Fraudulent Conveyances Part1 page7

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Glascock admitted on cross-examination during the taking of his November 9, 1984 deposition at Eglin Federal Prison Camp that he probably made several similar statements about Martha and the South Sequoia Boulevard house in Florence as attributed to him by the foregoing described testimony but flatly denied there was any condition of Martha coming back to him in any remark he made. In substance he stated: "It sounds like something I would say." (Deposition p. 36, line 19).

The Court attaches little weight to this described testimony for a number of reasons. First of all, this testimony from the defendant herself and from her best friend and mother is highly suspect. Each such witness had a decided interest in the outcome of the case. Secondly, this line of evidence offered to contradict Glascock's own testimony that the acquisition of the Florence, Alabama residential real estate in the name of his girl friend (later his wife) was a planned and deliberate scheme on his part to shield such property from the demands and claims of his creditors is simply overwhelmed by the other facts appearing in this evidentiary record which move one to the inevitable finding and conclusion that Glascock indeed intended to defraud his creditors by such maneuvers and that Martha A. Boogaerts, or Martha A. Roberts, or Martha A. Glascock, by whatever name she chose to use from time to time, was a knowing and willing accomplice to her lover and later husband in such fraudulent efforts. Finally, this particular line of testimony is not believable because of the lapse of time from the period in 1978 in which these exclamations of Glascock were allegedly voiced until that period in November 1984 in which the final bench hearing was held. There is not one shred of evidence in this record pointing directly or indirectly to any effort on Glascock's part to carry out his alleged threats. This Court therefore rejects this effort of defendant Boogaerts to clothe herself in a cloak of innocence woven by Glascock's ire.

13. The evidentiary record in this action shows that as of the time of the final bench hearing in this cause defendant William D. Glascock was a convicted felon several times over. Indeed, he was incarcerated in a federal prison facility at the time of the hearing. ⁶

On March 29, 1979 in the United States District for the Northern District of Alabama in CR 78-M-0220-S William D. Glascock on plea of guilty to Count 2 of the indictment therein was adjudged guilty by the Court of wilfully and knowingly attempting to evade and defeat a large part of the income tax due and owing by him and his wife to the United States of America for the calendar year 1972 by filing a false and fraudulent income tax return in violation of Section 7201 , Internal Revenue Code, 26 U.S.C. §7201 and was committed to the custody of the Attorney General of the United States or his authorized representative for imprisonment for a term of five (5) years (Defendants' Exhibit No. G).

Also on March 29, 1979 in this Court in CR 79-M-0079-S William D. Glascock on plea of guilty to Count 1 of the indictment therein was adjudged guilty of knowingly making false statements to a bank for the purpose of influencing the action of said bank on his application for a loan, the deposits of said bank having been insured by the Federal Deposit Insurance Corporation, in violation of 18 U.S.C. §1014 , and imposition of sentence was suspended and defendant placed on probation for period of five (5) years, subject to the general terms and conditions of probation of record in this Court and subject to the special condition that defendant was to pay all income taxes, penalties, interest and costs finally determined to be due and owing for the tax years alleged in the indictment in CR 78-M-0220-S, Northern District of Alabama, said probation to begin when due and lawful release from custody (Defendants' Exhibit No. B).

Also on March 29, 1979 in this Court in CR 79-M-0050-S William D. Glascock on plea of guilty to Count 1 of the indictment therein was adjudged by the Court of wilfully and unlawfully making false statements to a state bank and trust company, the deposits of which were then insured by the Federal Deposit Insurance Corporation, for the purpose of influencing the action of said bank in violation of Title 18, United States Code, Section 1014 , and was thereupon committed to the custody of the Attorney General of the United States or his authorized representative for imprisonment for a period of two (2) years, said sentence to run concurrently with the sentence imposed in CR 78-M-0220-S, Northern District of Alabama (Defendants' Exhibit No. C).

Also on March 29, 1979 in this Court in CR 79-M-0049-S William D. Glascock on plea of guilty to Count 4 of the indictment therein was adjudged guilty by the Court of knowingly making false statements in statement of condition for the purpose of influencing the action of a bank in approving loans to him, said bank having been insured by the Federal Deposit Insurance Corporation, in violation of 18 U.S.C. §1014 , and was thereupon committed to the custody of the Attorney General of the United States or his authorized representative for imprisonment for a period of two (2) years, said sentence to run concurrently with the sentence imposed in CR 78-0220-S, Northern District of Alabama (Defendants' Exhibit No. E).

On December 12, 1983 in the United States District Court for the Middle District of Louisiana William D. Glascock on plea of guilty to Counts 1 and 2 of the indictment therein was adjudged guilty of conspiring to violate 18 U.S.C. §§472 , 473 and 2, and 18 U.S.C. §472 and 2 --possession of forged and counterfeited obligations of the United States, and was thereupon committed to the custody of the Attorney General of the United States or his authorized representative for imprisonment for a period of five (5) years on Count 1 with impositions of sentence, as to imprisonment only, suspended and defendant placed on probation for a period of five (5) years on Count 2 to commence upon defendant's release from custody. As a special condition of probation the Court directed that defendant was to pay a fine in the sum of $5,000.00 as directed by the Probation Department (Defendants' Exhibit No. A).

In addition to the foregoing described felony convictions, defendant William D. Glascock on October 13, 1975 entered plea of guilty to An Attempt To Commit the Offense of False Pretenses, a misdemeanor, in the Circuit Court of Lauderdale County, Alabama, was adjudged guilty of such offense by such state court, and fined $500.00 and court costs (Defendants' Exhibit No. F).

14. In weighing the deposition testimony of William D. Glascock in this case and judging his credibility or believability, the Court has carefully considered Glascock's previous felony convictions, his previous state court conviction of crime involving dishonesty, all other credible evidence in this record which supports or contradicts his testimony, and his interest in the outcome of the case. The Court has found and determined and now finds and determines that Glascock's testimony herein is credible and worthy of belief.

15. As of the time of the final bench hearing the fair cash market value of the 119 South Sequoia Boulevard residential property in the City of Florence, Alabama was $68,000.00 to $78,000.00. (Testimony of David McFall, Vice President, First Federal Savings and Loan Association of Florence, whom the Court recognizes and accepts as an expert real estate appraiser in the Florence, Alabama community.) And as of such date, the unpaid principal balance of the first mortgage indebtedness thereon owed to First Federal Savings and Loan Association of Florence, mortgagee, was $19,391.75 with maturity date of July 1977.

16. At the time of her execution of the Real Estate Contract dated June 22, 1972 (Government Exhibit 1), at the time of her execution of the Lease-Sale Contract dated August 7, 1972 (Government Exhibit No. 2), at the time of the execution and delivery to her of the Deed of Conveyance dated February 17, 1976 (Government Exhibit No. 3) (in which she assumed and agreed to pay the unpaid balance of the First Federal mortgage on such property), at all times intervening between such transactions, defendant Martha A. Boogaerts (known at such times by different names) had no assets of consequence, no earned income, no source of funds other than from William D. Glascock, and was completely unable from a financial standpoint to personally meet the financial obligations imposed upon her by the terms and provisions of such documents. Further, during the period from February 17, 1976 until the time she and William D. Glascock moved to the State of Louisiana, defendant Boogaerts (then Martha A. Glascock but using the name of Martha A. Roberts in her business dealings with all third party entities) was wholly financially dependent upon her husband, William D. Glascock, and had no assets or funds or source of funds in her own right to enable her to make the requisite monthly mortgage payments required by the South Sequoia Boulevard property mortgage to First Federal. Finally, defendant Boogaerts, according to this evidentiary record, has expended no funds whatever from her separate estate on the South Sequoia Boulevard real estate.

17. Based on this evidentiary record, the Court finds as a fact that defendant William D. Glascock was insolvent at the time of the execution of the June 22, 1972 Real Estate Contract (Government Exhibit No. 1), at the time of the execution of the August 7, 1972 Lease-Sale Contract (Government Exhibit No. 2), at the time of the execution and delivery of the February 17, 1976 deed of conveyance (Government Exhibit No. 3), at all times intervening between such transactions, and at all times from February 17, 1976 until defendants Glascock and Boogaerts (then Martha A. Glascock) moved to the State of Louisiana.

18. The Court finds as a fact from this evidentiary record that the payment by William D. Glascock of the $3,950.00 earnest money payment required by the Real Estate Contract dated June 22, 1972 (Government Exhibit No. 1), his subsequent payment of the $2,550, plus interest, payment required by the Lease-Sale Contract dated August 7, 1972 (Government Exhibit No. 2), his payments of the $192.60 monthly payments to Hensley Construction Co., Inc. during the period from August 7, 1972 to February 17, 1976 as required by such Lease-Sale Contract, and his monthly mortgage payments of approximately $232.81 to First Federal (through Martha A. Glascock in the name of Martha A. Roberts) from February 17, 1976 until September 1976 (date of move to Louisiana) as required by the terms and provisions of the First Federal mortgage on the South Sequoia Boulevard property substantially reduced William D. Glascock's financial worth and had the effect of defeating or hindering his creditors, including the United States.

19. Defendant Martha A. Boogaerts currently stands as the sole record owner of the Florence , Alabama residential real estate in question. Her title and ownership, however, is subject to the first mortgage on such property held and owned by First Federal Savings and Loan Association of Florence.

20. From the facts shown in this evidentiary record there is no question but that plaintiff United States of America was an existing and most substantial creditor of defendant William D. Glascock at the time of execution of the Real Estate Contract dated June 22, 1972 by Hensley Contracting Co., Inc. and defendant Martha A. Boogaerts (then Martha A. Roberts), at the time of the subsequent delivery of possession of the South Sequoia Boulevard real estate by Hensley Construction Co., Inc. to defendants Glascock and Boogaerts (Roberts), at all times subsequent thereto until the time of execution of the Lease-Sale Contract dated August 7, 1972 by Hensley Construction Co., Inc. and defendant Martha A. Boogaerts (then Martha A. Roberts), at all times subsequent to August 7, 1972 until the execution and delivery of the February 17, 1976 deed of conveyance of such property by Hensley Construction Co., Inc. to defendant Martha A. Boogaerts (but in the name of Martha A. Roberts) and at all times during the period of February 17, 1976 until September 1976 (move to Louisiana), and that there was at the time of each such described real estate transaction during each intervening period between such transactions, and during the period of February 17, 1976 until September 1976, a conveyance of property out of which the plaintiff United States of America could have satisfied its claims against defendant William D. Glascock or some portion thereof.

CONCLUSIONS OF LAW

1. Subject matter jurisdiction exists under 28 U.S.C. §§1340 and 1345. ⁷ Personal jurisdiction and venue are not contested.

2. This is a fraudulent conveyance suit brought by the United States of America (" United States ") which has as its ultimate object the collection of federal taxes which are and have been long owed and past due by and from defendant William D. Glascock ("debtor"). The suit seeks to set aside as fraudulent to the United States in its capacity as a then creditor of debtor Glascock a February 1976 deed of conveyance of Alabama real estate from a third party to debtor's then spouse sued here in her present name of Martha A. Boogaerts. The United States asserts that the consideration for such conveyance was furnished by debtor and that the conveyance to the debtor's wife was made at debtor's instance and direction and with his spouse's knowledge and connivance for the purpose of preventing his creditors from subjecting such property to their claims or demands. The defendant spouse, divorced from Glascock since 1978, asserts in defense of the suit denial of any fraudulent connivance on her part with her then husband and further answers that the conveyance constituted a bona fide gift to her by her then husband motivated by his love and affection for her as his wife, as well as his appreciation for her devotion to him proven under rather strained circumstances prior to their May 1974 marriage. An odd twist in this scenario is that a part of the recited consideration for the conveyance under consideration was the grantee wife's assumption and agreement to pay the then unpaid balance of a first mortgage originally imposed on the property by her grantor. ⁸ While this fact is undoubtedly relevant on the consideration issue hereinafter discussed this factual aspect of consideration was not mentioned or discussed in the final bench hearing nor has it been raised or argued in the post-hearing briefs submitted by counsel for the parties.

3. The United States became a creditor of defendant William D. Glascock at the time Glascock failed to pay withholding taxes of his employees in 1971, 1972 and 1975 pursuant to 26 U.S.C. §6672 ⁹ and again on the respective April 15th federal income tax due dates succeeding the calendar years 1971, 1972 and 1973 when he failed to pay his lawful federal income taxes due for such calendar year periods. Regardless of when federal taxes are actually assessed, taxes are considered due and owing, and constitute a liability, as of the date the tax return for the particular period is required to be filed. United States v. Hickox [66-1 USTC ¶15,679 ], 356 F.2d 969 (5th Cir. 1966); ¹⁰ 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). Thus, the United States was clearly a creditor of William D. Glascock at the time of all of the transactions respecting the purchase of the South Sequoia Boulevard residential real estate, at all times intervening between such transactions and at all times subsequent to the date of February 17, 1976 on which the deed of conveyance in question was executed and delivered by Hensley Construction Co., Inc. to Glascock's wife but in the name of Martha A. Roberts.

The United States properly sought relief in the above entitled civil action under the applicable fraudulent conveyance laws of the particular state in which the real property and taxpayer were located--in this case, the law of Alabama. Commissioner v. Stern [58-2 USTC ¶9594 ], 357 U.S. 39 (1958); ¹¹ 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); United States v. Grice [83-1 USTC ¶9399 ], 567 F.Supp. 113, 115, n. 2 (M.D. Ala. 1983).

5. Under Alabama law "all conveyances . . . of any estate or interest in real or personal property and every charge upon the same made with intent to hinder, delay or defraud creditors . . . of their lawful actions, damages, forfeitures, debts or demands . . . are void." Ala. Code, §8 -9-6 (1975), formerly codified as Code 1940, Title 20 §7 . This statute is declaratory of the common law and of generally recognized equitable principles. Fleming v. Kirkland , 226 Ala. 222 (1933). Section 8 -9-6 (Ala. Code 1975) does not require the debt, claim or demand, which is protected by statute, to be reduced to judgment before the [action] to set aside a conveyance as fraudulent is filed. The action at law to reduce to judgment and the [action] to set aside are concurrent remedies in point of time, though the latter is, in fact, merely in aid of [the former]; that is, to give the plaintiff the fruits of his judgment when recovered. Roddam v. Martin, 285 Ala. 619, 622, 235 So.2d 654 (1970).

In construing the predecessor statute to §8 -9-6 (Ala. Code 1975), identical in wording to the present statute, the Supreme Court of Alabama stated in Roddam v. Martin, supra, 285 Ala. at p. 623:

The concurrence of three elements is essential before a conveyance can be declared fraudulent under Title 20 §7 , quoted supra. It must be shown that there is: (1) a creditor to be defrauded, (2) a debtor intending to defraud, and (3) a conveyance of property out of which the creditor could have realized his claim or some portion thereof. Adkins v. Bynum, 109 Ala. 281, 19 So. 400.

If this were the classical fraudulent conveyance fact pattern, the debtor husband would be the grantor in the challenged conveyance, the grantor's wife named grantee therein and Roddam v. Martin the easy authoritative answer to finding the conveyance to be fraudulent, assuming the presence and proof of the other Roddam factors. The discussion would then shift to an analysis of the evidentiary record to determine the presence of the other proof required before a conveyance found to be fraudulent is due to be set aside. But here by reason of the existence of a rather unusual fact pattern in this action to set aside an alleged fraudulent conveyance from a non-participating third party to the wife of the debtor with the grantee wife assuming an existing mortgage on the property in question as a recited part of the consideration for the conveyance, this federal court must explore even further through the maze of somewhat confusing opinions by the Supreme Court of Alabama dealing with the law of fraudulent conveyances in Alabama, ¹² some of ancient vintage, before the correct result emerges, at least to the point of reasonable legal certainty.

6. the lending decisions which articulate the principles governing fraudulent Alabama conveyances are Smith v. Wilder, 270 Ala. 637, 120 So.2d 871 (1960), and its progeny, J.C. Jacobs Banking Co. v. Campbell, 406 So.2d 834 (Ala. 1981). ¹³ In Wilder the Supreme Court of Alabama analyzed the conflicting case law and enunciated the principles which it deemed correct pertaining to a case of an existing creditor seeking to set aside, as fraudulent, a conveyance by his debtor:

An existing creditor seeking to set aside a conveyance may do so either because of actual fraud or on account of what is termed constructive fraud.

Actual fraud denotes the actual mental operation of intending to defeat or delay the rights of the creditor.

Constructive fraud, on the other hand, is based on facts and circumstances which the courts have said constititue legal fraud irrespective of actual intent. The term "constructive fraud" is generally used in referring to those instances where a grantor, indebted at the time, conveys property on a good as distinguished from a valuable consideration. Such conveyances are frequently referred to simply as voluntary conveyances.

270 Ala. at 649, 120 So. 871.

With respect to the burden of proof, the Wilder court made the following declarations:

The burden is upon an existing creditor alleging actual fraud to prove it. Birmingham Trust & Savings Co. v. Shelton , 231 Ala. 62, 163 So. 593.

Where a conveyance is sought to be vacated on the ground that it was voluntary, the burden is upon the complainant to show that his debt antedated the conveyance attacked.

When such proof is made the burden shifts to the grantee to go forward with the evidence.

. . .

If the evidence shows that the alleged fraudulent grantor was insolvent, failing or financially embarrassed when he made the conveyance, even though the consideration paid by the grantee was a new one, the burden is upon the grantee of showing a consideration both valuable and adequate.

However, if it does not appear that the grantor was insolvent, failing or financially embarrassed when he made the conveyance and the evidence shows that the consideration paid by the grantee was a new one, not resting on prior indebtedness, the only burden upon the grantee is to show that he paid a valuable consideration--substantial and not merely nominal.

. . .

But proof of payment of a present substantial valuable consideration did not in and of itself determine the rights of the parties.

Even though a consideration for the deed was a present valuable consideration, the complainants could have the deed vacated in its entirety by showing the grantor's intent to defraud and a participation therein by the purchaser . . . with knowledge of such intent or with notice of some fact calculated to put him on inquiry which, if followed up, would have lead [sic] to a discovery of the grantor's fraudulent intent. The burden of making such a showing was on the complainants. McClintock v. McEachin, 249 Ala. 591, 32 So.2d 305, and cases cited.

Smith v. Wilder, 270 Ala. 650.

The facts of Smith v. Wilder, involved, inter alia, a conveyance from father to son, which plaintiff alleged to be both actually and constructively fraudulent. The trial court found the son gave valuable and adequate consideration and was not a participating grantee, having no knowledge, either actual or implied, of any fraudulent intent on the part of the grantor, his father. The Alabama Supreme Court affirmed the finding of the trial court that the son had no knowledge of any fraudulent intent on the part of his father, the grantor, or notice of any fact which, if pursued, would have led to discovery of such intent, if any, and the trial court's consonant conclusion that the conveyance should not be set aside in its entirety. Nevertheless, the Supreme Court of Alabama remanded the case for a determination of whether the grantor in fact exercised a fraudulent intent, an issue about which the lower court had made no finding. In so doing, the Court stated:

The consideration paid by [the son] for the lands covered by the deed in question, although valuable, was in our opinion substantially inadequate. Therefore, we think the trial court should have considered the question as to whether the deed was fraudulently made by the grantor. This because of the equitable doctrine that, when a conveyance is fraudulently made upon a consideration which is valuable, but substantially inadequate, and the grantee is without notice of the grantor's intent and himself intends no fraud, the conveyance will be allowed to stand only as security for the value actually paid. London v. G.L. Anderson Brass Works, 197 Ala. 16, 72 So. 359, and cases cited; Rogers v. Conaway, 226 Ala. 334, 147 So. 152; Morrison v. Federal Land Bank of New Orleans , 232 Ala. 138, 167 So. 288.

270 Ala. at 651, 120 So.2d 871.

Returning now to J.C. Jacobs Banking Co. v. Campbell , supra, 406 So.2d commencing at 841, for the purpose of reviewing the Campbell court's critique and subsequent modification of Wilder:

The Nonjury Trial

An initial examination of the cross-appeals of Campbell from judgments favorable to defendants Brooks Derrick, Izzy Derrick, Payne, Self, and Words will prove helpful to an understanding of the issues raised in the other appeals. Judgment was rendered in favor of these defendants, each of whom was found by the trial court to have been a bona fide purchaser from Bynum, having paid an adequate consideration while not participating actively or constructively in his fraud.

Campbell contends the trial court misinterpreted applicable law in looking to questions of the adequacy of the consideration paid by appellants, and of their participation vel non in Bynum's fraudulent intent, as determinative of whether the conveyances to them should be set aside.

Code 1975, §8 -9-6, the basis of plaintiff's claim for relief, provides:

§8-9-6. Conveyances or assignments of property, etc., to hinder creditors, etc., void.

[Language of statute omitted].

This statute is declaratory of common law and of generally recognized equitable principles. Fleming v. Kirkland , 226 Ala. 222, 146 So. 384 (1933).

It is Campbell's position that a conveyance is void and due to be set aside as fraudulent, without regard to adequacy of consideration or grantee participation, upon proof of the three elements enumerated in Roddam v. Martin, 285 Ala. 619, 235 So.2d 654 (1970):

[Quote from Roddam re three elements omitted.]

Plaintiff contends the language of Code 1976, §8 -9-6, consistently with Roddam, speaks only to the grantor's fraudulent intent, noting that no mention is made of consideration or grantee participation in fraud. As the first and third elements of Roddam were not controverted at trial, Campbell claims the conveyances to cross-appellees were due to be set aside once Bynum's fraudulent intent in making them was proved.

[Discussion re Wilder and quotes from Wilder omitted.]

. . .

Campbell does not contend Bynum was insolvent, failing, or financially embarrassed at the time the conveyances in question were made, or that any of them were made for less than a valuable consideration, substantial and not merely nominal. Thus, cross-appellees assert, under Smith v. Wilder, the issue to be resolved is whether Bynum transferred his property with a fraudulent intent, in which his grantees participated with either actual or constructive knowledge.

Campbell argues, however, that this interpretation of Smith v. Wilder cannot result in harmony between the facts of that case and the result reached by this court in it . . .

[Recitation of facts of Wilder omitted.]

Campbell contends that this court, by remanding for a finding regarding the father's intent, confirmed that it is the fraudulent intent vel non of the grantor which determines whether a conveyance should be set aside and, if it is due to be set aside, the court will then decide whether the grantee should receive the benefit of equitable principles. Thus, according to Campbell , the entire analysis regarding consideration and grantee participation in Wilder is simply an equitable inquiry. The inquiry is whether a conveyance due to be set aside because of the grantor's fraudulent intent, is to be set aside in toto when the grantee is found to be a participant in the fraud, or is to be set aside only partially, with the grantee protected to the extent of consideration paid, when found to be an innocent purchaser. In support of this proposition, Campbell points to this court's phraseology that upon a showing of grantee participation the deed could be vacated "in its entirety"; language, he says, that is meaningless unless used for the purpose of making this distinction.

The reasoning employed by Campbell is logically unacceptable. Indeed, the three elements set out in Roddam must be found in order that a conveyance be declared fraudulent under the statutory proceeding whether the plaintiff is proceeding under a theory of actual or constructive fraud. Further proof, however, is required before a conveyance found to be fraudulent is due to be set aside. [Emphasis added.]

Where it appears the transfer in question was made for a valuable consideration, a plaintiff seeking to invoke the protection of Code 1975, §8 -9-6, must show the mutual fraudulent intent of the parties to the transaction. Proof of the grantor's intent alone is insufficient to cause the conveyance to be set aside. See 37 Am.Jur.2d Fraudulent Conveyances §6 (1954).

The reason for this requirement is that, failing such proof, the grantee is a bona fide purchaser for value who is entitled to keep the fruits of his bargain. See Harris, "Some Aspects of Fraudulent Conveyances in Alabama ," 6 Ala.Law. 170 (1945). The cases are replete with holdings that where the grantor is not insolvent, failing, or financially embarrased, a plaintiff creditor must prove participation by the grantee in the form of knowledge of the grantor's fraudulent intent, or notice of facts putting him on inquiry, which, if followed up, would lead to discovery of the grantor's intent; this would be required in order to set aside a fraudulent conveyance made for present valuable consideration. McClintock v. McEachin, supra; Van Antwerp v. Van Antwerp, 242 Ala. 92, 5 So.2d 73 (1941); London v. G.L. Anderson Brass Works, supra; Ledbetter v. Davenport Bros., 154 Ala. 336, 45 So. 467 (1908); Pippin v. Tapia, 148 Ala. 353, 42 So. 545 (1906); Smith v. Heineman, 118 Ala. 195, 24 So. 364 (1897); Florence Sewing Machine Co. v. Zeigler, 58 Ala. 221 (1877); Crawford v. Kirksey, 55 Ala. 282 (1876).

As previously indicated, and stated somewhat differently, the only recognized exception to this rule is the equitable principle applied when the consideration paid is found to be substantially inadequate.

Generally, inadequacy of consideration is only a "badge" or indicium of fraud. Where, however, the consideration is substantially or grossly inadequate, fraud may be inferred as a matter of law from inadequacy alone. Therefore, when the consideration, though valuable, is found to be substantially inadequate, and the grantee is without knowledge of the grantor's intent or of facts putting him on inquiry as to that intent, the conveyance will be allowed to stand only as security for the value actually paid. London v. G.L. Anderson Brass Works, supra, and cases cited therein; Morrison v. Federal Land Bank of New Orleans , supra.

This equitable principle was correctly determined to be controlling in Wilder, once it was found that the consideration given by the son was substantially inadequate. In applying the principle, however, this court inadvertently failed to recognize the very distinction it had drawn between actual and constructive fraud. Constructive fraud was equated only with voluntary consideration. A valuable but substantially inadequate consideration, however, is also a part of constructive fraud; the mutual fraudulent intent of the parties is inferred by law from the great disparity between the real value and the consideration given. Longon v. G.L. Anderson Brass Works, supra; Little v. Sterne, 125 Ala. 609, 27 So. 972 (1899); Gordon v. Tweedy, 71 Ala. 202 (1881).

Because fraudulent intent in Wilder was established as a matter of law by the son's payment of substantially inadequate consideration, it was not necessary for this court to remand for a finding concerning the grantor father's intent. This not too apparent, and understandable, flaw in the opinion was astutely seized upon by Campbell . It is what lends credence, however specious, to his arguments regarding proper interpretation of Wilder.

We, therefore, overrule Smith v. Wilder to the limited extent that it requires actual proof of the grantor's fraudulent intent before a conveyance may be partially set aside because made for substantially inadequate consideration.

406 So.2d at 841-844. While the above quotes from J.C. Jacobs Banking Co. v. Campbell have been far too lengthly, this Supreme Court of Alabama decision has now supplanted Wilder as the seminal case on the law of fraudulent Alabama conveyances and many of the principles there enunciated or quoted from prior authoritative reported cases and there reaffirmed are instructive in connection with the quest of this Court for a correct reasoned result in the above entitled civil action. For this reason the Court has the temerity to additionally include in the within memorandum of decision the Campbell court's reaffirmation of three long settled principles of Alabama fraudulent conveyance law, 406 So.2d at 847:

The Gladishes also raise as an issue the adequacy of consideration paid by them. Because we affirm and approve the findings that the Gladishes were fraudulent participants we see no need to address this issue. Where a conveyance is made upon a present consideration, there being an intent on the part of the grantor and the grantee to defraud the grantor's creditors, the conveyance is void as to existing creditors, however valuable and adequate the consideration. Smith v. Heineman, supra [118 Ala. 195, 24 So. 364 (1897)] If the grantee has notice of facts putting him on inquiry as to the grantor's fraudulent intent, it is the same as if he too has the intent [Emphasis added]. Crawford v. Kirksey, supra [55 Ala. 282 (1876)]; Waddle v. Great Southern Phos . Co., 184 Ala. 346, 63 So. 462 (1913); Smith v. Collins & Griffith, 94 Ala. 394, 10 So. 334 (1891).

. . .

It is well settled that conveyances or transfers made to hinder, delay, or defraud creditors are valid and operative between the parties when fully consummated. Neither party can rescind or defeat them. Continental Ins. Co. v. Dotson, 260 Ala. 499, 70 So.2d 796 (1954). A fraudulent conveyance is valid as to all the world except creditors of the grantor, notwithstanding the statute declaring that such conveyances are void. Brown v. Andrews, 288 Ala. 111, 257 So.2d 356 (1972); First National Bank v. Love, 232 Ala. 327, 167 So. 703 (1936).

* * *

Where parties enter into an arrangement pursuant to a fraudulent conveyance, a court will not interfere between them, but will leave them where they have placed themselves. This stems from the maxim "in pari delicto melior est conditio possidentis": in the case of equal or mutual fault the condition of the party in possession is the better one. Glover v. Walker , 107 Ala. 540, 18 So. 251 (1894); King v. King, 61 Ala. 479 (1878).

7. An impressive array of ancient but authoritative Alabama case law has firmly established the fraudulent conveyance principle that a conveyance made from a third party to a wife, at the instance of her husband, who paid the consideration therefor, is void as against the latter's existing creditors. Such conveyances are in equity regarded in the same light as if they had been made directly from the husband as grantor to the wife. Smith's Executor v. Cockrell, 66 Ala. 64 (1880); Peevey v. Cabiness, 70 Ala. 253 (1881); Stoutz v. Huger, 107 Ala. 248 (1895); Kelley v. Connell, 110 Ala. 543 (1895); Southern Home Building & Loan Ass'n v. Riddle, 129 Ala. 562 (1901); Wimberly v. Montgomery Fertilizer Co., 132 Ala. 107 (1901); John Silvey & Co. v. Vernon, 153 Ala. 570 (1907); Elam v. A.P. Brewer Lumber Co., 176 Ala. 48 (1912); and Veal v. Whittemore, 176 Ala. 490 (1912).

8. While Martha A. Boogaerts' assumption and agreement to pay (in her former name of Martha A. Roberts which was not then her true name) the $25,556.76 unpaid balance of the First Federal first mortgage indebtedness on the South Sequoia Boulevard property as a part of the consideration moving Hensley Construction Co., Inc. to execute and deliver to her in the name of Martha A. Roberts the February 16, 1976 deed of conveyance to the residential real estate in question would normally constitute a valid and valuable consideration under the laws of the State of Alabama for such conveyance, National Bank of Republic v. Dickinson, 107 Ala. 265, 18 So. 144 (1895), the complete failure of defendant Boogaerts to prove that she was then or subsequently personally able (until the property was rented by her upon the Glascocks' move to Louisiana in September 1976) to pay such indebtedness negates what would otherwise be considered and treated in the eyes of the law as valuable and substantially adequate consideration for the conveyance. Where a fraudulent conveyance is charged, the burden of proof that there was a valuable and adequate consideration for the transfer rests upon the grantee. Murphy v. Pipkin, 191 Ala. 111 (1914); Alabama Credit Corporation v. Deas, 417 F.2d 135, 140 (5th Cir. 1969); Gordon v. Gorman, 436 So.2d 851, 854-855 ( Ala. 1983). As a matter of fact, the Court has found as a fact from the evidentiary record herein [Finding of Fact No. 16] this defendant's personal financial inability to comply with the financial obligations incurred by her on paper under the June 22, 1972 Real Estate Contract (Government Exhibit No. 1), under the August 7, 1972 Lease-Sale Contract (Government Exhibit No. 2) and under the February 17, 1976 deed of conveyance (Government Exhibit No. 3). The record is replete with unassailable proof of Martha Boogaerts' complete and total reliance upon Glascock during this period for even her basic necessities of life. For the lack of a better word, the Court will label this incurrence and assumption of indebtedness as "paper consideration," here holds that this evidentiary record shows that it was not worth the paper on which it was written, and further holds that such mortgage assumption under the facts here presented was not only not valuable but was in fact and law substantially inadequate as against a creditor. See 6 A.L.R.2d 270: Annotation: "Assumption of mortgage as consideration for conveyance attacked as in fraud of creditors." See generally, Roddam v. Martin, 285 Ala. 619, 623, 235 So.2d 657.

This evidentiary record presents a conveyance of real property from a third party to the wife but at the specific instance and direction of the husband who furnished the entire consideration, although insolvent. ¹⁴ Under this state of facts, the Court concludes that the conveyance should be scrutinized by the Court as one between husband and wife in accordance with the teachings of the Supreme Court of Alabama. In Gurley v. Blue Rents, Inc., 383 So.2d 531, 535 (Ala. 1980), a case in which a creditor brought suit to set aside an alleged fraudulent conveyance wherein husband debtor conveyed to wife his respective share in property held by them as joint tenants with right of survivorship, the Alabama Supreme Court gave clear directives for trial courts to follow in considering a conveyance of the type now before the Court:

Having determined that the action was we find properly maintained, we now turn our attention to the question of whether the trial court was correct in finding that the present conveyance defrauded the appellee. In resolving this issue, it is highly significant that we are dealing with a conveyance of real property between husband and wife, one of whom was in financial difficulty. Any time an alleged fraudulent conveyance involves a husband and wife, the approach which must be taken by the court is affected. Exactly how it is affected varies from state to state [In this regard see Annot. 35 A.L.R. 2d 8 and 37 Am.Jur.2d Fraudulent Conveyances §25 (1976)]. In Alabama , the fact that a conveyance took place between a husband and wife does not raise any presumption of fraud, nor does it represent a badge of fraud. Instead, it alters the scrutiny with which the court must consider the conveyance. In Umphrey v. Barfield, 238 Ala. 11, 13, 189 So. 64, 65 (1939), this Court reasoned that ". . . while this relationship [the husband-wife relationship] is not within itself a badge of fraud, 'yet under all the authorities, supported by reason and common sense,' transactions between persons occupying such relationship are to be jealously watched and must be subjected to closer scrutiny than would be required of a stranger." Thus, the very fact that Mr. and Mrs. Gurley were the sole parties to the conveyance should have completely changed the way in which the trial court viewed the conveyance. It was essential that the conveyance be more closely scrutinized.

In addition, the relationship of the parties necessitated a shift in the burden of proof. This Court has held on numerous occasions that when a husband conveys certain property to his wife and that conveyance is attacked as a fraud on the husband's existing creditors, the wife bears the burden of proving that the conveyance was based upon a valuable consideration, substantial and not merely nominal. Smith v. Wilder, 270 Ala. 637, 120 So.2d 871 (1960); Dutton v. Lindler, 238 Ala. 363, 191 So. 210 (1939). The wife is thus laden with the initial responsibility of proving the bona fide character of the underlying transaction.

After reviewing the record and transcript of the trial, it is clear that the trial court, hearing evidence ore tenus, did not approach the case in the manner outlined above, but we find no error here. The trial court required the appellee to carry the burden of proof in establishing fraud in accordance with the requirements espoused by this Court in Roddam v. Martin. 285 Ala. 619, 235 So.2d 654 (1970). In doing so it determined that the appellee had met its burden and further concluded that the appellants failed to show the presence of any adequate consideration. Although the approach thus taken by the trial court on who had the burden of proof was incorrect because it placed an improper burden upon the appellee, we hold that the appellants were not prejudiced thereby. After reviewing the record, we find no clear or palpable error in the trial court's determinations. We, therefore, affirm the trial court's finding that the present conveyance perpetrated a fraud upon the appellee.

In conformity with the mandate of Gurley v. Blue Rents, Inc., the Court has closely scrutinized the conveyance here asserted by the United States to be fraudulent in hinderance of its lawful claims and demands against William D. Glascock, has in its deliberations shifted to the wife (now known as Martha A. Boogaerts) the initial responsibility of proving the bona fide character of the real estate transaction in question, and has reached the finding and conclusion that defendant Boogaerts abjectly failed to bear her burden of proving that the February 17, 1976 conveyance was based upon a valuable consideration supplied by her in her capacity as the then wife of defendant Glascock, substantial and not merely nominal.

9. Applying the settled legal principles of Alabama fraudulent conveyance law hereinabove set out to the facts of this case heretofore found specially by the Court, the Court concludes and holds that the overwhelming evidence in this case proves the existence, presence and concurrence of the three elements which Roddam v. Martin, supra, states to be essential before a conveyance can be declared fraudulent under §8 -9-6 (Code 1975). Without question the United States at all times here pertinent was a creditor [of Glascock] to be defrauded. Without peradventure William D. Glascock, even by his own admittance, intended to defraud the United States and his other creditors from their lawful claims and demands against him and his property by causing at his instance and direction the Real Estate Contract of June 22, 1972 (Government Exhibit No. 1), the Lease-Sale Contract of August 7, 1972 (Government Exhibit No. 2) and finally the Deed of Conveyance of February 17, 1976 (Government Exhibit No. 3) to each contain the name of Martha A. Roberts, first as his illicit lover-purchaser, secondly as his paramour-lessee, and thirdly as his wife-grantee. Finally, without dispute there was a conveyance of property out of which the United States , as creditor, could have realized its claims against Glascock, or some portion thereof. It is indeed a happenstance that the equity value of the South Sequoia Boulevard property is today worth far more than Glascock's equity value therein as of the date of the execution and delivery of the February 17, 1976 fraudulent conveyance. Having found the three elements enumerated in Roddam v. Martin to be here present and proved, the Court holds and declares the February 17, 1976 deed of conveyance, the June 22, 1972 Real Estate Contract of Sale and purchase and the August 7, 1972 Lease-Sale Contract from Hensley Construction Co., Inc. to Martha A. Roberts to be fraudulent under §8 -9-6 (Ala. Code 1975) and now further expressly finds and holds, pursuant to the requirements of J. C. Jacobs Banking Co., Inc. v. Campbell, supra, that this record abundantly shows that defendant Boogaerts knowingly and wilfully, with full knowledge of Glascock's then extreme financial distress and his intent to defraud the United States and his other creditors by causing the South Sequoia Boulevard residential property to be purchased by him but placed in her name for the purpose of hindering and defrauding his creditors, including the United States, and of preventing such creditors from being able to realize their claims from the equity in the property, participated in such fraudulent scheme with Glascock from June 22, 1972 to and including at least the date on which Glascock and his wife moved to the State of Louisiana September 1976, specifically including the date of February 17, 1976 on which the fraudulent conveyance was executed and delivered to defendant Boogaerts (then Martha A. Glascock but using her former name of Martha A. Roberts in business transactions). In other words, there is in this evidentiary record powerful proof of the mutual fraudulent intent of these defendants and their actual fraud respecting the real estate transaction which this action attacks as fraudulent. And now reiterating, the Court finds and holds that defendant Boogaerts furnished only nominal consideration in this questioned transaction, only her name . . . but not her true name. The Febraury 17, 1976 deed of conveyance here found to be fraudulent and to have been executed, delivered in violation of §8 -9-6 (Code Ala. 1975) is void as to William D. Glascock's creditor, United States of America, and is due to be appropriately set aside in such fashion that the title thereto will not revert to grantor Hensley Construction Co., Inc. and that its public sale by the United States Marshal for the Northern District of Alabama can be effected with due dispatch after public notice as provided by law. The first mortgage indebtedness of First Federal Savings and Loan Association of Florence (including accrued interest) against such real property will be paid from the first proceeds of such sale. Since the property is now occupied by tenants under rental agreement with defendant Boogaerts all rentals hereafter due from such tenants shall continue to be paid to Nadine Darby, the real estate agent, who shall continue to make the First Federal monthly mortgage payments from the rental fund until otherwise directed by the Court and shall hold the balance of such funds in escrow until further order of the Court. The occupancy rental rights of such tenants shall be later terminated by order of the Court. The insurer of such property shall be forthwith notified of the within memorandum of decision and accompanying order.

An appropriate Order will be entered in conformity herewith.

ORDER

In conformity with Memorandum of Decision entered contemporaneously in the above entitled civil action, it is

ORDERED, ADJUDGED and DECREED:

1. that the June 22, 1972 Real Estate Contract of Sale and Purchase by and between Hensley Contracting Co., Inc., as Seller, and Martha A. Roberts, as Purchaser, wherein Seller agreed to sell and Purchaser agreed to purchase for a consideration and on terms and conditions therein recited Lot 151 in The Cedars, a subdivision in the City of Florence, Lauderdale County, Alabama, according to plat thereof recorded in Plat Book 4 at pages 50-51 in the Office of the Judge of Probate of Lauderdale County, Alabama, commonly known as 119 South Sequoia Boulevard in the city of Florence, Alabama [hereinafter referred to as "Lot 151 in The Cedars"]; (2) the August 7, 1972 Lease-Sale Contract by and between Hensley Construction Co., Inc., as Lessor, and Martha A. Roberts, as Lessee, under the terms of which Lessor leased to Lessee and Lessee hired and rented from Lessor that certain improved residential property situated in the City of Florence, Lauderdale County, Alabama known as Lot 151 in The Cedars for a term certain at stated rental and on recited conditions, with option granted Lessee to purchase such real estate upon her fulfillment of the terms and provisions of such lease-sale agreement; and (3) the Deed of Conveyance dated February 17, 1976 by and from Hensley Construction Co., Inc., as Grantor, to and with Martha A. Roberts, as Grantee, conveying to such named Grantee that certain improved residential real estate situated in the City of Florence, Lauderdale County, Alabama known as Lot 151 in The Cedars for a consideration therein recited, including Grantee's record assumption and agreement to pay the then unpaid balance of the first mortgage indebtedness on the property therein described to First Federal Savings & Loan Association of Florence (hereinafter referred to as the "February 17, 1976 deed of conveyance"), such February 17, 1976 deed of conveyance being recorded in Deed Book 1095 at pages 1152 and such First Federal mortgage being recorded in Mortgage Book 1043 at pages 57-59 both in the Office of the Judge of Probate of Lauderdale County, Alabama,

are each hereby ADJUDGED and DECLARED to be fraudulent transactions and conveyances made at the instance and direction of defendant William D. Glascock with the knowledge and connivance of defendant Martha A. Boogaerts then using the name of Martha A. Roberts for the purpose of hindering, delaying or defrauding the plaintiff United States of America in its then capacity as a substantial creditor of defendant Glascock, all in violation of §8 -9-6 (Ala. Code 1975, predecessor statute Title 20 §7 (Code Ala. 1940)), that each such transaction and conveyance hereinabove described is further hereby ADJUDGED and DECLARED to be VOID as to plaintiff creditor United States of America, and that the record fee simple title to and the legal and equitable ownership of the described real estate which is the subject of such February 17, 1976 deed of conveyance, together with the appurtenances thereunto appertaining, is hereby DIVESTED of record by decree of the Court under its inherent powers first from and out of defendant Martha A. Boogaerts (but in the name of Martha A. Roberts) and then from Hensley Construction Co., Inc., a corporation, the respective designated grantee and grantor in such void February 17, 1976 deed of conveyance and is hereby simultaneously INVESTED in and to THOMAS C. GREENE, as United States Marshal in and for the Northern District of the State of Alabama who is herewith expressly AUTHORIZED, EMPOWERED and DIRECTED, in addition to all powers conferred upon such United States Marshal by law, to proceed with all due dispatch to sell subject real property, together with all appurtenances thereunto appertaining, at public sale, free and clear of all liens and encumbrances, including any and all federal tax liens but excepting lien for current ad valorem taxes, to the highest and best bidder for cash after first giving public notice of such sale as provided by law and to thereafter execute and deliver to the purchaser or purchasers thereof a good and merchantable title thereto by proper deed of conveyance (subject only to lien for current ad valorem taxes which shall be prorated as of date of closing), together with quiet and peaceable possession to such property; provided, however, from the proceeds of such sale the first mortgage indebtedness of First Federal Savings & Loan Association of Florence hereinabove referred to shall first be paid in full and next in succeeding order: (1) the proper proration of ad valorem taxes; (2) cost of publication, cost of insuring the improvements on such real estate against the hazard of loss by fire and other customary hazards from the date hereof to the date of conveyance to purchaser or purchasers, and other reasonable expenses of sale; (3) court costs herein; and (4) the remaining balance of such sales proceeds to be paid over to the plaintiff United States of America for credit on the federal tax indebtedness owed the United States of America by defendant Glascock (with application to first payment of such tax penalties, interest and other items as duly prescribed by law).

A Supplemental Order will be hereafter rendered and entered in the above entitled civil action respecting: (1) notification of the entry of the within Order and accompanying Memorandum of Decision to (i) First Federal Savings & Loan Association of Florence; (ii) the present tenants of such property; (iii) the present insurer of such property; (iv) Nadine Darby, real estate rental agent; and (v) the Tax Assessor and Tax Collector of Lauderdale County, Alabama; (3) the right of Nadine Darby, real estate rental agent, to continue handling the rental of such property on a short term basis for and on behalf of the United States Marshal on and subject to the present rental terms and conditions, including monthly rental, rental commission and the payment by such real estate rental agent of the monthly mortgage payment to First Federal Savings & Loan Association of Florence from the month to month rental funds received by her from the tenants of such property; (4) the interception by this Court as of the date hereof of any rental funds from the rental of such property by defendant Martha A. Boogaerts through her Florence, Alabama real estate rental agent now in the possession and control of such real estate rental agent, for the use and benefit of plaintiff United States of America in its capacity as a creditor of defendant William D. Glascock; (5) the continuation of the present fire insurance (plus other hazards) policy covering the improvements on such property in the name of the United States Marshal, with First Federal Savings & Loan Association of Florence named therein as first mortgagee, as its interest may appear, and the authorized payment by the United States Marshal of the premium therefor; (6) the right of the plaintiff United States of America in its capacity as a creditor of defendant William D. Glascock to have and receive any and all net rentals from authorized rent interception and from the authorized rental of such property from the date hereof to the date of the authorized conveyance of such property by the United States Marshal to the purchaser or purchasers of such property at the authorized public sale; and (7) any other lawful matters.

DONE and ORDERED this 26th day of March, 1986.

SUPPLEMENTAL ORDER

The within Order of the Court entered in the above entitled civil action is supplemental in nature to the Order of the Court entered herein on March 26, 1986 which accompanied the Memorandum of Decision in this cause dated March 26, 1986.

It is ORDERED, ADJUDGED and DECREED as follows:

1. Any and all rental funds [from the rental of the Florence, Alabama residential real estate hereinafter described] presently in the possession and control of Ms. Nadine Darby, 100 Darby Avenue, Florence, Alabama 35630, in her capacity as real estate rental agent for defendant Martha A. Boogaerts regarding the rental of the improved residential real estate legally known as LOT 151 in The Cedars, a subdivision in the City of Florence, Lauderdale County, Alabama, commonly known as 119 South Sequoia Boulevard, Florence, Alabama, are hereby INTERCEPTED by the Court for the ultimate use and benefit of the plaintiff United States of America in its capacity as a creditor of defendant William D. Glascock and Ms. Nadine Darby is hereby DIRECTED and REQUIRED to forthwith pay over and transfer such funds to Thomas C. Greene, United States Marshal, Northern District of Alabama, Room 128, Federal Courthouse, Birmingham, Alabama 35203.

2. Ms. Nadine Darby is hereby AUTHORIZED and EMPOWERED to continue handling the rental of the real estate hereinabove particularly described on a short term basis [no more than month-to-month] for and on behalf of the United States Marshal of the Northern District of Alabama on and subject to the present rental terms and conditions, including present monthly rental, 10% rental commission, and the payment by her, as real estate rental agent, of the monthly mortgage payment [including pro rata taxes and insurance] to First Federal Savings & Loan Association of Florence from the month to month rental funds received by her from the tenants of such property, with all remaining net rentals to be forthwith forwarded by her each month to the United States Marshal who shall hold the same for the ultimate use and benefit of plaintiff United States of America in its capacity as creditor of defendant William D. Glascock. Such real estate rental agent is specifically authorized to continue renting such property to the present tenants on and subject to the present rental terms and provisions, including present monthly rental, but only on a month to month basis, if they so desire.

3. The present fire insurance policy [and insurance against other hazards] covering the improvements on the above described real estate issued by Allstate Insurance Company to defendant Martha A. Boogaerts with First Federal Savings & Loan Association of Florence named therein as first mortgagee as its interest may appear may be continued in force and effect in the name of the new owner and insured, Thomas C. Greene, United States Marshal, Northern District of Alabama, Room 128, Federal Courthouse, Birmingham, Alabama 35203, with same mortgagee clause, by the authorization of the Court here given until such property is sold at public sale and thereafter conveyed to the purchaser or purchasers and the premiums therefor may continue to be paid from escrow funds held by First Federal Savings & Loan Association of Florence, as mortgagee. Any refund due the insured by the insurer upon the cancellation of such policy [which shall be effected simultaneously with the conveyance of such property to the purchaser or purchasers thereof at public sale] of any unearned premiums shall be refunded by the insurer to the United States Marshal for the use and benefit of Plaintiff United States of America in its capacity as creditor of defendant William D. Glascock.

4. Upon the public sale of such property by the United States Marshal and its conveyance to the purchaser or purchasers the first mortgage indebtedness of First Federal Savings & Loan Association of Florence [including accrued interest to date of payoff] shall forthwith be paid by the United States Marshal in full from the first proceeds of such sale. Any and all unused escrow funds then held by First Federal Savings & Loan Association of Florence shall be paid over by such Association to the United States Marshal for the use and benefit of plaintiff United States of America in its capacity as creditor of defendant William D. Glascock.

5. The United States Marshal is expressly authorized and empowered to permit the continued rental of such property by Nadine Darby, as real estate rental agent, as hereinabove provided, and to authorize and pay for from rental funds any necessary repair and maintenance to such property which is the obligation of the owner under the rental agreement. Such United States Marshal is further expressly authorized and empowered by the Court to insure such property against fire loss and other standard hazards in at least the amount presently insured and to cause or permit the premiums therefor to be paid from the escrow funds of First Federal Savings & Loan Association of Florence. Preference shall be given to Allstate Insurance Company as the insurer of such property if such insurer is agreeable to continuing the present policy at the present rate in the name of the new owner, the United States Marshal.

It is further ORDERED that a certified copy of the Order of the Court entered in the above entitled civil action and accompanying the Court's Memorandum of Decision herein dated March 26, 1986 (hereinafter referred to as "the March 26, 1986 Order") be forthwith filed by the Clerk of this Court in the Office of the Judge of Probate of Lauderdale County, Alabama for recording in the land records of such county, the costs thereof to be paid by the Clerk and taxed as a part of the costs of this cause. And it is further

ORDERED that a certified copy of such March 26, 1986 Order be forthwith mailed by the Clerk of this Court by United States Mail properly addressed and postage prepaid to: (1) Mr. Grady Ward, President, First Federal Savings & Loan Association, 102 S. Court Street, Florence, Alabama 35630; (2) Tax Assessor, Lauderdale County, Courthouse, Florence, Alabama 35630; (3) Tax Collector, Lauderdale County, Courthouse, Florence, Alabama 35630; (4) Ms. Nadine Darby, 100 Darby Avenue, Florence, Alabama 35630; (5) Thomas C. Greene, United States Marshal, Northern District of Alabama, Room 128, Federal Courthouse, Birmingham, Alabama 35203; (6) Norman and Carol Jacobs, tenants, 119 South Sequoia Boulevard, Florence, Alabama 35630; and (7) Mr. Robert G. Maxwell, Allstate Insurance Company, 1206 Helton Drive, Florence, Alabama 35630. And if it is further

ORDERED that a copy of the March 26, 1986 Order of the Court herein, a copy of the March 26, 1986 Memorandum of Decision herein and a copy of the within Order be forthwith mailed by the Clerk to all counsel of record and to defendant William D. Glascock, #00962017, Federal Prison Camp, Maxwell Air Force Base, Alabama 36112. And it is further

ORDERED that a copy of the within Order be forthwith mailed by the Clerk to: (1) Nadine Darby, 100 Darby Avenue, Florence, Alabama 35630; (2) tenants Norman and Carol Jacobs, 119 South Sequoia Boulevard, Florence, Alabama 35630; (3) Mr. Robert G. Maxwell, Allstate Insurance Company, 1206 Helton Drive, Florence, Alabama 35630; (4) Mr. Grady Ward, President, First Federal Savings & Loan Association of Florence, 102 South Court Street, Florence, Alabama 35630; and (5) Thomas C. Greene, United States Marshal, Northern District of Alabama, Room 128, Federal Courthouse, Birmingham, Alabama 35203; and (6) all counsel of record in the above entitled civil action.

DONE and ORDERED this 27th day of March, 1986.

¹ An inmate of the federal correctional facility known as Eglin Prison Camp, Eglin Air Force Base, Florida, prior to and at the time of the final bench hearing herein.

² At the time of the filing of this lawsuit this defendant bore the name of Martha A. Boogaerts via her third marriage. She will appear in this saga under other surnames via prior marriages but the surname she uses on specific occasions cannot be accepted as being the surname of her then husband.

³ Other defendants, being judgment creditors of William D. Glascock, were sued herein. However, such other defendants have either been dismissed or the Court has relegated their priority claim to a status inferior to the lien claim of United States .

⁴ Martha A. Boogaerts position in this litigation was amplified at the October 29, 1982 pre-trial conference herein. ¶5(c) of the Pre-Trial Order reads:

"(c) Defendants' positions. Martha A. Boogaerts contends that the property involved was purchased by her from Billy Hensley Construction Company. It is her contention that William D. Glascock has never had any right, title, or interest in said property and that both legal and equitable title to said property are vested in her in fee simple absolute. The property in question was purchased out of Martha A. Boogaerts' own personal funds with the exception of the down payment which was supplied by William D. Glascock. For a number of years William D. Glascock supported Martha A. Boogaerts both prior to and during their marriage. It is irrelevant that some of the funds used to purchase the house were provided to her by William D. Glascock. Subsequent to that period, Martha A. Boogaerts has personally provided all the funds which have been used to make payments on the property in question. There was never existing any intent or purpose to delay, hinder, or defraud the creditors of William D. Glascock not [sic] did a fraudulent conveyance ever occur. In the alternative, Martha A. Boogaerts contends that this action by the United States Government is barred by the applicable statute of limitations and the Equitable Doctrine of Laches."

⁵ Who by this date bore the legal name of Martha A. Glascock by virtue of Rebecca divorcing William D. Glascock in April 1974 and Martha's marriage to Glascock in Rome , Georgia on May 16, 1974. This act of defendant Boogaerts in taking title to the residential real estate in question in her former name, Martha A. Roberts, deserves and receives the later attention of the Court in its Findings of Fact, infra.

⁶ The Court notes that Glascock is still confined in a federal correctional facility at Maxwell Field, Montgomery , Alabama . This is an observation, not a finding of fact.

⁷ 28 U.S.C. §1340 provides in pertinent part: "The district courts shall have original jurisdiction of any civil action arising under any Act of Congress providing for internal revenue, . . ."

28 U.S.C. §1345 provides: "Except as otherwise provided by Act of Congress, all district courts shall have original jurisdiction of all civil actions, suits or proceedings commenced by the United States, or by any agency or officer thereof expressly authorized to sue by Act of Congress.

⁸ The Court has found that the evidentiary record that the unpaid balance of such mortgage at the time of the execution and delivery of the deed (and thus at the time of assumption) was $25,556.76 (Finding of Fact §7 , ante).

⁹ Section 6672 makes a responsible officer liable for the unpaid taxes withheld by a corporation for its employees. Section 3402 and accompanying regulations prescribe the method for calculating withholding taxes. The regulations issued pursuant to Section 6302(a) provide the rules for payment. Generally, those taxes are due within 30 days of the quarter the monies are withheld for.

¹⁰ The Eleventh Circuit, in the en banc decision Bonner v. City of Pritchard, 661 F.2d 1206, 1209 (11th Cir. 1981), adopted as precedent decisions of the former Fifth Circuit rendered prior to October 1, 1981.

¹¹ The Government's substantive rights in this case are precisely those which other creditors would have under Alabama law.

¹² The Alabama Supreme Court in Smith v. Wilder, 270 Ala. 637, 120 So.2d 871 (1960), discussed hereafter, acknowledges that historically the law of fraudulent conveyances in Alabama laws has been marked by confusion and uncertainty.

¹³ The Campbell court overruled Smith v. Wilder to the limited extent that Wilder requires actual proof of the grantor's fraudulent intent before a conveyance may be partially set aside because made for substantially inadequate consideration.

¹⁴ Under normal circumstances the wife-grantee's assumption and agreement to pay an existing mortgage on the real property which was the subject of the alleged fraudulent conveyance would constitute a valuable consideration under Alabama law. However, the court has ruled otherwise here for the reasons hereinabove stated.

 

 

 

United States of America , Plaintiff v. Irving R. Hoffman, et al., Defendants

U.S. District Court, East. Dist. Wis., 84-C-1574, 8/28/86, 634 FSupp 346

[Code Sec. 6871 ]

Tax claims-bankruptcy: Discharge of debt.--An individual's tax debt for two years was nondischargeable in bankruptcy because his tax debt resulted from the failure to file a return and from a willful attempt to defeat or evade tax payment. The individual mailed an unsigned return with meritless objections stamped throughout for one of the years at issue and failed to file any return for the second year.

[Code Sec. 7403 ]

Civil suits: Action to enforce lien: Res judicata.--The district court found that the Tax Court's determination of an individual's tax liability reduced to assessment was res judicata in the district court's proceeding. The district court rejected the individual's claim that the IRS reopened the question of the validity of the his tax deficiency by initiating the action to reduce outstanding federal tax assessments plus statutory additions to judgment, to foreclose tax liens against certain real property, and to obtain, if necessary, a deficiency judgment against him.

[Code Secs. 6321 , 6334 , 7403 and 7430 ]

Collection: Lien for taxes: Homesteaded property: Civil suits: Action to enforce lien: Foreclosure: Awarding of court costs: Awards.--The district court ruled that the federal tax liens which attached to all property and rights to property belonging to the individual attached to the family home which had been fraudulently conveyed to a family trust. Moreover, the court ruled that the lien existing in favor of the United States and attaching to such property would be foreclosed and the property sold. By applying state law ( Wisconsin ), the court found that the individual's interest in the family home had been fraudulently conveyed to the family trust because such conveyance rendered him insolvent and he had received no meaningful consideration in return for such conveyance. Moreover, the district court noted that a state court had already come to the same conclusion and that the individual was estopped from denying ownership of the home. Further, the court ruled that the individual's family home was not exempt from levy for collection of federal taxes owed due to the fact that it was homestead property. Code Sec. 6334 enumerates the types of property exempt from federal tax liens and homestead property was not one of the types so enumerated. Finally, the IRS's request for attorney's fees was denied because the court was not persuaded that the individual's position was patently frivolous. However, the IRS was allowed to recover its costs.

[Code Sec. 6343(a) ]

Collection: Seizure of property: Return of property: Effect of release.--The fact that the IRS had once levied upon an individual's homestead property and subsequently released its levy did not preclude a subsequent levy upon the same property. A release of the levy did not operate to prevent any subsequent levy.

Francis D. Schmitz, Assistant United States Attorney, Milwaukee, Wis., Mary Bielefeld, Department of Justice, Washington, D.C. 20530, for plaintiff. Joseph W. Weigel, 622 North Water Street , Milwaukee , Wis. 53202 , for defendants.

DECISION and ORDER

GORDON, Senior Judge:

The United States filed this action pursuant to 28 U.S.C. §§1340 and 1345 and 26 U.S.C. §§7402(a) and 7403 to reduce outstanding federal tax assessments plus statutory additions to judgment, to foreclose tax, liens against certain real property, and to obtain, if necessary, a deficiency judgment against the defendants. The United States also seeks attorneys' fees and costs. Following a stay resulting from the defendants' petition to and ultimate discharge in bankruptcy court, a trial to the court was held on July 28-29, 1986.

Based on the testimony and other evidence elicited at trial, I find that the defendants are liable for outstanding taxes, statutory additions and interest in the amount of $46,321.01 plus interest and penalties accruing since June 30, 1984. Furthermore, I find that a lien arises in favor of the United States in the amount of the unpaid balance of assessment made against Irving Hoffman, including real property conveyed by Irving Hoffman to the Irving R. Hoffman Family Equity Pure Trust.

FINDINGS OF FACT

Irving Hoffman filed an unsigned, incomplete tax form for the tax year 1974. This form 1040 was stamped "OBJECT, 5TH AMEND. U.S.C." in numerous places and submitted along with many attachments, including portions of the Magna Carta. Mr. Hoffman failed to file any semblance of a tax return for the 1975 tax year. In the absence of proper returns for either 1974 or 1975, the Internal Revenue Service reconstructed Mr. Hoffman's income for these years and concluded that he owed taxes of $12,164 for 1974 and $10,596 for 1975. The IRS also concluded that Mr. Hoffman owed statutory additions to taxes exceeding $6,900. Mr. Hoffman sought review of these computations in the United States tax court.

The tax court judge concluded that Mr. Hoffman failed to offer sufficient evidence to dispute the IRS determination. Accordingly, a judgment reflecting this decision and the IRS determinations was entered on October 13, 1982. On February 11, 1983, a delegate of the secretary of the treasury made an assessment for the deficiencies in federal income tax and additions thereto in the amount determined by the tax court. Interest on the tax court's figure was also assessed for 1974 and 1975 resulting in a total assessment of $43,140.76.

Despite the tax court's decision and a series of notices from the IRS, Irving Hoffman refused to pay. The IRS proceeded to take enforcement action. In filing notices of federal tax liens against all property owned by Mr. Hoffman, the IRS learned that Mr. Hoffman had transferred all of his property into trust. Most significant to the case now before me is the fact that on January 30, 1976, Irving Hoffman transferred and conveyed all of his interest in the Hoffman family home in Racine, Wisconsin, to Ann Hoffman and Dennis Hoffman, trustees for the Irving R. Hoffman Family Equity Pure Trust. Mr. Hoffman received a receipt for property held in trust in exchange for his conveyance. This conveyance rendered Mr. Hoffman insolvent.

In its continuing effort to collect back taxes from Mr. Hoffman, the IRS imposed a levy on the Hoffman family home. A sealed bid auction was held on the house but no bidders would pay a fair price; on December 2, 1983, the levy was released. Still other methods were employed by the IRS to secure payment from Irving Hoffman. Notices of levy were served on the banks where the Hoffman trust held checking accounts. Approximately $5,800 was secured by virtue of this procedure. However, the IRS, unsuccessful in satisfying the remainder of the Hoffman deficiency, ultimately turned to this court for relief pursuant to 26 U.S.C. §7403 by filing an enforcement action on December 17, 1984.

CONCLUSIONS OF LAW

Only days before trial, defendants filed a motion to dismiss this action on grounds that the claim for back taxes was discharged in bankruptcy. Although back taxes more than three years overdue at the time of discharge in bankruptcy are generally deemed dischargeable, the bankruptcy code does not discharge a tax debt resulting from the failure to file a return or from a willful attempt to defeat or evade tax payment. 11 U.S.C. §523(a)(1). This statutory provision renders Mr. Hoffman's 1974 and 1975 tax debt nondischargeable. In 1974, Mr. Hoffman mailed an unsigned return with meritless objections stamped throughout; in 1975, Mr. Hoffman failed to file any return at all. His consequent tax liability cannot be discharged. I, therefore, must deny defendants' motion to dismiss.

The defendants' tax liability has already been determined by the tax court; it is not ripe for reconsideration in this action. Generally "if a claim of liability or non-liability relating to a particular tax year is litigated, a judgment on the merits is res judicata as to any subsequent proceeding involving the same claim and the same tax year." Commissioner of Internal Revenue Service v. Sunnen [48-1 USTC ¶9230 ], 333 U.S. 591, 598 (1948).

Relying only on United States v. O'Connor [61-2 USTC ¶9495 ], 291 F.2d 520 (2d Cir. 1961), the defendants attempt to contravene this general rule by asserting that when the United States initiated this action, it reopened the question of the validity of the Hoffman tax deficiency. I disagree. In O'Connor, jeopardy assessments, entered without a tax court judgment, were sought to be enforced by the United States pursuant to 26 U.S.C. §7403 . In that situation, the court held, assessments are open to judicial scrutiny. O'Connor, supra, 291 F.2d at 527. By contrast, in the instant case, a full hearing in tax court has already resulted in a determination of a tax deficiency on the part of the Hoffmans. Pursuant to Sunnen, supra, the tax courts findings for the years 1974 and 1975, reduced to assessment, are res judicata in this proceeding.

Even if the validity of Irving Hoffman's liability were open to scrutiny in this court, my ultimate conclusion on this issue would be the same. Certificates of assessments and payments, once introduced, are presumptively correct. Welch v. Helvering [3 USTC ¶1164 ], 290 U.S. 111, 115 (1933); Frick v. Phillips, 518 F. Supp, 1329, 1331 (E.D. Wis. 1981). The defendants have failed to produce any competent evidence to overcome this presumption. Therefore, the IRS determinations have not been disproved.

In light of his federal tax liability, the court may order foreclosure on any property in which Irving Hoffman has an interest in order to facilitate collection of taxes due. 26 U.S.C. §7403 . Ascertaining the taxpayer's rights in certain property for purposes of foreclosure under §7403 is determined by state law. Slodov v. United States [78-1 USTC ¶9447 ], 436 U.S. 238, 256 n.19 (1978); National Bank & Trust Co. v. United States [79-1 USTC ¶9101 ], 589 F.2d 1298, 1302 (7th Cir. 1978). Thus, turning to Wisconsin law, I find that the conveyance by Irving Hoffman of his property interest in the family home on Indiana street to the Hoffman family trust was fraudulent and should be set aside pursuant to Wis. Stat. §242.09.

Applying Wisconsin law, a Wisconsin court has already come to the same conclusion, and Mr. Hoffman is now estopped from denying ownership. The doctrine of collateral estoppel relieves parties of the burden of relitigating identical issues and promotes judicial economy by preventing needless litigation. Allen v. McCurry, 449 U.S. 322, 326. Mutuality of parties is not required in order for the doctrine to apply. Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313 (1971).

Thus, although the United States was not a party to the state action, the following factors support application of the doctrine of collateral estoppel to the instant case: (1) there was a final determination on the merits by the Racine County Circuit Court; (2) Irving Hoffman had a full opportunity to address the ownership issue in the state action; (4) Irving Hoffman was represented by counsel; and (5) the ownership issue in the state action is identical to the ownership issue in this case. See Continental Can Company v. Marshall , 604 F.2d 590 (7th Cir. 1979).

Even if Mr. Hoffman were not collaterally estopped from disputing the fraudulent nature of the conveyance at issue, enough evidence has nevertheless been presented in the course of this action to warrant such a finding. Indeed, in a situation where a taxpayer disposes of property prior to the existence of federal tax liens, the United States may seek relief under the fraudulent conveyance law 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. Ressler [77-1 USTC ¶9459 ], 433 F.Supp. 459 (S.D. Fla. 1977). In Wisconsin , fraudulent conveyance law is set forth in chapter 242 of the Wisconsin statutes. "Every conveyance made . . . 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 . . . without a fair consideration." Wis. Stat. §242.04.

In the instant case, it is not disputed that the conveyance rendered Irving Hoffman insolvent. In addition, Irving Hoffman received no meaningful consideration in return for his conveyance to the trust. All that was received in exchange for his conveyance to the trust was a receipt for trust property. This receipt cannot fairly be construed as a "fair equivalent for said property." Wis. Stat. §242.03. See also Running v. Widdes, 52 Wis.2d 254 (1971) (holding that the definition of fair consideration under the terms of the fraudulent conveyance statute be given construction which benefits creditors, not grantees).

Because the transaction of January 30, 1976, rendered Irving Hoffman insolvent and was made without fair consideration, I conclude that the conveyance was fraudulent as to the United States pursuant to Wis. Stat. §242.04 and is, therefore, void and shall be set aside. Wis. Stat. §242.09. Consequently, federal tax liens, attaching to all property and rights to property belonging to Irving Hoffman, may attach to the Hoffman family home fraudulently conveyed to the Hoffman Family Trust on January 30, 1976. Moreover, the lien existing in favor of the United States and attaching to Irving Hoffman's property shall be foreclosed and the property sold.

Defendants contend that even if ownership interest in the Hoffman family home is determined to vest in Irving Hoffman, foreclosure is improper because the home is exempt homestead property. Even though homestead property might be exempt under state law from the claims of private creditors, "[n]o provision of a state law may exempt a property from levy for the collection of federal taxes owed." Treas. Reg. on Proc. and Admin. §301.6334-1(c) . Only 26 U.S.C. §6334 enumerates the types of property exempt from federal tax liens; nowhere on this list does homestead property appear. "[T]he . . . homestead exemption does not erect a barrier around a tax payer sturdy enough to keep out the Commissioner of Internal Revenue." United States v. Estes [71-2 USTC ¶9677 ], 450 F.2d 62, 65 (5th Cir. 1971). See also United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677 (1983).

Thus, the state homestead exemption does not protect defendants from foreclosure. Moreover, the fact that the IRS once levied upon the Hoffman homestead and subsequently released its levy does not preclude another foreclosure attempt at this time. Release of the levy "shall not operate to prevent any subsequent levy." 26 U.S.C. §6343(a) . See also Stewart Title & Trust v. Ordean [76-1 USTC ¶16,214 ], 528 F.2d 844 (9th Cir. 1976) (government's release of levy on escrow account did not operate to exempt levy pursuant to civil action under section 7403 ). In sum, I am persuaded that the United States is entitled to foreclosure of the Hoffman homestead.

To the extent that proceeds from the sale of the property are insufficient to satisfy the claim of the United States against Irving Hoffman, the United States shall have a deficiency judgment in the amount of the unpaid tax plus statutory interest.

The United States requested attorney's fees in this case. Despite my holding in favor of the government, I am not persuaded that the defendants' position is patently frivolous so as to warrant imposition of fees pursuant to 28 U.S.C. §§1927 and 2412(b). Cf. Lovell v. United States [84-1 USTC ¶9298 ], 579 F.Supp. 1047 (W.D. Wis. 1984); Schultz v. Stark [83-2 USTC ¶9542 ], 554 F.Supp. 1219 (E.D. Wis. 1983). The United States shall, however, recover its costs.

Therefore, IT IS ORDERED that defendants' motion to dismiss on grounds of discharge in bankruptcy be and hereby is denied.

IT IS ALSO ORDERED that the plaintiff have and recover of the defendant, Irving R. Hoffman, judgment in the amount of $46,321.01, representing the defendant's deficiency as of June 30, 1984, together with costs and disbursements as taxed by the clerk of court.

IT IS FURTHER ORDERED that the plaintiff have and recover of the defendant, Irving R. Hoffman, interest on the assessed deficiency of $46,321.01, accruing from June 30, 1984, until the date of judgment and properly calculated by a delegate of the secretary of the treasury pursuant to 26 U.S.C. §6601 . Such calculation shall be submitted to the clerk of this court on or before September 22, 1986.

IT IS FURTHER ORDERED that the federal tax lien arising from the unpaid federal tax liability of the defendant, Irving R. Hoffman, shall attach to the real property located at 2319 Indiana Street , Racine , Wisconsin , more particularly described as follows:

Single family frame house located at 2319 Indiana St. , Racine , WI 53405 . Lot 76' by 135', House 24' by 301/2' with 16' by 30' Addition.

Legal Description:

Lots 9 and 10, Block 23, Doris Park Addition, according to the recorded plat thereof.

Said Land being in the City of Racine , Racine County , Wisconsin .

IT IS FURTHER ORDERED that the federal tax lien attaching to the above-described property be foreclosed and the property sold at auction in accordance with 26 U.S.C. §7403 .

IT IS FURTHER ORDERED that the proceeds of such sale be paid to the plaintiff to be applied towards the satisfaction of the unpaid federal tax liability of the defendant, Irving R. Hoffman.

IT IS FURTHER ORDERED that the plaintiff have a deficiency judgment against the defendant for any portion of the indebtedness of Irving R. Hoffman remaining unsatisfied after disposition of the proceeds of the above-described property.

IT IS FURTHER ORDERED that the plaintiff's request for attorney's fees be and hereby is denied.

IT IS FURTHER ORDERED that the entry of the entire judgment in this case be withheld by the clerk of this court until the interest factor referred to above is determined so that a single judgment may be entered.

 

 

 

United States of America , Plaintiff v. Leonhard and June Wodtke, Individually and as Trustees for Life Science Church of Oto , Iowa , and Order of Almighty God, Oto, Iowa, John Hancock Mutual Life Insurance Company, Defendants

U.S. District Court, N.D. Iowa . W. D., C 82-4004, 12/26/85, 627 F.Supp. 1034.

[Code Sec. 6001 ]

Records required to be kept: Substantiation of deductions.--The assessment of taxes made against the taxpayer was presumptively correct where she failed to make available proof of the amount of her deductions.

[Code Secs. 6321 and 6502 ]

Lien for taxes: Fraudulent conveyance: Collection period for assessment: Suspension of collection period.--Real and personal property purportedly transferred by the taxpayers to the Life Science Church remained subject to federal tax liens against the taxpayers and could be levied on the satisfy their tax liabilities because the transfer was fraudulent. The "church" was actually the "alter ego" of the taxpayers, who retained control over the property and who made the transfer in an attempt to leave themselves with no assets to pay their present and future tax liabilities. Also, the collection on the lien was not barred by the six-year collection period since the government filed suit to reduce the tax assessments against the taxpayers to judgment within the six-year period.

Asher E. Schroeder, Assistant United States Attorney, Sioux City, Ia. 51102, David A. Slacter, Department of Justice, Washington, D.C. 20530, for plaintiff. Leonhard and June Wodtke, Oto, Ia. 51044, pro se, Willis A. Buell, 830 Frances Bldg., Sioux City, Ia., for John Hancock Mutual Life Ins. Co., Mark Bennett, Allen, Babich & Bennett, 5835 Grand Ave., Des Moines, Ia. 50312, for defendants.

FINDINGS OF FACT, CONCLUSIONS OF LAW, MEMORANDUM DECISION AND ORDER

O'BRIEN, Chief Judge:

This matter comes before the Court after a three-day trial to the Court. The Court finds for the plaintiff, United States of America . The Court hereby makes the following Findings of Fact and Conclusions of Law.

FINDINGS OF FACT

1. This matter came on for trial. Plaintiff, the United States , was represented by David A. Slacter and Asher E. Schroeder. Defendants Leonhard and June Wodtke appeared pro se and Defendant John Hancock Mutual Life Insurance Company (John Hancock) was represented by Janet Brown.

2. Plaintiff instituted this action to reduce tax assessments made against Leonhard and June Wodtke to judgment. The plaintiff also sought to foreclose its tax liens against certain real property, a farm owned by Leonhard and June Wodtke.

3. Leonhard and June Wodtke are husband and wife residing on a 300-acre farm in Oto, Iowa , in the county of Woodbury .

4. The Wodtkes purchased this farm in 1954. (Plaintiff's Exh. 10).

5. The Wodtkes obtained a mortgage from John Hancock in order to purchase the farm. (Defendants' Exh. 102). As of the day prior to trial, the outstanding balance due on the mortgage with interest and attorneys' fees was $20,557.75. Interest continues to accrue on this amount.

6. During the years 1973 and 1974, the Wodtkes derived income from their farm and a gasoline service station operated by Leonhard Wodtke.

7. The Wodtkes filed timely tax returns for 1973 and 1974 and paid the amount of tax shown to be due and owing on these returns. (Plaintiffs Exhs. 6 and 7).

8. In January of 1975, Revenue Agent John Mansfield of the Sioux City , Iowa office of the Internal Revenue Service was assigned to audit the Wodtkes' tax returns for the years 1973 and 1974.

9. Mansfield began working on the audit in early July of 1975 at which time he wrote a letter to the Wodtkes informing them of the audit.

10. Mansfield began his audit shortly thereafter. The Wodtkes refused to supply substantiation for the deductions they claimed on their tax returns.

11. Because Mansfield had to leave Sioux City for additional training, the audit was taken over by Revenue Agent Robert Ackerman, also of the Sioux City Internal Revenue Service office.

12. Mr. Ackerman served an Internal Revenue Service summons on the Wodtkes which asked them to produce all records and other documents which substantiated the deductions claimed on their tax returns for 1973 and 1974.

13. The Wodtkes refused to comply with the summons based on Fifth Amendment grounds. The United States District Court for the Northern District of Iowa ultimately determined that the Wodtkes had interposed the Fifth Amendment in good faith and they therefore did not have to produce any records.

14. Mansfield returned from training by the time the summons issue was decided. In order to complete his audit he used the information left that was available. This information included a letter from Standard Oil listing the amount expended by the Wodtkes during 1973 and 1974 for gasoline and other products and for rent. Mansfield also had some employment tax forms which were produced by the Wodtkes.

15. Because the Wodtkes refused to supply any further substantiation of expenses, Mansfield disallowed all deductions claimed by the Wodtkes on their tax returns for these two years other than the deductions substantiated by the documents he did have.

16. Mansfield authored a report which set forth the results of his audit. This report broke down each of the two years into farm and service station expenses. In each area, Mansfield disallowed all business deductions claimed by the Wodtkes other than those substantiated by written documentation. Mansfield 's stated reason for so doing was the Wodtkes' failure to produce any written substantiation for their deductions. (Plaintiff's Exh. 2).

17. Mansfield 's audit report was incorporated into a notice of deficiency mailed to the Wodtkes by certified mail on March 21, 1977. (Plaintiff's Exh. 1).

18. The notice of deficiency proposed deficiencies for the years 1973 and 1974 as follows:

Year                                   Addition to Tax  Negligence Penalty

1973 .................................   $ 70,787.60        $ 3,539.38

1974 .................................     95,865.62          4,793.28

The notice of deficiency was essentially the same as Mansfield's audit report except that certain math errors were corrected and a penalty for negligence or intentional disregard for rules and regulations was imposed pursuant to §6653(a) of the Internal Revenue Code.

19. Mr. Wodtke filed a timely petition with the United States Tax Court to contest the audit determination of the Internal Revenue Service.

20. Mrs. Wodtke did not petition the Tax Court.

21. The Internal Revenue Service is precluded by statute from assessing taxes proposed in a notice of deficiency for 90 days after mailing of the notice. This is to give a taxpayer time to petition the Tax Court. If a petition is filed, the taxes cannot be assessed until after the Tax Court decision is final.

22. The Internal Revenue Service assessed the taxes proposed in the notice of deficiency against Mrs. Wodtke after the expiration of the 90-day period on August 24, 1977 as follows:

Year    Tax      Penalty   Interest  Lien Fees

                                      $12.00

1973 $70,787.60 $3,539.38 $16,621.99     1 

1974  95,865.62  4,793.28  16,758.75     --

 

23. Later, because there was some confusion as to whether Mrs. Wodtke had also filed a petition with the Tax Court or whether Mr. Wodtke's petition included Mrs. Wodtke, the Internal Revenue Service abated the taxes assessed against Mrs. Wodtke. This abatement occurred on July 19, 1977.

24. Later, the Internal Revenue Service determined that the petition filed by Mr. Wodtke only covered Mr. Wodtke's liability and not that of Mrs. Wodtke. The Internal Revenue Service then reassessed the taxes against Mrs. Wodtke on August 24, 1977. (Plaintiff's Exh. 4).

25. Mr. Wodtke was accorded a hearing by the Tax Court in Des Moines , Iowa . Mrs. Wodtke, Revenue Agent Mansfield and others were present.

26. By decision dated November 21, 1978 the Tax Court upheld the notice of deficiency. The Eighth Circuit affirmed on appeal in an unpublished opinion. (Plaintiff's Exh. 3).

27. The Internal Revenue Service assessed taxes against Mr. Wodtke on August 10, 1979 for the years 1973 and 1974 as follows:

Year    Tax      Penalty   Interest  Lien Fees

                                      $12.00

1973 $70,787.60 $3,539.38 $22,545.85     2 

1974  95,865.62  4,793.28  24,781.27     --

(Plaintiff's Exh. 5).

28. The Internal Revenue Service filed notices of federal tax liens against all property and rights to property belonging to the Wodtkes with the Office of the Recorder for Woodbury County . A tax lien was filed with respect to Mrs. Wodtke on February 20, 1980 and against Mr. Wodtke on the same day. A second tax lien was filed with respect to Mr. Wodtke on July 31, 1980 to correct the spelling of his first name. ³

29. As of July 29, 1985, Mr. Wodtke was indebted to the United States in the amount of $442,625.08. This amount includes the amount of his assessment, plus interest of $101,812.71 for 1973 and $137,601.73 for 1974 together with penalties for each year.

30. As of July 29, 1985, Mrs. Wodtke was indebted to the United States in the amount of $447,031.75. This total includes the amount of her assessment, plus interest of $103,517.77 for 1973 and $139,910.87 for 1974 together with penalties for each year.

31. Interest continues to accrue on the amounts by which the Wodtkes are indebted to the United States at the rate specified by law.

32. On December 7, 1976, Mr. Wodtke executed a "vow of poverty" by which he purported to give all of his present and future possessions and all income to an Order of the Life Science Church called The Order of Almighty God, Alpha Chapter. The gift stated it was irrevocable except provided that all property would revert to the donor if certain events occurred. (Defendants' Exh. B, p. 1).

33. Approximately one year later, on December 27, 1977, Mrs. Wodtke executed a similar "vow." By her vow, Mrs. Wodtke purported to give "all" of her property to The Order of Almighty God 904, Chapter. (Defendants' Exh. B, p. 2).

34. The Wodtkes testified that these various names were all synonyms for the Life Science Church of Oto, Iowa.

35. The Wodtkes each testified that the Church had documents describing its existence and purpose but declined to produce such documents or state where such documents were located. The Court concludes that the Church has never been incorporated.

36. The Wodtkes testified that the Church was run by a board of directors and a number of trustees. However, the Wodtkes declined to name any of these individuals. The only names ever appearing on documents relating to the Church are Leonhard and June Wodtke.

37. By two quit claim deeds dated December 31, 1977, the Wodtkes purportedly transferred to themselves as Trustees of the Life Science Church of Oto, Iowa, and the Order of Almighty God, a portion of their 300-acre farm for the recited consideration of $1.00. There was no other consideration for the transfer; therefore, the transaction lacked sufficient consideration. (Plaintiff's Exh. 9, p. 1).

38. By quit claim deed dated September 13, 1978, the remainder of the farm purportedly was transferred to the Church and Order. Again, the deed recited token consideration of $1.00; there was insufficient consideration for the transfer. (Plaintiff's Exh. 9, p. 3).

39. The three deeds affecting title to the farm were recorded in the Woodbury County Recorder's office on September 14, 1978. (Plaintiff's Exh. 9).

40. In August of 1978, Special Agent James Whelan of the Internal Revenue Service attended a seminar in Sioux City . The speaker discussed setting up one's own church and taking a vow of poverty in order to avoid payment of income taxes.

41. Mr. Whelan was present pursuant to an investigation of a third party. By coincidence, he happened to sit next to Mr. Wodtke. At the end of the seminar, Mr. and Mrs. Wodtke encouraged Mr. Whelan to set up his own church and take a vow of poverty in order to avoid payment of federal taxes. Mr. Wodtke represented that he had done those very things in order to avoid payment of taxes.

42. The Wodtkes' residence is located on the farm. They continued to reside there both before and after the purported conveyance to the Church and live there at the present time. Throughout this proceeding, the Wodtkes referred to the property as the "Wodtke farm."

43. Both before and after the purported conveyance to the Church, the Wodtkes and their family made all decisions affecting the farm. These decisions included what to plant, how much of each crop to plant, when to plant, when to harvest and when to sell.

44. After the transfer, the Wodtkes testified that a board of directors controlled the farm. The Wodtkes would not testify who these board of directors were although they did admit that initially they alone controlled the farm.

45. No individuals other than the Wodtkes are identified as having a say in Church affairs. The Court concludes that the Wodtkes have failed to persuade the Court that anyone but themselves operate the farm.

46. Both prior to and after the purported transfer of the farm, the Wodtkes belonged to the National Farmers Organization (NFO), a group that assists farmers in selling their crops. The NFO sells the crops and remits the proceeds to the farmer. Both prior to and after the purported transfer, Leonhard Wodtke continued receiving payment in his own name. This only changed after June Wodtke began working for the NFO in November of 1977. Initially, Mrs. Wodtke, as a signatory on checks written by the NFO, wrote checks payable to Leonhard Wodtke individually. This continued through November of 1979. Thereafter, she wrote checks out to the Life Science Church. (Plaintiff's Exh. 16).

47. Through December of 1977, Mr. Wodtke endorsed the NFO checks in his own name. Thereafter, whether made payable to him or the Church, the checks were endorsed "Life Science Church" except in those instances where the checks were endorsed over to third parties in which case Mr. Wodtke signed his own name. (Plaintiff's Exh. 16).

48. The Wodtkes deposited the NFO checks in a Life Science Church account at Mapleton Trust and Savings Bank. Leonhard and June Wodtke were the only individuals with signature authority on this account. (Plaintiff's Exh. 17).

49. Both prior to and after the conveyance, the Wodtkes controlled the farm and enjoyed the fruits of their labors. The proceeds of farm crops went to the benefit of the Wodtkes and their family.

50. After the Wodtkes purportedly transferred all of their real and personal property to themselves as Trustees for the Life Science Church, they continued to retain beneficial enjoyment of all the property purportedly transferred.

51. The Wodtkes control all disbursements from the income earned by the farm. They have controlled such disbursements from the time of the purported conveyance until the present.

52. The Wodtkes use funds purportedly belonging to the Church to provide all of their necessities, including food, heat, electricity and clothing. Food and clothing is paid for out of a so-called $100.00 monthly allowance given the Wodtkes from the Church. The Church funds come from funds earned by the Wodtkes in their farming operation.

53. After the purported conveyance to the Church in 1977, Mr. Wodtke applied for and received from at least 1975 to 1981 crop insurance through the Federal Crop Insurance Corporation (FCIC) in his own name. At all times the farm was listed as being owned by Leonhard and June Wodtke. The Wodtkes never notified the FCIC of a change in ownership. Mr. Wodtke made repeated contract changes throughout the years in his own name. On January 17, 1981, the FCIC mailed Mr. Wodtke a check for $1,929.17 for a 1980 crop year loss he suffered. Previously, Mr. Wodtke had failed a claim for indemnity in his own name. (Plaintiff's Exh. 15).

54. Mr. Wodtke also participated in a program sponsored by the Agricultural Stabilization and Conservation Service (ASCS). Under this program, farmers received payments for low yields. Mr. Wodtke submitted crop yield information to the ASCS from 1975 through 1981 although he only participated in the ASCS program in 1980. ASCS records list Leonhard Wodtke as the owner and operator of the farm. In 1981, Mr. Wodtke received a check in his own name for $196.73 from the ASCS because of his low yields for the 1980 crop year. (Plaintiff's Exh. 14).

55. Mr. Wodtke also farmed some property owned by Edna Kloster during pertinent years. Mr. Wodtke paid cash rent for use of the property. ASCS records list Leonhard Wodtke as the operator of this farm but show Edna Kloster as the owner. Because of low yields on this farm, Mr. Wodtke was mailed a check by ASCS for $917.89 in his own name.

56. The Wodtkes claimed and received a homestead exemption in their own names with the county assessor's office through 1981. This resulted in a lower tax bill for each year the exemption was claimed. Although the Wodtkes claim their home and farm is a church and a church exemption would be a total exemption, they had never claimed a church exemption with the assessor's office. (Testimony of Harold Zar).

57. The Wodtkes never notified John Hancock of a change in ownership of the farm. John Hancock sent all notices relating to the mortgage to Leonhard and June Wodtke and continues, through the present, to look to them for payment.

58. On April 20, 1982, the Wodtkes caused to be recorded a purported mortgage in the amount of $375,000.00 from International Trust and Mortgage Ltd., an entity in the British West Indies . (Plaintiff's Exh. 11). The mortgage purportedly encumbered the Wodtkes' farm. Although the Wodtkes signed the mortgage as Trustees of the Life Science Church, they claim to have no knowledge of where the mortgage money has gone or whether the mortgage is being repaid. The Wodtkes stated that the other directors of the Church, whom they refused to name, have knowledge of the mortage. No appraisal of the property was made prior to the recording of the purported mortgage.

59. The above-mentioned purported mortgage is, based on the evidence, a sham, filed in an attempt to cloud title to the farm and is of no force and effect. It is unlikely that any lender would loan such a large amount without an appraisal and with tax liens encumbering the property. It is also unlikely that the Wodtkes would not know anything about the mortgage even if one actually had been executed.

60. The purported transfer of the farm and other property occurred at a time when the Wodtkes knew they were facing a significant tax liability for 1973 and 1974.

61. The purported transfer of the farm and other property occurred at a time when the Wodtkes knew they did not file tax returns for 1975 and 1976, even though they had continued to earn income and were liable for federal income taxes. At the time of the purported transfer, the Wodtkes had no intention of filing any future tax returns or paying income taxes.

62. The purported transfer was made for no consideration.

63. Mrs. Wodtke made the purported transfer after she had received the notice of deficiency and after she had been assessed for 1973 and 1974 taxes.

64. Although Mr. Wodtke took his "vow of poverty" prior to receiving the notice of deficiency, the vow did not actually "convey" the real property. The "conveyance", if it occurred at all, took place when the quit claim deeds were executed and filed. The quit claim deeds were filed after the notice of deficiency was sent and after Mr. Wodtke had filed a petition with the Tax Court.

65. The Wodtkes attempted to place all of their assets beyond the reach of the United States by their purported transfer of property to themselves as Trustees of the Life Science Church of Oto, Iowa.

66. The Wodtkes attempted to avoid paying their tax liabilities by the purported transfer.

67. The purported transfer was made with actual intent to hinder, defraud or otherwise delay the United States from collecting taxes owed to it.

68. The Wodtkes purposefully attempted to render themselves insolvent by their purported transfer. The purported transfer left them with little or no assets in their own names. Their remaining assets were insufficient to pay their then existing and anticipated debts.

69. The purported transfer of the Wodtkes' property was fraudulent as to the United States and should be set aside in order to allow the United States to foreclose its tax liens.

70. The purported transfer of the Wodtkes' property is a nullity because both before and after the purported conveyance, the Wodtkes enjoyed the beneficial use of such property and controlled the use of such property.

71. The purported transfer is of no force and effect because the evidence before the Court is persuasive that the Church has no existence separate and apart from the Wodtkes. No competent evidence to the contrary was produced. The Church is the alter ego of the Wodtkes. In essence, the Wodtkes conveyed the property to themselves.

CONCLUSIONS OF LAW

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

Defendants contend that Title 26 is not positive law and therefore this Court has no jurisdiction. Title 1, United States Code, Section 204(a) states:

United States Code.--The matters set forth in the edition of the Code of Laws of the United States current at any time shall, together with the then current supplement, if any, establish prima facie the laws of the United States, general and permanent in their nature . . . provided, however, That whenever titles of such Code shall have been enacted into positive law, the test thereof shall be legal evidence of the laws therein contained, in all the courts of the United States. . . .

Id. (Emphasis in original). If construction of a section of the United States Code which has not been enacted into positive law is necessary, recourse must be had to the original statutes themselves. United States v. Welden, 377 U.S. 95, 84 S.Ct. 1082, 12 L.Ed.2d 152 (1964). Under §204, the United States Code cannot prevail over the statutes at large if the two are inconsistent. Stephan v. United States, 319 U.S. 423, 63 S.Ct. 1135, 87 L.Ed. 1490 (1943). The Wodtkes have not identified specific code sections which they challenge. They have not cited a single instance wherein any portion of Title 26 differs from the Internal Revenue Code as passed and amended. The Court therefore rejects defendants' contention that Title 26 is not law.

The Wodtkes contend that the Sixteenth Amendment to the Constitution was not properly ratified. Because the federal income tax laws are derived from the Sixteenth Amendment, the Defendants Wodtke reason that they have no tax liabiity.

The validity of the enactment of a constitutional amendment is not a justiciable issue. It is a political question upon which the courts cannot rule. Coleman v. Miller, 307 U.S. 433, 447-451, 59 S.Ct. 972, 979-981, 83 L.Ed. 1385 (1939); Luther v. Borden, 48 U.S. (7 How.) 1, 38-39, 12 L.Ed. 581 (1849).

The validity of the Sixteenth Amendment was first upheld nearly seventy years ago in Brushaber v. Union Pacific Railroad Co. [1 USTC ¶4 ], 240 U.S. 1, 36 S.Ct. 236, 60 L.Ed. 493 (1916). Recent decisions have been no different. Parker v. Commissioner [84-1 USTC ¶9209 ], 724 F.2d 469, 471 (5th Cir. 1984); Baker v. Commissioner [CCH Dec. 34,976(M) ], 37 T.C.M. (CCH) 307, 309 (1978) aff'd without published opinion, 639 F.2d 787 (9th Cir. 1980), cert. denied, 451 U.S. 1018, 101 S.Ct. 3008, 69 L.Ed.2d 390 (1981); Ginter v. Southern, 611 F.2d 1226, 1229 (8th Cir. 1979). The defendants' argument that the Sixteenth Amendment is a nullity is rejected.

The Wodtkes have moved to dismiss this civil matter claiming that it is really a criminal case. Part of this case involves an alleged fraudulent conveyance. However, this is a civil fraud, not criminal fraud. See Rouse v. Rouse, 174 N.W.2d 660 (Iowa 1970).

This case involves the Wodtkes' tax liabilities for the years 1973 and 1974. There is no possibility of the Wodtkes being prosecuted for a tax offense relating to these years as the statute of limitations for offenses arising under the internal revenue laws has passed. (26 U.S.C. §6531 .) Section 6531 prescribes three-year and six-year periods for certain offenses. The Government has taken the position that the period in which the Government could have sought to indict the Wodtkes for tax offenses occurring in 1973 and 1974 has expired.

The Wodtkes have argued that the Government cannot foreclose its tax liens as these liens have expired. This argument is unpersuasive. Section 6321 of the Internal Revenue Code (26 U.S.C.) provides for a lien in favor of the United States against all property and rights to property belonging to a taxpayer. This lien arose at the time the taxes were assessed and continues until the liability is satisfied or becomes unenforceable because of lapse of time. Section 6502(a) provides for a six-year period for tax collection. However, the six-year period is extended if the Government commences suit to reduce the liability to judgment within that period. The suit tolls the statutory period, United States v. Ettelson [47-1 USTC ¶9137 ], 159 F.2d 193, 196 (7th Cir. 1947), the obtaining of a judgment will keep the time for collection open indefinitely, United States v. Overman [70-1 USTC ¶9342 ], 424 F.2d 1142 (9th Cir. 1970), and will correspondingly extend the life of the lien. §6322 . The lien is effective against the taxpayer even if not filed. United States v. Trilling [64-1 USTC ¶9292 ], 328 F.2d 699, 702 (7th Cir. 1964).

The Wodtkes referred the Court to §6323(g) which provides that tax liens must be refiled within six years and one month of the assessment. They then argue that the liens have expired because they were not refiled. Defendants ignore that §6323 provides for the filing of tax liens in order to protect certain classes of individuals which include purchases, holders of security interests, mechanics liens and judgment lien creditors. §6323(a) . These terms are defined in §6323(h) . Neither the Wodtkes nor their Church meet the definition of a protected party.

So long as the persons being foreclosed are not one of the enumerated classes, the Government can foreclose its tax liens arising by virtue of §6321 even if no tax lien was ever filed. United States v. Trilling, supra. The §6321 liens arise by operation of law and continue so long as the period for collection remains open. By filing this suit, the Government has extended the collection period. Thus, the tax liens remain in effect and may be foreclosed if appropriate.

It is true, of course, that because the tax liens were not refiled, a purchaser, holder of a security interest or other enumerated person could acquire priority over the tax lien. Whether such a person could be a bona fide purchaser in the face of the notices of lis pendens filed by the Government is a separate question. Nevertheless, since there are no parties present claiming protected status, further discussion of the point is moot. ⁴

The assessment of taxes against Mr. Wodtke was based on a decision by the United States Tax Court and affirmed by the Eighth Circuit Court of Appeals. The liability of Mr. Wodtke is therefore fixed and must be accepted as valid and correct. Commissioner v. Sunnen [48-1 USTC ¶9230 ], 333 U.S. 591, 597-602, 68 S.Ct. 715, 719-721, 92 L.Ed. 898 (1948); United States v. Annis [80-2 USTC ¶9801 ], 634 F.2d 1270, 1272 (10th Cir. 1980); Russell v. United States [79-1 USTC ¶9367 ], 592 F.2d 1069, 1071 (9th Cir. 1979).

Because Mrs. Wodtke did not petition the Tax Court, she may litigate her tax liability in this case. Mrs. Wodtke moved for a jury trial on this issue but waived her right to a jury prior to trial. The United States agreed to this waiver and accordingly this issue was tried to the Court. Rule 38(d), Federal Rules of Civil Procedure.

An assessment of taxes is presumptively correct. A taxpayer has the burden of proving the assessment is in error and proving his or her correct tax liability. United States v. Janis [76-2 USTC ¶16,229 ], 428 U.S. 433, 96 S.Ct. 3021, 49 L.Ed.2d 1046 (1976); Welch v. Helvering [3 USTC ¶1164], 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212 (1933).

Every person who may owe a tax is required to keep records which will enable a correct tax return to be filed. A taxpayer is obligated to make these records available to the Government so that a reported tax liability may be verified. 26 U.S.C. §6001 ; Carr Enterprises, Inc. v. United States, [83-1 USTC ¶9202 ], 698 F.2d 952 (8th Cir. 1983); Lukovsky v. Commissioner [82-2 USTC ¶9704 ], 692 F.2d 527 (8th Cir. 1982). Taxpayers are not exempt from this record-keeping requirement because they are farmers. See 26 C.F.R. §1.6001-1(b) .

A taxpayer has the burden of proving his entitlement to a tax deduction. Burnet v. Houston [2 USTC ¶710 ], 283 U.S. 223, 51 S.Ct. 413, 75 L.Ed. 991 (1931); Lukovsky v. Commissioner, supra at 528.

A tax deduction is a matter of legislative grace. Congress could choose, if it desired, to impose a tax on gross income without allowance of deductions. A taxpayer who claims a deduction has the burden of showing that he is entitled to the deduction and the exact amount of the deduction. Commissioner v. National Alfalfa Dehydrating & Milling Co. [74-1 USTC ¶9456 ], 417 U.S. 134, 148-49, 94 S.Ct. 2129, 2136-37, 40 L.Ed.2d 717 (1974); Interstate Transit Lines v. Commissioner [43-1 USTC ¶9486 ], 319 U.S. 590, 593, 63 S.Ct. 1279, 1281, 87 L.Ed. 1607 (1943).

Mrs. Wodtke was uncooperative with the audit and failed to provide any proof of the amount of her deductions. Where a taxpayer fails or refuses to provide documentation, the Internal Revenue Service must disallow every deduction taken. Accordingly, the assessment of taxes made against her is valid and correct. Burnet v. Houston, supra; Oliver v. Commissioner [66-2 USTC ¶9577 ], 364 F.2d 575 (8th Cir. 1966); Roberts v. Commissioner [CCH Dec. 32,789 ], 62 T.C. 834 (1974).

The abatement of the first tax assessment made against Mrs. Wodtke does not render the subsequent assessment invalid so long as the subsequent assessment was made in a timely manner. Schildhaus v. Commissioner [CCH Dec. 29,890(M) ], 28 T.C.M. (CCH) 1463, 1475 (1969), aff'd, [74-1 USTC ¶9452 ] 442 F.2d 1343 (2d Cir. 1971) (per curiam.)

The statute of limitations for assessing taxes for 1973 normally would have expired on April 15, 1977. However, if a notice of deficiency is issued, the statute of limitations is suspended for 90 days during which time the taxpayer can file a petition with the United States Tax Court. If no petition is filed, the limitation period is extended for an additional sixty days, plus however much time was left remaining between the date of the notice and the original statute of limitations date. 26 U.S.C. §6503(a) ; Ramirez v. United States [76-2 USTC ¶9537 ], 538 F.2d 888, 210 Ct.Cl. 537 (1976), cert. denied, 429 U.S. 1024, 97 S.Ct. 642, 50 L.Ed.2d 625 (1976).

The notice of deficiency was mailed March 21, 1977. For the next 90 days, the Service was precluded from assessing taxes against the Wodtkes. After this 90-day period expires, the Service has 60 days, plus whatever time was left on the three-year limitation period. Because the notice of deficiency was mailed 25 days prior to April 15, 1977, the Service had 90 days, plus 60 days, plus 25 days to assess Mrs. Wodtke for 1973 taxes.

The assessment of taxes made against Mrs. Wodtke on August 24, 1977 was made in a timely manner. Taxes for 1973 could have been assessed against her through September 12, 1977. Ramirez v. United States, supra; 26 C.F.R. §301.6503(a)-1(a)(2) .

As of July 29, 1985, Mrs. Wodtke was indebted to the United States for federal income taxes, interest, penalties and lien fees in the amount of $182,495.57 for 1973 and $264,536.18 for 1974. Interest continues to accrue on those amounts at the rate specified in 26 U.S.C. §6621 , compounded daily only on those amounts accruing after December 31, 1982. (§6622 .)

As of July 29, 1985, Mr. Wodtke was indebted to the United States for federal income taxes, interest, penalties and lien fees in the amount of $180,398.84 for 1973 and $262,227.04 for 1974. Interest continues to accrue on these amounts at the rate specified in 26 U.S.C. §6621 , compounded daily only on interest accruing after December 31, 1982. §6622 .

As of the dates of the assessments against Mr. and Mrs. Wodtke, tax liens arose against all of their property and interests in property. 26 U.S.C. §6322 .

The vows of poverty taken by the Wodtkes were not sufficient to transfer their real property under Iowa law since the purported vows contained no description of the land affected. Iowa Code §558.19 ; Leighton v. Leighton, 196 Iowa 1191, 194 N.W. 276, 282 (1923).

The purported conveyance of the farm from the Wodtkes to themselves as Trustees of Life Science Church of Oto, Iowa, by quit claim deeds recorded on September 14, 1978 was subject to the tax lien against Mrs. Wodtke which arose on August 24, 1977, the date of her tax assessment. 26 U.S.C. §6323(a) and (h)(6) ; District Divine Science Church of Allen County v. United States, 80-1 USTC ¶9119 (N.D.Ind. Dec. 4, 1979).

The Life Science Church of Oto, Iowa held all property purportedly transferred from the Wodtkes as their nominee. From its inception, the Church has been the alter ego of Leonhard and June Wodtke; the evidence failed to demonstrate that it has any existence separate and apart from the Wodtkes. Therefore, the real and personal property purportedly transferred remained subject to federal tax liens against the Wodtkes and could be levied on to satisfy the Defendant Wodtkes' tax liabilities. Loving Savior Church v. United States [84-1 USTC ¶9261 ], 728 F.2d 1085 (8th Cir. 1984).

"Unbridled discretionary powers in a trustee negative the existence of a trust relationship." Hansen v. Birmingham [50-2 USTC ¶9417 ], 92 F.Supp. 33, 42 (N.D.Iowa 1950). The purported transfers of property from the Wodtkes to themselves as Trustees of the Life Science Church of Oto, Iowa were ineffective to transfer ownership, since the grantors also were trustees of the property and retained beneficial interest to the property and unrestricted control of the assets.

Chapter 504A of the Iowa Code contains the Iowa Nonprofit Corporation Act. The Act permits nonprofit organizations, including religious organizations, to be incorporated under its terms. To comply with the Act, an organization must perform certain acts which include adopting bylaws and adopting articles of incorporation which must be filed with the Secretary of State. A qualifying nonprofit corporation may sue and be sued and can own and receive property. Iowa Code §§504A.4.2, 504A.4.4. The Life Science Church of Oto, Iowa is an unincorporated organization which has not complied with the requirements of the Act.

Iowa law does not require that religious organizations comply with the Nonprofit Corporation Act. However, a religious organization that does not incorporate has no legal existence, can neither sue nor be sued and cannot hold property in its own name. Iowa Code ch. 504A; Presbyterian Church of Osceola v. Harken, 177 Iowa 195, 158 N.W. 692, 694 (1916). Because the Life Science Church of Oto, Iowa has no legal existence, the purported transfer of real and personal property to it by the Wodtkes did not transfer title. Title to all the purportedly transferred property remains with the Wodtkes.

In summary, the purported transfers of real and personal property by the Wodtkes were fraudulent as to the United States. The transfers were made with knowledge of their outstanding tax liabilities and in an attempt to avoid the payment of such taxes. The transfers were made in an attempt to leave themselves with no assets to pay their present and future tax liabilities. The purported transfers were without consideration and the Wodtkes retained possession, control and full use of the property purportedly transferred. Rouse v. Rouse, 174 N.W.2d 660, 667 (1970).

The tax liens of the United States are prior to all other interests in the property with the exception of the outstanding balance of the mortgage and other fees owed to John Hancock. ⁵

The farm shall be sold by an officer of the Court with proceeds first being applied to costs of sale and thereafter to John Hancock in the total amount of the Wodtkes' indebtedness to it and thereafter to the United States in satisfaction of the tax liabilities of the Wodtkes. Excess proceeds, if any, shall be paid to the Wodtkes.

Because the Court determines that the conveyance of the property to the church was ineffective and the Wodtkes have had the beneficial use of the farmland from which they earn income, there is no evidence of pauper status. The Court taxes costs of this action to the Defendant Wodtkes.

Accordingly,

IT IS ORDERED that the Government shall prepare a judgment consistent with this Memorandum Decision and Order with updated tax liability figures for Leonhard and June Wodtke to be filed effective January 15, 1986.

¹ Lien fee assessed February 19, 1980 when lien was prepared.

² Lien fee assessed February 19, 1980 when lien was prepared.

³ No additional lien fee was assessed on this second tax lien.

⁴ All Motions to Dismiss by the Wodtkes are denied.

⁵ The matter of Hancock's entitlement to other fees will be addressed in a later order only if it is shown that resolution of that matter is necessary to clear title and there is a dispute concerning them.

 

 

 

United States of America, Plaintiff v. Bobby G. Braswell and Lennie T. Braswell, Defendants

U. S. District Court, So. Dist. Ala., So. Div., Civil Action No. 84-0089-T-S, 7/24/85

[Code Sec. 6672]

Employment taxes: Failure to collect and pay over: Penalties: Corporate officers.--A corporation's president and general manager, who admitted that he was a responsible person as defined in Code Sec. 6672, was liable for the 100% penalty for failure to pay over withholding taxes for eight quarterly periods. The taxpayer used the money, that he knew should have been withhold for the government, to pay creditors, salaries, and other operating expenses of his business.

[Code Secs. 6321 and 6901]

Transferees: Liability for taxes: Liens: State law: Fraudulent transfers.--The wife of a corporate officer (who was liable for the 100% withholding tax penalty and interest thereon) was required to pay over the proceeds of an undivided one-half interest in real estate which, under state law, was fraudulently transferred to her by her husband. Because she had used the proceeds from the sale of the original property that was fraudulently transferred to make a succession of residence purchases, the court places a judgment against the wife's most recent real estate purchase. Under state law, the IRS was also awarded judgment against the corporate officer, who was considered an owner of an undivided one-half interest in the last residence purchased by his wife, subject to the rights of intervening creditors.

THOMAS, District Judge:

The Court having considered all the matters of record herein, the testimony and exhibits, and the arguments propounded by counsel, together with the applicable law, finds as follows:

Findings of Fact

1. This action was instituted at the direction of the Attorney General of the United States and pursuant to the authorization of a delegate of the Secretary of the Treasury. The defendants reside in Mobile County, Alabama.

2. During the years 1970, 1971 and 1972, Bobby G. Braswell, one of the defendants herein, was President and General Manager of Braswell and Boykin, Inc.

3. With respect to each of the four quarters of 1970 and 1971, defendant Bobby G. Braswell was a person responsible for the withholding of, truthfully accounting for, or paying over to the United States or its agents, Internal Revenue taxes from the compensation of employees of Braswell and Boykin, Inc.

4. During the eight quarters of 1970 and 1971, Mr. Braswell was aware that such taxes were not being withheld or paid over to the United States or its agents and with such knowledge continued to pay other creditors and operating expenses, including his own salary, and otherwise placed back into the operation of the business, those monies required to be withheld and paid over to the United States or its agents.

5. On April 11, 1974, and prior thereto, defendant Bobby G. Braswell and his wife, Lennie T. Braswell, one of the defendants herein, each owned a one-half interest in two parcels of real property located in Mobile County, Alabama. One parcel consisted of a vacant lot and the other parcel consisted of a lot improved with a dwelling house in which both defendants resided (known as the "Old Pascagoula Road property").

6. Prior to April 12, 1974, a Revenue Officer of the Internal Revenue Service contacted Mr. Braswell concerning his failure to truthfully account for or pay over to the United States or its agents internal revenue taxes which were withheld, or should have been withheld, from the compensation of employees of Braswell and Boykin, Inc.

7. On April 12, 1974, Mr. Braswell conveyed by warranty deed to his wife, Lennie T. Braswell, his one-half interest in the two aforementioned parcels of real property for a consideration of $500.00. The fair market values of the two parcels, at the time of the April 12, 1974 conveyance, are found to be $5,500.00 with respect to the vacant lot and $58,715.00 with respect to the lot improved with the dwelling house. At the time of the April 12, 1974 conveyance, to lot improved with a dwelling house was encumbered with a mortgage of $31,750.00. The court therefore finds that, at the time of the April 12, 1974 conveyance, Bobby G. Braswell had an equity in the two parcels on which execution could issue.

8. Subsequent to Mr. Braswell's April 12, 1974 conveyance to his wife, he continued to reside in the dwelling house and treat the property as his own.

9. On May 11, 1976, Mrs. Braswell sold that parcel consisting of the lot improved with the dwelling house for a consideration of $64,500.00, receiving $34,054.00 in cash with the purchaser assuming the outstanding mortgage. The proceeds received by Mrs. Braswell from the sale of the lot improved with a dwelling house were used to purchase residential real estate known as the "Cottage Hill Road Property".

10. Thereafter, Mrs. Braswell acquired a succession of residential properties known as the "Grand Bay Property", the "North Levert Street Property", the "Winford Road Property", and the "Winford Way Property". The equity realized from the sale of each of these properties was invested in the next property purchased except that Mr. Braswell invested $51,000.00 in new money in the "North Levert Street Property." Mr. Braswell was a joint venturer in the purchases and sales and his income, at least in part, was used to pay off installments of the indebtedness incurred in connection with such purchases. The defendants now reside at 8840 Winford Way, Mobile County, Alabama (the "Winford Way Property").

11. On August 8, 1977, a 100% penalty in the amount of $75,067.45 was assessed against Mr. Braswell as a person responsible for the willful failure to withhold or pay over taxes accruing for the eight quarters of 1971 and 1972 pursuant to section 6672 of the Internal Revenue Code of 1954. Notice and demand for payment of the assessment has been made.

12. At the time this action was instituted, the unpaid portion of the original assessment against Mr. Braswell had, as a result of various payments and credits, been reduced to $71,385.26, plus statutory interest and additions.

13. By its action herein, the plaintiff requests the court to adjudge: (1) that defendant Bobby G. Braswell is indebted to the United States in the amount of $71,385.26, plus statutory interest and additions as provided by law; (2) that the April 12, 1974 conveyance from Mr. Braswell to his wife, was, and is, fraudulent and therefore null and void and of no effect as to the liens and claims of the United States; and (3) that defendant Lennie T. Braswell is indebted to the United States in the amount of the proceeds she received from the sale of the "Old Pascagoula Road Property" on May 11, 1976.

14. In their answer, the defendants have denied that they are indebted to the United States and further deny that they have committed any fraudulent acts herein.

15. Any of the foregoing which may constitute conclusions of law are hereby incorporated therein.

Conclusions of Law

1. This court has jurisdiction over the action pursuant to Sections 1340 and 1345 of Title 28 of the United States Code and Section 7402 of the Internal Revenue Code of 1954.

2. Sections 3102 and 3402 of the Internal Revenue Code require employers to withhold Federal Income Tax and Social Security taxes from their employees' wages. The money withheld constitutes a special fund held in trust for the United States. I. R. C. §7501 (1977). Each employee is credited by the government with the taxes withheld from his wages, even if those funds are never remitted to the government. Mazo v. United States [79-1 USTC ¶9284], 591 F. 2d 1151 (5th Cir. 1979), cert. denied, 444 U. S. 842, 100 S. Ct. 82, 62 L. Ed. 2d 54 (1979).

3. When a corporate employer neglects to pay the required taxes, the government is authorized by Section 6672 of the Internal Revenue Code of 1954 to assess the full amount due against the corporation's responsible officers in the form of a penalty. Slodov v. United States [78-1 USTC ¶9447], 436 U. S. 238, 98 S. Ct. 1778, 56 L. Ed. 2d 251 (1978); Howard v. United States [83-2 USTC ¶9528], 711 F. 2d 729 (5th Cir. 1983); Moore v. United States [72-2 USTC ¶9569], 465 F. 2d 514 (5th Cir. 1972), cert. denied, 409 U. S. 1108, 93 S. Ct. 907, 34 L. Ed. 2d 688 (1973). This penalty is distinct from, and in addition to, the employer's liability for these taxes. Newsome v. United States [70-2 USTC ¶9597], 431 F. 2d 742 (5th Cir. 1970).

4. The IRS is not obligated to pursue every person with responsibility for paying taxes of this nature. The fact that there may be other fiscally "responsible persons" ¹ does not relieve the officer of his duty to pay over these taxes. Hornsey v. IRS, 588 F. 2d 952 (5th Cir. 1979).

5. Upon the government's introduction into evidence properly certified copies of the certificate of assessment a prima facie case of tax liability is established. The burden is then shifted to the defendant to overcome the presumption of liability arising from the assessment. United States v. Rindskopf, 105 U. S. 418, 26 L. Ed. 1131 (1882); United States v. Molitor [64-2 USTC ¶9820], 337 F. 2d 917 (9th Cir. 1964); Adams v. United States, 358 F. 2d 986 (Ct. Cl. 1966). The court concludes that defendant Bobby G. Braswell has failed to illustrate that the assessment made against him was incorrect, and the mere general denials of liability found in the defendants' answer, reply to request for admissions, and answers to interrogatories, unsupported by tangible evidence introduced at trial are insufficient to rebut the prima facie case made against him regarding the amount of tax liability. In any event, Mr. Braswell, in his response to the government's request for admissions, has admitted to being a "person responsible" within the meaning of Section 6672 of the Internal Revenue Code of 1954 and further, the court concludes that Mr. Braswell possessed sufficient status, duty and authority so as to allow a determination that he was a "person responsible" within the meaning of Section 6672. See Mazo v. United States, supra at 1156; Hornsby v. IRS, supra at 953; Liddon v. United States [71-2 USTC ¶9591], 448 F. 2d 509 (5th Cir. 1971), cert. denied, 406 U. S. 918, 92 S. Ct. 1769, 32 L. Ed. 2d 117 (1972). Accordingly, the court concludes that defendant Bobby G. Braswell is indebted to the United States in the amount of $71,385.26, plus such additional statutory additions and interest as provided by law.

6. Federal tax liens do not come into existence with respect to all property and rights to property belonging to defendant Braswell until the date of assessment. 26 U. S. C. §6322. The assessment was made on August 8, 1977. Therefore, a federal tax lien did not attach to the legal title of the property conveyed from Mr. Braswell to Mrs. Braswell on April 12, 1974.

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, 78 S. Ct. 1047, 2 L. Ed. 2d 1126 (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).

7. Under Alabama law, ² a conveyance of assignment or property with the intent to "hinder, delay, or defraud creditors . . . [is] void." However, the concurrence of three elements is essential before a conveyance can be declared fraudulent. It must be shown that there is: (1) A creditor to be defrauded; (2) A debtor intending to defraud, and (3) A conveyance of property out of which the creditor could have realized his claim or some portion thereof. Roddam v. Martin, 285 Ala. 619, 235 So. 2d 654 (Ala. 1970); J. C. Jacobs Banking Co. v. Campbell, 406 So. 2d 834 (Ala. 1981); United States v. Grice [83-1 USTC ¶9399], 567 F. Supp. 113 (M. D. Ala. 1983); Foy v. Foy, 447 So. 158 (Ala. 1984).

8. It must also be noted that an action to set aside or attack a conveyance as being fraudulent may be brought, in Alabama, even though the debt, claim, or demand has not been reduced to a judgment. Roddam v. Martin, supra at 666; Almon v. Byrd, 336 So. 2d 183 (Ala. 1976).

9. Regardless of when it is actually assessed, a liability arising under the Internal Revenue Code (26 U. S. C.) is considered due and owing, and constitute a liability, at the latest, as of the date the tax return for the particular period is required to be filed. ³ United States v. Hickox [66-1 USTC ¶15,679], 356 F. 2d 969 (5th Cir. 1966); United States v. Grice, supra at 115; United States v. Ressler, supra at 463. Therefore, the full amount assessed Mr. Braswell was due and owing at least by the close of 1972. The United States was thus an existing creditor of Bobby G. Braswell at the time of the April 12, 1974, conveyance. Accordingly, there existed a creditor to be defrauded at the time Mr. Braswell conveyed the subject property to his wife on April 12, 1974.

10. At the time of the April 12, 1974, conveyance, Mr. Braswell had an equity in the subject property. The court therefore concludes that, at the time of the April 12, 1974, conveyance, the United States, as a creditor, could have realized a portion of its claim out of the property conveyed.

11. The actionable fraud may be actual fraud or what is termed constructive fraud. Smith v. Wilder, 270 Ala. 637, 120 So. 2d 871 (1960). Actual fraud denotes the actual mental operation of intending to defeat or delay the rights of the creditor. Constructive fraud, however, is based on facts and circumstances which the courts have said constitute legal fraud irrespective of actual intent. The term "constructive fraud" is generally used in referring to those instances where a grantor, indebted at the time, conveys property on a good, as distinguishable from a valuable, consideration. Smith v. Wilder, supra; Gordon v. Gorman, 436 So. 2d 851 (Ala. 1983).

12. In Alabama, the fact that a conveyance took place between a husband and wife does not raise any presumption of fraud, nor does it represent a badge of fraud. Instead, it requires the court to more strictly scrutinize the conveyance at issue. Gurley v. Blue Rents, Inc., 383 So. 2d 531 (Ala. 1980); Umphrey v. Barfield, 238 Ala. 11, 189 So. 64 (1939).

13. In addition, when a husband conveys certain property to his wife and that conveyance is attacked as a fraud on the husband's existing creditors, the wife bears the burden of proof that the conveyance was based on a valuable consideration, substantial and not merely nominal. Gurley v. Blue Rents, Inc., supra at 535; Gordon v. Gorman, supra at 854-55; United States Shoe Corp. v. Beard, 463 F. Supp. 754 (S. D. Ala. 1979). The court concludes that Mrs. Braswell has failed to establish that the conveyance was based on a valuable consideration in that the wife's payment of $500.00 for property valued at over $58,000.00 constitutes nominal consideration as distinguished from valuable consideration. Consequently, the court concludes that defendant Bobby G. Braswell's April 12, 1974, conveyance to his wife, Lennie T. Braswell, was fraudulent.

14. A fraudulent grantee occupies the position of trustee and is liable to account therefore as a trustee for such creditors. American Nat. Bank & Trust Co. v. Powell, 235 Ala. 236, 178 So. 21 (1937); Yates v. Guest, 416 So. 2d 973 (Ala. 1982).

15. If the fraudulent grantee has sold the property, she must account for its fair and reasonable value at the time and place she received it, with interest. Dickinson v. National Bank of Republic, 14 So. 550 (Ala. 1893); American National Bank & Trust Co. v. Powell, supra; Yates v. Guest, supra at 977. Accordingly, the court concludes that Mrs. Braswell is accountable to the United States in the amount of $17,027.00, plus interest at the legal rate from May 11, 1976, for which execution may issue. Said amount constitutes defendant Bobby G. Braswell's one-half interest in the $34,054.00 in cash which Mrs. Braswell received as proceeds from the sale of the Old Pascagoula Road Property.

16. When a wife, acting alone, purchases and sells a succession of residences following her husband's conveyance to her without valuable consideration of his one-half interest in a residence previously held by them in joint ownership, the husband is, as to his creditors existing at the time of his conveyance to his wife, considered to be, subject to the rights of intervening creditors, the owner of an undivided one-half interest in the last residence acquired by the wife. Gordon v. Gorman, supra. The court therefore concludes that defendant Bobby G. Braswell is to be considered the owner of an undivided one-half interest in the residence located at 8840 Winford Way, Mobile County, Alabama.

17. Any of the foregoing which constitute findings of fact are hereby incorporated therein.

Judgment will be entered in accordance with the foregoing Findings of Fact and Conclusions of Law.

Judgment

Pursuant to the Findings of Fact and Conclusions of Law entered this date, it is ORDERED, ADJUDGED and DECREED that a judgment in the amount of SEVENTY-ONE THOUSAND, THREE HUNDRED EIGHTY-FIVE AND 26/100 DOLLARS ($71,385.26) be, and hereby is, entered in favor of the plaintiff, United States of America, and against the defendant, Bobby G. Braswell, together with interest and statutory additions as provided by law. Said amount of interest and statutory additions to be computed by the plaintiff, United States of America.

It is FURTHER ORDERED, ADJUDGED and DECREED that a Judgment in the amount of SEVENTEEN THOUSAND, TWENTY-SEVEN DOLLARS ($17,027.00) be, and hereby is, entered in favor of the plaintiff, United States of America and against the defendant, Lennie T. Braswell, together with interest at the legal rate from May 11, 1976, until paid, for which execution may issue. Payments made in partial or full satisfaction of this judgment shall be applied pro tanto to the payment of the foregoing judgment against defendant Bobby G. Braswell.

It is FURTHER ORDERED, ADJUDGED and DECREED that defendant Bobby G. Braswell is the undivided one-half owner of the property located at 8840 Winford Way, Mobile County, Alabama, for which execution may issue, subject to the rights of any intervening creditors.

It is FURTHER ORDERED, ADJUDGED and DECREED that in no event shall payments exceed SEVENTY-ONE THOUSAND, THREE HUNDRED EIGHTY-FIVE and 26/100 DOLLARS ($71,385.26) plus interest and statutory additions as provided by law.

Costs are to be taxed against the defendant, Bobby G. Braswell.

Amended Judgment

Pursuant to the findings of fact and conclusions of law entered on July 24, 1985, it is ORDERED, ADJUDGED AND DECREED that a judgment in the amount of One Hundred Fifty-Four Thousand, Seven Hundred Ninety-Six Dollars and Fifty-Five Cents ($154,796.55) (consisting of $71,385.26 in principal indebtedness and $83,411.29 in interest for the period August 8, 1977, through July 31, 1985, computed at the respective rates of interest established under Section 6621 of the Internal Revenue Code of 1954 as they were in effect from time to time during said period) be, and hereby is, entered in favor to the plaintiff, United States of America, and against defendant, Bobby G. Braswell, together with interest thereon after July 31, 1985, on the unpaid balance thereof at the respective rate or rates established under Section 6621 of the Internal Revenue Code of 1954 as they are in effect from time to time after said date.

It is FURTHER ORDERED, ADJUDGED AND DECREED that a Judgment in and amount of Thirty-Eight Thousand, Nine Hundred Fifty-Seven Dollars and Seventy-Six Cents ($38,957.76) (consisting of $17,027 in principal indebtedness and $21,930.76 in interest for the period May 11, 1976, through July 31, 1985, computed at the respective rates of interest established under Section 6621 of the Internal Revenue Code of 1954 as they were in effect from time to time during said period) be, and hereby is, entered in favor of the plaintiff, United States of America, and against defendant, Lennie T. Braswell, together with interest after July 31, 1985, on the unpaid balance thereof at the respective rate or rates established under Section 6621 of the Internal Revenue Code of 1954 as they are in effect from time to time after said date, for which execution may issue. Payments made in partial or full satisfaction of this Judgment shall be applied pro tanto to the judgment against defendant Bobby G. Braswell.

It is FURTHER ORDERED, ADJUDGED AND DECREED that defendant Bobby G. Braswell is the undivided one-half owner of the property located at 8840 Winford Way, Mobile County, Alabama, for which execution may issue, subject to the rights of any intervening creditors. The property located at 8840 Winford Way, Mobile County, Alabama, is that certain lot or parcel of improved real property which was conveyed by William Donald Neville, grantor, to Lennie T. Braswell, grantee, as evidenced by that certain vendors lien deed recorded in Real Property Book 2682, at pages 854-857, in the office of the Judge of Probate, Mobile County, Alabama, the said property being properly described therein as follows, to wit:

Lot 13, Winford, Unit 2, Block "A", according to plat thereof recorded in Map Book 30, page 92, of the records in the office of the Judge of Probate Mobile County, Alabama."

It is FURTHER ORDERED, ADJUDGED AND DECREED that in no event shall payments exceed One Hundred Fifty-Four Thousand, Seven Hundred Ninety-Six Dollars and Fifty-Five Cents ($154,796.55) plus interest after July 31, 1985, on the unpaid balance thereof at the respective rate or rates established under Section 6621 of the Internal Revenue Code of 1954 as they are in effect from time to time after said date.

Costs are to be taxed against defendant, Bobby G. Braswell.

¹ The term "person", as used in Section 6672, is defined to include any officer or employee of a corporation . . . who, as such officer [or] employee . . . is under a duty to perform the act in respect of which the violation occurs. 26 U. S. C. §6671(b).

² Code 1975, §11-51-120.

³ On these facts, the court need not address the question of at what precise time the personal liability of a responsible person arises in connection with Section 6672 liability.

 

 

 

Ronald H. Schock, dba Environmental Systems and Services, Plaintiff v. Internal Revenue Service of United States of America, M & T Sperling, Inc., Thomas Sperling, Andrew Quick, John A. Paro, Wesco and Does I through X, inclusive, Defendants

U. S. District Court, No. Dist. Calif., No. C-84-0033 WWS (FSL), 1/10/85

[Code Secs. 6321 and 6323]

Lien for taxes: Property subject to: Fraudulent conveyances: Priority: Interpleader: Attorney's fees.--Federal tax liens with respect to a company's delinquent employment taxes had priority over other judgment creditors as to proceeds of a promissory note originally given to the company in exchange for its operating assets. The transfer of the note by the company to third parties was set aside as a fraudulent conveyance under California law because fair consideration was not given for the note and the company was rendered insolvent by the transfer. The court awarded attorney's fees to the stakeholder in this interpleader action, to be paid after the claims of the IRS and other judgment creditors.

Thomas F. Johnson, 525 South Main Street, Ukiah, Calif. 95482, for plaintiff. Michael D. Howard, Assistant United States Attorney, San Francisco, Calif. 94102, for United States. William T. Murphy, Schaeger, Walerk & Murphy, 155 North Redwood Drive, San Rafael, Calif. 94903, for Wesco. Robert J. Stumpf, Bronson, Bronson & McKinnon, P. O. Box 7358, San Francisco, Calif. 94120, for Andrew Quick and John Paro. Thomas Sperling, 950 Brooklyn, Roseburg, Ore. 97470. Anthony Young, 1640 Fifth Street, Santa Monica, Calif. 90401, for Meteorology Research, Inc. J. D. Calhoun, Tarkington & Carey, 505 Sansome Street, San Francisco, Calif. 94111, for Matheson Gas Products and J. Goldman.

Findings of Fact and Conclusions of Law

LANGFORD, Magistrate:

This action was tried before this Court on October 22 and 23, 1984. These Findings of Fact and Conclusions of Law are filed pursuant to Rule 52(a), Federal Rules of Civil Procedure.

Findings of Fact

1. M. & T. Sperling, Inc. (hereinafter the "Company") is a non-operating California corporation which was formed in 1975 by Thomas Sperling (hereinafter "Sperling") and four associates. In 1976 Sperling purchased all the Company stock and thereafter was the Company's sole shareholder.

2. From 1976 through October 1, 1981, the Company's primary business activity was in the field of environmental quality analysis, and the Company conducted business under the fictitious name-style of "Environmental Systems and Services" (hereinafter "ES&S").

3. The Company's gross revenues from 1979 to October 1981 were as follows:

1979 ....         $340,000

1980 ....          680,000

1981 ....          390,000

 

4. In October 1981, all the Company's operating assets were sold to Ronald Schock (hereinafter "Schock"). Schock purchased the Company's assets for $30,000 cash and three notes. Two of the notes were secured; one was for $150,000, and one was computed on gross income. The remaining note was unsecured in the amount of $18,000.

5. It is the $150,000 note given from Schock to the Company (hereinafter the "note") which is the subject of this lawsuit. The note was secured by equipment, a lease, and an option to purchase a building, all of which belonged to the Company.

6. Prior to Schock's purchase of the Company's operating assets, the Company owned approximately 300 gold mining claims. Because the Company failed to file claim renewals, pay the renewal fees, or expend requisite additional development costs, the claims lapsed in September 1981, and the Company failed to renew the claims during the 90-day grace period which expired in December 1981. The Company never listed its gold mining claims as assets on its balance sheets. At best, the claims were without value in the latter half of 1981, and the Company no longer owned the claims following December 1981.

7. From January 1982 through April 1982, the Company had no other income than that received on the notes given by Schock in exchange for the Company's operating assets. Moreover, as of April 23, 1982, Sperling had no assets of any significant value which were available to pay his or the Company's creditors. In December 1982, Sperling sold his remaining interest in an airport at Lakeport and sustained a net loss on the property as a result of the sale.

8. From January 1982 through April 1982, numerous irate creditors of the Company attempted to collect on overdue bills. During this period of time, Andrew Quick (hereinafter "Quick") leased business space from Sperling in the Company building. Quick's secretary was also the secretary for the Company. In their attempts to collect the overdue bills, some of the creditors telephoned Schock, and Schock referred such calls to a telephone number which was answered either by Quick's secretary or by Quick when Sperling was not available. Also during this time, Quick personally assisted in having Sperling's power reinstated following a cut-off of the power for non-payment of the bill. On April 1, 1982, the sheriff served the Company with at least three lawsuits. Service of the lawsuits was made at the building occupied by Quick and the Company. Sperling discussed the receipt of the lawsuits with Quick sometime prior to April 23, 1982. Also on April 1, 1982, Sperling had a telephone conversation with Internal Revenue Service Officer Robert Yakerson concerning the Company's unpaid employment and unemployment taxes. That telephone conversation was followed up by a meeting between Messrs. Sperling and Yakerson in the Company's building on April 7, 1982. Quick was aware of the April 7 meeting, and asked Sperling if the Internal Revenue Service was going to "throw him in jail." During the same month, Sperling told Quick that the airport in which Sperling owned a personal interest was in foreclosure.

9. On or about April 23, 1982, the Company transferred to Quick and John A. Paro (hereinafter "Paro") its sole remaining asset of value, i. e., the note. The then remaining principal owed on the note was $147,826, with an interest rate on the balance of ten and one-half percent. The minimum monthly payment on the note was $1,300; the maximum monthly payment on the note was $2,024.02. Regardless of whether the minimum or the maximum was paid, the total yearly payment on the note was $24,288.24.

10. In exchange for the note, Quick and Paro paid $40,000 ($20,000 each). Although the note was held in the name of the Company, the entire $40,000 purchase price was paid to Sperling individually. From the April 23, 1982 transfer of the note until the present date, the Company has received no further income from any source and has had no assets of value. At the time of the transfer of the note, the Company owed 55 creditors a total of approximately $120,000 in overdue bills. Of the $40,000 payment received from Quick and Paro, less than $5,000 was used to pay off the Company's creditors, and the remainder of the payment was used for Sperling's personal benefit.

11. Sperling testified that he believed at the time of the transfer of the note that the transfer would delay the Company's creditors from collecting on their respective accounts. Although Quick testified that he had no knowledge of creditors' claims against the Company on the date of the transfer, the Court finds that he was aware of the fact that Sperling had serious financial difficulties before the note was transferred. Prior to the transfer, neither Quick nor Paro made any meaningful inquiry into the financial status of the Company or of Sperling. Considering Quick's proximity to Sperling's office, and the repeated instances upon which Quick was advised of Sperling's financial straits, the Court finds that Quick would have had intentionally to look the other way to avoid being aware of Sperling's creditor problems.

12. As stated before, neither Quick nor Paro paid the Company anything for the transfer of the note held in the name of the Company. Quick and Paro have alleged that Sperling was the alter ego of the Company, but even if that were true, the Court finds that fair consideration was not given for the note. In addition to Schock's promise to repay the $150,000 note in full, Sperling gave his own personal guarantee for payment of the note. Furthermore, the note was secured by equipment, a lease and an option to buy the Company building, and Schock had timely made all payments from the time of the origination of the note until its transfer to Quick and Paro. Regardless of the value of these various items of security, it is clear that together with Schock's and Sperling's guaranties, the note was worth considerably more than the $10,000 to $15,000 alleged by Quick and Paro to be the value of the note at the time it was transferred. The Court is likewise unpersuaded by Quick and Paro's expert, who testified that the note was worth approximately $10,000 on the date of transfer.

13. Prior to the initiation of the instant interpleader action by Schock, Quick and Paro received approximately $22,000 of their $40,000 purchase price for the note. Since the date of filing this action, Schock's monthly payments have been made directly into the Court.

14. On April 7, 1982, Sperling gave the Internal Revenue Service a $10,000 check as partial payment for the Company's delinquent employment and unemployment taxes, and requested that the Internal Revenue Service refrain from filing any liens against the Company until the end of the month. The check was dishonored by the bank, but the Internal Revenue Service records do not reflect notification of the check's return until June 7, 1982. On April 30, 1982, federal tax liens with respect to the Company's delinquent employment taxes were prepared, and the liens were filed with the Lake County Recorder's Office during the first week of May, 1982. The Internal Revenue Service has never collected any funds with respect to the subject federal tax liens. Those tax liens are as follows:

(a) August 10, 1981: Federal employment taxes against the Company for the first quarter of 1981 in the amount of $20,241, exclusive of interest and penalties;

(b) December 7, 1981: Federal employment taxes against the Company for the second quarter of 1981 in the amount $15,850, exclusive of interest and penalties;

(c) February 8, 1982: Federal employment taxes against the Company for the third quarter of 1981 in the amount of $17,982, exclusive of interest and penalties; and

(d) March 8, 1982: Federal unemployment taxes against the Company for 1980 in the amount of $816.36, exclusive of interest and penalties.

15. On March 21, 1983, Meteorology Research, Inc. (hereinafter "MRI") obtained a judgment against the Company in the amount of $17,456.33, plus interest at seven percent that date. On March 15, 1983, J. Goldman/Matheson Gas Products (hereinafter "Goldman") obtained a judgment against the Company in the amount of $3,253.52, plus interest in the amount of $567.36. Neither of these judgments have been satisfied.

16. Sperling testified that the claims made by the IRS, MRI and Goldman were due and owing by the Company on the date of the transfer of the note to Quick and Paro.

Conclusions of Law

1. Federal tax liens come into existence with respect to all property and rights to property belonging to taxpayers such as the Company on the date the taxes are assessed. Where a taxpayer transfers property after taxes are due but prior to the filing of a tax lien, the United States may seek relief under the fraudulent conveyance laws of the state in which the property is located. Accordingly, California law governs the substantive issues in this interpleader action.

2. Under California law, a conveyance without adequate consideration, made by a person who is insolvent or who as a result of the conveyance becomes insolvent, is void. Likewise, California law provides that a conveyance made without fair consideration, when the grantor believes that he will incur debts beyond his ability to pay as such debts occur, is fraudulent both as to present and future creditors. Moreover, a conveyance the grantor makes to hinder, delay or defraud creditors is similarly void. The Court concludes, based on grantor Sperling's testimony, that the transfer of the note was made with his actual intent to hinder or delay the present or future creditors of the Company.

3. So long as there is insufficient consideration and the transferor is rendered thereby insolvent, and the creditor has a claim at the time of the conveyance, it is not necessary under California law to show actual fraudulent intent to set aside a conveyance. When a transferor has existing indebtedness, a voluntary conveyance is presumptively fraudulent when it is made without fair consideration. The question then becomes whether the grantee gave fair consideration for the note; that is, whether the values exchanged were equivalent and whether the grantee acted in good faith. The Court has concluded that Quick and Paro did not give fair consideration for the note, and that Quick did not act in good faith. Because Quick acted as the agent for Paro with respect to the acquisition of the note, Paro is chargeable with Quick's lack of good faith. The transfer of the note, therefore, must be set aside.

4. In this action, it is clear that the IRS liens were filed before the judgments of MRI and Goldman were entered. The Court concludes that the creditors are entitled to the proceeds on a first in time, first in right basis, as follows: first, the IRS; second, MRI; and third, Goldman.

5. The Court also concludes that pursuant to its discretion to award attorneys' fees in interpleader actions, Schock is entitled to payment for his attorney's fees in this action. Those fees are to be paid after the principal claims of the IRS, MRI and Goldman, respectively, are paid.

6. Next, the Court concludes that the IRS, MRI, and Goldman, respectively, should be paid interest and/or penalties in accordance with the judgment filed contemporaneously herewith.

7. Finally, the Court concludes that any remaining proceeds from the note should be divided equally between Quick and Paro.

IT IS SO ORDERED.

Order Based on Findings of Fact and Conclusions of Law

On October 1, 1981, Ronald H. Schock and Lorna Schock (hereinafter "Schock") signed a promissory note in the amount of $150,000.00 and made payable to M & T Sperling, Inc. (hereinafter "the note"). On April 23, 1982, the note was assigned to Andrew M. Quick and John A. Paro (hereinafter, respectively, "Quick" and "Paro"). Based on the Findings of Fact and Conclusions of Law filed contemporaneously herewith.

IT IS HEREBY ORDERED that the transfer of the note to Messrs. Quick and Paro is set aside.

IT IS FURTHER ORDERED that the Clerk of the Court, so long as it has proceeds from the note, and therefore Schock, shall disburse the proceeds from the note to the entities and in the amounts designated below:

First, the Internal Revenuw Service shall receive the principal amount of its claim, i. e., $54,889; then

Second, Meteorology Research, Inc. shall receive the principal amount of its claim, i. e., $17,456.33; then

Third, J. Goldman/Matheson Gas Products shall receive the principal amount of its claim, i. e., $3,235.52; then

Fourth, Schock shall receive attorney's fees incurred in connection with this interpleader action, i. e., $2,775.00; then

Fifth, Messrs. Quick and Paro shall receive the amount necessary to recoup their full $40,000 purchase price of the note, i. e., approximately $18,000, subject to proof; then

Sixth, the Internal Revenue Service shall receive interest according to law on the principal amount of its claim; then

Seventh, Meteorology Research, Inc. shall receive interest at the rate of seven percent (7%) on the unpaid balance of the principal amount from March 21, 1983; then

Eighth, J. Goldman/Matheson Gas Products shall receive interest in the amount of $567.36 plus seven percent (7%) on the unpaid balance of the principal amount from March 15, 1984; then, and finally

Ninth, the balance of the note proceeds shall be paid equally to Messrs. Quick and Paro.

IT IS FURTHER ORDERED that Schock shall maintain a descending balance statement which indicates the disbursement of the proceeds from the note, and shall forward copies of the statement to the entities above listed on or before June 30th and January 1st of each year until the note has been paid in full.

IT IS SO ORDERED.

Judgment

On October 1, 1981, Ronald H. Schock and Lorna Schock (hereinafter "Schock") signed a promissory note in the amount of $150,000.00 an made payable to M & T Sperling, Inc. (hereinafter "the note"). On April 23, 1982, the note was assigned to Andrew M. Quick and John A. Paro (hereinafter, respectively, "Quick" and "Paro"). The transfer of the note to Messrs. Quick and Paro is hereby set aside pursuant to the California Uniform Fraudulent Conveyance Act, California Civil Code Section 3439, et seq., and the liens of the Internal Revenue Service, Meteorology Research, Inc., J. Goldman/Matheson Gas Products (hereinafter the "creditors") and the attorney's fees of Schock shall attach to the proceeds of the note. The funds held by the Clerk of the Court and future payments made by Schock shall be distributed pursuant to the Court's Order entered contemporaneously herewith, with the creditors' liens being paid in the order of their creation and Schock's attorney's fees paid thereafter.

 

 

 

United States of America, Plaintiff v. Eddie L. May, et al., Defendants

U. S. District Court, So. Dist. Calif., Civil No. 83-0214-E, 10/31/84

[Code Sec. 6323]

Collection: Validity of lien: Conveyance by taxpayer: Fraudulent conveyance by taxpayer.--Pursuant to California law, the court set aside the taxpayer's transfer of real estate as fraudulent. The court also foreclosed the taxpayer's interest in that property by judicial sale and granted the United States a deficiency judgment in the event that the proceeds from the sale were insufficient to satisfy the taxpayer's obligation to the government. Seven days after the taxpayer stipulated to a deficiency for two tax years, she gratuitously transferred her one-half interest in her homestead to her half brother thus rendering herself insolvent. Furthermore, the taxpayer could not create a genuine issue of fact by contradicting her own testimony; therefore, summary judgment was properly granted. The taxpayer initially testified that she received no consideration for the transfer, but later testified that she received $5,000 in a debt forgiveness. In looking to the numerous badges of fraud, the court concluded that the transfer was made with fraudulent intent with little or no consideration.

Kathryn A. Snyder, Assistant United Attorney, Nancy Morgan, Department of Justice, Washington, D. C. 20530, for plaintiff. A. Lee Estep, 2120 San Diego Avenue, San Diego, Calif. 92110, Anthony E. Erbacher, 9745 Prospect Ave, Santee, Calif. 92071, Dennis D. Burns, 118 Rea Avenue, El Cajon, Calif, 92020, for defendants.

Memorandum Decision

Background

ENRIGHT, District Judge.

This is an action by the United States to recover tax deficiencies owed for the years 1969 and 1970 by defendants Eddie L. May and his former wife, Margarita Woolf.

In a Memorandum Decision dated June 20, 1984, this court granted summary judgment in the government's favor on several claims. The court held that the United States is entitled to judgment against Eddie May in the amount of $105,289.01 as a result of tax deficiencies. Margarita Woolf was held to owe $52,257.98, plus interest, on her tax deficiencies. In light of these deficiencies, the United States was held to possess tax liens on all property owned by May and Woolf. Finally, as to the property known as "Hidden Glen Ranch," conveyed by Eddie May to his second wife, Efigenia May, the court held that the conveyance was fraudulent and should be set aside. The court permitted the foreclosure of the tax lien on the ranch property and ordered that if the proceeds of the sale of the ranch were insufficient to satisfy May's liability, the United States was entitled to a deficiency judgment against him.

At present, the court has before it an attempt by the United States to satisfy Margarita Woolf's tax liability out of property formerly owned by Woolf, located at 3705 Fairmount Avenue, San Diego, California, and conveyed to Woolf's half brother, J. deJesus Munoz. The government moves for summary judgment in its favor setting aside the transfer of that property as fraudulent, foreclosing Woolf's interest in that property by judicial sale, and granting the United States a deficiency judgment in the event the proceeds from the sale of the property are insufficient to satisfy Woolf's obligation to the government.

Facts

The facts relating to the transfer of the Fairmount property from Woolf to Munoz are as follows. The property was originally purchased in 1977 by Margarita Woolf and J. deJesus Munoz as tenants in common. After an assessment in 1977 by the Secretary of the Treasury for the deficiency on her 1969 federal income tax return, Margarita Woolf stipulated through counsel to a determination of tax deficiency in the amount of $38,083.18 in the United States Tax Court. This amount was never paid, however, and, as noted, this court has recently held that Woolf owes $52,257.98 to the United States.

Margarita Woolf transferred her interest in the property to her half brother and coowner on February 8, 1979, seven days after she stipulated to the deficiency in the tax court. The transfer was accomplished by quitclaim deed and the deed recited that the transfer was for no consideration.

Despite the language of the deed, however, there is some confusion as to the consideration for the transfer. Neither Woolf nor her half brother appear certain as to what the consideration was, if anything. Early in her deposition, Woolf states that there was no consideration for the transfer. Later, she indicates that the property may have been transferred in exchange for forgiveness of all her prior debts to her brother, unspecified in amount. Still later, Woolf states that she had received a $5,000 loan from Munoz which he forgave as consideration, but that was the only debt forgiven. Finally, on her 1979 tax return Woolf states that she received $23,800 for the sale of her share of the property to Munoz.

The following exchange is indicative of the ambiguity surrounding the transaction:

Q. So you just received that $5,000. Was there any other cancellation of indebtedness? I mean, the other money that you owed your brother, did he cancel that indebtedness?

A. We have adjusted as we go along, because he did help me and he has sent me money. Whenever I need it, he sent me money.

A. But you don't have any more cash. You never received any more money on the sale of the Fairmount Street?

A. Not on that property, no.

(Questioning of Ms. Woolf by Ms. Nancy Morgan, Tax Division, United States Department of Justice).

In his deposition, Woolf's half brother Munoz testified that he paid Woolf for the Fairmount property. He testified that the payment he made to her was in the form of bank drafts and cash. He stated in his deposition that he could not remember the exact amount, however:

Q. And not to repeat, how much did you pay her?

A. Exactly, I would not be able to say.

Q. $10,000?

A. No. She can give you more exact amount than I can.

Q. I'm just asking for your recollection. Is it $20,000, can you approximate?

A. No. No I can't give you an exact amount.

(Deposition questioning of Mr. Munoz by Ms. Karen Stifter, Tax Division, United States Department of Justice).

At the time of the transfer from Woolf to May, both deponents indicate that the fair market value of the property was $40,000. Munoz added roughly $20,000 in improvements to the property during this period.

Discussion

It is this court's conclusion that the government's motion for summary judgment should be granted.

California has adopted the Uniform Fraudulent Conveyances Act, Cal. Civ. Code §§ 3439 to 3439.12 (West 1970). Under Section 3439.04 of the California Civil Code, a conveyance made 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 . . . without a fair consideration.

As is evident from the statutory language itself, no intent to defraud creditors by way of the transfer need by shown under this section. Headen v. Miller, 141 Cal. App. 3d 169, 172, 190 Cal. Rptr. 198 (1983).

Under this section, the conveyance of the Fairmount Avenue property from Woolf to Munoz must be set aside as fraudulent. After the conveyance of her interest in the property, Woolf had no assets and an indebtedness of $35,000, according to her deposition testimony. The conveyance thus rendered Woolf insolvent. Cal. Civ. Code §3439.02(a) (West 1970); Tri-Continental Leasing Corp., Inc. v. Zimmerman, 485 F. Supp. 495, 498 (N. D. Cal. 1980).

Further, while there is some uncertainty as to the consideration Woolf received for the property, it is this court's review that there was no fair consideration as it is defined in the Act, Cal. Civ. Code §3439.03 (West 1970), as a matter of law.

Fairness of the consideration received is to be viewed from the creditor's perspective. Patterson v. Missler, 238 Cal. App. 2d 759, 766, 48 Cal. Rptr. 215 (1965). Woolf has testified, and the deed supports this testimony, that she received no consideration for the transfer. Alternatively, she has testified that she received $5,000 in the form of debt forgiveness from her half brother. Her tax return for the year in question would suggest that she received $23,800, but there is no supporting evidence in her testimony that she received that amount, nor can her brother remember paying that sum to her for the property. There is some suggestion that the transfer was in exchange for a cancellation of past indebtedness to Munoz accumulated over the years 1970 to 1979 and amounting to in excess of $56,000.

This "consideration" is discovered for the first time in Woolf's response to the present motion, however: She never referred to the cancellation of indebtedness in this amount as consideration in her deposition testimony and even asserted that $5,000 debt to Munoz that was also allegedly cancelled in exchange for the property was the only debt forgiven in exchange for the transfer.

Summary judgment is properly granted only when there is no genuine issue of material fact and the moving party is entitled to judgment in its favor as a matter of law. Retail Clerks Union Local 648, AFL-CIO v. Hub Pharmacy, Inc., 707 F. 2d 1030, 1033 (9th Cir. 1983). But the fact that there is confusion in defendants' own minds about the consideration for the transfer does not preclude summary judgment in the present case; a party cannot create a genuine issue of fact by contradicting his own testimony. Mesirow v. Pepperidge Farm, Inc., 703 F. 2d 339, 344 (9th Cir. 1983), cert. denied, -- U. S. --, 104 S. Ct. 83 (1983); Lopez v. General Motors Corp., 697 F. 2d 1328, 1333 (9th Cir. 1983).

Thus, the evidence before the court establishes that the conveyance from Woolf to Munoz was fraudulent under Section 3439.03 and should be set aside. In addition, this conveyance is also fraudulent under Section 3439.04 of the California Civil Code which provides that conveyances made with actual intent to defraud present and future creditors are void as to such creditors.

As discussed in the earlier Memorandum Decision in this case, proof of actual intent to defraud is difficult to obtain, therefore proof of such intent is generally made through circumstantial evidence. United States v. Bertie, 529 F. 2d 506, 508 (9th Cir. 1976).

Certain "badges of fraud" are viewed as particularly indicative of fraudulent intent. The numerous badges of fraud in the instant transaction lead this court to conclude that the transfer was made with fraudulent intent. In so holding, the court looks to

(1) the close personal relationship between the transferor Woolf and the transferee Munoz,

(2) the fact that Woolf was rendered insolvent by the transaction,

(3) the inadequacy of the consideration, if any,

(4) the lack of documentation of the alleged loans, and

(5) the fact that the lawsuit was imminent at the time of transfer.

Bertie, 529 F. 2d at 509, n. 5.

In addition, it is worth noting that Woolf continued to reside on the property with her daughter after the alleged transfer, paying only nominal rent and receiving full support from Munoz. This, too, is a badge of fraud. Id. at 509.

Conclusion

Upon due consideration of the parties' memoranda and exhibits, the arguments advanced at the hearing, and for the reasons set forth herein, the court grants plaintiff's motion for summary judgment.

 

 

 

The Indiana National Bank, Plaintiff v. Robert N. Gamble, M.D. Church of Christian Liberty, Defendants v. United States of America Intervenor v. Golf Mill State Bank, Third-Party Defendant

U. S. District Court, No. Dist. Ill., East. Div., No. 83 C 0403, 612 FSupp 1272, 10/19/84

[Code Secs. 6321, 6323, 7402 and 7403]

Federal tax lien: Fraudulent conveyance: Church related tax schemes.--The conveyance of the taxpayer's residence, purchased one year earlier for $127,000, to the Church of Christian Liberty for $10.00 was set aside as fraudulent because at the time he made the quit-claim transfer, the taxpayer was in default on three promissory notes issued to the Indiana National Bank and he had been notified that his 1975 income taxes were being audited. The taxpayer, who had become an ordained minister of the church, had taken a vow of poverty, transferred all his and his immediate family's assets to the church, and assigned all his future income to the church in return for a monthly stipend. Even though the property had been quit-claimed to the church, the mortgage coupons and the insurance were still in the taxpayer's and his wife's names and the mortgage payments were made by the taxpayer's mother-in-law who was the only member of the household who was not subject to a vow of poverty.

Julie Friedman Alcorn, Berman, Maragos, Haber and Fagel, Chicago, Ill., for plaintiff. Robert N. Gamble, M.D. pro se. Rev. Paul D. Lindstrom for Church of Christian Liberty. Assistant United States Attorney Michael S. O'Connell, Ms. Ellen Carpenter, Department of Justice, Washington, D. C. 20530, for intervenor. David J. Zeller, Arnstein and Zeller, Skokie, Ill., for third-party defendant.

Memorandum Opinion and Order

GETZENDANNER, District Judge:

The plaintiff, Indiana National Bank, originally instituted this action in the Circuit Court of Cook County to set aside as fraudulent the conveyance by defendant Robert N. Gamble of his residence at 9 Beechnut Drive, South Barrington, Illinois to the Church of Christian Liberty. The United States, asserting a tax lien on the property, intervened in that action and had the case removed to this Court pursuant to 28 U. S. C. §1441. The matter is now before the court on the motions of the United States and Indiana National Bank for summary judgment. For the reasons stated below, both motions are granted.

Factual Background

For the purposes of the present motion, the facts will be interpreted in the light most favorable to the defendant. However, as the following summary will show, the material facts of this case are not in dispute. Dr. Robert N. Gamble is a cardiac, thoracic, and vascular surgeon, who began religious training with the Church of Christian Liberty in 1972. In 1974, Dr. Gamble became ordained as a minister of the Church and a member of the Order of John Calvin the Reformer. Gamble's relationship with the Church involves several complex financial arrangements. As part of his ordination, Gamble underwent a vow of poverty which required him to transfer all his and his immediate family's assets (except for his personal library) and to assign all his future income to the Church. In exchange, Gamble received assurances of a monthly stipend to cover all the family's bills, such as the mortgage and insurance on the Beechnut property, utility payments and grocery bills. Under this arrangement, Gamble's family remains substantially free to dispose of his income as they see fit.

Gamble's financial system with the Church also involves use of two corporations. In 1976, Gamble entered into an agreement with R. V. Tatooles Associates Service Corporation whereby his salary was assigned directly to the Order on a monthly basis. In September 1983, Gamble formed the John Knox Surgery Corporation, in which Gamble is president, his wife vice-president and secretary, and their daughter treasurer. Gamble is the only physician presently associated with Knox. Under this new arrangement, Gamble receives no salary. The corporation's funds remaining after expenses are paid are sent to the Order as a fee for Gamble's services, and the Order continues to provide the Gambles with a monthly allowance.

On June 15, 1976, Gamble and his wife executed a trust deed to purchase the Beechnut property. The mortgage on this property was, and still is, held by the third-party defendant, Golf Mill State Bank. According to Gamble, the Order provided the funds for the down payment; title was taken in his and his wife's name, however, because Golf Mill refused to finance any purchases under the Church's name. Although Gamble denies that he ever "owned" the Beechnut property, Gamble admitted having signed the trust deed and the loan application to Golf Mill along with accompanying documents relating to the loan. These documents identify Gamble as one of the co-obligors on the mortgage, and as the record owner of the property.

On July 1, 1977, title to the Beechnut property was conveyed by quit-claim deed from the Gambles to the Church. The stated consideration for the conveyance was $10.00. According to Gamble, this consideration was never paid, but the Gambles did receive an oral assurance that the Church would cover all future mortgage payments, along with payments for matters such as food, utilities, and clothing. Gamble further testified that this conveyance was made voluntarily. Gamble did not notify Golf Mill of the quit-claim transfer since they had previously refused to deal with the Church. The Gambles pay no rent for the use of the house. The mortgage coupons and the insurance are still in his and his wife's names. Gamble has assigned to Mrs. Helen Koerner, his mother-in-law, the task of writing the monthly mortgage checks, which are drawn on her personal checking account. Mrs. Koerner is the only member of Gamble's household who is not subject to his vow of poverty.

At the time that Gamble made the quitclaim transfer, he was in default on three promissory notes issued to plaintiff Indiana National Bank in the amounts of $2,692.57 dated December 12, 1973; $7,304.75 dated December 22, 1972, and $2,798.93 dated June 15, 1973. Consequent to the above default, on or around October 16, 1975, the Bank filed suit against Gamble in Minnesota state court to collect on the notes, plus interest, costs and attorney fees. Due to his religious convictions and the ecclesiastical position of the Order regarding legal counsel, Gamble did not contest the suit, and judgment was rendered against him on September 1, 1977 in the amount of $18,037.80. Gamble has testified that the summons and complaint in that case had been served on him in Minnesota, that he was aware of the lawsuit, and that he was aware of the judgment rendered. The Bank later filed suit against Gamble in Cook County to register its Minnesota judgment in Illinois. Gamble was again aware that he had been made a defendant in that case but again did not appear, and the Bank obtained a registration of the judgment on October 20, 1978.

Also at the time of the quit-claim transfer, Gamble's 1975 income taxes were being audited. The I. R. S. notified Gamble that his 1975 return was being examined by letter dated March 25, 1977. On May 5, Gamble was sent a Report of Individual Tax Audit Changes. Although Gamble's testimony is somewhat conflicting on the matter of receiving these documents, Gamble admitted to mailing a response to the District Director in Edina, Minnesota on May 16, 1977, in which he requested an appointment to discuss the audit.

On May 19, 1978, Gamble filed a petition with the Tax Court for a redetermination of the deficiency in his 1975 income taxes. The Tax Court dismissed Gamble's petition for want of prosecution, and found that there was a deficiency in Gamble's 1975 income tax in the amount of $7,840.66. On July 13, 1981, the Secretary of the Treasury assessed $11,129.71 in unpaid taxes and interest against Gamble. Gamble has refused to pay the assessment, and a Notice of Federal Tax Lien was filed with the Cook County Recorder's office on January 20, 1982. The Government now requests this court to set aside the conveyance, to reduce its tax assessment against Gamble to judgment, to determine the validity of its lien, and to order that the Beechnut property be sold by a proper officer of the Court with the proceeds to be distributed to the various parties in order of priority.

Illinois Law of Fraudulent Conveyance

The law underlying this case is wellsettled. Under Ill. Rev. Stat., ch. 59, §4, "[e]very gift, grant, conveyance, assignment or transfer of, or charge upon any estate . . . made with the intent to disturb, delay, hinder or defraud creditors or other persons . . . shall be void as against such creditors, purchasers, and other persons." The Illinois courts have divided transfers voidable under this section into two categories: fraud in law and fraud in fact. Tcherepnin v. Franz, 457 F. Supp. 832, 836 (N. D. Ill. 1978); Harris v. Aimco, Inc., 66 Ill. App. 3d 60, 62, 383 N. E. 2d 631, 633 (5th Dist. 1978); Wilkey v. Wax, 82 Ill. App. 2d 67, 70, 225 N. E. 2d 813, 814 (1st Dist. 1967). To prove fraud in fact, the plaintiff seeking to set aside a transfer must demonstrate an actual intent to hinder creditors. However, a voluntary transfer which is made without consideration or which directly impairs the rights of creditors "will be regarded as fraudulent in law, irrespective of the honesty of the grantor's motives." First Security Bank v. Bawoll, 120 Ill. App. 3d 787, 458 N. E. 2d 193, 198 (2d Dist. 1983). See also Capitol Indemnity Corp. v. J. H. Keller, 717 F. 2d 324, 327 (7th Cir. 1983) (transfer without consideration constructive fraud and void under Illinois law); Tcherepnin, 457 F. Supp. at 836 (fraudulent intent immaterial in fraud in law cases).

To sustain a claim of fraud in law, a creditor must prove three elements: (1) a voluntary gift; (2) an existing or contemplated indebtedness; and (3) failure of the debtor to retain sufficient assets to pay the indebtedness. Tcherepnin v. Franz, 475 F. Supp. 92, 96 (N. D. Ill. 1979) (Tcherepnin II); Mills v. Susanka, 394 Ill. 439, 448, 68 N. E. 2d 904, 909 (1946). Because actual intent to impair creditors is irrelevant, the presumption of fraud in such cases can be rebutted only if the debtor shows that he retained sufficient property to pay his or her obligations, Tcherepnin, 457 F. Supp. at 840, or that adequate consideration was given for the transfer. Harris v. Aimco, Inc., 66 Ill. App. 3d 60, 62, 383 N. E. 2d 631, 633 (5th Dist. 1978). If the presumption of fraud is successfully rebutted, then the creditor must prove actual intent to defraud. Till v. Till, 87 Ill. App. 2d 358, 361, 231 N. E. 2d 641, 643 (1st Dist. 1967).

In the present case, the United States and Indiana National Bank have offered the following to demonstrate that Gamble's quit-claim conveyance of his Beechnut Drive home should be deemed fraudulent. First, Gamble has testified that the transfer was voluntary in all respects. The property was purchased one year before the transfer for $127,000, but was quit-claimed for a mere $10.00, a manifestly inadequate consideration. Under Illinois law, which this court is bound to follow, a transfer for grossly inadequate consideration is deemed to be a "voluntary gift." Till, 87 Ill. App. 2d at 361; 231 N. E. 2d at 643.

Second, at the time of the transfer, Gamble was in default on loans from the Indiana National Bank and knew of legal proceedings being brought against him to reduce that claim to judgment. Gamble was also aware no later than May 16, 1977 that the IRS was auditing him for his 1975 taxes. Although those taxes had not yet been assessed, the law is well settled, for fraudulent conveyance purposes, tax liabilities are due and owing on the date the returns are required to be filed and not the date of assessment. United States v. St. Mary [72-1 USTC ¶9319], 334 F. Supp. 799, 803 (E. D. Pa. 1971); United States v. van der Horst [67-2 USTC ¶9669], 270 F. Supp. 365, 368 (D. Del. 1967). See also Zeddies v. United States [66-1 USTC ¶9273], 357 F. 2d 897, 899 (7th Cir. 1966) (holding that statutory liens under 26 U. S. C. §6322 by contrast arise at time of assessment and that government was therefore relegated to its rights as a creditor to avoid a preassessment conveyance). Therefore, the second element of constructive fraud--an existing or contemplated indebtedness--is also met.

Finally, Gamble has repeatedly testified that he is subject to a vow of property and owns no property of his own. Although Gamble's financial arrangements with the Church might in fact allow him to reach the funds necessary to pay his creditors, the Church's property is presently beyond his creditors' reach. See Cairo Lumber Co. v. Landenberger, 313 Ill. App. 1, 9, 39 N. E. 2d 596, 600 (1942) (property concealed in the names of third parties is not readily available for creditor satisfaction and therefore not to be considered in determining amount of property retained by transferor). The court therefore agrees that Gamble has not retained sufficient assets to pay his indebtedness to them.

In his response, defendant Gamble has not presented any opposing affidavits to refute the above facts but instead has relied on unsupported factual obligations and bare legal conclusions to create a factual dispute. While this would ordinarily be insufficient to defeat a motion for summary judgment, the court notes that both Dr. Gamble and the Church, through its representative Reverend Paul Lindstrom, are appearing pro se, and should be held to a standard of pleading and argument less stringent than that applied to expertly trained members of the legal profession, see Hughes v. Rowe, 449 U. S. 5, 9-10 (1981). The court therefore entertains these arguments in full.

Gamble first contends that the Indiana National Bank fraudulently induced him to sign the promissory notes at issue and that the United States ' tax assessment is invalid in law and was obtained only as a result of his inability to represent himself in those earlier proceedings. As the movants note, the bank's judgment on the promissory notes and the Tax Court's decision with respect to Gamble's 1975 tax liability are res judicata and cannot be relitigated in the present action. That religious convictions may have influenced Dr. Gamble not to contest those suits does not alter this conclusion. Dr. Gamble does not argue that allowing those earlier cases to proceed to judgment violated his first amendment rights, and, even if he did, the record shows that Dr. Gamble's decision was due to the Church's inability at that time to provide him with counsel of choice from within the Order, and his own busy schedule preventing him from representing himself. In this respect, Gamble's decisions not to defend the Bank suit and not to prosecute his Tax Court petition were as much due to personal convenience as to religious scruples. The court therefore finds no grounds for questioning the application of ordinary res judicata principles to the present case.

The court also finds that Gamble's arguments about the merits of the judgments against him does not affect the conclusion that there was an existing or contemplated indebtedness against the debtor. Under Illinois law, a party with a subsisting claim against a debtor at the time of the conveyance is a pre-existing creditor, even though his claim may not have matured or been reduced to judgment until after the conveyance was made. See Tcherepnin, 457 F. Supp. at 839; Menconi v. Davidson, 80 Ill. App. 2d 1, 5, 225 N. E. 2d 139, 142 (1st Dist. 1967). That Gamble believed the Bank's suit to be without merit and believed that he owed no taxes is irrelevant to the existence of those debts. Tcherepnin, 457 F. Supp. at 839.

Defendant Gamble next argues that such property was never in reality owned by him, despite the use of his and his wife's names in the title, since the Church had financed both the downpayment and all subsequent payments. As the government argues, the bona fides of Gamble's financial arrangements with the Church must be seriously questioned, since these arrangements allow Gamble to claim tax exemptions and protection from creditors while enjoying full use of his income and property. Even assuming good faith in Gamble's relations with the Church, however, the facts are uncontested that Gamble took title in his own name because the mortgagee Golf Mill Bank had refused to finance a purchase by the Church. The trust deed and all other legal documents relating to the realty were signed by the Gambles without any suggestion that they might have been acting as agents for the Church.

In essence, Gamble's argument amounts to the contention that the 1977 quit-claim deed was a nullity intended merely to formalize his own understanding of what the relative property interests between himself and the Church had been all along. Gamble's understanding, however, is irrelevant. It has long been held in Illinois that a mortgagor who warrants title "will not be heard to say that at the time of the execution of the mortagage he had no title but that there was an outstanding title in a third person." Kronan Building & Loan Ass'n v. Medeck, 368 Ill. 118, 122, 13 N. E. 2d 66, 68 (1938). Moreover, in his brief Gamble contends that the 1977 quit-claim deed was used to transfer the Beechnut property into the Church's name for the purpose of obtaining a tax exemption. Thus, Gamble himself has admitted that the property was "legally" his at the time of the transfer, his relations with the Church notwithstanding.

Gamble finally argues that the transfer was supported by a valuable consideration--namely the Church's promise of continued support--and therefore cannot be avoided absent a showing of actual intent to defraud. The government has argued that such intent can be inferred from the circumstances of this case. The court does not reach the issue of intent, however, since a transfer of property for future services or support creates a trust for the transferor's benefit and is void against creditors. People's Bank v. Wood, 207 Ill. App. 602 (1917). Moreover, insofar as the Church had promised in 1974 to pay Gamble's mortgage payments and other living expenses, Gamble received absolutely no benefit from the contract that he did not have before. Thus, Gamble's argument that he received a valuble consideration must be rejected. The three elements of constructive fraud having been proven and not rebutted, the court finds that the conveyance may be set aside.

Federal Tax Lien

The conveyance having been ordered set aside, the court now addresses the question of relief. The United States has requested that its tax liens on the property be reduced to judgment and foreclosed and that the property be sold, with the proceeds to be distributed pursuant to the court's determination. The court finds that Gamble's previous default judgment in the Tax Court in Gamble v. Commissioner, No. 5289-78, (Tax Court Jan. 15, 1981), is res judicata in this action and that the government's assessment may therefore be reduced to judgment. See United States v. Bottenfield [71-1 USTC ¶9371], 442 F. 2d 1007, 1008 (3rd Cir. 1971).

The court also concludes that the property should be sold. In United States v. Rodgers [83-1 USTC ¶9374], 103 S. Ct. 2132 (1983), the Supreme Court held that Section 7403 of the Internal Revenue Code, 26 U. S. C. §7403, empowers a federal district court to order the forced sale of a family home in which a delinquent taxpayer had an interest at the time he incurred his indebtedness, even though the taxpayer's spouse has an unencumbered separate "homestead" interest under state law in the same property. The Court noted that to the extent third-party property interests are "taken" in the process, §7403 provides compensation by requiring the court to distribute the proceeds of the sale according to the interests of the respective parties. Id. at 2145. However, the Court also concluded that §7403 does not require a "forced sale under all circumstances," but leaves "some limited room . . . for the exercise of reasoned discretion." Id. at 2149.

In carving out an exception to the government's power of forced sale, the court emphasized that the discretionary power of the district courts to refuse authorization for a judicial sale should be "exercised rigorously and sparingly, keeping in mind the Government's paramount interest in prompt and certain collection of delinquent taxes." Id. at 2152. The Court noted that it could think of "virtually no circumstances" in which a court should refuse to authorize a sale to protect the interests of the taxpayer himself instead of the interests of innocent third parties. Id. at 2151. And the Court noted that even where innocent third party interests are at stake, a "fairly limited set of considerations will almost always be paramount." Id. at 2151. The Court identified these considerations as follows: the extent to which the Government's interest would be prejudiced by a forced sale of the debtor's partial interest only; whether the third party with a nonliable separate interest in the property has a legally recognized expectation that the separate property would not be subject to forced sale by the delinquent taxpayer; the likely prejudice to the third party; and the relative character and value of the non-liable and liable interests held in the property. Id. at 2151-52.

Keeping in mind the Supreme Court's admonition in Rodgers that the above factors not be used as a mechanical checklist to the exclusion of common sense, the court applies these factors to the present case. The property is a residence jointly owned by Dr. and Mrs. Gamble. To sell only Dr. Gamble's interest would significantly prejudice the United States' financial interests in the property since few, if any, purchasers would pay half of the residence's fair market value simply to be a co-owner with Mrs. Gamble. Second, the court finds that Mrs. Gamble, having attempted to convey her interest in the property to the Church, cannot be said to have a solid exception that her interest in the home was beyond foreclosure for another's debts. Although a forced sale would, of course, cause personal dislocation to Mrs. Gamble, the only way to avoid that dislocation would be to allow Dr. Gamble to continue in possession of his home without paying off his creditors first. Such a result would go against the equities in this case, and would wholly undermine the "Government's paramount interest in prompt and certain collection of delinquent taxes." Rodgers, 103 S. Ct. at 2152.

Accordingly, the court holds that the federal tax lien on the Beechnut property be foreclosed and the property sold, with the proceeds to be distributed according to the respective interests of the parties. The parties have not yet briefed the issue, but the court assumes that distribution would follow the priorities of 26 U. S. C. §6323. That statute would give the United States's lien priority over that of the unperfected judgment creditor Indiana National Bank, but would subordinate the government's lien to Golf Mill State Bank, which held a perfected security interest prior to the time the government recorded its tax lien. It also appears that Mrs. Gamble may be entitled to a homestead estate in the Beechnut property under Ill. Rev. Stat., ch. 110, ¶12-901 (1981). If so, Rodgers clearly mandates that the taking of that estate through forced sale be compensated. The court will not enter a final order as to distribution, however, until such time as the parties have had an opportunity to be heard on the issue.

Therefore, the motion for summary judgment is granted. The conveyance is set aside, the government's tax lien is reduced to judgment, and the property is ordered sold to satisfy the claims of Gamble's creditors. The case is set for status on October 26, 1984, to discuss the priority of distribution.

It is so ordered.

 

 

 

United States of America, Plaintiff v. Samuel L. Ambrose, et al., Defendants

U. S. District Court, No. Dist. Ohio, East. Div., Case No. C79-2147Y, 9/21/84

[Code Sec. 6321]

Lien: Fraudulent conveyance.--Conveyances of the taxpayer's property to relatives were set aside since they were made to shield the property from the government's lien for taxes. Title to the property was originally held by the taxpayer's minor son, who supposedly received the funds to purchase the property from an inheritance. Such an inheritance was doubtful and the father remained in control of the property--even later when the property was transferred to his mother without consideration. The taxpayer was a man known for forgery, failing to file returns, efforts to defraud other creditors and a prior conviction for tax cheating. A lien against another piece of property formerly owned by the taxpayer could not be foreclosed because, despite the queer nature of conveyances of the property to relatives, the original conveyance did not appear fraudulent.

John M. Siegel, Assistant United States Attorney, Cleveland, Ohio 44114, Jason M. Green, Department of Justice, Washington, D. C. 20530, for plaintiff. John Kennedy Lynch, 711 Statler Office Tower, Cleveland, Ohio 44115, for defendants.

Memorandum Opinion

Down, District Judge:

This case came before the Court for a bench trial. The Court deferred decision pending filing of the transcript and post-trial requests for findings of facts and conclusions of law by the parties. Briefing was complete on August 22, 1984, and the case is now ready for decision.

At the outset, a brief overview of the case is appropriate. The parties have stipulated that Samuel Ambrose owes the government for back taxes for the years 1970, 1971, and 1972. ¹ The government now seeks to collect those back taxes by foreclosing upon two pieces of property located at 1007 North Ward Avenue and 725 Esme Drive in Girard, Ohio.

During the past fifteen years, these two properties have been held by relatives of Samuel Ambrose and have been the subject of number of conveyances. The government contends that these conveyances were sham transactions conducted by Samuel Ambrose to avoid his tax liabilities, and that they should be set aside, placing title to return the properties to Samuel Ambrose's name. The government would then foreclose on the properties in satisfaction of its outstanding claims against Samuel Ambrose.

Although this case involves a federal tax claim, the issues for decision are ones of state law. Under Ohio Law,

Where a conveyance or obligation is fraudulent as to a creditor, such creditor, when his claim has matured, may, as against any person . . .

(1) have the conveyance set aside . . . to the extent necessary to satisfy his claim; or

(2) disregard the conveyance and attach or levy execution upon the property conveyed.

Ohio Rev. Code §1336.09(a). Under this statute, the government may have the conveyances annulled and levy execution upon the property if the conveyances are fraudulent. The statute goes on to define fraudulent conveyances to include

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

Ohio Rev. Code §1336.07. Under this statute, therefore, the government may succeed in perfecting its liens on the property if the conveyances were made with actual intent to hinder, delay, or defraud the government's collection of its claims.