one month after the action was filed, did not warrant dismissal of the action. The business trust could not avoid liability by being dissolved after the action had been filed. Further, the action was governed by the 10-year federal statute of limitations and not the six-year state ( Minnesota ) statute of limitations governing fraudulent conveyances.

Thomas B. Heffelfinger, United States Attorney, Kenneth W. Saffold, Assistant United States Attorney, Minneapolis, Minn. 55401, Jeffrey D. Snow, Tracy A. Anagost, Department of Justice, Washington, D.C. 20530, for plaintiff. Lawrence H. Crosby, Clem & Crosby, 1313 S.E. Fifth St., Minneapolis, Minn. 55414, for defendants. John R. Koch, Reichert, Wenner, Koch & Provinzino, 501 St. Germain, St. Cloud, Minn. 53602, for C.J.S. Ranch.

MEMORANDUM AND ORDER

MACLAUGHLIN, District Judge:

This matter is before the Court on defendants Scherping's motion to dismiss. The motion will be denied.

FACTS

On September 27, 1983, the Internal Revenue Service (IRS) assessed defendants LaVern Scherping, Loren Scherping, and Jane Scherping for unpaid federal income taxes; pursuant to 26 U.S.C. §§6321 and 6322 , a lien against all defendants Scherping's property arose on the day the assessment was made. The defendants failed to pay the taxes due, and on September 20, 1989, the United States filed this action, seeking to reduce the assessments to judgment, to set aside conveyances of real property to defendant Epsilon Company (Epsilon) and C.J.S. Ranch as fraudulent, and to foreclose the federal tax liens against that property. On September 16, 1989, Loren Scherping, LaVern Scherping, and their mother, Laura Scherping, resigned as trustees of Epsilon, a business trust, and amended the terms of the trust to terminate it. Pl.'s Mem. Ex. B-G. The amendment dissolving Epsilon was filed on October 17, 1989. Pl.'s Mem. Ex. A. On May 20, 1991, after several attempts, the United States effected legal service of this action on defendants. Defendants Scherping now move for dismissal under Federal Rule of Civil Procedure 12(b), on two grounds: first, that the statute of limitations to set aside a fraudulent conveyance has run; and second, that the government has failed to join indispensable parties.

DISCUSSION

In reviewing a motion to dismiss for failure to state a claim the Court presumes all factual allegations to be true and all reasonable inferences from those allegations are construed in favor of the non-moving party. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); Palmer v. Tracor, Inc., 856 F.2d 1131, 1132 (8th Cir. 1988). The appropriate inquiry is not whether plaintiff will ultimately prevail but whether he will be allowed to introduce evidence to support his claims. Scheuer, 416 U.S. at 236. Because dismissal on the pleadings is an extreme remedy it is not favored by the courts and is employed only when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957) (footnote omitted). Robinson v. MFA Mutual Insurance Co., 629 F.2d 497, 500 (8th Cir. 1980). See also Palmer, 856 F.2d at 1132.

I. Is the Action to Set Aside Fraudulent Conveyances Barred by the Statute of Limitations?

In support of their motion to dismiss, defendants first argue that the government has no cognizable fraudulent conveyance claim. Defendants contend that because the government obtained service in this case under Minnesota law, the date upon which the statute of limitations was tolled is also governed by Minnesota law. Minnesota Rule of Civil Procedure 3.01 provides that a civil action is commenced when the summons is delivered to the sheriff in the county where the defendant resides; the summons in this action was delivered to the Stearns County sheriff for service on April 26, 1991. Defendants assert that the last conveyance at issue in this case, however, was made to C.J.S. Ranch by a deed dated August 18, 1982 and recorded November 15, 1983. Thus, defendants argue, the action was commenced more than six years after the last conveyance was made and is barred by the six-year statute of limitations applicable to Minnesota 's Fraudulent Conveyance Act.

As the plaintiff notes, however, the defenses of limitations and laches cannot be asserted against the United States . United States v. Brown, 835 F.2d 176, 180 (8th Cir. 1987) (citing Guaranty Trust Co. v. United States, 304 U.S. 126, 132 (1938)). Indeed, the United States Court of Appeals for the Eighth Circuit has expressly held that the IRS may bring suit to set aside fraudulent conveyances without reference to Minnesota's statute of limitations for such actions, because "the United States is not bound by state statutes of limitation or subject to the defense of laches in enforcing its rights." United States v. Wurdemann [81-2 USTC ¶9757 ], 663 F.2d 50, 51 (8th Cir. 1981) (quoting United States v. Summerlin [40-2 USTC ¶9633 ], 310 U.S. 414, 416 (1940)).

While the United States is not bound by state statutes of limitation, it is of course bound by federal statutes of limitation. Defendants do not dispute, however, that this action was timely commenced under 26 U.S.C. §6502 . Therefore, the Court will deny defendants' motion to dismiss the fraudulent conveyance claim as time-barred.

II. Has Plaintiff Failed to Join Parties Who are Indispensable to this Action?

Under 26 U.S.C. §7403(b) , "[a]ll persons having liens upon or claiming any interest in the property involved in [an action to enforce a tax lien] shall be made parties thereto." Under Federal Rule of Civil Procedure 19, a court may dismiss an action if it determines that in equity and good conscience the action should not proceed without joinder of a particular party. Defendants contend that under these rules, Epsilon and defendants' mother, Laura Scherping, ¹ are indispensable to this action, and that because these parties have not been joined, the Court should dismiss the action under Federal Rule of Civil Procedure 12(b)(7).

A party moving to dismiss an action for failure to join a person needed for just adjudication bears the burden of showing the nature of the absent party's interest; to meet this burden, the moving party may need to present affidavits or other extra-pleading evidence of the absent party's interest. 5A Charles A. Wright and Arthur R. Miller, Federal Practice and Procedure §1359 at 426-27 (2d ed. 1990). If an initial appraisal of the facts reveals a possibility that the absent party is needed for a just adjudication, the burden shifts to the opposing party to negate the conclusion. 7 Charles A. Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure §1609 at 130 (2d ed. 1986).

A. Laura Scherping

Defendants assert that Laura Scherping's presence is indispensable to this action, for the following reasons. First, defendants assert that Laura Scherping has a one-third ownership interest in trust certificates issued by C.J.S. Ranch. Defendants have not, however, submitted any evidence of Laura Scherping's ownership interest. Second, defendants assert that Laura Scherping occupies the property at issue (again, defendants have not submitted any evidence of that fact) and that she therefore has an interest in this action to foreclose on the property. Finally, defendants note that paragraph 13 of the complaint alleges that Laura Scherping conveyed property to Epsilon (which plaintiff denominates the nominee or fraudulent conveyee of LaVern Scherping and Loren Scherping), and that paragraph 14 of the complaint alleges that Epsilon, by its trustees LaVern Scherping, Loren Scherping, and Laura Scherping, conveyed property to C.J.S. Ranch (which plaintiff denominates the nominee or fraudulent conveyee of LaVern Scherping, Loren Scherping, and Jane Scherping). Thus, defendants argue, Laura Scherping is inextricably involved in any claims of fraud regarding the transfers to Epsilon and C.J.S. Ranch and must be joined so that the Court may fairly consider the fraudulent conveyance claims.

Plaintiff acknowledges that Laura Scherping once owned 240 acres of real estate now owned by C.J.S. Ranch; however, plaintiff has entered into a stipulated settlement with C.J.S. Ranch which precludes it from asserting tax liens against those 240 acres. Pl.'s Mem. Ex. A. Instead, plaintiff seeks to foreclose only on an additional parcel of 200 acres that was transferred from Epsilon to C.J.S. Ranch. Plaintiff argues that because C.J.S. Ranch, not Laura Scherping, claims to own the 200 acres, Laura Scherping's presence as a party is not necessary to adjudicate the claims regarding the 200 acres. Plaintiff does not address defendants' claims that Laura Scherping's interest as occupant of the property or owner of trust certificates issued by C.J.S. Ranch renders her presence necessary to this action.

As to the fraudulent conveyance claims, plaintiff asserts that while Laura Scherping will likely be called as a witness regarding those claims, she is not implicated in the fraudulent conveyance claims, because the allegedly fraudulent transfers were between defendants Scherping and Epsilon and between Epsilon and C.J.S. Ranch. Plaintiff asserts that there are no allegations that Laura Scherping in her individual capacity participated in the fraudulent conveyances and that she is therefore not a necessary party to this action.

Rule 19 requires joinder of a person who has an interest in an action and is so situated that a disposition in the person's action may impair that person's ability to protect the interest; if a person deemed indispensable to the action cannot be joined, dismissal may be warranted. The Court concludes that defendants have not met their burden of showing that Laura Scherping's interest as an occupant of the property or as owner of trust certificates issued by C.J.S. Ranch renders her indispensable to this action. As noted above, defendants have not submitted any evidence of the nature of these alleged interests. It is impossible to determine from defendants' papers whether Laura Scherping occupies the 200 acres at issue in this case, or the 240 acres that plaintiff has released from the tax lien. Nor is the nature of her occupancy discernible; defendants cite case law regarding the interests of life tenants in foreclosure actions, but do not assert that Laura Scherping is a life tenant. The nature of Laura Scherping's interest as owner of trust certificates is similarly unclear, as defendants have failed to submit copies of those certificates.

While the record does suggest that Laura Scherping may have some interest in the fraudulent conveyance claims, those claims do not directly affect her. Plaintiff seeks to set aside the conveyances as fraudulent so that it may enforce liens that have attached to defendants' property; plaintiff does not seek damages against Laura Scherping or claim a right to foreclose on property owned by her. Moreover, although Laura Scherping's participation in the conveyances may render her testimony significant to the fraudulent conveyance claims, her presence as a party would not be necessary to adjudicate those claims. The Court therefore concludes that Laura Scherping does not have an interest that renders her indispensable to this action.

B. Epsilon

Defendants assert that Epsilon is a necessary party to this suit because, as a prior titleholder of the property at issue, it stands in the chain of title of the property. Defendants then assert that because Epsilon was dissolved on September 17, 1989, it cannot be made a party to this suit and the Court must therefore dismiss the action. Plaintiff responds that Epsilon is a party to this action, and that, contrary to defendants' assertion, Epsilon was not dissolved until October 17, 1989, one month after plaintiff filed this action. Plaintiff states that the dissolution of Epsilon is suspicious, and that, at the very least, it is entitled to discovery regarding the dissolution before any determination is made that Epsilon is not a proper party to the action.

Defendants' argument that Epsilon is a necessary party that cannot be joined has several flaws. First, while 26 U.S.C. §7403(b) requires joinder of all parties claiming an interest in the property at issue, there is no requirement that all persons in the chain of title be joined. Thus, defendants have not met their burden of showing that Epsilon's presence is indispensable to this action. Second, as plaintiff points out, Epsilon is already a party to this action; by order dated August 23, 1991, the Court held that Epsilon had been properly served and denied Epsilon's motion to dismiss. Finally, as the Court noted in its August 23, 1991 order, amendments to business trusts are effective upon filing. Minn. Stat. §318.02(1). The amendment dissolving Epsilon was filed on October 17, 1989, which was after this action commenced on September 20, 1989. The dissolution of Epsilon just one month after this action was commenced is somewhat suspicious. It would be clearly inequitable to allow a business trust to avoid liability merely by dissolving after a complaint has been filed. ² Therefore, the Court will deny defendants' motion to dismiss the suit on the grounds that Epsilon is a necessary party who cannot be joined.

Accordingly, based on the foregoing, and upon all the files, records and proceedings herein,

IT IS ORDERED that defendants' motion to dismiss is denied.

¹ Defendants also alleged that defendant C.J.S. Ranch was an indispensable party. C.J.S. Ranch was dismissed from this suit without prejudice by order of the Court dated May 31, 1990. By order dated March 25, 1992, however, the Magistrate Judge granted plaintiff's motion to add C.J.S. Ranch as a defendant. Therefore, defendants' argument that the action must be dismissed for failure to join C.J.S. Ranch has been rendered moot.

² Defendants' assertion that Minn. Stat. §318.02(3) precludes a business trust from defending any action unless it is a currently constituted business trust is incorrect. Minn. Stat. §318.02(3) confers on a business trust the power to sue and be sued, but is silent on the ability of a dissolved trust to sustain suit. The Court has located no Minnesota statute precluding a dissolved business trust from defending an action.

 

 

 

United States of America , Plaintiff v. Red Stripe, Inc., f/k/a Asher Bros., Inc. and George Asher, Defendants

U.S. District Court, East. Dist. N.Y., CV 89-3504, 3/20/92

[Code Secs. 6321 , 6502 , prior to amendment by P.L. 101-508, and 6651 ]

Assessment: Collection: Limitation period: Reorganization: Fraudulent conveyance: Penalties.--The collection of an assessed tax from a corporation and its sole shareholder began within the six-year limitations period and the taxpayers remained liable for the taxes following a reorganization. The date of the assessment was not proved incorrect and the IRS's claim was brought exactly six years after the filing of the lien. Following the reorganization, the corporate taxpayer remained the primary obligor of the tax liabilities even though the acquiring corporation agreed to assume the liabilities. A transfer of the acquiring corporation's stock from the corporate taxpayer to its sole shareholder was deemed a fraudulent conveyance because it left the corporation insolvent and unable to pay its tax liabilities. Additions to tax were imposed because the shareholder did not exercise ordinary business care and prudence when relying on the advice of his tax advisors concerning the assumption of the liabilities.

Philip H. Karter, Andrew D. Plepler, Department of Justice, Washington, D.C. 20530, for plaintiff. James C. Sherwood, Kostelanetz, Ritholz Tigue & Fink, 80 Pine St., New York, N.Y. 10005, for defendants.

Memorandum of Decision and Order

MISHLER, District Judge:

The United States of America ("Government"), claims that defendant Red Stripe, Inc. formerly known as Asher Bros., Inc. (hereinafter referred to as "Red Stripe"), ¹ has to pay federal corporate income taxes for the fiscal years ending June 30, 1975, 1976, 1977, 1978 and 1979 and seeks to reduce to judgment the corporate income taxes due from Red Stripe, Inc.

The Government also maintains that the transfer of Red Stripe's assets to its sole stockholder, defendant George Asher ("Asher"), was a fraudulent conveyance. Plaintiff seeks to reduce to judgment Asher's tax liability as a transferee for the unpaid taxes on investments in four limited partnerships for the tax years 1975, 1976 and 1977.

The issues were tried to the court.

Red Stripe was a New York corporation with its principal place of business in New Hyde Park, New York. Defendant George Asher, who currently resides in Hollywood , Florida , lived in Great Neck, New York , during the time of the events complained of.

LIABILITY FOR TAX YEARS 1975, 1976 AND 1977

For the tax years ending in 1975, 1976 and 1977, Red Stripe filed income tax returns which claimed tax reductions and investment credits relating to its investment in four limited partnerships, i.e., Brighton Associates, Plaza Group, Sunny Hill Associates and Road Group.

On September 30, 1983, the Internal Revenue Service ("I.R.S.") and Red Stripe entered into an agreement, pursuant to I.R.C. §7121(b) , stipulating that Red Stripe made improper tax deductions and investment credits on its tax returns for the taxable years of 1975, 1976, and 1977, in relation to its investment in the four limited partnerships. Red Stripe also agreed to extend the time within which an assessment could be made to December 31, 1983.

On October 20, 1983, the I.R.S. assessed deficiencies of $11,980.00 for the taxable year of 1975, $47,166.00 for the tax year 1976 and $198,848.00 for the tax year of 1977. This did not include the statutory rate of interest.

Red Stripe claims that it is not responsible for these taxes. It maintains that these debts were assumed by the Beatrice Food Corporation ("Beatrice"), when Beatrice purchased Red Stripe from Mr. Asher, in exchange for 180,000 shares of Beatrice common stock, in August, 1979.

The Beatrice stock that was transferred to Red Stripe was valued at $3,982,500 or $22.125 per share. The parties intended the transaction to qualify as a tax free reorganization pursuant to I.R.C. §368(a)(1)(C) . After the reorganization, which occurred in August 1979, Red Stripe ceased to function as an operating business.

Pursuant to the Agreement and Plan of Reorganization ("Agreement") between Beatrice and Red Stripe, it is unclear whether Beatrice agreed to assume some, or all, of Red Stripe's tax liabilities. For the most part, the Agreement appears to state that Beatrice did not agree to assume the tax liability for Red Stripe's limited partnership investments.

Section 1.02 of the Agreement states in pertinent part that Beatrice did not acquire:

the assets reflected on the Company Balance sheet under the caption 'Deferred Credits--Partnership interest and other' (including the limited partnership interests of the Company in the Road Group, The Plaza Group, Brighton Associates and Sunny Hill Associates . . . ."

Section 1.03 of the Agreement states that Beatrice would not assume any:

liability or obligation . . . in connection with or relating to any of the Retained Company Assets (including the limited partnership agreements referred to in Paragraph 8(d) of the Company letter." ²

The Agreement states in section 1.04(a) that:

Beatrice shall not be responsible for, and shall not assume or undertake to pay, perform, satisfy or discharge, any liability or obligation of the Company or the Company Liabilities and Obligations.

1.04(b) states:

The company and/or the Company Shareholder, as the case may be, shall remain responsible for the Retained Company liabilities and obligations.

However, Exhibit G, the Assumption Agreement and Undertaking, states on page 2 that Beatrice agrees to assume the "liabilities and obligations of the Company (Red Stripe) for federal and state income taxes referred to in paragraph 11 of the Company Letter . . . ."

Paragraph 11, §(c) of the Company Letter states:

The Company has waived the statute of limitations with respect to the assessment of federal income taxes relating to the limited partnership interests of the Company in The Road Group, The Plaza Group, Brighton Associates and Sunny Hill Associates.

The Assumption Agreement and Undertaking appears to state that Beatrice would be responsible for the tax liabilities on the limited partnerships. In contrast, the Agreement and Plan of Reorganization states that Red Stripe would be responsible for the taxes. We do not attempt to construe the intent of the contracting parties because, as discussed below, the assumption agreement has no effect on Red Stripe's tax liability.

All of Red Stripe's operating assets, except for a sailboat valued at roughly $27,000, a condominium valued at approximately $100,000 and an interest in worthless limited partnership tax shelters, were transferred to Beatrice. One month after the reorganization, 153,000 Beatrice stock shares were transferred to Asher. Shortly thereafter, the condominium and sailboat were conveyed to Asher. Over the next year, the remaining 27,000 shares of Beatrice stock were released from escrow and transferred to Asher.

In exchange for the transfer of Beatrice stock, Asher redeemed all of his stock in Red Stripe. However, his Red Stripe stock retained little, if any value, because the corporation's only valuable asset, the Beatrice stock, had already been transferred out of the corporation, to its sole stockholder.

DISCUSSION

Defendants claim that they are not responsible for the tax liability incurred between 1975-1977 because the government's complaint was not filed within six years of the underlying assessment. ³ We find this argument to be without merit.

The Government has produced a Certificate of Assessments and Payments ("Certificate") which states that an assessment for the tax years 1975, 1976, and 1977 was made on October 20, 1983. The Government's complaint was filed exactly six years later, on October 20, 1989.

Defendants argue that the assessment of tax for the years in question occurred not on October 20, 1983, but rather on or before October 3, 1983. To support this contention, defendants refer to a letter written by Diane R. Mirabito, an IRS attorney, ("Mirabito letter") directed to Red Stripe's former counsel, Bernard Segal, Esq. (Exhibit C). The letter states in pertinent part that "[o]n October 3, 1983 the Internal Revenue Service filed Notices of Federal Tax Lien against Red Stripe, Inc. in the amounts of $22,541.45, $86,570.14, and $349,508.14 for the fiscal years ended June 30, 1975, June 30, 1976, and June 30, 1976, and June 30, 1978, respectively."

Since an assessment is a necessary prerequisite to the issuance of a tax lien, ⁴ which the letter states was filed on October 3, 1983, defendant maintains that "an assessment must have been issued on that date or earlier." (Defendant's Post-Trial Memo. at 6).

"Statutes of limitation barring the collection of taxes must receive a strict construction in favor of the government." Lower Realty Co. v. Anderson, 31 F.2d 268, 269 (2d Cir.), cert. denied, 280 U.S. 558, 50 S. Ct. 17 (1929); Kahn v. United States [78-1 USTC ¶9185 ], 444 F. Supp. 388, 392 (S.D.N.Y. 1977), aff'd [79-1 USTC ¶9131 ], 590 F.2d 48 (2d Cir. 1978).

While defendants dispute the date contained in the Certificate, a Certificate is presumptive proof of a valid assessment. ⁵ United States v. Lorson Electric Co., Inc. [73-1 USTC ¶9449 ], 480 F.2d 554 (2d Cir. 1973); United States v. Chila [89-1 USTC ¶9299 ], 881 F.2d 1015 (11th Cir. 1989). The date of assessment found in the certificate is also presumptively valid. Brewer v. U.S. [91-2 USTC ¶50,379 ], 764 F. Supp. 309, 315-16 (S.D.N.Y. 1991); United States v. Nuttall [89-2 USTC ¶9460 ], 713 F. Supp. 132, 137 n.8 (D.Del.), aff'd, 893 F.2d 1332 (3d Cir. 1989); United States v. Dixon [87-2 USTC ¶9485 ], 672 F. Supp. 503, 505-06 (M.D. Ala. 1987), aff'd, 849 F.2d 1478 (11th Cir. 1988) (per curiam); United States v. Posner [76-1 USTC ¶9224 ], 405 F. Supp. 934 (D. Md. 1975).

This presumption places the burden on the taxpayer to demonstrate by a preponderance of the evidence that the date of assessment is incorrect. Schaffer v. C.I.R., 779 F.2d 849, 857 (2d Cir. 1985); United States v. Lease [65-2 USTC ¶9478 ], 346 F.2d 696, 700 (2d Cir. 1965); United States v. Paladin [82-1 USTC ¶9360 ], 539 F.Supp. 100, 102 (W.D.N.Y. 1982). See also United States v. Strebler [63-1 USTC ¶9278 ], 313 F.2d 402, 403-04 (8th Cir. 1963):

At the trial of the case at bar the Government introduced evidence by way of a "Certificate of Assessment" which revealed appellee's liability for the amount of taxes claimed. The law is that such assessment is presumptively correct; and the "burden is on the taxpayer to overcome this presumption" by countervailing proof. (citations omitted).

The Mirabito letter is not entitled to the same presumption of validity as the Certificate. See Herbert v. U.S. [88-1 USTC ¶9376 ], 662 F.Supp. 573, 583 (S.D.N.Y. 1987), citing Heckler v. Community Health Services, 467 U.S. 51, 59-61, 104 S. Ct. 2218, 2223-24 (1984) and Schweiker v. Hansen, 450 U.S. 785, 788-89, 101 S. Ct. 1468, 1471 (1981) (per curiam), rev'd on other grounds, 850 F.2d 32 (2d Cir. 1988) (The government is not "bound by a position taken . . . by one of its employees or agents.") ⁶; Louderback v. United States [81-2 USTC ¶16,368 ], 500 F.Supp. 575, 579 (D.Colo.1980) ("[A]n Internal Revenue Service agent does not have authority to make a final determination binding on the government . . . .").

Admittedly, the Certificate and the Mirabito letter both fail to provide the underlying documents which would firmly reveal the date of assessment. The Mirabito letter concludes that a lien was filed on October 3, 1983, but does not provide any recorded evidence to support this contention. As noted above, the government is not required to produce the documents underlying the assessment because the Certificate is presumptively valid.

In order to rebut the presumption in favor of the Government, defendants must present more than a mere conclusory statement signed by an I.R.S. attorney, whose actions do not bind the government. Since the Government has millions of taxpayers to oversee, it was Asher who was in the best position to know when he received the assessment.

We find that the assessment was made on October 20, 1983 and the government's claim relating to defendant's tax liability from 1975-1977 was filed within the six year statutory limit.

We also find that the transfer of Beatrice stock from Red Stripe to Asher was a fraudulent conveyance under section 273 of New York 's Debtor and Creditor law. DCL §273 states:

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.

In the case at bar, the transfer of Beatrice Stock from Red Stripe to Asher was without "fair consideration" and rendered Red Stripe insolvent.

DCL §271 states:

[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.

When a transfer is made without consideration ⁷, the defendants have the burden of proving solvency. ACLI Government Securities, Inc. v. Rhoades, 653 F.Supp. 1388, 1393 (S.D.N.Y. 1987), aff'd, 842 F.2d 1287 (2d Cir. 1988); In re Q.P.M. Leasing Services, Inc., 40 B.R. 380, 392 (Bankr.S.D.N.Y.), aff'd, 44 B.R. 1023 (S.D.N.Y. 1984); aff'd, 769 F.2d 911 (2d Cir. 1985).

Red Stripe's federal tax liability had accrued at the time of the transaction with Beatrice. Therefore the conveyance from Red Stripe to Asher was made when Red Stripe was indebted to the Government. By removing Red Stripe's chief asset, the Beatrice stock, it left Red Stripe without the means to pay its debts and rendered it insolvent pursuant to New York 's Debtor and Creditor law.

Asher argues that Red Stripe never was insolvent because the taxes on the limited partnerships had not been assessed when he received the Beatrice stock. Although the actual assessment had not been made, Asher testified that he was aware that the I.R.S. had made inquiries about the limited partnership investments and he even signed numerous waivers of the statute of limitations so that the I.R.S. could audit the transactions. (Tr. at 183-84). Moreover, a creditor has standing to maintain an action to set aside a fraudulent conveyance, even if the debt was not in existence at the time of the transfer. See Studley v. Lefrak, 66 A.D.2d 208, 412 N.Y.S. 2d 901, 905 (2d Dep't) aff'd, 48 N.Y.2d 954, 425 N.Y.S.2d 65 (1979) (and cases cited therein).

Defendants also claim that Red Stripe was solvent because the Agreement between Beatrice and Red Stripe provided that Beatrice would assume Red Stripe's tax liabilities for the limited partnerships. Red Stripe is the primary obligor of the tax liabilities. It cannot avoid the obligation to pay federal income taxes through an agreement providing that a third party assumed that obligation. If Red Stripe acquired a right of action against Beatrice, it is free to exercise any potential right to indemnification in a separate proceeding.

Even if we accept defendants' argument that Beatrice agreed to assume the tax liabilities on the limited partnerships, its breach of contract claim against Beatrice cannot be considered a corporate asset for purposes of determining its solvency. "Only assets with a present salable value are taken into consideration in determining insolvency . . . ." Glenmore Distilleries v. Seideman, 267 F.Supp. 915, 918 (E.D.N.Y. 1967). Claims that are "inchoate, uncertain, and contested" have no present value and cannot be considered an asset of the company. Glenmore Distilleries at 918; See also ACLI Government Securities, Inc. at 1394.

Not only did the stock transfer render Red Stripe insolvent but it was also without "fair consideration." Fair consideration is defined in DCL §272 :

Fair consideration is given for the property or obligation;

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

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

Asher testified that the consideration he gave to Red Stripe in return for the Beatrice stock was merely a promise to provide future personal services to Red Stripe by way of enforcing Red Stripe's rights against Beatrice. ⁸ This does not satisfy the requirements of DCL §272 because promises to provide future services are insufficient to serve as adequate consideration under New York 's Debtor and Creditor Law. Orbach v. Pappa, 482 F.Supp. 117, 120 (S.D.N.Y. 1979); Kleinfeld v. Pedersen, 116 A.D.2d 970, 498 N.Y.S.2d 596, 597 (4th Dep't 1986 ); Schmitt v. Morgan, 98 A.D.2d 934, 471 N.Y.S.2d 365, 367 (3d Dep't 1983 ).

Assuming arguendo that Asher was able to establish that his services to the corporation was fairly equivalent to the transfer of Beatrice stock, we find that the transfer of stock from Red Stripe to Asher was not made in accordance with the good faith requirements of DCL §272 . "It has been held that preferential transfers to directors, officers and shareholders of insolvent corporations in derogation of the rights of general creditors do not fulfill the good faith requirement of the Debtor and Creditor Law." Farm Stores, Inc. v. School Feeding Corp., 477 N.Y.S. 2d 374, 378 (2d Dept. 1984 ), aff'd, 64 N.Y.2d 1065, 489 N.Y.S.2d 877 (1985).

In support of this proposition, Farm Stores cited Southern Industries v. Jeremias, 66 A.D.2d 178, 185, 411 N.Y.S.2d 945 (1978), which stated:

Whether it be upon the theory that directors of insolvent corporations are trustees for the benefit of all creditors, or upon the theory that it would be inequitable to allow directors to use inside information and their controlling voice in corporate affairs to benefit themselves over the claims of others, the common law forbids preferences to directors of insolvent corporations as being contrary to principles of fair, honest and open dealing . . . Accordingly, the transfer in this case is void because, although made for a fair consideration, it was not made in good faith."

Accord Studley at 906. ("The manipulation of corporate assets by the respondents in the face of the petitioner's rights by preferring the interests of those in control of the corporation reflects bad faith and deprives the respondents of the status of transferees for fair consideration.").

Defendants also argue, by way of the "Step analysis" doctrine, that Asher gave "fair consideration" for the conveyance of Beatrice stock. We find that this argument borders on the frivolous.

"Step-analysis" is a doctrine of tax collection which postulates that a transaction should be viewed as a whole, rather than in separate parts. See Minnesota Tea Co. v. Helvering [38-1 USTC ¶9050 ], 302 U.S. 609, 613, 58 S.Ct. 393, 395 (1938). In The South Bay Corp. v. Comm'r [65-1 USTC ¶9433 ], 345 F.2d 698, 705 (2d Cir. 1965), the court stated that the "Step-analysis" doctrine "compar[es] . . . the situation as it existed before the first step of the transaction with the situation existing after the last step of the transaction . . . ."

Defendants maintain that the transfer of stock to Asher was not a fraudulent conveyance because the Government has concentrated only on the transfer of the Beatrice stock. The other step of the transaction, which defendant asserts constitutes "fair consideration," was the fact that in exchange for the Beatrice stock, Asher gave up his interest in Red Stripe.

However, it was not Asher who exchanged his personal assets for the Beatrice stock, but rather his corporation, Red Stripe. There is no contention that the transaction between Red Stripe and Beatrice was without "fair consideration." The crux of the fraudulent conveyance claim is that the transaction between Red Stripe and Asher was without "fair consideration." It appears that defendants themselves have neglected to analyze a "step" of the transaction.

We find that the transfer of Beatrice stock from Red Stripe to Asher was without "fair consideration" and rendered Red Stripe insolvent. The transfer of Beatrice stock to Asher was a fraudulent conveyance under DCL §273 . ⁹

The Government, as the creditor, is entitled to judgment pursuant to DCL §278 , which states in pertinent part:

1. Where a conveyance . . . is fraudulent as to a creditor, such creditor . . . may . . .

a. Have the conveyance set aside or obligation annulled to the extent necessary to satisfy his claim . . . .

When a conveyance is fraudulent under DCL §273 , the "creditor may obtain judgment against any transferee to whom his debtor has transferred the property up to the value of the property . . . ." De West Realty Corp. v. United States [76-2 USTC ¶9588 ], 418 F. Supp. 1274, 1279 (S.D.N.Y. 1976); see also In re Swan-Finch Corp. [67-2 USTC ¶9718 ], 279 F. Supp. 386, 391 (S.D.N.Y. 1967); Brown v. Kimmel, 68 A.D.2d 896, 414 N.Y.S.2d 226, 227 (2d Dep't 1979); Gruenbaum v. Lissauer, 185 Misc. 717, 730, 57 N.Y.S.2d 137, 145 (Sup.Ct. N.Y.Co. 1945) aff'd, 270 App.Div. 836, 61 N.Y.S.2d 372 (1st Dep't 1946 ).

Asher is liable to the Government for its damages, in the form of taxes and interest to the extent of the assets received from Red Stripe.

The Government is also entitled to receive a "failure to pay" penalty from defendants pursuant to I.R.C. §6651(a)(2) .

I.R.C. §6651(a)(2) states in pertinent part:

(a) Addition to the Tax--In case of failure . . .

(2) to pay the amount shown as tax on any return specified in paragraph (1) on or before the date prescribed for payment of such tax (determined with regard to any extension of time for payment), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount shown as tax on such return 0.5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 0.5 percent for each additional month or fraction thereof, during which such failure continues, not exceeding 25 percent in the aggregate.

Defendants claim that a penalty is improper because their failure to pay was based on "reasonable cause." The burden of proving "reasonable cause" is on the taxpayer. Parkchester Beach Club Corp. v. Comm'r [64-2 USTC ¶9680 ], 335 F.2d 478, 481 (2d Cir. 1964); Baasch v. U.S. [91-1 USTC ¶50,264 ] 742 F. Supp. 65, 69 (E.D.N.Y. 1990); aff'd, 930 F.2d 911 (2d Cir. 1991).

"To demonstrate 'reasonable cause,' a taxpayer must show that he exercised 'ordinary business care and prudence.' " Denenburg v. United States [91-1 USTC ¶50,014 ], 920 F.2d 301, 303 (5th Cir. 1991) quoting Treas. Reg. §301.6651-1(c)(1) (as amended 1973). " '[R]easonable cause' is established when a taxpayer shows that he reasonably relied on the advice of an accountant or attorney that it was unnecessary to file a return, even when such advice turned out to have been mistaken." United States v. Boyle [85-1 USTC ¶13,602 ], 469 U.S. 241, 250, 105 S. Ct. 687, 692 (1985). Asher testified that his failure to pay was based on the advice of both his attorney and accountant that the tax liability would be assumed by Beatrice.

We find that Asher did not exercise "ordinary business care and prudence" when he relied on the advice of his tax advisors. While defendants cite to the Supreme Court's decision in Boyle, supra [85-1 USTC ¶13,602 ] 469 U.S. at 250, 105 S. Ct. at 692, for the proposition that "reasonable cause" is established when a taxpayer relies on the advice of an attorney or an accountant concerning a question of law, the taxpayer must demonstrate that such reliance is reasonable.

Even the most generous reading of the Red Stripe-Beatrice assumption agreements reveal that it is unclear whether Beatrice agreed to assume the tax obligations in question. Asher, who claimed to be familiar with the assumption agreements, had to recognize that the tax assumption sections of the contracts were in conflict.

One's duty to pay taxes cannot be circumvented merely by alleging that another party is contractually obligated to fulfill those responsibilities. Asher's lack of "ordinary business care and prudence" cannot be salvaged by claiming that he relied on the advice of his attorneys and accountants. A reasonably prudent businessperson would not have relied on the advice of his lawyer and accountant that an assumption of the tax liability by a third party would release him, as the taxpayer, from the payment of income taxes due the Government.

Defendants also argue that "reasonable cause" has been established because I.R.S. agents allegedly instructed him, during a meeting held in 1985, not to pay his taxes. This argument is without merit. Even if the agents had instructed Asher not to pay his taxes, the government cannot be estopped by the misinformation given by its employees. Heckler v. Community Health Services, 467 U.S. at 59-61, 104 S. Ct. 2223-24; Schweiker v. Hansen, 450 U.S. at 788-89, 101 S. Ct. at 1471. Moreover, the alleged statements by the I.R.S. agents were not made until 1985, one and a half years after the assessment had been made. Assuming arguendo that Asher's meeting with the I.R.S. agents provided the basis for his failure to pay his taxes, it does not explain why he failed to make the tax payments in the year and a half prior to the meeting.

LIABILITY FOR TAX YEARS 1978 AND 1979

The Government concedes that the income tax deficiencies for the years 1978 and 1979 have been paid in full. (Plaintiff's Post-Trial Memo. at 21). The only remaining dispute for these years concern the interest that is due.

Defendants claim that an interest schedule provided by an IRS appellate officer (Exhibit A) states that $224.49 in interest is owed. The Government maintains that this schedule is "not a reflection of the actual statutory interest rate due." (Plaintiff's Post-Trial Memo. at 21). Since the Government has not presented any evidence to demonstrate that the interest schedule provided by the I.R.S. was calculated incorrectly, we find that the defendants owe the Government $224.49 in interest for tax years 1978 and 1979.

ORDER

It is

Ordered that judgment be entered in favor of the plaintiff, United States of America against defendants Red Stripe, Inc, f/k/a Asher Bros, Inc. and George Asher in the sum of $22,541.25 for the tax year ending June 30, 1975, the sum of $86,570.14 for the tax year ending June 30, 1976, and the sum of $349,508.14 for the tax year ending June 30, 1977--the total sum of $458,619.53 together with interest and interest in the sum of $224.49 (for the tax years 1978 and 1979) together with penalty pursuant to I.R.C. §6651(a)(2) from October 20, 1983.

The Government is directed to compute the interest and penalty on the sums due to the date of the memorandum and order and serve defendants' counsel with the copy of the computation. Defendants' counsel may challenge the Governments' computation within five (5) days of receipt of the same.

Entry of judgment is stayed pending determination of the sum due to date.

SO ORDERED.

¹ Although we refer to the company as Red Stripe, it was known as Asher Bros, until August 1, 1979.

² Paragraph 8(d) of the Company letter makes reference to the four limited partnership interests that were retained by Red Stripe.

³ I.R.C. §6502(a)(1) states that an action to collect taxes must commenced within 6 years after assessment of the tax.

⁴ See In re Carlson [78-2 USTC ¶9562 ], 580 F.2d 1365, 1368 (10th Cir. 1978); U.S. v. Mitchell [65-2 USTC ¶9581 ], 349 F.2d 94, 99 (5th Cir. 1965).

⁵ "In general, courts will not look behind an assessment to evaluate the procedure and evidence used in making the assessment." Ruth v. United States [87-2 USTC ¶9408 ], 823 F.2d 1091, 1094 (7th Cir. 1987).

⁶ Although the cited Supreme Court cases deal with the issue of estoppel, they stand for the general proposition that the government is not bound by the statements or actions of its employees.

⁷ See pages 13-17 infra.

⁸ Since Asher stated that Red Stripe ceased to be a going business concern after the deal was commenced, it is difficult to conceive how Asher intended to provide any services to the corporation.

⁹ We do not reach the question of whether to impose a constructive trust because, as the government states in its post-trial brief," [t]here is . . . no practical distinction between the Government's constructive trust claim and its fraudulent conveyance claim." (Plaintiff's Post-Trial Memo. at 23.).

 

 

 

United States of America , Plaintiff v. Carl Murphy, Jr. and Lisa Carol Murphy Doran, Defendants

U.S. District Court, No. Dist. Miss. , East. Div., Civ. EC88-4168-B-D, 1/30/92

[Code Secs. 6321 and 6322 , prior to amendment by P.L. 89-719 ]

Lien for taxes: Property subject to: Transfer prior to lien: Fraudulent conveyance.--The transfer of real property between a taxpayer and his daughter was set aside, and summary judgment was granted to the IRS providing for the foreclosure of tax liens against the property because the transfers were made for the purpose of avoiding federal tax liability. The taxpayer transferred the property prior to the existence of the tax liens and, therefore, the fraudulent conveyance law of the state where the property and the taxpayer were located was applicable. The taxpayer's admission that, when he was insolvent, he transferred the property to his daughter without consideration and at a time when he owed federal taxes, the close relationship of the parties, and the fact that the transfers were not made in the normal course of business were all factors under state law establishing fraudulent intent on the part of the taxpayer in making the transfers.

Robert Q. Whitwell, United States Attorney, Thomas Dawson, Assistant United States Attorney, Oxford, Miss. 38655, for plaintiffs.

MEMORANDUM OPINION

BIGGERS, Jr., District Judge:

This action came on for consideration of the plaintiff's motion for summary judgment, and the Court having considered all of the matters of record, together with the applicable law, finds as follows:

The above-entitled action was filed by the plaintiff, the United States of America, against the defendants, Carl Murphy, Jr. (hereinafter referred to as taxpayer) and his daughter, the defendant Lisa Carol Murphy Doran, seeking a judgment for the unpaid balance of the taxpayer's unpaid federal income tax liability for the years 1975 through 1977, in the amount of $150,257.40, plus interest as provided by law.

The complaint also seeks to set aside as fraudulent the conveyances of two parcels of real property, as improved, from the taxpayer to his daughter, to sell these parcels of property in accordance with the law and practice of the Court, and to apply the sales proceeds toward satisfaction of the taxpayer's liability for the taxable year 1975 through 1977 of $150,257.40, plus interest and statutory additions as provided by law.

On April 16, 1990, the Clerk of the Court entered a default against the taxpayer and against the defendant, Lisa Carol Murphy Doran, by reason of their failure to file an answer to the plaintiff's complaint or to otherwise plead. Consequently Lisa Carol Murphy Doran has no interest in the two parcels of real property which are the subject of this proceeding.

On March 21, 1991, the plaintiff served a request for admissions upon the taxpayer, pursuant to Rule 36(a) of the Federal Rules of Civil Procedure, requesting that he admit that certain statements of fact contained therein were true, and requesting that he admit certain documents exhibited with this request were genuine. The taxpayer failed to serve a written answer or an objection to the request for admissions. Therefore the statements contained therein are admitted, and the exhibits exhibited therewith are genuine. (Federal Rules of Civil Procedure, Rules 36(a) and (b).) ¹

A delegate of the Secretary of the Treasury made assessments against the taxpayer, pursuant to 26 U.S.C. Section 6861 , for unpaid federal income taxes, penalties, and interest, and gave notice of and made demand for payment of the assessments on the dates, in the amounts, and for the taxable periods shown in the following table [Haynes Aff., para. 2a.; Request for Admission No. 1]: ²

                       Dates of

                     Assessments

Type of  Taxable  and Notice of and    Amounts of

 Taxes   Periods  Demand for Payment   Assessments

Income    1975         2/03/83        $15,999.61(T)

                                       11,103.18(I)

                                        7,999.81(P)

Income    1976         2/03/83         21,312.70(T)

                                       13,275.88(I)

                                       10,656.35(P)

Income    1977         2/03/83         15,956.14(T)

                                        8,839.00(I)

                                        7,978.07(P)

(T)  Tax

(I)  Interest

(P)  Penalty, pursuant to the provisions of Section

6653(b) of the Internal Revenue Code of 1954.

 

On May 20, 1985, the United States Tax Court entered a final decision in the case of Carl Murphy, Jr. v. Commissioner of Internal Revenue, Docket No. 18084-83 (a copy of which is attached to the plaintiff's motion for summary judgment as Exhibit B) which, pursuant to the agreement of the parties, determined that the taxpayer was liable for income tax deficiencies and additions thereto for the years 1975 through 1977 in the amounts shown in the following table:

                                                         Income Tax

Years                                                   Deficiencies Additions

1975 ..................................................  $ 4,901.08  $2,450.54

1976 ..................................................   12,654.54   6,327.27

1977 ..................................................   11,524.92   5,762.46

This decision was not appealed to the Court of Appeals for the Fifth Circuit.

The unpaid balance of the assessments, described above, amounts to $150,257.40, including interest and statutory additions accrued through April 15, 1991, plus interest and statutory additions thereafter as provided by law, which amount the taxpayer has refused and neglected to pay. [Haynes Aff., para. 2b.]

On July 20, 1967, the taxpayer became the owner of a parcel of real property situated in Lee County, Mississippi, which is more fully described as follows [Plaintiff's Motion, Ex. C; Plaintiff's Request for Admission No. 5]:

Commencing at the Northwest corner of the Northwest Quarter of Section 30 , Township 8 South, Range 5 East, and run South along Section line for 1164 feet to iron on the East line of a county Line road for a point of beginning; thence East for 535.8 feet to an iron; thence South 417.6 feet to iron; thence West 535.8 feet to iron on Section Line; and the East line of said County Line Road: thence North along Section line for 417.6 feet to the point of beginning. Being 5 acres situated in the Northwest Quarter of Section 30 , Township 8 South, Range 5 East, Lee County , State of Mississippi .

By deed dated October 6, 1976, the taxpayer attempted to transfer, or voluntarily transferred and conveyed this parcel of real property to his daughter, the defendant Lisa Carol Murphy Doran (then Lisa Carol Murphy). On the date that the conveyance was made, Lisa Carol Murphy Doran was a minor, but she has now reached the age of majority (21) under Mississippi law. The deed of conveyance was not filed with the Clerk of the Chancery Court of Lee County , Tupelo , Mississippi until June 5, 1980. [Plaintiff's Motion, Ex. E; Plaintiff's Request for Admission No. 6.]

On or before January of 1983, the taxpayer constructed a building on this parcel of real property from his own funds. [Plaintiff's Request for Admission No. 7.]

The transfer and conveyance of the parcel of real property in issue, and the construction of the building on this parcel of real property, were made without a fair and adequate and valuable consideration or any consideration; or, in the alternative, the transfer of the said parcel of real property and construction of the said building thereon were made with the intent and purpose to delay, hinder, and defraud the creditors of the taxpayer, and, more particularly, the plaintiff, United States of America. [Plaintiff's Request for Admission No. 8.]

At the time of the transfer of the parcel of real property in issue, and at the time that the building was constructed on this parcel of real property, the taxpayer was insolvent, or was thereby rendered insolvent, by the transfer of the said parcel of real property and the construction thereon of the said building. [Plaintiff's Request for Admission No. 9.]

On July 1, 1975, the taxpayer became owner of another parcel of real property situated in Lee County, Mississippi, which is more fully described as follows [Plaintiff's Motion, Ex. D; Plaintiff's Request for Admission No. 10]:

Commencing at the Northwest Corner of the Northwest Quarter of Section 30 , Township 8 South, Range 5 East, Lee County, Mississippi; run thence South along the section line, 1164.0 feet to an iron pin on the East line of a county road (Being the Northwest Corner of the Carl Murphy, Jr., property described in a certain warranty deed from Oliver Eaton to Carl Murphy, Jr., dated December 17, 1974, and recorded in Book 949, Page 13, deed records of Lee County, Mississippi; thence run East along the South ling (sic) of the Harper property and the North line of the said Carl Murphy, Jr., property, 535.8 feet to an iron pin and the point of beginning; thence run East along the South side of said Harper property, 175.0 feet to an iron pin; thence run South 417.6 feet to an iron pin; thence run West 175.0 feet to an iron pin at the Southeast Corner of said Carl Murphy, Jr. property; thence run North along the East line of said Carl Murphy, Jr. property 417.6 feet to the point of beginning. Being 1.68 acres, more oe (sic) less, lying and being in the Northwest Quarter of Section 30 , Township 8 South, Range 5 East, Lee County, Mississippi.

By deed dated October 6, 1976, the taxpayer attempted to transfer, or voluntarily transferred and conveyed this second parcel of real property to his daughter, the defendant Lisa Carol Murphy Doran (then Lisa Carol Murphy). On the date that the conveyance was made, Lisa Carol Murphy Doran was a minor, but she has now reached the age of majority (21) under Mississippi law. The deed of conveyance was not filed with the Clerk of the Chancery Court of Lee County, Mississippi, until May 12, 1980. [Plaintiff's Motion, Ex. F; Plaintiff's Request for Admission No. 11.]

The transfer and conveyance of this second parcel of the parcel of real property was made without a fair and adequate and valuable consideration or any consideration; or, in the alternative, the said transfer of the parcel of real property was made with the intent and purpose to delay, hinder, and defraud the creditors of the taxpayer, and, more particularly, the plaintiff, United States of America. [Plaintiff's Request for Admission No. 12.]

At the time of the transfer and conveyance of this second parcel of real property, the taxpayer was insolvent, or was thereby rendered insolvent, by such transfer and conveyance. [Plaintiff's Request for Admission No. 13.]

The plaintiff has filed a motion for summary judgment seeking a judgment for the amount of the taxpayer's unpaid federal income tax liability for the years 1975 through 1977 in the amount of $150,257.40, plus interest and statutory additions as provided by law, seeking to set aside as fraudulent the conveyances of the two parcels of property, as improved, from the taxpayer to his daughter, and seeking to foreclose its federal tax liens of $150,257.40, plus interest and statutory additions as provided by law, against the two parcels of real property, as improved.

The law is well settled that federal law determines not only whether the United States is entitled to a judgment against the taxpayer for his unpaid federal taxes, but also whether it has liens for unpaid federal taxes against the said parcels of real property, as improved, and whether it can foreclose these liens against the parcels of real property, as improved. However, the question of whether the taxpayer has an interest in these parcels of real property, as improved, to which its federal tax liens can attach must be answered by applicable state law. United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51 (1958); Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509 (1960); United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713 (1985).

In the present case, the Tax Court of the United States, in Carl Murphy, Jr. v. Commissioner of Internal Revenue, Docket No. 18084-83 (1985) entered a decision May 20, 1985, pursuant to the agreement of the parties, providing that the taxpayer was liable for income tax deficiencies and additions thereto for the taxable years 1975 through 1977 in the amount of $43,620.81. This decision, which was not appealed to the Court of Appeals for the Fifth Circuit, is now res adjudicata, and therefore determinative of the taxpayer's liability in issue. 28 U.S.C. Section 7483 ; United States v. International Bldg. Co. [53-1 USTC ¶9366 ], 345 U.S. 502 (1953); Sorrentino v. Ross [70-1 USTC ¶9334 ], 425 F.2d 213 (5th Cir. 1970).

On February 3, 1983, assessments were made against the taxpayer for the amount of his federal income tax liability for the years 1975 through 1977, pursuant to 28 U.S.C. Section 6861 ; and after abatement of part of this liability in accordance with the decision of the aforesaid Tax Court opinion, there remaining outstanding the amount of $150,257.40, plus interest and statutory additions as provided by law. These assessments are prima facie correct, and the taxpayer has failed to allege any facts which overcomes the presumption of correctness. Mersel v. United States [69-2 USTC ¶15,914 ], 420 F.2d 517 (5th Cir. 1970); United States v. Zolla [84-1 USTC ¶9175 ], 724 F.2d 808 (9th Cir. 1984), cert. denied, 469 U.S. 830 (1984); United States v. Lorson Electric Company, Inc. [73-1 USTC ¶9449 ], 480 F.2d 554 (2nd Cir. 1973). Therefore, the Court finds that the taxpayer is indebted to the plaintiff for the amount of this unpaid tax liability of $150,257.40, plus interest and statutory additions provided by law, and a judgment in favor of the plaintiff for the amount of this liability is appropriate.

The Court now turns to the question of whether the plaintiff is entitled to enforce its federal tax liens against the two parcels of real property in issue.

On July 20, 1967 and July 1, 1975, the two parcels of real property in issue were conveyed to the taxpayer by warranty deeds; and on or before January of 1983, the taxpayer constructed a building on one of the parcels of real property from his own funds. He then attempted to transfer these parcels of real property, as improved, to his daughter, Lisa Carol Murphy Doran, on October 6, 1976, even though the deeds of conveyance were not filed with the office of the Chancery Clerk of Lee County, Mississippi, until 1980.

Federal tax liens do not come into existence with respect to the property of a taxpayer until the dates underlying assessments are made. 26 U.S.C. Section 6322 . In such a situation, where a taxpayer disposes of property prior to the existence of a federal tax lien, the United States may seek relief under the applicable fraudulent conveyance laws of the particular state in which the property and taxpayer are located. Commissioner v. Stern [58-2 USTC ¶9594 ], 357 U.S. 39 (1958); United States v. Kaplan, 277 F.2d 405 (5th Cir. 1960); United States v. Ressler [77-1 USTC ¶9459 ], 433 F. Supp. 459 (S.D.Fla. 1977), aff'd, [78-2 USTC ¶9571 ], 576 F.2d 650 (5th Cir. 1978), cert. denied, 440 U.S. 929 (1979).

In Mississippi, a creditor's basic remedy, when a debtor transfers property leaving the debtor insolvent, is to have the conveyance set aside and to treat the property as still in the hands of the debtor. Miss. Code Ann. §15 -3-3 (1972); Thompson v. Neeley, 50 Miss. 310 (1874); Shaw v. Millsaps, 50 Miss. 380 (1870); Dulion v. Harkness, 80 Miss. 8 (1902). Miss. Code Ann. §11 -5-75 (1972) provides that a creditor can have a fraudulent conveyance set aside and subject the property to satisfaction of his debt. The usual remedy is to have the Court sell the property transferred and apply the proceeds to the debt.

In cases where there is direct proof of actual fraud, the Mississippi courts have held that the transaction is fraudulent as to the transferor's creditors, regardless of the adequacy or sufficiency of consideration. See Blount v. Blount, 95 So.2d 545 (1957) quoting 2 Pomeroy, Equity Jurisprudence, 1793 (3rd ed.) and 37 C.J.S. Fraudulent Conveyances §132 . Fraudulent intent on the part of the transferor can be shown by direct proof, or is inferred from the acts of the transferor. The Mississippi Supreme Court has set forth certain factors which, if present, are considered as "badges of fraud," that is, indications of fraudulent intent on the part of the transferor. Reed v. Lavecchia, 193 So. 439 (1940). Some of the factors set out by the Court are (1) inadequacy of consideration; (2) a transaction not in the usual course or mode of doing business; (3) resulting insolvency of the transferor; (4) transfer of all of transferor's property; (5) retention of possession by transferor; (6) the close relationship of the parties; and (7) a transfer to a person having no apparent use for the property. See Bazbee v. Pigott, 507 So.2d 77 ( Miss. 1987).

It has further been held that, while conveyances between related parties are valid or invalid for the same reason as conveyances by a grantor to any other person, the circumstances surrounding the conveyances must be carefully scrutinized on account of the natural temptation to give the relative an unfair advantage. Detrio v. Boylan, 190 F.2d 40 (5th Cir. 1951); Fidelity & Deposit Co. of Maryland v. Lovell [52-2 USTC ¶9550 ], 108 F. Supp. 360 (S.D. Miss. 1952), aff'd sub nom., United States v. Fidelity & Deposit Co. of Maryland [54-2 USTC ¶9486 ], 214 F.2d 565 (5th Cir. 1954).

In cases of actual fraud, all that is needed to bring a conveyance within the fraudulent conveyance statute in Mississippi is for a creditor to be defrauded, a debtor intending to defraud, and a conveyance of property that can be used to pay the debt. Kidd v. Kidd, 49 So.2d 824 (1951).

Regardless of when it is actually assessed, a liability arising under the Internal Revenue Code (26 U.S.C.) is considered to be due and owing no later than the date that a federal tax return for a particular period is required to be filed. United States v. Hickox [66-1 USTC ¶15,679 ], 356 F.2d 969 (5th Cir. 1966); United States v. Grice [83-1 USTC ¶9399 ], 567 F. Supp. 113 (M.D. Ala., S.D. 1983); United States v. Ressler, supra at 463.

In this proceeding, the federal income tax liability in issue for the years 1975 through 1977 was assessed on February 3, 1983. Therefore, the United States was an existing creditor of the taxpayer for the amount of his outstanding federal income tax liability for 1975, when he attempted to convey the two parcels of real property, as improved, to his daughter on October 6, 1976. Moreover, there is serious question as to whether the two conveyances were valid as to the federal income tax claim of the United States for the years 1976 and 1977 because the deeds of conveyance to his daughter were not filed with the Clerk of the Chancery Court of Lee County, Mississippi, until 1980, when the tax liability for these years was due.

Apart from this question, which is not necessary for the resolution of the issues presented here, the Court concludes that the conveyances of the parcels of real property in issue, as improved, by the taxpayer to his daughter were fraudulent as to the rights of the United States as a creditor, and should thus be set aside. This result is supported by the plaintiff's admissions that the parcels of real property were transferred to his daughter without consideration when he was insolvent, or was rendered insolvent by such transfers, at a time he owed federal taxes to the United States . Other badges of fraud identified in cases arising under Miss. Code Ann. §15 -3-33 (1972) are also present here, including the close relationship of the parties, who were members of the same family, and the fact that the transfers were not made in the normal cause of business.

As a result the Court concludes that the taxpayer is the sole owner of the parcels of real property in issue and to any proceeds derived from the sale thereof, particularly in view of the failure of the defendant, Lisa Carol Murphy Doran, to assert a claim thereto in this proceeding. Therefore the only remaining issue is whether the plaintiff is entitled to enforce its federal tax liens to these parcels of real property, as improved.

The statutory basis for the creation of federal tax lien is prescribed by 26 U.S.C. Sections 6321 and 6322 , which provide that if a taxpayer fails to pay any assessed tax liability, the amount of such liability shall be a lien in favor of the United States upon all of its property and rights to property, whether real or personal. This lien arises at the time an assessment is made and continues until the liability is satisfied or becomes unenforceable by reason of lapse of time.

Once a federal tax lien attaches to a taxpayer's property, it is entitled to priority over all competing claims to such property, unless otherwise provided by federal law. United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81 (1954). Rice Inv. Co. v. United States [80-2 USTC ¶9654 ], 625 F.2d 565 (5th Cir. 1980); Texas Oil & Gas Corp. v. United States [72-2 USTC ¶9653 ], 466 F.2d 1040 (5th Cir. 1972), cert. denied, Pecos County State Bank v. United States , 410 U.S. 929 (1973).

In this case, the plaintiff's federal tax liens, having an unpaid balance of $150,267.40, plus interest and statutory additions as provided by law, attached to the two parcels of property, as improved, in issue when the liability in question was assessed on February 3, 1983, and the Court finds that these liens still encumber the said parcels of real property, as improved.

The plaintiff is therefore entitled to summary judgment providing for the foreclosure of its federal tax liens against the two parcels of real property, as improved, that these parcels of real property be sold at public auction, and that after payment of the expenses of sale and any outstanding ad valorem taxes due with respect thereto to Lee County, Mississippi, the remaining proceeds be paid to the United States and applied toward partial satisfaction of the taxpayer's unpaid federal income tax liability for 1975 through 1977. Any sales proceeds remaining after payment of the federal tax liability shall be deposited into the registry of the Court subject to such further order as the Court may deem to be appropriate.

A judgment in accordance with this opinion will be issued.

SO ORDERED this the 28th day of January, 1992.

¹ Reference is hereinafter made both to the statements of fact which are admitted by reason of the taxpayer's failure to respond to the plaintiff's request for admissions and to the documents exhibited therewith, which the taxpayer has admitted are genuine.

² The Affidavit of Ruthie L. Haynes, Acting Chief of the Special Procedures Function of the Internal Revenue Service in Jackson , Mississippi , is attached to the plaintiff's motion for summary judgment as Exhibit A.

 

 

 

United States of America , Plaintiff v. Emmett K. Troyer, et al., Defendants

U.S. District Court, No. Dist. Ind. , S. Bend Div., S90 -195 (RLM), 7/15/91

[Code Sec. 6321 ]

Liens: Real property: Ownership: Fraudulent conveyances.--Transfers of real property made by an individual to himself as the trustee of his church and the subsequent transfer of the property by the church to a second church of which church was the trustee were fraudulent and void. The individual remained in possession and control of the property, there was no legal change of ownership, no apparent consideration was paid, the transfers occurred about the time that the individual became delinquent in the payment of taxes, and certain detrimental admissions concerning the purpose of the transfer were made another proceeding. Accordingly, the government was entitled to execute its liens for unpaid taxes subject to superior mortgage interests.

MEMORANDUM AND ORDER

MILLER, JR., District Judge:

This cause is before the court on the plaintiff's motion for summary judgment on all counts of the complaint. Defendants Emmett and Carol Troyer also seek summary judgment with respect to anticipated claims against them brought by the State of Indiana 's Department of Revenue ("DOR"), a named defendant in this cause.

These matters were fully briefed by the parties. Both the government and the Troyers requested that the court rule without a hearing pursuant to Federal Rule of Civil procedure 78. At first, the court concluded that a hearing on the motions would be useful. That hearing had to be cancelled due to the court's engagement in the jury trial of a criminal matter and, upon reflection, the court concluded that a hearing was unnecessary.

I.

The United States brought this cause against primarily the Troyers, both as individuals and as trustees of the Life Science Church of South Bend. The Life Science Church has also been named as a defendant, along with the Church of St. Matthew , Standard Federal Bank, Fidelity Investment, Inc., and the DOR. The government seeks to reduce certain tax assessments against the Troyers to judgment and to foreclose on tax liens against two parcels of real estate, allegedly owned by the Troyers, in satisfaction of that judgment. The two plots of real estate at issue are located at 1820 East Colfax Avenue , South Bend , Indiana ("Colfax property"), and 3105 Mishawaka Avenue , South Bend , Indiana (" Mishawaka Avenue property").

The Troyers purchased the Colfax property in June, 1975. They mortgaged the Colfax property to Tower Federal Savings & Loan ("Tower"), predecessor in interest to Standard Federal, in July, 1975. That mortgage agreement included a provision requiring the Troyers to secure Tower's acceptance of any written assumption agreement from a successor in interest before the Troyers could be released from liability on the mortgage. Neither Tower nor its successor, Standard Federal, has accepted a written assumption agreement with respect to the Troyers' mortgage.

On November 10, 1977, the Troyers executed a quitclaim deed, attempting to transfer their interest in the Colfax property to the Life Science Church. The deed specified "One dollar and other valuable consideration" and, furthermore, that the transfer was to Emmett and Carol Troyer, as trustees of the Life Science Church.

On September 23, 1983, the Life Science Church executed a quitclaim deed with respect to the Colfax property to the Church of St. Matthew . The deed reflected consideration in the amount of $10,000.00, but evidence in the record confirms that neither the Troyers nor the Life Science Church ever received those funds. Emmett Troyer was trustee of the Church of St. Matthew when this deed (and the similar September, 1983 deed to the Mishawaka Avenue property) was executed.

The Troyers purchased the Mishawaka Avenue property in February, 1978. Following the purchase, the Troyers mortgaged the Mishawaka Avenue property to Fidelity Investment on February 27, 1978. The Troyers have never arranged for a successor in interest to assume their mortgage with Fidelity Investment. The principal balance due on that mortgage as of April 19, 1991 was $9,271.21, with interest accruing at the daily rate of $3.03.

On November 10, 1977, the Troyers executed a quitclaim deed, transferring their interest in the Mishawaka Avenue property to themselves, as trustees of the Life Science Church, for "One dollar and other valuable consideration." On September 23, 1983, the Life Science Church transferred its interest in the Mishawaka Avenue property to the Church of St. Matthew by quitclaim deed. Again, while the deed reflected consideration in the amount of $10,000.00, neither the Troyers nor the Life Science Church ever received that sum.

The Church of St. Matthew executed two $10,000.00 promissory notes in favor of the Life Science Church in September, 1983 as purported consideration for the transfer of the Colfax and Mishawaka Avenue properties. The $10,000.00 sums reflected amounts collectible by the Life Science Church "in the event its congregation did not remain as members of the congregation of the Church of St. Matthew for at least 90 days." The Church of St. Matthew states that it assumed the mortgages on those properties with Standard Federal Savings and Fidelity Investment, Inc. and thereafter made mortgage payments.

The Troyers remained in possession of the Colfax and Mishawaka Avenue properties after the 1983 conveyances, pursuant to an oral lease between the Troyers and the Church of St. Matthew requiring the Troyers to pay rent in the amount of the monthly mortgages due on the properties, plus an additional $10.00. The alleged oral lease also required the Troyers to keep insurance on the properties, to pay real estate taxes on them, and to maintain the properties in good condition.

The alleged oral lease was never reduced to writing, as required by IND. CODE 32-2-1-1, and purportedly ran from September, 1983 to May, 1989, when the Troyers were ousted from the Church of St. Matthew . Thereafter, the Troyers made mortgage payments on the Colfax and Mishawaka Avenue properties directly to the financial institutions.

The Troyers have retained uninterrupted possession of the Colfax and Mishawaka Avenue properties since acquiring those parcels in 1975 and 1978. They presently reside at the Colfax property. They have continued to pay the expenses of both properties and made improvements on the properties. In a state court proceeding the Troyers instituted against the Church of St. Matthew , the Troyers admitted that the transfers of their ownership rights to these properties were "solely for the purpose of defeating the provisions of the Internal Revenue Code . . ."

In July, 1982, the Life Science Church filed for bankruptcy under Chapter 13 of the Bankruptcy Code; in October, 1982, the bankruptcy court converted the filing to one under Chapter 11. On May 19, 1983, the United States filed its proof of claim in the Life Science Church's bankruptcy case. In January, 1984, the government filed its objection to the debtor's plan of reorganization and disclosure statement with the bankruptcy court.

On May 26, 1987, the Internal Revenue Service ("IRS") made assessments against Emmett and Carol Troyer for unpaid withholding and Federal Insurance Contribution Act taxes for the fourth quarter of 1977, all four quarters of 1978 and 1979, and the first three quarters of 1980, for Federal Unemployment Act taxes for the 1978, 1979, and 1980 tax years, penalties, and interest. Notice of these assessments and demand for payment were sent to the Troyers on the same date. The Troyers have refused to pay the amounts assessed and the accompanying penalties, which presently total $50,031.19, not including statutory additions from the date of the assessments.

II.

A party seeking summary judgment must demonstrate that no genuine issue of fact exists for trial and that the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Certain Underwriters of Lloyd's v. General Accident Ins. Co. of America, 909 F.2d 228, 231 (7th Cir. 1990). If that showing is made and the motion's opponent would bear the burden at trial on the matter that forms the basis of the motion, the opponent must come forth with evidence to show what facts are in actual dispute. Lujan v. National Wildlife Federation, 110 S.Ct. 3177, 3186 (1990); Celotex Corp. v. Catrett, 477 U.S. 317 (1986); Sims v. Mulcahy, 902 F.2d 524, 540 (7th Cir.), cert. denied, 111 S.Ct. 249 (1990). If he fails to do so, summary judgment is proper. Fitzpatrick v. Catholic Bishop of Chicago , 916 F.2d 1254, 1256 (7th Cir. 1990); Tatalovich v. City of Superior , 904 F.2d 1135, 1142 (7th Cir. 1990). A genuine factual issue exists only when there is sufficient evidence for a jury to return a verdict for the motion's opponent. Harbor House Condominium Ass'n v. Massachusetts Bay Ins. Co., 915 F.2d 316, 320 (7th Cir. 1990); Hines v. British Steel Corp., 907 F.2d 726, 728 (7th Cir. 1990). Summary judgment should be granted if no reasonable jury could return a verdict for the motion's opponent. Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986); Visser v. Packer Engineering Associates, Inc., 924 F.2d 655, 660 (7th Cir. 1991).

The parties cannot rest on mere allegations in the pleadings, Hughes v. Joliet Correctional Center, 931 F.2d 425, 428 (7th Cir. 1991); McCarthy v. Kemper Life Ins. Companies, 924 F.2d 683, 687 (7th Cir. 1991), or upon conclusory allegations in affidavits. Mestayer v. Wisconsin Physicians Service Ins. Corp., 905 F.2d 1077, 1079 (7th Cir. 1990). The court must construe the facts as favorably to the non-moving party as the record will permit, Brennan v. Daley, 929 F.2d 346, 348 (7th Cir. 1991); Soldal v. County of Cook, 923 F.2d 1241, 1245 (7th Cir. 1991), and draw any permissible inferences from the materials before it in favor of the non-moving party, Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574 (1986); Illinois Bell Telephone Co. v. Hanes and Co., Inc., 905 F.2d 1081, 1087 (7th Cir. 1990), as long as the inferences are reasonable. Bank Leumi Le-Israel, B.M. v. Lee, 928 F.2d 232, 236 (7th Cir. 1991). The non-moving party must show that the disputed fact is material, or outcome-determinative, under applicable law. Johnson v. Pelker, 891 F.2d 136, 138 (7th Cir. 1989).

Even on an issue of intent, summary judgment is proper if the party with the burden at trial presents no indication of the necessary motive or intent. Illinois Bell Telephone Co., 905 F.2d 1081, 1087 (7th Cir. 1990); Holland v. Jefferson Nat'l Life Ins. Co., 883 F.2d 1307 (7th Cir. 1989).

The court will address the motions with the above standards in mind.

A.

The IRS asks the court to enter judgment as a matter of law on the tax assessments and penalties made against the Troyers and to foreclose on its liens against the Colfax and Mishawaka Avenue properties. The government contends that the Troyers' attempted transfers of their interests in those properties to the Life Science Church were, in effect, transfers to themselves and effected no legal change in ownership. The government further maintains that the purported transfers to the Church of St. Matthew were fraudulent conveyances and should be set aside as a matter of law. The government acknowledges that its legal rights in the Colfax and Mishawaka properties are subordinate to those of the mortgaging banks, Standard Federal Bank and Fidelity Investment.

The Troyers present three general positions in response to the government's motion. They contend that (1) the federal tax assessments against them are inaccurate; (2) the government should be barred from pursuing those claims in this cause because such were not timely (or properly) asserted in the prior bankruptcy proceeding involving the Life Science Church; and (3) the facts in the record do not support a finding that the transfers to the Life Science Church and/or the Church of St. Matthew were fraudulent.

The Church of St. Matthew also has objected to the IRS's summary judgment motion. The church asserts that it provided valid consideration for the conveyance of the Colfax and Mishawaka Avenue properties in 1983 in the two $10,000.00 promissory notes.

Neither the Troyers' nor the Church of St. Matthew's positions are well-taken. For the following reasons, the court will enter summary judgment in favor of the United States on its complaint in this cause.

IV.

The federal tax assessments against the Troyers are valid as a matter of law. While the Troyers assert inaccuracies in the assessments, they have not come forward with any legal or factual attack that disturbs the legal presumption in favor of validity of tax assessments.

Once the United States has come forward with evidence that federal tax assessments have been made and that balances are due with respect to those assessments, there is prima facie proof that taxes are owing. United States v. Rindskopf, 105 U.S. 418, 422 (1881); Anastasato v. Commissioner [86-2 USTC ¶9529 ], 794 F.2d 884, 886 (3rd Cir. 1986); United States v. Stonehill [83-1 USTC ¶9285 ], 702 F.2d 1288 (9th Cir. 1983), cert. denied, 465 U.S. 1079 (1984). Here, the United States has met this burden by submitting several Form 4340 statements evidencing the taxes owed by the Troyers. Those submissions suffice to warrant a presumption of the validity of the IRS's assessments. Several courts have held that a Form 4340 submission is sufficient evidence of the making of an assessment to establish the government's prima facie case of tax liability. United States v. Chila [89-1 USTC ¶9299 ], 871 F.2d 1015 (11th Cir.), cert. denied, 110 S.Ct. 498 (1989); United States v. Dixon [87-2 USTC ¶9485 ], 672 F.Supp. 503, 506 (M.D. Ala. 1987), aff'd, 849 F.2d 1478 (11th Cir. 1988); G.M. Leasing Corp. v. United States [75-1 USTC ¶9435 ], 514 F.2d 935, 941 (10th Cir. 1975), rev'd on other grounds [77-1 USTC ¶9140 ], 429 U.S. 338 (1977).

Once the IRS has shown evidence of an assessment, the burden shifts to the taxpayer to refute the validity of the tax liability. Helvering v. Taylor [35-1 USTC ¶9044 ], 293 U.S. 507, 515 (1935); Calderone v. United States, 799 F.2d 254, 258 (6th Cir. 1986); Anastasato v. Commissioner [86-2 USTC ¶9529 ], 794 F.2d at 886; Avco Delta Corp. v. United States [76-2 USTC ¶9570 ], 540 F.2d 258 (7th Cir. 1976), cert. denied sub nom. Canadian Parkhill Pipe Stringing Ltd. v. United States, 429 U.S. 1040 (1977). Courts traditionally give deference to the tax assessments of the IRS and, absent proof in defense of delinquency, routinely reduce such assessments to judgment. Lasky v. C.I.R. [56-2 USTC ¶9684 ], 235 F.2d 97 (2nd Cir. 1956), aff'd [57-1 USTC ¶9482], 352 U.S. 1027 (1957); United States v. Mensik [72-1 USTC ¶9438 ], 335 F.Supp. 770 (M.D. Pa. 1971).

The Troyers have not come forward with evidence or legal authority to challenge the validity of the Form 4340 certificates, absent their own self-serving conclusions. While the Troyers assert a failure on the part of the IRS to file its claim properly in a prior bankruptcy proceeding, the Troyers provide no legal support for their implied suggestion that such a failure bars this action. Indeed, tax assessments are non-dischargeable in bankruptcy proceedings. 11 U.S.C. §523(a)(1)(A). Further, the debtor before the bankruptcy court was the Life Science Church, not the Troyers; the tax assessments in this cause are against the Troyers, not the Life Science Church .

The Troyers clearly have failed to meet their burden in challenging the validity of the federal tax assessments recorded against them in May, 1987. Accordingly, giving a presumption of validity to those assessments, this court may properly reduce them to judgment.

V.

The IRS further asserts that the Troyers have maintained their ownership interests in the Colfax and Mishawaka Avenue properties, notwithstanding attempted transfers of those plots to the Life Science Church and the Church of St. Matthew . Accordingly, the government asks that it be permitted to foreclose on the tax liens against the Colfax and Mishawaka Avenue properties, subject to the mortgage rights of Standard Federal Bank and Fidelity Investment. The government has requested appropriate relief.

A.

Initially, the IRS contends that the transfers to the Life Science Church affected no legal change in ownership and were, in effect, transfers from the Troyers in their individual capacities to the Troyers in their capacities as trustees of the Life Science Church . The government refers this court to Troyer v. Commissioner [CCH Dec. 45,673(M) ], 57 T.C.M. (CCH) 334, 338 (1989), in which the tax court held that the Troyers' attempted transfers to the Life Science Church were transfers to themselves. Citing Ferrell v. Pierce, 785 F.2d 1372, 1374 (7th Cir. 1986), the government argues that this court must give collateral estoppel effect to the tax court's determination on this issue.

To give collateral estoppel effect to the tax court's determination, this court must find that (1) the party against whom the issue is asserted is the same party who lost the issue in the earlier proceeding; (2) the issue was litigated and decided on the merits; (3) resolution of the issue was necessary to the resolution of the earlier case; and (4) the issues are the same. Kunzelman v. Thompson, 799 F.2d 1172, 1176 (7th Cir. 1986). The parties in the cause before this court were not all before the tax court when it rendered its judgment with respect to the Troyers' transfer of property rights to the Life Science Church: the church was not a party to those proceedings. Accordingly, this court cannot invoke the doctrine of collateral estoppel with respect to issues resolved by the tax court below.

B.

Alternatively, the IRS asserts that the property transfers from the Troyers to the Life Science Church and then to the Church of St. Matthew were all fraudulent conveyances. The Troyers contend that it was not their intent to defraud the IRS, nor do the undisputed facts suggest evidence of fraud. The Church of St. Matthew further alleges that the quitclaim deeds executed by the Life Science Church in its favor are valid. Neither law nor fact support the defendants' positions, however.

Federal courts apply state substantive laws in actions to set aside a fraudulent conveyance and foreclose on a federal tax lien. Commissioner v. Stern [58-2 USTC ¶9594 ], 357 U.S. 39, 42-45 (1958). State law must be consulted to determine the extent to which a taxpayer has an interest in property for the purpose of imposing a federal tax lien. Once state law has determined the extent of the taxpayer's legal interest in property, federal law dictates the tax consequences. Medaris v. United States [89-2 USTC ¶9565 ], 884 F.2d 832 (5th Cir. 1989); S.E.C. v. Levine [89-2 USTC ¶9515 ], 881 F.2d 1165 (2nd Cir. 1989); United States v. Phillips [89-2 USTC ¶9407 ], 715 F. Supp. 81 (S.D.N.Y. 1989); Eskanos v. Alpha 76 [90-2 USTC ¶50,344 ], 712 F. Supp. 819 (D. Colo. 1989); Loving Saviour Church v. United States [84-1 USTC ¶9261 ], 728 F.2d 1085 (8th Cir. 1984). Since both the properties in question and the tax indebtedness have an Indiana situs, Indiana law appears appropriate for examination.

Principles of Indiana law on fraudulent conveyances are well established. IND. CODE 32-2-1-14 et seq. Under Indiana law, fraudulent intent generally is a question of fact and no conveyance or charge will be adjudged fraudulent against creditors solely on the grounds that it was not founded on valuable consideration. U.S. Marketing Concepts v. Don Jacobs, 547 N.E. 2d 892 ( Ind. App. 1989). Other factors must be considered. Purple v. Farrington, 119 Ind. 164, 21 N.E. 543 (1889); Pence v. Rhonemus, 58 Ind. 268, 108 N.E. 129 (1915). The character of a sale or transfer of property must be judged by the circumstances existing at the time of the conveyance and not by subsequent events having no actual connection with the transaction. Stamper v. Stamper, 227 Ind. 15, 83 N.E.2d 184 (1949); Deming Hotel Co. v. Sisson, 216 Ind. 587, 24 N.E.2d 912 (1940); Ray v. Simons, 76 Ind. 150 (1881).

While the determination of whether a conveyance was fraudulent involves the consideration of various elements and factors, certain circumstances so frequently indicate transfers to defraud creditors that they are recognized as indicia or "badges of fraud". Arnold v. Dirrim, 398 N.E.2d 442 (Ind. App. 1979); Cook v. Ball, 144 F.2d 423 (7th Cir.), cert. denied, 323 U.S. 761 (1944). "Badges of fraud" from which fraudulent intent may be inferred include: the debtor's transfer of property during pendency of suit; transfer of property that renders the debtor insolvent or greatly reduces the estate; series of contemporaneous transactions which strip the debtor of all property available for execution; secret or hurried transactions not in the usual mode of doing business; any transaction conducted in a manner different from customary methods; transactions whereby the debtor retains benefits over transferred property; little or no consideration in return for transfer; and transfer of property between family members. U.S. Marketing Concepts v. Don Jacobs, 547 N.E.2d 892 ( Ind. App. 1989); Jones v. Central National Bank of St. Johns , 547 N.E.2d 887 ( Ind. App. 1989).

The Troyers' conduct evidences a clear intent to defraud the IRS. Several "badges of fraud" mark the attempted transfers of the Colfax and Mishawaka Avenue properties from the Troyers to the Life Science Church. The church gave no apparent consideration for the two properties' transfer. While the quitclaim deeds suggested "One dollar and other valuable consideration", none of the defendants have brought forth evidence of other valuable consideration. Additionally, despite the apparent transfer of the Colfax and Mishawaka Avenue properties, they retained all apparent ownership rights over those properties, including obligations on two mortgages. The two purported transfers occurred at approximately the time the Troyers first became delinquent in their payment of federal taxes. Moreover, the fact that such transfers occurred at about the same time, and in the same unconventional manner, suggests that the Troyers sought to deplete their available assets quickly.

Many of the badges of fraud discussed above apply similarly to the attempted 1983 transfers to the Church of St. Matthew . While the quitclaim deeds evidencing those transfers suggested consideration in the amount of $10,000.00, none of the parties dispute the fact that such consideration was never given. The Troyers continued to retain control over the Colfax and Mishawaka Avenue properties and continued to make the mortgage payments (albeit through the church) on those properties, as well as payments of all other property expenses. These purported transfers were executed simultaneously and at the same time the Life Science Church (the purported owner of the properties) had filed bankruptcy.

In addition, evidence in the record indicates that the Troyers made admissions concerning their motives in the property transfers. While the Troyers have tried to deny prior statements of their intent to avoid federal taxes, their arguments fail to erase those previous admissions.

Accordingly, for the reasons stated above, the court concludes that the Troyers' conveyances of the Colfax and Mishawaka Avenue properties to the Life Science Church, and the subsequent conveyances of those properties to the Church of St. Matthew , were fraudulent. Those attempted transfers are void as a matter of law. The court finds that the Troyers hold property rights in those parcels, subject to the mortgages of Standard Federal Bank and Fidelity Investment, Inc.

C.

Section 6321 of the Internal Revenue Code provides for the imposition of a federal lien encompassing "all property and rights to property whether real or personal" belonging to "a delinquent taxpayer". The tax lien arises at the time of the assessment of the tax liability, continuing thereafter until the underlying tax liability is satisfied or collection is barred by the statute of limitations, and attaches to after-acquired property of the taxpayer. 26 U.S.C. §§6322 , 6502 ; Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265 (1945); J.D. Court, Inc. v. United States, 712 F.2d 258, 260-261 (7th Cir. 1983), cert. denied, 466 U.S. 927 (1984).

Pursuant to this authority, the United States is entitled to execute its tax liens against the Colfax and Mishawaka Avenue properties. As agreed by the IRS and the mortgaging banks, those liens are subject to the superior interests of Standard Federal Bank and Fidelity Investment, Inc.

VI.

The Troyers have moved for partial summary judgment on what appears to be anticipated claims by the Indiana Department of Revenue. The IRS added the DOR as a party "because it may claim an interest in real property which is involved in this action as it has recorded judgments against Emmett K. Troyer and Carol L. Troyer for unpaid Indiana Gross Income Taxes which cloud the title to real property involved in this action." In response to that portion of the IRS's complaint, the DOR acknowledges that tax assessments have been made against the Troyers for the tax period in 1982 and 1986. However, nothing in the record suggests when such assessments were made or any priority they may have to the federal tax assessments.

In their brief motion, the Troyers present the following statement of (what they perceive as) uncontested facts:

1. That on May 30, 1984, St. Joseph County Circuit Court Judge John Montgomery entered an order vacating all tax assessments against these defendants assessed by the Indiana Department of Revenue (copy of Order attached hereto marked Exhibit 1).

2. That the tax claims filed in this court by the Indiana Department of Revenue as due and owing from the Troyers are claims that were included and vacated by Judge Montgomery in the state court proceedings Cause No. N-3931.

Exhibit 1 to the Troyers' motion is an order from the St. Joseph Circuit Court entered in State of Indiana , ex rel. The Indiana Department of State Revenue v. Troyer Pool & Building, Inc., Cause No. N-3931, on May 30, 1984. It reads as follows:

This matter coming before the Court for dismissal on the oral agreement of the parties reached through their respective attorneys of record and the Court being fully advised that the parties have agreed that this cause and all ancillary proceedings raised therein by the defendant be dismissed on the condition that the defendant and CAROL TROYER and EMMETT TROYER individually be allowed and granted the right to open up any and all assessment and claims made by the State of Indiana Department of Revenue for income tax claimed or alleged to be due from said defendant and said individuals and that any and all judgments entered affecting said persons for said taxes and claims be vacated and set aside, and that in accordance with said agreement the parties hereto have relied upon said agreement and have accordingly ceased any and further proceedings in this case in reliance thereon and the Court being fully advised in the premises:

IT IS HEREBY ORDERED that the above-entitled cause and all ancillary proceedings instituted therein by plaintiff or defendant, pursuant to said agreement referred therein by plaintiff or defendant, pursuant to said agreement referred to above and on condition thereof be and the same hereby is dismissed in accordance with the foregoing agreement.

The state court order did not foreclose the DOR from reopening tax claims against the Troyers. It approved a settlement agreement between those parties in the state court proceedings. Accordingly, the Troyers have not demonstrated that no genuine issue of material fact exists with respect to potential DOR tax claim against them or their properties. Their motion for partial summary judgment, therefore, will be denied.

VII.

Accordingly, this court now finds that there is no genuine issue of material fact that the Troyers' attempted transfers of their property interest in the Colfax and Mishawaka properties were fraudulent. Those efforts to transfer the properties, therefore, are void as a matter of law.

For the foregoing reasons, the court DENIES the Troyers' motion for partial summary judgment and GRANTS the United States of America 's motion for summary judgment. Judgment shall be entered on those tax assessments made by the Internal Revenue Service on May 26, 1987 against Emmett and Carol Troyer in the amount of $50,031.19, along with statutory additions accruing from the May 26, 1987 date of assessment. The court further finds that the Troyers hold ownership rights as mortgagors to the real properties located at 1820 East Colfax Avenue and 3105 Mishawaka Avenue, in South Bend, Indiana, subject to those rights of Standard Federal Bank and Fidelity Investment, Inc., and that the United States is entitled to foreclose on those properties in satisfaction of its tax assessments against the Troyers pursuant to 26 U.S.C. §6321 .

 

 

 

United States of America , Plaintiff v. Michael Evan Parks, et al., Defendants

U.S. District Court, Dist. Utah , Cent. Div., Civ. 87C-0761S, 4/26/91

[Code Secs. 6321 and 7403 ]

Tax lien: Action to enforce lien: Fraudulent conveyances.--A tax lien against property conveyed to an irrevocable trust prior to the assessment of the taxes was foreclosed since the transfer was fraudulent under Utah state law. The court did not accept the taxpayer's contention that he transferred his interest in the property for estate planning purposes in lieu of making a will. Fraud was indicated by the fact that (1) the conveyance was made for no consideration, (2) the conveyance was made two days after the due date for the taxpayer's tax return, which was later improperly filed, (3) the conveyance was made by the taxpayer to a trust for which he acted as trustee with his parents as beneficiaries, (4) the taxpayer was rendered insolvent by the transfer, and (5) the taxpayer, not acting as trustee, granted an option to purchase the property after the conveyance.

Kirk C. Lusty, J. Scott Moede, Department of Justice, Washington , D.C. 20530 , for plaintiff. John J. Borsos, 370 E. South Temple, Salt Lake City, Utah 84111, for Phyllis Parks.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

SAM, District Judge:

The above-entitled case came before United States District Judge David Sam for trial on March 1, 1991 with Kirk C. Lusty and J. Scott Moede, Trial Attorneys, Tax Division, U.S. Department of Justice, representing the United States and John Borsos representing defendant Phyllis Parks. Defendant Michael Evan Parks appeared neither in person nor by counsel. The Court having considered the evidence presented at trial, the briefs submitted by the parties, and being fully advised in this matter, adopts the following.

FINDINGS OF FACT

1. This is a civil action by the United States to reduce to judgment the federal tax assessments against Michael Evan Parks, to set aside the conveyance of a parcel of real property from defendant Michael Evan Parks to defendant Bel-Aire Irrevocable Trust and to foreclose the federal tax liens against the interest of Michael Evan Parks in that parcel of real property. The Court has subject matter jurisdiction over this action pursuant to 26 U.S.C., Section 7402 , and 28 U.S.C., Sections 1340 and 1345.

2. Michael Evan Parks was notified of the date set for trial in the above-entitled action. From the evidence produced at trial it is clear that Michael Evan Parks had actual knowledge of the trial date in this action but made a deliberate choice not to appear.

3. Michael Evan Parks is the natural son of Evan A. Parks and Margaret C. Parks the beneficiaries of the Bel-Aire Irrevocable Trust.

4. On October 21, 1976 Michael Evan Parks and Phyllis J. Weiler (later Parks) purchased three parcels of real property located in Parowan , Utah . The legal description of the parcels of real property are as follows:

Parcel 1: Commencing at a point 82.2 feet South of the Northwest corner of Block 11, Plat "C", Parowan City Survey, and running thence Southwesterly along U.S. Highway #91 to intersect the West line of 3rd West Street, 102.2 feet; thence South 238.5 feet; East 217 feet; thence North to the South line of U.S. Highway #91; thence Southwesterly along U.S. Highway #91 to the point of beginning.

Parcel 2: All of Lot 4, and the East 13 feet of Lot 3, Block 11, Plat C, Parowan City Survey.

Parcel 3: Beginning at a point 118 feet East and 117 feet North from the Southwest corner of Lot 3, Block 11, Plat C, Parowan City Survey and running thence East 100 feet to a point 13 feet West of the East line of said Lot 3; thence North 150.3 feet to the South right of way line of U.S. Highway 91; thence Southwesterly along said right of way line to a point due North of the place of beginning; thence South to the place of beginning.

5. On April 17, 1980, Michael Evan Parks and Phyllis Parks, recorded a Quit-Claim Deed with the Iron County Recorder conveying the three parcels of real property at issue to defendant Bel-Aire Irrevocable Trust. On that same date Michael Evan Parks and Phyllis Parks executed a trust agreement purporting to transfer the three parcels of real property as well as various items of personal property to the Bel-Aire Irrevocable Trust. Both Michael Evans Parks and Phyllis Parks were named as Trustees of that trust. Under the trust agreement distributions from the trust were left to the sole discretion of the trustees.

6. Michael Evan Parks did not file a federal income tax return for the calendar year 1979 or any year subsequent. However, on April 16, 1981 Michael Evan Parks filed a 1979 Form 1040 return with the United States . On that form Michael Evan Parks failed to list any information but his name and the following statement, "I offer to amend or re-file this return exactly as you wish. If you will please show me how to do so without waiving my constitutional rights." On that same date Michael Evan Parks filed an identical return for 1980.

7. On November 14, 1981; May 6, 1985; October 25, 1985; and July 30, 1984 a delegate of the Secretary of the Treasury made assessments against defendant Michael Evan Parks for unpaid income taxes, plus interest and penalties for the periods and in the amounts indicated:

  TYPE                                        DATE OF

OF TAX                               PERIOD  ASSESSMENT    AMOUNT

Income .............................  1977    09/14/81   $ 5,075.72

Income .............................  1979    05/06/85    20,663.68

Income .............................  1980    05/06/85    14,394.48

Income .............................  1981    10/25/82    17,775.40

Income .............................  1982    07/30/84    11,540.49

                                                         ----------

                                                         $69,449.77

 

8. For the years 1979 through 1982 defendant Michael Evan Parks, Sr., filed no federal income tax returns other than the returns identified in paragraph 6, herein. The United States requested on several occasions that Mr. Parks properly file his federal income tax returns. Following Park's continued failure to file those returns the United States made the assessments set forth above.

9. Defendant Bel-Aire Irrevocable Trust did not pay defendants Michael Evan Parks and Phyllis Parks any sum in exchange for the transfer to it of the three parcels of real property at issue in this action.

10. From April 17, 1980 until the present, Michael Evan Parks has continued without interruption in his use and enjoyment of the motel and business which are situated on the property conveyed to the Bel-Aire Irrevocable Trust. Michael Evan Parks has never paid any rent to his Bel-Aire Irrevocable Trust in connection with his occupation of the property, and the Bel-Aire Irrevocable Trust has never undertaken any act which could be termed inconsistent with Michael Evan Park's ownership of the subject property.

11. On or about October 15, 1982 Michael Evan Parks and Phyllis Parks, in their individual capacities entered into an Option Agreement and Interim Lease. Under that agreement Michael Evan Parks and Phyllis Parks granted Rod Jensen the option to purchase the three parcel of property at issue in this action for $150,000. In exchange for the option to purchase the property at issue Rod Jensen paid Michael Parks and Phyllis Parks the sum of $3,500. That sum was retained by Michael Evan Parks and Phyllis Parks.

12. With respect to those federal employment taxes which accrued or were assessed following the conveyance on April 17, 1980, the intent of the defendant Michael Evan Parks to defraud the United States (as both an existing and subsequent creditor) in making that conveyance to the Bel-Aire Irrevocable Trust was established at trial through the proof of the many "badges of fraud" which characterized the transfer at issue here.

13. First, the conveyance in question was made for absolutely no consideration whatsoever.

14. Second, the conveyance at issue was made within two days after the due date for Mr. Parks' 1979 federal income tax return. That fact when coupled with the returns that Mr. Parks subsequently filed demonstrate that Mr. Parks conveyed the property to the trust in an attempt to hinder, delay or defraud the United States in collecting the federal taxes that were due from him.

15. Third, the conveyances were made by the defendant, Michael Evan Parks to the Bel-Aire Irrevocable Trust for which he acted as trustee and for which his parents were beneficiaries.

16. Fourth, the effect of conveying the real property at issue together with various items of personal property to the Bel-Aire Irrevocable Trust on April 17, 1980 had the effect of rendering the defendant Michael Evan Parks insolvent or unable to pay his existing debts.

17. Fifth, the fact that Michael Evan Parks, acting in his individual capacity and not as a trustee, granted an option to purchase the property to Rod Jensen in October, 1982 (after the date he purportedly conveyed the property to the Bel-Aire Irrevocable Trust), while retaining the proceeds of the sale of the option also establishes Michael Evan Parks' fraudulent intent in conveying the subject property to the Bel-Aire Irrevocable Trust.

18. Finally, the claim that Michael Evan Parks transferred the property to the Bel-Aire Irrevocable Trust in lieu of making a will or for estate planning purposes does not, in view of the highly suspicious circumstances surrounding the conveyance, convince the Court that this was nothing other than an attempt to hinder, delay and defraud his creditors, including the United States.

CONCLUSIONS OF LAW

The Court having set forth its Findings of Facts adopts the following:

1. The United States of America filed its complaint in the instant action on August 27, 1987. The suit was authorized by the District Counsel, Internal Revenue Service, a delegate of the Secretary of the Treasury, and was brought at the direction of the Attorney General of the United States , pursuant to 26 U.S.C., Sections 7401 and 7403 .

2. The Court has jurisdiction of this action under 28 U.S.C., Sections 1340 and 1345, and 26 U.S.C., Section 7402 . Venue is proper pursuant to 28 U.S.C. Section 1396 .

3. Section 6321 of the Internal Revenue Code of 1986 (26 U.S.C.) provides:

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

4. Accordingly, if, as here, after assessment, notice and demand for payment, a taxpayer fails or refuses to pay outstanding federal taxes, a lien attaches to all property and rights to property belonging to him or her. Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265, 267-268 (1945).

5. "The statutory language 'all property and rights to property,' appearing in 6321 * * * is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 719-720 (1985). "Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes." Glass City Bank v. United States, supra at 267.

6. The tax lien created automatically upon the assessment of the tax continues until the tax liability is satisfied or the lien becomes unenforceable by reason of lapse of time. 26 U.S.C., Sec. 6322 .

7. A court proceeding to obtain a judgment for unpaid tax assessments must be instituted within six years after assessment, or prior to the expiration of any period for collection agreed upon in writing by the taxpayer and the Internal Revenue Service. 26 U.S.C., Sec. 6502(a) . The earliest assessment in the present case was made against the defendant on November 2, 1981. Accordingly, this action was timely filed for all taxable periods in suit.

8. At the trial of the present case, the Government introduced Certified Certificates of Assessments and Payments for the defendant Michael Evan Parks, for the relevant taxable periods at issue in this suit. A certificate of assessments and payments is a domestic public document under seal which is admissible into evidence as a self-authenticating exception to the hearsay rule. Holland v. United States [54-1 USTC ¶9177 ], 209 F.2d 516 (10th Cir.), aff'd, [54-2 USTC ¶9714 ], 348 U.S. 121 (1954); United States v. Strebler [63-1 USTC ¶9278 ], 313 F.2d 402 (8th Cir. 1963); Rules 803(8) and 902(1), Federal Rules of Evidence.

9. The assessments set forth on the Certified Certificates of Assessments and Payments are presumptively correct evidence of a taxpayer's tax liabilities and satisfy the Government's burden of proof so that the United States may rest its case on this issue. United States v. Janis [76-2 USTC ¶16,229 ], 428 U.S. 433, 440-441 (1976); Anderson v. United States [77-2 USTC ¶9614 ], 561 F.2d 162, 165 (8th Cir. 1977); Kiesel v. United States [77-1 USTC ¶9101 ], 545 F.2d 1144, 1146 (8th Cir. 1976). See also Welch v. Helvering [3 USTC ¶1164 ], 290 U.S. 111 (1933).

10. The defendant taxpayer must then prove that, in fact, the assessment is incorrect. As the U.S. Court of Appeals for the Eighth Circuit explained in United States v. Strebler, supra, citing Paschal v. Blieden [42-1 USTC ¶9458 ], 127 F.2d 398, 401 (8th Cir. 1942), "the law is that such [certified] assessment is presumptively correct, and 'the burden is on the taxpayer to overcome' this presumption by countervailing proof."

11. The defendants here must also show the incorrectness of the statutory additions to the tax assessed. These assessments, too, are entitled to a presumption of validity. Norton v. United States [77-1 USTC ¶9296 ], 551 F.2d 821, 827 (Ct. Cl. 1977), cert. denied, 434 U.S. 831 (1977); Estate of Geraci v. Commissioner [74-2 USTC ¶13,024 ], 502 F.2d 1148 (6th Cir. 1974), cert. denied, 420 U.S. 992 (1975); Rubber Research. Inc. v. Commissioner [70-1 USTC ¶9274 ], 422 F.2d 1402, 1407 (8th Cir. 1970).

12. Thus, the Certified Certificates of Assessments and Payments establish the following with respect to the taxes, penalties and interest involved here: (1) that the taxes, penalties and interest were assessed (Sections 6201 and 6203 of the Internal Revenue Code); (2) that notice and demand for the payment of these taxes was properly made (Sections 6303(a) and 6321 of the Internal Revenue Code); and (3) that the taxpayer is presumptively liable for the unpaid taxes, penalties and interest shown on those Certificates. United States v. Strebler, supra; United States v. Lorson Electric Company [73-1 USTC ¶9449 ], 480 F.2d 554 (2d Cir. 1973).

13. The relevant statutory provision defining a fraudulent conveyance is found in Section 25 -1-7 of the Utah Code, which provides that:

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

14. The essential elements of a cause of action for a fraudulent conveyance include: (1) a conveyance, (2) of any estate or interest in lands, or in goods and chattels, or in things in action, and (3) made with the intent to hinder, delay or defraud creditors. Utah Code, Section 25 -1-7.

15. At the time Michael Evan Parks conveyed his interest in the parcels of property at issue in this action Michael Evan Parks was indebted to the United States for unpaid federal income taxes for 1979. See United States v. Thomassen [85-1 USTC ¶9325 ], 610 F. Supp. 386, 391-392 (D. Neb. 1985).

16. Equity will act to set aside conveyances of land if they were fraudulently made to defeat the collection of taxes. United States v. Phillips [46-1 USTC ¶9262 ], 59 F. Supp. 1006, 1008 (S.D. Ga. 1945).

17. In interpreting and applying the law of fraudulent conveyances, the Utah Supreme Court in Dahnken, Inc. of Salt Lake City v. Wilmarth, 726 P.2d 420, 423 (Utah 1986), stated that in United States v. Jones [86-2 USTC ¶9832 ], 631 F. Supp. 57, 59-60 (W.D. Mo. 1986) stated that although actual fraudulent intent must be shown to hold a conveyance fraudulent pursuant to Section 25 -1-7, its existence may be inferred from the presence of certain indicia of fraud or "badges of fraud." [Citations omitted.]

18. The courts have considered the following to be among the "badges of fraud:"

1. insolvency of the grantor;

2. inadequate consideration;

3. the transfer of all of the debtor's property;

4. the transfer was made in anticipation of a suit or liabilities;

5. a close relationship between the transferor and transferee;

6. the conveyance was not made an ordinary course of business;

7. failure to record the conveyance;

8. the retention of possession by the transferor;

9. the reservation of an interest or benefit by the grantor;

10. the security given by the transferor is in excess of the debt;

11. secrecy or haste in the transfer;

12. the state taxes or real property taxes are paid by transferor.

See generally, Dahnken, Inc. of Salt Lake City , supra; Givan v. Lambeth, 351 P.2d 959, 962 ( Utah , 1960); and United States v. Jones [86-2 USTC ¶9832 ], 631 F. Supp. 57, 59-60 (W.D. Mo. 1986).

19. The "badges of fraud" demonstrate that the conveyance at issue was a fraudulent conveyance under Utah law.

20. The claim by the defendant, Michael Evan Parks, that he transferred his property to the Bel-Air Irrevocable Trust on April 17, 1980, in lieu of making a will or for estate planning purposes is insufficient to rebut the presumption of fraud. The Court specifically finds that the conveyances in question here are fraudulent under Utah Code, Section 25 -1-7.

21. Section 7403 of the Internal Revenue Code of 1986 (26 U.S.C.) provides in pertinent part that:

(c) Adjudication and Decree.--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 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 interests of the parties and of the United States.

* * *

22. Having considered the evidence and testimony of record, the Court finds that the United States is the holder of federal tax liens in the total amount of $69,449.77, plus statutory additions to tax according to law.

23. The conveyances of the above-described parcels of real property by the defendant, Michael Evan Parks, are fraudulent within the meaning of Utah Code, Section 25 -1-7, and are hereby set aside. As a result, the parcels of property are now held by defendants Michael Evan Parks and Phyllis Parks as tenants in common.

24. The federal tax liens of the United States attach to the property owned by the defendant Michael Evan Parks, which specifically include the parcel of real property at issue in this action.

25. IT IS HEREBY ORDERED THAT:

a. The plaintiff, the United States of America , is granted judgment against the defendant, Michael Evan Parks, in the amount of $69,449.77, plus accrued but unassessed statutory additions to tax, plus accruing interest from the date of this judgment, until paid in full, and court costs and the costs of this action presently and in the future.

b. The United States is granted judgment foreclosing its federal tax liens on the real property described above.

c. The parcel of real property which are the subject of this action shall be sold at Marshal's sale, with the proceeds to be paid as follows:

FIRST: The costs of this sale;

SECOND: One-half to the United States , to the extent of its federal tax liens plus any statutory additions to tax and costs of this action and one-half to Phyllis Parks;

THIRD: The remainder to be paid to defendant Michael Evan Parks.