Fraudulent Conveyances Part1 page8

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Factual Discussion

A. The Ambrose Family. The principal defendant in this case, Samuel L. Ambrose, was born in Youngstown , Ohio , in 1928. Except for military service, and a period from 1955 through 1963 when he lived in Florida , Samuel Ambrose has lived in the Youngstown-Warren area all his life. Samuel Ambrose pled guilty to two counts of income tax evasion on January 14, 1974.

Mary Selak, also a defendant in this lawsuit, is Samuel Ambrose's mother. Martha M. Ambrose is Samuel Ambrose's wife of over 30 years. Her mother, Alma Silvis, died in September 1968. Her father, William Silvis, died in 1954.

Samuel and Martha Ambrose have two children. William Ambrose was born on August 15, 1954. During 1970, he was involved in a serious auto accident, later receiving a payment on his insurance claims. He was married for a brief period of time but was divorced in June 1976. Deborah Caisango is Samuel and Martha Ambrose's daughter. She is married to Robert Caisango, Martha and Samuel Ambrose's son-in-law.

B. Transactions Involving Ward Avenue . During the years relevant to this lawsuit, there were six transactions involving the Ward Avenue property. The Court will summarize these transactions and their surrounding circumstances before turning to the issues of characterization which are the principal focus of dispute between the parties. In labeling the actors in these summaries, the Court will focus upon the "actors" of record. The Court recognizes that the government believes that at least some of the record documents are foregeries or otherwise inaccurate.

1. During 1964, Samuel and Martha Ambrose purchased the Ward Avenue property. At that time the property consisted of four lots with a house built on one of the lots. The Ambroses purchased the property subject to an $18,500.00 mortgage held by Trumbull Savings & Loan Company. The Ward Avenue property served as a personal residence of Samuel and Martha Ambrose, their children William Ambrose and Deborah Caisango and Mrs. Ambrose's mother, Alma Silvis.

2. On January 31, 1966, Samuel and Martha Ambrose conveyed the Ward Avenue property to Alma Silvis by a quit claim deed. There was no consideration given in exchange for this conveyance. The Ambroses continued to live in the house along with Alma Silvis. Samuel Ambrose continued to pay the real estate taxes and the mortgage on the property.

3. On August 29, 1968, one month before her death, Alma Silvis conveyed the Ward Avenue property to Deborah Caisango by a quit claim deed without consideration. At that time, Deborah Caisango was 18 years old and was living in the Samuel Ambrose home on Ward Avenue along with her husband and two year old child.

4. During February 1971, the Ward Avenue property was replatted into three lots. The family home was on one lot and the other two lots were free of structures. During the late fall of 1972, the two unimproved lots were sold to Alfred W. Weavers, and Robert T. Moosally. All of the negotiations surrounding this transaction were conducted by Samuel Ambrose.

5. On December 8, 1972, Deborah Caisango conveyed the remaining Ward Avenue property to William Ambrose without consideration. Following this transaction, Samuel Ambrose continued to pay the real estate taxes and utilities on the property. Further, William Ambrose, the legal title holder for the property, paid rent to Samuel Ambrose while William and Samuel Ambrose both lived in the Ward Avenue house.

6. On February 13, 1979, William Ambrose conveyed the Ward Avenue property to Mary Selak, Samuel Ambrose's mother. There was no consideration for this conveyance and Mary Selak did not know that the conveyance was taking place at that time. This conveyance was undertaken in hopes of insulating the property from the government's claims for Samuel Ambrose's back taxes. Following this transaction, Samuel and Martha Ambrose continued to live in the Ward Avenue house. Mary Selak did not collect any rent or pay any of the expenses on this property.

C. Transactions Involving Esme Drive . On November 15, 1972, William Ambrose purchased the Esme Drive property as a vacant lot for approximately $4000.00. He was a minor at the time and paid for the property in cash.

During 1973, a house was built on the Esme Drive property at a cost of $30,000. William Ambrose took no part in the construction; Samuel Ambrose had all of the contacts with the building people. Samuel Ambrose frequently signed William Ambrose's name to documents involved in the construction and many of the payments made for the construction were made in cash. Deborah Caisango, Robert Caisango, and their children have lived in the Esme Drive property from that time until the present. The Court finds that there was no credible evidence presented at trial regarding any payment of rent by Deborah and Robert Caisango on the Esme Drive property.

On February 10, 1979, William Ambrose conveyed the Esme Drive property to Mary Selak. The conveyance was done by a quit claim deed without payment of any consideration. Prior to the conveyance, Mary Selak had no knowledge that she was going to become the owner of the Esme Drive property. This conveyance was undertaken in hopes of insulating the property from the government's claims for Samuel Ambrose's back taxes.

D. Alma Silvis' Financial Position. The defendants' principal contention in this litigation is that the bulk of these transactions were made possible by funds held by, and later inherited from, Alma Silvis. The defendants contend that prior to her death in 1968, Alma Silvis kept nearly $70,000.00 in cash in a metal strongbox under her bed in the Ward Avenue home. This money was originally used to make loans to Samuel Ambrose in the early 1960's and the 1966 conveyance of the Ward Avenue property to Alma Silvis was made as security for these loans. Later, after Alma Silvis' death, the cash in the cash box was divided among Deborah Caisango and William Ambrose with each grandchild taking $30,000. That cash remained in the cash box until 1973 when William Ambrose paid for the Esme Road construction using this cash. Deborah Caisango's share was allegedly gambled away by her husband.

Analysis of this contention begins with the fact that Alma Silvis inherited a net estate of $4966.00 when her husband, William Silvis, died in September, 1954. Defendants have presented testimony that Alma Silvis also received between $20,000 and $25,000 in cash from real estate sold by William Silivis just before his death, along with $40,000 in insurance proceeds upon William Silvis' death. Later, Alma Silvis bought a home in Florida for $20,000 and received a gift of $45,000 in cash from an aunt, Alma Miller in 1959. ² All of these influxes of income were in cash and were kept in the metal strongbox. None of these transactions is acknowledged in any probate records.

E. Samuel Ambrose's Past Record. All of these transactions must be considered in the context of Samuel Ambrose's past record of business dealings and tax practices. Samuel Ambrose has not filed federal income tax returns since 1972. He has pled guilty, and served a jail term, for conspiring to assist in and advise in the preparation and presentation of false and fraudulent federal income tax returns and the forging of signatures to government checks and tax returns. The government has outstanding liens for Samuel Ambrose's liabilities for back taxes, but has been unable to locate assets upon which to levy.

Samuel Ambrose has participated in a number of actions and schemes designed to frustrate, defeat, and defraud his creditors, including the United States by using various close relatives or their names in business transactions. Notably, Samuel Ambrose frequently conducted business in the name of William Ambrose, frequently signing his name as William Ambrose. Funds held in a Metropolitan Savings & Loan passbook savings account in the name of William Ambrose for the benefit of Samuel Ambrose were withdrawn on or about April 8, 1976, one hour ahead of the Internal Revenue Service's levy on the account. Finally, the transactions involving the William Ambrose Leasing Company were conducted by Samuel Ambrose.

Factual Conclusions

A. Silvis Assets. Simply stated, the Court finds defendants' testimony on this issue incredible. In the Court's view, Alma Silvis did not receive these large cash payments and did not have nearly $70,000 in cash in her personal control at the time of her death. The Court, therefore, rejects defendants' view of the various transactions involving the Ward Avenue and Esme Drive properties based upon the use of this cash. Samuel Ambrose's personal income provided the needed funds for these transactions.

B. Ward Avenue Property. The January 1966 conveyance of the Ward Avenue property by Samuel and Martha Ambrose to Alma Silvis lacks economic substance. The Court does not believe that Alma Silvis made loans to Samuel and Martha Ambrose in the amount of $18,700 as claimed by the defendants because the Court does not believe that Alma Silvis ever had the $18,700 to make the loans. Further, any conveyance of the Ward Avenue property in 1966 would have lacked economic substance to Alma Silvis because of the outstanding bank mortgage on the property.

The August 1968 conveyance from Alma Silvis to Deborah Caisango is also suspect. At the time, Alma Silvis was disabled by a stroke and was unable to sign her name. The signature on the deed, however, does not reflect the signature of an infirm individual. In the absence of a reliable witness to the signing of the deed, the Court believes that this conveyance did not take place.

The September 1968 unprobated will of Alma Silvis is a forgery. The ink used to sign Alma Silvis' name was not produced till substantially after her death. The will, therefore, is a foregery manufactured after Alma Silvis' death.

The 1972 conveyance of the Ward Avenue home from Deborah Caisango to William Ambrose was also a meaningless transaction; Samuel Ambrose acted as the owner of the property both before and after this transaction. There is no credible evidence that proceeds from the sale went to anyone other than Samuel Ambrose. Before the transaction, Samuel Ambrose negotiated the sale of the two extra lots to Weavers and Moosally. After the sale, Samuel Ambrose continued to live in the house and collected rent from the legal title holder, William Ambrose. Finally, the Court notes that this conveyance from a brother to a sister without consideration raises questions on its face regarding the substance of the transaction.

The 1978 conveyance of the Ward Avenue property from William Ambrose to Mary Selak was admittedly undertaken to avoid the claims of Samuel Ambrose's creditors, particularly, the United States Government. There is no evidence in the record that Mary Selak has acted as the equitable owner of the property after the conveyance.

C. Esme Drive Property. William Ambrose, although listed on the deed as the purchaser, did not purchase the Esme Drive property in 1972. Samuel Ambrose paid his own cash for the property and signed William Ambrose's name to the deed.

The 1973 construction of a house on the Esme Drive property was transacted by Samuel Ambrose. He negotiated with and supervised the contractors on the job and paid them from his own funds. Although William Ambrose's name is signed to some of the documents involved with the construction, those signatures are forgeries by Samuel Ambrose. William Ambrose did not have assets sufficient to pay for this construction at that time.

The 1978 conveyance of the Esme Drive property from William Ambrose to Mary Selak was admittedly undertaken for the purpose of insulating the property from Samuel Ambrose's creditors. There is no evidence that Mary Selak has acted as the equitable owner of the Esme Drive property since the conveyance.

Conclusions of Law

Under Ohio Rev. Code ¶1336.07, a fraudulent conveyance is defined as one incurred with actual intent to hinder, delay, or defraud a present or future creditor. The issue for decision in this case, therefore, is whether the government has proven that the conveyances of the Ward Avenue and Esme Drive property are fraudulent within this definition.

Samuel Ambrose has been the equitable owner of the Esme Drive property from the time of its purchase to the present. The other legal title holders to this parcel of property have been mere nominees of Samuel Ambrose. Samuel Ambrose changed the names on the deeds to the Esme Drive property with actual intent to hinder, delay, obstruct and defraud the claims of the United States government.

With respect to Ward Avenue , the Court concludes that the government has failed to meet its burden of proving that the 1966 conveyance of the Ward Avenue property from Samuel and Martha Ambrose to Alma Silvis was fraudulent. Although the transaction lacked economic substance and cannot be explained in any rational manner, the government has not demonstrated fraud. The Court, therefore, will not grant relief to the government under Ohio Rev. Code §1336.07 with regard to the Ward Avenue property.

Based on this analysis, the Court sets aside all of the conveyances involving the Esme Drive property pursuant to Ohio Rev. Code §1336.09(a). The United States judgment lien claims are foreclosed against the Esme Drive property. The Esme Drive property is ordered to be sold pursuant to the custom of this Court. The proceeds are to be applied to the judgment lien claims of the United States .

¹ The stipulation, filed February 1, 1983, admits the following judgment is outstanding against Samuel L. and Martha M. Ambrose:

I. Against Samuel L. and Martha Ambrose for income tax for the year 1970 in the amount of $14,139.71;

II. Against Samuel L. Ambrose for income tax for the tax year 1971 in the amount of $30,252.74;

III. Against Samuel L. Ambrose for income tax for the tax year 1972 in the amount of $63,181.18;

IV. Against Samuel L. Ambrose as transferree of Better Records, Inc.,

a. For the year ended 1971 in the amount of $60,208.74;

b. For the year ended 1972 in the amount of $93,977.58.

The Ambroses also stipulated liability for statutory interest on these tax assessments.

² Defendants contend that Alma Silvis kept $30,000 of this gift and gave $15,000 to Martha Ambrose.

 

 

 

George L. Turner and John R. Turner, as Co-Trustees of the JAR/T Trust, Plaintiffs v. Glenn W. Turner, Alice Ann Turner, and the United States of America, Defendants United States of America, Plaintiff v. Glenn W. Turner, et al., Defendants

U. S. District Court, Mid. Dist. Fla., Orlando Div., Case Nos. 79-186-Orl-Civ-Y, 79-425-Orl-Civ-Y, 9/15/83

[Code Sec. 6323]

Lien for taxes: Priority over recorded mortgage: Validity of mortgage.--A tax lien was superior to a recorded "trust mortgage" where the mortgage was void because it was made with the specific and actual intent on the part of the taxpayer to delay, hinder, or defraud his creditors, including the United States.

Mark O. Cooper, 125 South Court Avenue, Orlando , Florida 32801 , for George L. Turner and John R. Turner, Trustee. Paul S. Richter, Richter, Alexander & Widder, 1990 M. Street, Washington, D. C. 20036, Roger V. Varth, Barrett, Hanna, Daly & Gaspar, 2555 M. Street, N. W., Washington, D. C. 20037, for Glenn W. Turner and Alice A. Flynn, Lawrence R. Steiner, 701 East Semoran Blvd., Altamonte Springs, Florida 32701, for Koscot Interplanetaria de Mexico, S. A. Kendell W. Wherry, Assistant United States Attorney, Orlando, Florida 32802, Richard F. Mitchell, Department of Justice, Washington, D. C. 20530, for plaintiff.

Findings of Fact and Conclusions of Law

YOUNG, District Judge:

These consolidated cases came before this Court for bench trial on two issues: (1) Whether the tax lien of the United States of America and the judgment lien of Genetic Laboratories, Inc. are superior to the "JAR/T Trust mortgage" on the Turner Castle Property and (2) Whether the assignment of that mortgage from Koscot Interplanetaria de Mexico, S. A. to the JAR/T Trust was valid? This Court makes findings of fact and conclusions of law, as follows:

Findings of Fact

1. At all relevant times prior to 1979, the defendants Glenn W. Turner (Glenn) and Alice Ann Turner were husband and wife. In 1979 they were divorced. Alice has remarried and her name is now Alice A. Flynn.

2. Glenn formed Koscot Interplanetary, Inc., a Florida corporation, in 1967, and was the controlling shareholder and chief operating officer. Koscot operated an aggressive sales program that produced substantial sums of cash.

3. Effective August 1, 1971, Glenn effected a major corporate reorganization, whereby Glenn W. Turner Enterprises, Inc.--which Glenn owned--became a holding company for a number of other firms, including Koscot Interplanetary and Dare to Be Great, Inc. Turner Enterprises also owned a number of other diverse corporations set up by Glenn to market many different products and programs, most of which were unsuccessful. These Turner Enterprises corporations all revolved around Glenn Turner and his promotional abilities. Without his presence, there would have been no basis for their activities or existence.

4. Dare To Be Great, Inc., operated a sales program that generated substantial amounts of cash for Turner Enterprises. Pursuant to civil litigation brought by the United States Securities and Exchange Commission, the United States District Court in Oregon enjoined the Dare To Be Great program in August, 1972. That Court order produced a major financial contraction for Turner Enterprises, so that for the period of time up to July 3, 1973, Glenn Turner and Turner Enterprises faced a financial crisis.

5. During late 1972 and 1973, Glenn Turner, Turner Enterprises, and its subsidiaries faced a great many civil suits, brought by state attorneys general and by private litigants. The private claims were gathered in a multi-district class action in the Western District of Pennsylvania, In Re Glenn W. Turner Enterprises; that class action, and the claims made therein, threatened the very corporate existence of Turner Enterprises. The financial and legal problems surrounding Turner Enterprises at this time made virtual chaos of its activities.

6. During this period of time, Glenn and other senior officials at Turner Enterprises were deeply concerned about the legal consequences of their activities, and were fearful of an involuntay bankruptcy petition being filed by creditors.

7. On July 3, 1973, Koscot Interplanetary filed a voluntary petition for a Chapter Eleven arrangement in the Bankruptcy Court for the Middle District of Florida.

8. In 1972 Glenn Turner created Worldwide Consultants, Inc., which was capitalized for a $500 unpaid subscription receivable. Worldwide was established in order to serve as a vehicle whereby Glenn could get more funds out of Turner Enterprises for his own benefit. Glenn caused the stock in Worldwide to be issued to his wife, Alice, who was unfamiliar with business affairs and would do as her husband told her. Alice was designated as the initial president of Worldwide, although she never functioned Worldwide stock was transferred, at Glenn's of the affairs of Worldwide. Later, the Worldiwde stock was transferred, at Glenn's direction, to his brother George L. Turner, but there was no arm's length sale of stock between Alice Turner and George Turner. Although a contract of sale was executed, nothing was ever paid by George Turner for the stock.

9. Worldwide Consultants engaged in various activities for the benefit of Glenn Turner. It contracted to provide Glenn Turner's services to Turner Enterprises for payment by Turner Enterprises of $60,000 per week, despite Glenn's personal ownership of Turner Enterprises. Even though Glenn Turner purported to resign as an officer and director of Turner Enterprises to become an employee of Worldwide, he continued to direct the affairs of Turner Enterprises thereafter.

10. Later, in 1973 and 1974, Glenn Turner was a defendant in a lengthy federal criminal trial in Jacksonville , Florida , and incurred major expenses. Worldwide was used as a conduit to channel money into this country from foreign firms owned by or affiliated with Glenn, so that these legal expenses might be paid. In addition, substantial real estate investments of Worldwide were transferred to Glenn's counsel in satisfaction of Glenn's legal expenses.

11. The relationship between Glenn and Worldwide Consultants was such that Glenn served as the guilding force of Worldwide Consultants through his brother George, who succeeded Alice as president.

12. In late 1970 koscot acquired land on Bear Gully Road in Seminole County , Florida , on which it proceeded to build a massive marble Castle to serve as a personal residence for Glenn Turner and his family. In 1972 Glenn and his senior management personnel at Turner Enterprises were concerned that creditors might encumber the Castle property by way of enforced collection procedures. As a result, in August, 1972, Koscot transferred title of the Castle property to Glenn and Alice Turner, as tenants by the entireties, in a transaction whereby Glenn and Alice assumed the prior land mortgage on the Castle, and gave Koscot Interplanetary a second mortgage for $379,600. Glenn and Alice Turner thereby were able to protect the Castle property from their creditors by virtue of the homestead exemption under Florida law.

13. In early 1973 Glenn Turner became fearful that a federal tax lien might arise to encumber his assets, which lien would have priority over the Florida homestead exemption. In an effort further to protect the Castle from creditors, including the Internal Revenue Service, Glenn with his wife gave a mortgage on the Turner Castle to Worldwide Consultants, Inc., in the amount of $1,185,000. That mortgage was recorded in the land records of Seminole County on April 18, 1973.

14. Glenn has testified that the $1,185,000 mortgage was an effort by himself and by senior Koscot management to change, or adjust upward, the sales price, in order to lend credibility to the sale in the eyes of the Internal Revenue Service. This Court rejects such an explanation. Title to the property had passed during the preceding year 1972. An attempt to rearrange a transaction in order to satisfy the anticipated questions of the Internal Revenue Service is not a legitimate business purpose, and reflects a complete absence of any arm's length relationships among the parties. There was therefore a complete absence of consideration flowing from Worldwide to Glenn and Alice in exchange for this $1,185,000 mortgage.

15. At the time of the mortgage Glenn and Alice Turner were indebted to the United States for unpaid income taxes for more than $300,000, together with whatever amounts are determined to be due for years 1969, 1970 and 1971.

16. In 1972 Worldwide allegedly borrowed $900,000 from Koscot Interplanetaria de Mexico, S. A. and gave back three promissory notes dated July 7, 1972, July 12, 1972 and October 20, 1972 in the amounts of $500,000, $200,000 and $200,000 respectively. Koscot de Mexico had formerly been a Mexican subsidiary of Turner Enterprises, although it had allegedly been sold earlier in 1973 to an offshore firm, Ariaramnes, headed by Chris H. Johnson, a Turner associate. The Glenn W. Turner Enterprises consolidated federal income tax return for the fiscal year ending July 31, 1972 shows that Koscot de Mexico had assets of $1,328,359 and liabilities of $3,014,922.

17. On July 2, 1973, the eve of Koscot's Chapter Eleven petition, there was recorded in the Seminole County land records an assignment of this mortgage on the Turner Castle , from the mortgagee Worldwide to Koscot de Mexico. George Turner testified that the consideration for that transfer was the cancellation of the $900,000 indebtness of Worldwide to Koscot de Mexico, which had been incurred the previous year. Even assuming, but without deciding, that the "loan" was a bona fide transaction, this Court finds that Koscot de Mexico was not an innocent purchaser of the mortgage assignment because of the close relationship between Worldwide, which George Turner claims he bought from Alice Turner in August of 1972 and Koscot de Mexico, controlled through Ariaramnes by Chris Johnson, Glenn Turner's "right hand man".

18. In 1975 Glenn Turner sent Chris Johnson, his trusted aide and right-hand man, to the Cayman Islands , in order to establish a Caymanian trust for the benefit of Glenn's children. Johnson attempted to establish the "JAR/T Trust," but his efforts failed, and no trust was established.

19. Thereafter, in July of 1975 Johnson traveled to Mexico City , and contacted officials of Koscot de Mexico. At that time Leonel Roehlaender was the president and was in charge of running Koscot of Mexico; Santiago Garza was second in charge of Koscot of Mexico and Manuel Galicia, a Mexican attorney, was then representing Koscot of Mexico in various legal matters in Mexico . Upon the oral request of Garza, attorney Galicia executed an assignment of the subject $1,185,000 mortgage to the JAR/T Trust. Garza indicated to Galicia that Roehlaender had authorized the assignment. Galicia never spoke to Roehlaender directly. The assignment was recorded in the Seminole County land records by Johnson on August 4, 1975.

20. This assignment was a voluntary transfer. No consideration was paid or given to Koscot Interplanetaria de Mexico, S. A., by Johnson, or by anyone else, in exchange for this assignment to the JAR/T Trust. There was no evidence that Koscot of Mexico's financial situation had improved from 1972, when the Glenn W. Turner Enterprises consolidated tax return showed that Koscot of Mexico's debts were approximately three times its total assets.

21. By virtue of the willingness of the officials for Koscot de Mexico to execute an assignment for the apparent benefit of Glenn and Alice 's children, Glenn Turner demonstrated his ability and capacity to control and direct that form and its officials.

22. Manuel Galicia was not authorized by Koscot of Mexico, under Mexican or under Florida law, to execute the mortgage assignment.

23. At the time of the mortgage assignment, there was no JAR/T Trust to receive the assignment as grantee and therefore, there could be no express trust. The Co-Trustees argue that a resulting trust arose when the express trust failed for lack of a grantee/trustee. The legal doctrine of resulting trust is an equitable remedy and in this case equity does not justify a finding that a resulting trust was created.

24. For the reasons stated in findings of fact numbers 20 through 23, namely, lack of consideration, absence of proper authority to execute the assignment document, Glenn Turner's control, through Chris Johnson, of the actions of Koscot of Mexico, and the inexistence, in July 1975, of any entity known as the JAR/T Trust, this Court finds that the assignment of the subject mortgage from Koscot of Mexico to the JAR/T Trust was void and of no effect.

25. On June 4, 1973, an assessment for unpaid federal income taxes, including penalties and interest, for the years 1969, 1970 and 1971, was made against Glenn W. and Alice Ann Turner, in the total amount of $1,028,569.22. On June 5, 1973, after giving notice of the assessment to the Turners and making demand for payment, the Internal Revenue Service filed a notice of federal tax lien reflecting this assessment in the office of the Clerk of the Circuit Court for Seminole County, at Sanford, Florida.

26. On July 12, 1973, George and John Turner--Glenn Turner's brothers--established a trust for the benefit of Glenn and Alice's children; it was then known as "The Trust" or "the Turner Family Trust." Max Morris served as the initial trustee. The names of the children were Terry, Richard, Johnny and Alice.

27. In 1973 Genetics Laboratories, Inc. a Minnesota-based manufacturer of medical products, needed funds to expand its marketing program. Glenn Turner was looking for a new form with which to identify himself. Genetics president A. A. Beisang met Glenn Turner through the efforts of Max Morris and A. M. Hochstadt, who were then serving as consultants to Glenn. Negotiations followed between Genetics and Glenn, which resulted in a series of agreements dated July 18, 1973, between and among Genetics, the Turner Family Trust (Max Morris, trustee), and Medical Marketing, Inc. Medical Marketing was established to market Genetics products; its stock was owned by the Trust. The Trust also executed an option agreement, whereby it could subsequently acquire up to ninety percent of the stock of Genetics. In all of this, Genetics and Beisang dealt with Glenn. Any decisions concerning Medical Marketing were subject to the personal approval of Glenn. Therefore, at the time of this Trust's creation in July of 1973, Glenn was intimately involved with its activities and affairs.

28. Genetic Laboratories filed a lawsuit in February of 1975 in the United States District Court in Minnesota naming Glenn Turner, Glenn W. Turner Enterprises and the Turner Family Trust as three of the defendants. In the suit, Genetic Laboratories sought $875,000 in net profits which it claimed it would have realized under the July 18, 1973 agreements. On May 17, 1977 Genetic Laboratories recovered a default judgment in the amount of $871,152.00 plus interest, costs, and attorneys's fees against Glenn W. Turner Enterprises, Glenn Turner and the Turner Family Trust, jointly and severally. On August 15, 1980 such judgment was set aside as to the Turner Family Trust only.

29. After the failure of the efforts to establish a "JAR/T Trust" in the Cayman Islands, the name of the 1973 Turner Family Trust was changed in 1976 to "JAR/T Trust." This name change was needed to provide an assignee, and hence apparent substance, to the 1975 assignment. Thereafter George and John Turner, in their capacities as successor trustees of this trust, now the JAR/T Trust, commenced litigation seeking a judicial foreclosure of the $1,185,000 mortgage.

30. These findings are based upon clear and convincing evidence.

Conclusions of Law

1. This Court has jurisdiction over the parties hereto and over the subject matter of this action. 28 U. S. C. §1340, 1345, 1444 and 2410.

2. The law of the State of Florida governs this case on the issues of alter ego and fraudulent conveyance. Commissioner v. Stern [58-2 USTC ¶9594], 357 U. S. 39, 45 (1958).

3. Under the law of Florida, where a corporation is used as the mere instrumentality or device of the debtor, and where that instrument corporation is used to accomplish some fraudulent or tortious purpose, such as to mislead creditors, then that corporation will be found to be the alter ego or nominee of the debtor, the corporate veil will be pierced, and corporate assets made available for the creditors of the subject debtor. Bendix Home Systems, Inc. v. Hurston Enterprises, Inc., 566 F. 2d 1039 (5th Cir. 1978); House of Koscot Development Corp. v. American Line Cosmetics, 468 F. 2d 64 (5th Cir. 1972); Matter of Kassuba, 10 B. R. 309, 312 (S. D. Fla. 1981).

4. Worldwide Consultants, Inc. was operated and manipulated by, on behalf of, and for the personal benefit of Glenn Turner, in order that assets might be removed from Turner Enterprises. Creditors of both Glenn and Turner Enterprises were thereby defeated. Worldwide Consultants was the mere instrumentality of Glenn Turner, and constituted his nominee and alter ego, so that its assets were and are available for collection of the liabilities of Glenn Turner.

5. A transfer of property undertaken with the intent to delay, hinder or defraud creditors is voidable at the instance of the creditors. A mortgage may be such a fraudulent transfer of property. Section 726.01 of Florida Statutes Annotated; Sebring Co. v. O'Rourke, 101 Fla. 885, 134 So. 556 (1931).

6. The mortgage by Glenn Turner and his wife Alice to Worldwide Consultants, Inc. was made with the specific and actual intent on Glenn Turner's part to delay, hinder or defraud his then creditors, including the United States and subsequent creditors, including Genetic Laboratories; Alice Turner did simply whatever her husband told her to do. Accordingly the mortgage transfer from Glenn and Alice to Worldwide is void as to the United States and as to Genetic Laboratories, creditors of Glenn and Alice Turner.

7. As previously noted, this Court has found proof of actual intent to defraud but even in the absence of such proof a fraudulent conveyance may be established from surrounding circumstances, based upon the "badges of fraud." United States v. Fernon [81-1 USTC ¶9287], 640 F. 2d 609 (5th Cir. 1981); 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). In the instant case, there has been proved (1) a close personal affiliation between Glenn Turner and the mortgagee Worldwide Consultants, Inc.; (2) an absence of consideration for the mortgage; (3) the substantial indebtedness of Glenn and Alice Turner at the time of the mortgage; and (4) the vast number of civil lawsuits pending against Turner and his corporation in late 1972 and early 1973. Accordingly, the United States and Genetic Laboratories have proved, through proof of the "badges of fraud," that this mortgage is a transfer in fraud of creditors, and hence is void as to the United States and as to Genetic Laboratories.

8. Only an innocent purchaser for value can take property free and clear of the prior fraud on creditors where the transferee of a fraudulent conveyance (or the transferor's alter ego) thereafter transfers the property to a third party. If the subsequent transferee is not an innocent purchaser for value, then he takes subject to the original taint, and the complaining creditor may reach the property in his hands. United States v. Ressler, supra, 433 F. Supp. 459, 465; United States v. Fernon, supra, 640 F. 2d 609, 614 n. 11; cf. United States v. Fidelity & Deposit Co. [54-2 USTC ¶9486], 214 F. 2d 565 (5th Cir. 1954); and 37 Am. Jur. 2d, Fraudulent Conveyances, §§ 152-154.

9. In traveling to the Cayman Islands in 1975 to attempt to establish another trust, and in traveling later to Mexico City to secure the assignment to the JAR/T Trust, Chris H. Johnson was serving as the agent of Glenn W. Turner.

10. Neither Koscot Interplanetaria de Mexico, S. A., nor the trustees of the JAR/T Trust are innocent purchasers for value of the subject mortgage, and accordingly any interests they may assert in the Turner Castle property are void and unenforceable as to the United States and as to Genetic Laboratories, because those interests are subject to the initial taint of the transfer to Worldwide Consultants, Inc. Coconut Grove Exchange Bank v. Fleming Novelty Works, 144 So. 337 (Fla. 1932); Beasley v. Coggins, 37 So. 213 (Fla. 1904); Post v. Bird, 9 So. 888 (Fla. 1891).

11. A lien for unpaid federal income taxes arose against all property and rights to property of Glenn W. Turner and Alice A. Turner as of June 5, 1973, the date of the demand upon them for payment of the tax assessment. Sections 6321 and 6322 of the Internal Revenue Code of 1954. The amount of the underlying liability is awaiting determination in United States Tax Court. That tax lien attached to the Turner Castle property as of June 5, 1973.

12. Genetic Laboratories, Inc. is a judgment creditor holding a judgment from the United States District Court of Minnesota, dated May 17, 1977 against Glenn W. Turner Enterprises, Inc. and Glenn W. Turner individually and jointly. Such judgment was registered in the United States District Court for the Middle District of Florida, Orlando Division, Case No. 77-472 1/2-Orl-Civ-R on November 11, 1977 and was recorded on December 12, 1977 in the Public Records of Seminole County, Florida. Writs of execution as to Glenn Turner and Glenn W. Turner Enterprises were issued and delivered to the Marshal on November 9, 1979. Such writs were executed on January 4, 1980 and docketed in Case Number 77-472 1/2-Orl-Civ-R as returned unsatisfied as to money satisfaction on January 16, 1980.

13. Case No. 79-186-Orl-Civ-Y is a suit brought by the Co-Trustees of the JAR/T Trust in which they claim to be the owners of the subject mortgage and seek to foreclose on that mortgage. In Case 79-186, Genetic Laboratories intervened and filed a counterclaim seeking to have a declaratory judgment that its judgment of record is superior to the claim of the JAR/T Trust on the subject mortgage. Case 79-425-Orl-Civ-Y was brought by the United States seeking to foreclose its tax liens and to have the original transfer of the mortgage to Worldwide and the two subsequent assignments set aside as fraudulent conveyances.

14. As to Case 79-186 (the foreclosure action brought by the Co-Trustees), this Court's determination that the assignment of the subject mortgage from Koscot of Mexico to the JAR/T Trust was void and of no effect precludes the Co-Trustees from any further right to foreclose a mortgage which is not validly held by the JAR/T Trust. Therefore, the Co-Trustees complaint in Case 79-186 should be dismissed with prejudice.

15. This Court has determined that the original transfer of the mortgage from Glenn and Alice to Worldwide and subsequent assignment of the mortgage to Koscot of Mexico are invalid as to the United States and Genetic Laboratories. This Court has also determined that the subsequent mortgage assignment from Koscot of Mexico to the JAR/T Trust was void and of no effect. Accordingly, this Court will enter a declaratory judgment that the United States' federal tax liens for 1969, 1970 and 1971 and Genetic Laboratories' judgment of record are superior to any claim of Koscot of Mexico or the Co-Trustees on the subject mortgage.

16. The United States also seeks to have its federal tax liens foreclosed. This issue cannot be decided by this Court unless and until the amount of the United States' federal tax liens for 1969, 1970 and 1971 is decided by the Tax Court.

Judgment

In accordance with the Findings of Fact and Conclusions of Law filed simultaneously herewith, it is.

ORDERED that the Co-Trustees' complaint in Case No. 79-186 be and is hereby dismissed with prejudice and the relief sought by the plaintiffs in that case be and is hereby denied; and it is further

ORDERED that in Case No. 79-425 the United States' federal tax liens for 1969, 1970 and 1971 against Glenn W. Turner and Alice Ann Turner Flynn on the tract of real property located in Seminole County, Florida which Glenn W. Turner and Alice Ann Turner Flynn own as tenants in common, which is further described as follows:

The W 1/2 of the NE 1/4 of the NW 1/4 (less the S. 22 feet) and the SW 1/4 of the NW 1/4 (less the S. 30 feet) and the E 1/2 of the NW 1/4 of the NW 1/4, Section 36, Township 21 South, Range 30 East.

be and are hereby declared superior to the mortgage lien encumbering the above-described real property, which mortgage was dated March 1, 1973 and recorded on April 18, 1973 in Official Records Book 976, Pages 1030 through 1033 of the Public Records of Seminole County, Florida, and superior to any claim of Koscot Interplanetaria de Mexico, S. A. or the Co-Trustees of the JAR/T Trust arising from said mortgage; and it is further

ORDERED that as to the counterclaim of Genetic Laboratories, Inc. in Case No. 79-186, the judgment of record of Genetic Laboratories, Inc. which was entered on May 17, 1977, against Glenn W. Turner Enterprises, Inc. and Glenn W. Turner individually and jointly and which was registered in the United States District Court for the Middle District of Florida and recorded on December 12, 1977 be and is hereby declared superior to any claim arising from the above-described mortgage.

 

 

 

United States of America, Plaintiff v. Jerome E. Morgan and Sue Morgan; Ross and Georgina Brown; State of Colorado, Department of Revenue; Sears Roebuck and Company; and Gudrun E. Gaskill, Defendants

U. S. District Court, Dist. Colo., Civil Action 80-A-828, 11/1/82

[Code Secs. 6323 and 7403]

Lien for taxes: Conveyance by taxpayer: Fraudulent: Foreclosure.--A husband's conveyance to his wife of his interest in the family home was set aside under Colorado's fraudulent conveyance statute, and the federal tax liens upon the property were foreclosed. The wife had paid her husband nothing in consideration of the transfer, and the husband became insolvent immediately after the transfer. A finding was made that the couple intended to hinder and delay their creditors generally, and the IRS in particular by the conveyance. Also, the wife knew her husband was unemployed and that he was transferring to her the only asset with which he could hope to satisfy the just demands of his creditors. In addition, the tax lien upon the husband's one-half interest in the family home, held in joint tenancy with his wife, was foreclosed, because under Colorado law, a homestead interest is referred to as an exemption from civil obligations, but does not create a present interest in land.

Nancy E. Rice, Jeffrey King, Assistant United States Attorneys, Denver, Colo. 80294, for plaintiff. Robert Mendel, 90 Madison, Denver, Colo. 80206, for J. E. and S. Morgan, James P. Lindsay, Mary M. Schwertz, Holland & Hart, 2900 Anaconda Tower, Denver, Colo. 80201, for R. and G. Brown. Attorney General, Billy Shuman, Spec. Assistant Attorney General, State of Colo. 1525 Sherman St., Denver, Colo. 80203, for State of Colorado, Gudrun E. Gaskill, 548 Pine Song Trail, Golden, Colo. 80401, pre se, John F. Shaforth, Phyllis K. Hirschfeld, Shaforth & Toll, 620 Boston Bldg., Denver, Colo. 80202, for Gudrun Gaskill.

Memorandum Opinion and Order

ARRAJ, District Judge:

This action was brought by the United States to reduce to judgment tax assessments against Jerome Morgan, to set aside as fraudulent a conveyance of real property by Jerome Morgan to Sue Morgan, and to foreclose federal tax liens upon the property. I have granted the government's motion for summary judgment against Jerome Morgan on the question of his liability for income taxes assessed for calendar years 1974, 1975, and 1976. A trial to the court was held October 4, 1982 on the issue of whether Jerome's conveyance to his wife of his interest in the family home should be set aside under Colorado's fraudulent conveyance statute. The following shall constitute my findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52(a). Questions concerning the priorities of liens on the property are reserved for future decision.

The Challenged Conveyance

Jerome and Sue Morgan purchased a house and acreage at 528 Pine Song Trail in Golden, Colorado, in 1973, taking the property in joint tenancy. The following year they bought additional lots adjoining the original acreage, taking these too in joint tenancy. They made the property their home and reared two children there. From the time of their marriage in 1959 until October of 1976, Jerome's employment income was the primary means of support for the family. He became unemployed in October of 1976 and has not worked since.

Jerome incurred substantial income tax liabilities for calendar years 1974, 1975, and 1976 which remain unpaid. He did not file his 1974 and 1975 returns until June of 1977. He signed these on June 14, 1977, the date of the challenged conveyance. He timely filed his 1976 return, but failed to remit payment for the liability reported. Jerome and Sue had filed joint tax returns for years prior to 1974; however, Jerome filed the 1974, 1975, and 1976 returns separately. The Morgans testified at trial that she did not sign the later returns because she did not want to be held responsible for the reported tax liabilities.

In May of 1977, the Internal Revenue Service made a formal assessment and demand for payment of the 1976 taxes. In August of 1977, the I. R. S. made similar assessments and demands for the 1974 and 1975 taxes. By force of 26 U. S. C. §6321, these assessments created liens against all of Jerome's property. The tax liens of the United States are superior to the interests of all other claimants, except those expressly given priority. 26 U. S. C. §6323.

On June 14, 1977, roughly one month after the assessment for 1976 taxes and one month before the assessments for 1974 and 1975 taxes, Jerome signed a quitclaim deed conveying his one-half interest in the property to Sue. They admit that she paid him nothing in consideration of the transfer, and that he was insolvent immediately after the transfer.

Jerome met with a revenue officer to discuss his tax liability on December 2, 1977. At the agent's request, he completed a financial statement on which he listed the house as one of his assets. When the agent learned of the conveyance to Sue, he asked why it had been made. Jerome responded that the purpose of the transfer was to prevent attachment by creditors. At some point in the meeting, the possibility that the I. R. S. would foreclose was discussed. The agent requested that Jerome have the property placed back into joint tenancy and provide the I. R. S. with documentary proof of the reconveyance. Jerome agreed in writing to do this. The promise was never kept.

Despite the conveyance of Jerome's interest to Sue, they both continued to represent that Jerome was a part owner. Jerome listed the house as an asset on the personal financial statement he prepared at the revenue agent's request. On or before January 17, 1978, Jerome responded to interrogatories posed by a judgment creditor in a state court action by twice stating that he owned the house with his wife. On two occasions after the conveyance, Jerome and Sue redeemed the property from foreclosure sales, claiming to be its owners.

At the time of Jerome's June 14, 1977 conveyance, he faced massive debts. Collection activities by his creditors had become intense. Foster Lumber Company had caused the house to be sold at foreclosure, and the Morgans narrowly averted the issuance of a public trustee's deed by redeeming the property on June 10, 1977. On October 25, 1977, Ross and Georgina Brown, as holders of the first deed of trust, filed a Notice of Election and Demand for Sale. (This was later withdrawn.) Samuel Frisch commenced foreclosure of a third deed of trust on April 4, 1978. Again the Morgans redeemed the property. In addition, at least six other creditors obtained money judgments against Jerome between July of 1977 and March of 1978, and the suit of yet another creditor was settled out of court. In summary, the circumstances of Jerome's financial position in the summer of 1977 gave him ample reason to anticipate that the forced sale of his interest in the house was imminent.

When a taxpayer disposes of his property prior to the time a federal tax lien arises, the United States may sue to have the conveyance set aside as fraudulent under the laws of the state where the property is located. Commissioner v. Stern [58-2 USTC ¶9594], 357 U. S. 39, 78 S. Ct. 1047, 2 L. Ed. 2d 1126 (1958). Colorado's fraudulent conveyance statute provides that any conveyance "made with the intent to hinder, delay, or defraud creditors" is void. Colo. Rev. Stat. §38-10-117 (1973).

A conveyance made with the requisite intent is void as to both present and future creditors. Fish v. East, 114 F. 2d 177, 183 (10th Cir. 1940); Gregory v. Filbeck, 12 Colo. 379, 21 P. 489, 490 (1889); House v. Johnson, 19 Colo. App. 524, 76 P. 743, 743 (1904). That the transferor did not intend to defraud his creditors will not defeat a suit to void a transfer as fraudulent. If the transferor's intent was merely to hinder or to delay the payment of his creditors, the transfer will be voided. Fish v. East, supra, at 182; Italian-American Bank of Denver v. Lepore, 79 Colo. 466, 246 P. 792, 793 (1926); Mohler v. Buena Vista Bank and Trust Co., 588 P. 2d 894, 895-96 (Colo. App. 1978). The requisite intent may be shown, of course, by circumstantial evidence. Fish v. East, supra, at 183.

When the transfer in question is between unrelated parties, the courts require more than a showing of fraudulent intent on the part of the transferor. Want of consideration or knowledge of fraud on the part of the transferee must also be shown. Wright v. Nelson, 125 Colo. 217, 242 P. 2d 243, 246-47 (1952). However, "where a debtor conveys lands to his wife when he is insolvent, or by the transfer is made insolvent, the husband and wife have the burden to establish by clear and satisfactory proof that the conveyance was for a valuable consideration, and without intent to hinder, delay, or defraud creditors of the husband." Armstrong v. Fishbach, 95 Colo. 64, 67, 32 P. 2d 828, 829 (1934). Accord Gutheil v. Polichio, 103 Colo. 426, 431-32, 86 P. 2d 972, 974 (1939); Thuringer v. Trafton, 58 Colo. 250, 144 P. 866, 868 (1914).

The Morgans have failed to meet this burden of proof. Indeed, if the burden of proof were on the government, I would still find that the Morgans intended to hinder and delay their creditors generally, and the I. R. S. in particular, by the conveyance. For his own part, Jerome admitted as much to the I. R. S. revenue agent, and the facts could hardly support a contrary conclusion.

Defendants assert the general principle that a transfer cannot be set aside as a fraudulent conveyance unless the transferee knew of, or participated in, the transferor's intent. See Fish v. East, 114 F. 2d 117, 183 (10th Cir. 1940); Roberts v. Dietz, 86 Colo. 595, 284 P. 337, 338 (1930); Helm v. Brewster, 42 Colo. 25, 93 P. 1101, 1104 (1908). They contend that Sue had no knowledge or intent. Without conceding that the asserted principle applies to transfers between husband and wife under these circumstances, I find that Sue also intended to hinder or delay creditors by the conveyance.

Sue Morgan testified that she knew Jerome was indebted to several creditors, including the IRS; that she was acutely aware of the possibility of foreclosure by Jerome's creditors; and that this caused her great anxiety. It seems highly unlikely that she did not discuss these matters with her husband and gain privy to his plans for dealing with them. She knew that she would be personally liable for the taxes on Jerome's income for the years 1974 to 1976 unless she withheld her signature from the returns. She knew that Jerome was unemployed and that he was transferring to her the only asset with which he could hope to satisfy the just demands of his creditors. Sue testified that saving the house was foremost on her mind in the summer of 1977. It is no coincidence that the only way to prevent or delay foreclosure involved the actions she cooperated in taking: Jerome's separate filing of his tax returns and the transfer of his one-half interest in the house to her.

Defendants also contend that the conveyance was part of a bona fide loan transaction entered into with Sue Morgan's parents, the Oliversons. Over a period of several years prior to and including 1977, the Oliversons gave approximately $15,000 to the Morgans and their creditors. In particular, the Morgans made an urgent plea for funds on June 9, 1977, and the Oliversons gave them approximately $5,000 on that day. The $5,000 included a check made payable to the Public Trustee of Jefferson County in an amount sufficient to redeem the house from foreclosure.

The Oliversons and the Morgans referred to all of these payments as "loans" which the Morgans were to repay when they were able to do so. They testified that the Oliversons were reluctant to make the June 9, 1977 payments, and consented only on the condition that Jerome transfer his interest in the house to Sue. Defendants contend that Sue's exclusive ownership was intended to provide security for the loans, and that if the loans were not repaid by the time the Morgan children graduated from high school, she was to sell the property and pay the loans with the proceeds. Mr. Oliverson testified that he trusted Sue, but not Jerome, to keep the property clear of additional encumbrances.

On this interpretation of the facts, defendants assert first that the conveyance was merely a permissible preference of one creditor over others. Additionally, they contend that by virtue of the transfer, Sue became a "purchaser," as defined by 26 U. S. C. §6323(h)(6), and therefore took the property free of the lien for 1976 taxes, for which public notice had not yet been filed. See 26 U. S. C. §6323(a). Neither of these conclusions is correct.

The argument that Jerome's conveyance was a legitimate preference of the Oliversons over other creditors is groundless. A preference requires some form of payment, or the transfer of other valuable rights to a creditor. The conveyance to Sue did not have the purpose or the effect of conferring legal rights on the Oliversons or of discharging the asserted debt in any degree.

Nor can Sue claim the protections of a "purchaser" under 26 U. S. C. §6323(a). I find that the Morgans intended by the conveyance to hinder creditors, for their own advantage. This being true, the conveyance is void even if, as defendants contend, it was made for full and adequate consideration. Helm v. Brewster, 42 Colo. 25, 93 P. 1101, 1104 (1908). Section 6323(a), which protects "purchasers" from unrecorded tax liens, was surely not intended to change this result.

Moreover, several facts make it appear that the Oliversons payments to or for the benefit of the Morgans were gifts and never intended to be repaid. The Oliversons never took the simple step of obtaining a note of indebtedness from the Morgans. They never obtained a deed of trust. In the more than twenty years since they began giving money to the Morgans, they have not been repaid, if at all, more than a nominal amount, despite the fact that for a number of years during that period the Morgans had a substantial income.

For the foregoing reasons, the challenged conveyance cannot stand. The law will not sanction such a flagrant disregard of the rights of Jerome's creditors. I turn now to the matter of foreclosure of the tax lien.

Lien Foreclosure

Defendants assert that the Colorado homestead statute operates to bar foreclosure of the government's tax lien, relying upon United States v. Hershberger [73-1 USTC ¶9289], 475 F. 2d 677 (10th Cir. 1973). In that case, the Tenth Circuit held that when a homestead law creates a property interest in the delinquent taxpayer's spouse, the United States may not foreclose a tax lien upon the homestead property to collect taxes for which the spouse is not liable. The challenged conveyance in the present case having been voided, the Morgans hold their property in joint tenancy. It is concededly homestead property under Colo. Rev. Stat. §38-41-202(1) (1981 Supp.), in spite of the fact that a declaration of homestead was not recorded until September 8, 1982. It is also conceded that Sue Morgan is not liable for the taxes in question.

In Hershberger, the court was confronted with a Kansas homestead statute which had been expressly contrued by state courts as conferring upon the record owner's spouse an estate in land. See Helm v. Helm, 11 Kan. 19 (reprinted in second edition at 25). After concluding that Congress has given federal courts the equitable power to decline to foreclose federal tax liens under appropriate circumstances, the court stated:

Homestead laws not creating a present property interest but rather conferring privileges and exemptions are subordinate to the federal tax liens. But when the homestead laws expressly provide for a present property interest and confer more than merely an exemption, such as is found under Kansas law, the homestead interest is good against the federal tax lien.

475 F. 2d at 682 (citations omitted).

The Tenth Circuit's statement should not be taken to mean that foreclosure of a tax lien may never be had upon property owned jointly by the delinquent taxpayer and a spouse who is not liable for the tax. On the contrary, in such a situation the district court generally has the discretion to foreclose the lien on the entire property, on only the taxpayer's interest, or not at all. United States v. Eaves [74-2 USTC ¶9526], 499 F. 2d 869, 871 (10th Cir. 1974).

Nor should it be taken to mean that the district court may not foreclose a tax lien upon property jointly owned by the non-taxpayer spouse whenever the property is a homestead. This point is illustrated by the Fifth Circuit's ruling in United States v. Rogers [81-2 USTC ¶9536], 649 F. 2d 1117 (5th Cir. 1981), cert. granted sub nom. United States v. Rodgers, 102 S. Ct. 1748, 72 L. Ed. 2d 160 (1982), which follows the Hershberger line of reasoning. In Rogers, the propriety of foreclosure upon a taxpayer's undivided interest in the homestead property was held to depend upon the nature of the rights conferred by the homestead statute, even though, as here, his wife owned a one-half interest in the homestead which would be affected by foreclosure. Accordingly, the tax lien in the present case may be foreclosed, at least upon Jerome Morgan's interest in the property, if under Colorado law a homestead interest is not a distinct interest in land.

The Colorado homestead statute, Colo. Rev. Stat. §38-41-201 (1981 Supp.), declares simply:

Every homestead in the state of Colorado occupied as a home by the owner thereof or his family shall be exempt from execution and attachment arising from any debt, contract, or civil obligation not exceeding in value the sum of twenty thousand dollars in actual cash value in excess of any liens or encumbrances on the homesteaded property in existence at the time of any levy of execution thereon.

Unlike the Kansas statute considered in Hershberger, supra, the Colorado statute has never been construed to create an interest in land. The Colorado homestead has been referred to as an "exemption," and nothing more. See, e.g., Thomas v. Hysom, 167 Colo. 218, 446 P. 2d 911, 911-12 (1968). Any similarity in wording between the Colorado and Kansas statutes is irrelevant in view of the entirely different meanings drawn from them by the highest courts of those states.

Defendants contend, however, that until July of 1977 the Colorado statute did create a distinct estate in homestead property. Prior to that time, a conveyance of homestead property required the signatures of both spouses in all cases. Colo. Rev. Stat. §38-35-118(1) (1973) (amended 1977). This rule was modified to allow the owner to convey homestead property without his or her spouse's consent unless a declaration of homestead has been property recorded. 1977 Colo. Sess. Laws 1719, §2 (codified as Colo. Rev. Stat. §38-41-202(3) and (4) (1981 Supp.)). Defendants assert that Sue Morgan, having acquired a vested property right by virtue of the former statute, could not be divested of that right by legislative amendment. See Galligher v. Smiley, 28 Neb. 189, 44 N. W. 187, 189 (1889). See also Morris v. Porter, 393 S. W. 2d 385, 387 (Tex. Civ. App. 1965) (homestead right held to be "vested").

These arguments are without merit. Defendants have presented no authority for the proposition that the naked right to prevent one's spouse from making a voluntary conveyance of homestead property constitutes an estate in land. Moreover, the overwhelming weight of authority supports the rule that a debtor's homestead exemption privileges do not constitute vested rights which are beyond the legislature's power to modify or abolish. See Estate of Murray, 133 Cal. App. 3d 601, 183 Cal. Rptr. 924, 926 (1st Dist. 1982); In Re Blair's Estate, 42 Cal. 2d 728, 269 P. 2d 612, 615 (1954); Nesmith v. Nesmith, 155 Fla. 821, 21 So. 2d 789, 789 (1945); Petrulionis v. Dudek, 113 Ill. App. 2d 398, 252 N. E. 2d 23, 25 (1969); In Re Ragan's Estate, 237 Iowa 619, 23 N. W. 2d 521, 523 (1946); French v. French, 91 Nev. 248, 533 P. 2d 1357 (1975); Walkup v. Covington, 173 Tenn. 7, 114 S. W. 2d 45, 47 (1938); Sherwin-Williams Co. v. Morris, 25 Tenn. App. 272, 156 S. W. 2d 350, 352 (1941). The Colorado homestead statute plainly does not create a distinct interest in land, and foreclosure upon Jerome's interest in the property is therefore not barred by the rule of Hershberger, supra.

Conclusion

For the reasons stated above, Jerome Morgan's June 14, 1977 transfer to his wife of his one-half interest in the property located at 528 Pine Song Trail, Golden, Colorado, is hereby set aside. It is further adjudged that the United States holds a valid tax lien upon Jerome's undivided interest, and is entitled to foreclosure upon that interest. Upon the suggestion of counsel for the United States and the Morgans, the parties will be allowed until December 20, 1982 to agree upon arrangements for the sale of the property and the disposition of proceeds. If agreement cannot be reached by that time, the Court will set the matter down for further hearing and final disposition.

 

 

 

United States of America, Plaintiff v. Billy H. Grice; Jlain W. Grice, Belinda Carmen Grice; and Enterprise Banking Company, Defendants

U. S. District Court, Mid. Dist. Ala., So. Div., Civil Action No. 82-207-S, 5/31/83

[Code Sec. 6321]

Lien for taxes: Fraudulent transfer of real estate: State law.--Conveyance of certain real property to the taxpayers' daughter was fraudulent under Alabama law, and the IRS was entitled to have the transaction set aside.

dohn C. Bell, United States Attorney, Kenneth E. Vines, Assistant United States Attorney, Montgomery, Ala. 36101, Curtis L. Muncy, Department of Justice, Washington, D. C. 20530, for plaintiffs. Clarence W. Slaughter, P. O. Box 7153, Dothan, Ala. 36302, for Bill H. and Jlain W. Grice, Richard H. Ramsey, P.O. Box 1825, Dothan, Ala. 36302, for Belinda Carmen Grice, Joseph Cassady, Cassady, Fuller & Marsh, 203 E. Lee St., Enterprise, Ala. 36330, for Enterprise Banking Co.

Memorandum Opinion and Order

HOBBS, District Judge:

This cause is now before the Court on plaintiff's motion for summary judgment, filed May 4, 1983. In support of its motion, the Government filed a memorandum of law and several exhibits. Although invited to do so, none of the defendants has filed counter affidavits or exhibits in opposition to plaintiff's motion.

The Government brought this action in October of 1982 seeking to have the Court set aside as fraudulent certain transfers of real estate by defendants Jlain and Billy Grice to their daughter, Belinda Carmen Grice. ¹ The Court has judisdiction of this action pursuant to 28 U. S. C. Sections 1340 and 1345.

On January 25, 1975, defendants Billy and Jlain Grice transferred by warranty deed to their daughter, Belinda Grice, certain real estate on which was located their residence. The deed was not filed in probate court, however, until March 29, 1977. On April 1, 1977, three days after the filing of the warranty deed, defendants Jlain and Billy Grice transferred the same property, with improvements, to their daughter Belinda by quitclaim deed. The deed was not filed until August 1, 1977.

In 1976 Billy and Jlain Grice petitioned the United States Tax Court to determine their tax liability for the years 1971, 1972, and 1973. The Tax Court determined certain deficiencies in their tax payments existed, and Mr. and Mrs. Grice were assessed for said deficiencies. As a result of this assessment, a tax lien of the United States arose on the real property at issue on October 24, 1977. On December 16, 1977, notices of this tax lien were filed in the Coffee County Probate Court.

Under Alabama law, ² a conveyance is deemed fraudulent pursuant to Section 8-9-6 ³ of the Alabama Code when there is a creditor to be defrauded at the time of the transfer, the creditor could have realized its claim or some portion thereof out of the property conveyed, and if the debtor intended to defraud his creditor. J. C. Jacobs Banking Co. v. Campbell, 406 So. 2d 834 (Ala. 1981); Roddam v. Martin, 285 Ala. 619, 235 So. 2d 654 (1970).

Even if the Court deems the transfer to Belinda Grice to have occurred on January 25, 1975, the date the warranty deed was executed, the Government still must be deemed a creditor as of that date, despite the fact that the assessment was not made until 1976. No matter when federal taxes are in fact assessed, they are considered due and owing, thus constituting a liability, when the tax return is required to be filed. United States v. Ressler, 433 F. Supp. at 463. Under this authority, defendants Jlain and Billy Grice were indebted to the Government for the tax years 1971, 1972 and 1973 on April 15 of 1972, 1973 and 1974. Therefore, the Government was a creditor of the Grices at the time of the transfers previously described.

At the time of the transfer in January of 1975, the Grices had approximately $33,000 equity in the house and lot in question. It appears, therefore, that the Government could realize a portion of its claim out of this property, thus satisfying the second requirement under Alabama law.

At first blush the question of the Grices' intent to defraud appears to be a disputed question of fact making summary judgment unavailable. The Government correctly points out, however, that such a determination can be made as a matter of law. Under Alabama law an expressed consideration in a deed of "one dollar and love and affection" is not valuable consideration and therefore is insufficient against a creditor. Roddam v. Martin, 285 Ala. at 623, 235 So. 2d at 656. The two deeds in question recited the consideration as "ten dollars and other valuable consideration." However, in answer to plaintiff's interrogatory number 1(b) which asked Belinda Grice to describe with particularity the consideration paid by her for the property, she answered: "The consideration was the love and affection for me by my parents, Billy H. Grice and Jlaine W. Grice, and to settle a dispute as to ownership of the property, in contemplation of their divorce." Defendants also contend that the conveyance to Belinda Grice was made on the advice of separate counsel in contemplation of their divorce. The Court concludes, however, that such consideration is not valuable under Alabama law. A judicial conclusion that no valuable consideration passed voids a deed as a matter of law, no matter the intent of the parties. See Crovo v. Aetna Cas. & Sur. Co., 336 So. 2d 1082, 1086 (Ala. 1976). The third factor appears satisfied. ⁴

In accordance with the joint stipulation of fact filed by all parties in this cause on May 24, 1983, the Court further finds that defendant Enterprise Banking Company has a valid mortgage lien on the real property in question here. Said mortgage lien arose November 3, 1973, prior to the Government's tax lien, and thus has priority over the tax lien to the proceeds of the sale of the real property.

Accordingly, in consideration of the law, the facts as established by the pleadings, the discovery and other exhibits, the Court finds that there are no genuine issues of material fact.

It is, therefore, ORDERED that plaintiff's motion for summary judgment, filed May 4, 1983, is hereby granted.

It is further ORDERED that plaintiff, within ten days from the date of this order, file with this Court a proposed judgment and order of sale and notice of sale.

It is further ORDERED that this case is removed from the trial docket for June 6, 1983.

¹ The Government's complaint in this case also sought to obtain a deficiency judgment for the unpaid balance of assessment of taxes against Billy and Jlain Grice for the tax years 1971, 1972 and 1973. On January 20, 1983, this Court entered judgment against these defendants for $91,327.85 for the unpaid balance, leaving only the alleged fraudulent transfers at issue.

² A federal tax lien does not come into existence until the date of assessment. The tax lien in the case at bar, therefore, did not attach to the real estate in question until after the Grices transferred the property to their daughter. In such a situation the Government must seek relief under the fraudulent conveyance laws of the state in which the taxpayers and property are located--in this case, the law of Alabama. See United States v. Ressler [77-1 USTC ¶9459], 433 F. Supp. 459, 463 (S. D. Fla. 1977), affd. [78-2 USTC ¶9571], 576 F. 2d 650 (5th Cir. 1980).

³ All conveyances or assignments in writing, or otherwise, 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, purchasers or other persons of their lawful actions, damages, forfeitures, bebts or demands, and every bond or other evidence of debt given, action commenced or judgment suffered with the like intent, against the persons who are or may be so hindered, delayed or defrauded, their heirs, personal representatives and assigns are void. Ala. Code §8-9-6 (1975).

⁴ Even if Belinda Grice's stated consideration is deemed valuable consideration, the amount she paid must also be shown to be adequate. If the amount is substantially inadequate, then fraud can be inferred as a matter of law. See J. C. Jacobs Banking Co. v. Campbell, 406 So. 2d at 844. Belinda Grice's stated consideration can only be deemed substantially inadequate.

 

 

 

United States of America v. Morris F. Estes and Muriel Robinson Estes, Commerce Union Bank, Fidelity Federal Savings and Loan Association, and Investor's Savings and Loan Association

U. S. District Court, Mid. Dist. Tenn., Nashville Div., No. 81-3495, 4/30/82

[Code Sec. 6321]

Lien for taxes: Fraudulent transfer of real estate.--An insolvent taxpayer's transfer of real property to his wife, which occurred shortly before he filed a return showing a sizable tax liability with no payment attached and shortly before assessments were made and tax liens related to this indebtedness were filed, was found to have been a fraudulent transfer of property under state law and therefore void as against the rights of the United States as creditor. Therefore, the United States was given permission to foreclose its tax liens against the transferred property if necessary.

Terrence M. Kelly, Assistant United States Attorney, Nashville, Tenn. 37203, Robert E. Rice, Department of Justice, Washington, D. C. 20530, for plaintiff. Morris Estes, 419 Nichols Circle, Gallantin, Tenn. 37066, pro se. Charles Patrick Flynn, One Commerce Place, Nashville, Tenn. 37239, for Muriel Robinson Estes. Stephen M. Miller, Denny, Lackey & Chernau, 218 Third Ave., Nashville, Tenn. 37201, for Fidelity Federal. David M. Amonette, Bone & Woods, United Southern Bank Building, Gallatin, Tenn. 37066, for Investors Savings & Loan.

Memorandum

MORTON, Chief Judge:

1. In December 1971, Morris F. Estes purchased 95 acres of realty in Sumner County, Tennessee. Approximately half this property was developed for residential housing and sold. The remaining property consists of three tracts known as Tracts 11, 12, and 13 of the J. B. Marler property. ¹ On April 2, 1975, Morris Estes transferred the larger two tracts, 12 and 13, to Muriel Robinson Estes and himself to hold as tenants by the entireties.

On June 10, 1977, Morris F. Estes executed two quitclaim deeds to Muriel Robinson Estes, conveying to her all his interests in the above-mentioned tracts of realty. ² On June 15, 1977, Morris Estes signed and mailed his 1976 Federal income tax return, showing a liability of $15,289.00; no payment accompanied the return. On June 22, the two quitclaim deeds were recorded.

2. As demonstrated by the Form 4340, Certificates of Assessments and Payments, an assessment was made against Morris F. Estes on July 18, 1977, for the 1976 income taxes mentioned above. Certain credits from previous years reduced the balance due for the 1976 taxes to $13,099.16. Morris Estes does not contest this liability.

3. Notices of federal tax liens relating to this indebtedness were properly filed in Sumner County, Tennessee, on December 6, 1977, (against Morris Estes) and again on June 26, 1980, (against Muriel Robinson as nominee of Morris Estes).

4. Defendants admit that no cash was paid for the June, 1977 transfer, but contend that Ms. Estes did pay fair consideration because of her "assumption" of the outstanding indebtedness against the property.

5. The evidence adduced at trial, however, contradicts this assertion. Ms. Estes has never become liable on the first and second mortgages, owing to Fidelity Federal in the approximate total of $100,000. Nor has Mr. Estes ever been released from this liability. The evidence further showed that she did not begin making regular payments on these loans until, at the earliest, a year and a half after the transfer.

6. Muriel Robinson Estes also contends she "assumed," and caused to be paid, a debt to Springfield Production Credit Co. of approximately $50,000 which had been secured by the subject property. However, the proof showed that she had been liable for this amount before the transfer. Furthermore, that loan was paid from the proceeds of another loan taken out in December, 1977, by both defendants. Thus, both defendants were fully liable for this amount before the transfer, and both are still liable today. In addition, Muriel Robinson Estes did not begin to make payments on either of these loans until December, 1978, a year and a half after the subject transfer.

7. A third debt which was secured by the property at the time of the transfer was in the amount of $14,500, owed to the Bank of Hendersonville. Like the Springfield note, Ms. Estes was liable in this loan before the transfer. This loan was paid in August, 1978, more than a year after the transfer, to avoid foreclosure.

8. The last indebtedness secured by the property at the time of the transfer was a note to Commerce Union Bank for approximately $27,000. Muriel Robinson Estes did not become liable for this amount until October, 1979, and Morris Estes is still liable therefore. Ms. Estes began to make monthly payments of approximately $467 on this note six months after selling a portion of the subject property by an installment deed for which she received approximately $460 each month.

9. The evidence further showed that Morris Estes continued to live at the subject property for a year and a half after the transfer.

10. The evidence showed that immediately after the transfer, Morris Estes had no assets of any substance. Although he asserts that the proceeds of a certain note (the "Stokes note") he had obtained for the sale of certain real property was an asset at the time, it was shown that this note had been pledged to Third National Bank as collateral for an otherwise unsecured loan from the bank to Mr. Estes. Before 1977, Third National Bank would receive the payments from the Stokes note, apply 70 percent of the proceeds to Mr. Estes' loan, and pay him the remaining 30 percent. In May of 1977, Mr. Estes received $12,000 pursuant to this arrangement. But because the check written to Third National Bank by the obligor on the Stokes note was returned for insufficient funds, the bank immediately demanded return of the $12,000 and added that amount to Mr. Estes' loan balance. The bank also notified Mr. Estes that it would thereafter retain 92 percent of the note proceeds. After 1978, the bank retained 100 percent of the note proceeds. It is therefore obvious that the Stokes note did not represent an asset of any value to Morris Estes as of the time of the transfer.

11. The only other assets owned by Mr. Estes at the relevant time were certain items of furniture, clothing, and two encumbered automobiles. No values for these assets were proven, but they would appear to be of minimal worth.

12. On the other hand, Mr. Estes' debts at the time were quite substantial. First, of course, he owed the United States approximately $13,000. An action had been instituted against him in Davidson County for approximately $26,000, which he owed to Associates Capital Corporation for a loan made to him in 1974. He also owed Commerce Union Bank between five and ten thousand dollars for an unsecured business loan. The aforesaid loan from Third National Bank was then outstanding in the amount of $47,000, according to a letter supplied by an officer of the bank. All of these amounts were owed in addition to the indebtedness secured by the property, which totalled approximately $191,000 at the time, and for which Mr. Estes was still liable after the transfer.

13. From the above recitation, it is obvious that Morris Estes was insolvent at the time of the subject transfer.

14. The testimony of an expert property appraiser established that the property was worth $293,000 at the time of the transfer. This expert testified that the land was then worth $125,000 ($2,500 an acre), and that the house was then worth $168,000. This conclusion is buttressed by the fact that 17 acres of nonfrontage property was sold for $2,750 an acre eighteen months after the subject transfer. The defendants presented no expert testimony on this point. The Court therefore concludes that the property was worth at least $293,000 at the time of the transfer.

Conclusions of Law

1. This as a civil action brought by the United States to obtain a judgment against Morris F. Estes for unpaid federal income taxes; to set aside certain conveyances of property from Morris F. Estes to Muriel Robinson Estes as fraudulent; and to foreclose federal tax liens against the property fraudulently conveyed. Jurisdiction is conferred upon this Court by Sections 1340 and 1345, Title 28, United States Code, and by Sections 7402 and 7403 of the Internal Revenue Code of 1954 (Title 26, U. S. C.).

2. Tennessee Code Section 64-312 defines "fraudulent conveyance" as any conveyance made for less than fair consideration by one who is insolvent, or who is rendered insolvent by the transfer.

3. In the instant case, it is quite clear that Morris Estes transferred his interests in the subject property at a time when he was insolvent--that is, at a time when "the fair market value of his property would have not covered his obligations as they fell due." Hyde Properties v. McCoy [75-1 USTC ¶9470], 507 F. 2d 301, 307 (6th Cir. 1974), citing State, ex rel v. Caldwell, 21 Tenn. App. 396, 400 (C. A. Tenn. 1937).

4. The remaining question is whether the transfer was made for fair consideration. The defendants herein contend that the consideration paid was the "assumption" of mortgage indebtness by Muriel Robinson Estes. But it is clear that no meaningful assumption occurred. On only one small note was Mr. Estes relieved of liability--and on that note Ms. Estes was liable before the transfer. Mr. Estes remains liable on the vast majority of the debts which encumbered the property at the time of the transfer. Just as important, Ms. Estes did not begin making regular payments on these indebtedness until early 1979--and it has not been shown that she has made all the payments since then. Under these circumstances it cannot be said that Muriel Robinson Estes "assumed" the existing indebtedness on the property.

5. Merely taking property "subject to" debt does not constitute consideration for purposes of the fraudulent conveyance statutes, Testerman v. Hart, 12 Tenn. App. 494 (C. A. Tenn. 1930).

6. It is therefore clear that there was no consideration for the transfer arising from the pre-existing debt against the property.

7. Even if Muriel Robinson Estes had "assumed" some or all of the debt secured by the property, this would not constitute "fair" consideration for purposes of Section 64-312. This Court has found that at the time of the transfer the property was worth at least $293,000. The debt then secured by the property totaled approximately $191,000. Thus, there was slightly in excess of $100,000 of equity in the property at the time. Her alleged assumption of the secured debt therefore could not have constituted "fair" consideration for the transfer.

8. Because Morris Estes was insolvent at the time of the subject transfer and because Muriel Robinson Estes did not pay "fair consideration" for the property, the transfer was fraudulent and is null and void as against the United States. Sections 64-312 and 64-317, Tenn. Code.

9. Further, Section 64-301 brands as fraudulent all transfers of property made with the intent to hinder or delay creditors.

10. The words "hinder" and "delay", as used in Section 64-312, have been recently defined:

* * * By hindering and delaying creditors in the collection of their debts is meant the doing of an * * * act which causes or presents an obstacle in the collection of the debt by a creditor. The act done by the debtor may not defraud the creditor in fact, and yet be fraudulent in law, because it hinders and delays creditors in the collection of their debts. Thus, for instance, a debtor may have property more than sufficient to pay all his debts, yet if he puts his property out of his hands so that it cannot be reached by the ordinary process of law, it is hindering and delaying in the eyes of the law, and a legal fraud. Such hindering and delaying of creditors in collection of their debts, the law denounces and treats as a fraud. * * *

United States v. Kerr, 43 A. F. T. R. 2d 79-379, 79-381 (ED Tenn. 1978), quoting Kellog v. Richardson, 19 F. 68, 69-70 (C. C. WD Mo. 1883).

11. The initial burden to show this intent rests upon the plaintiff. However, once "suspicious circumstances" have been demonstrated, the burden shifts to the transferee to demonstrate a lack of fraudulent intent. Citizens Bank and Trust Company v. White, 12 Tenn. App. 583 (C. A. Tenn. 1930); Nashville Milk Producers v. Alston, 307 S. W. 2d 66 (C. A. Tenn. 1957); Gurlich's Inc. v. Mynick, 338 S. W. 2D 353 (C. A. Tenn. 1964).

12. Here, the "suspicious circumstances" include: a transfer for no or insufficient consideration; a transaction between husband and wife; a transfer which occurred simultaneously with the filing of a tax return with no payment attached; a transfer which an action for a money judgment was pending; retention of possession of the property by the transferor; a transfer of substantially all of the debtor's assets; and payments by the transferor on the property after the transfer.

13. The law in Tennessee is clear that the burden of proof therefore shifts to defendants to show that Morris Estes did not intend to "hinder" or "delay" his creditors by the transfer. This is a burden defendants failed to carry.

14. If the transfer was made with the intent to delay, hinder, or defraud creditors, the transfer is void whether or not consideration was paid. Gemignani v. Partee, 302 S. W. 2d 821, 42 Tenn. App. 358, 375 (C. A. Tenn. 1956). Nor is it relevant whether the transferor was solvent at the time of the transfer. McConnico v. Third National Bank in Nashville, 499 S. W. 2d 874 (C. A. Tenn. 1973).

15. The subject transfer is therefore also void as against the United States pursuant to Section 64-301, Tenn. Code.

16. Morris Estes is indebted to the United States in the amount of $21,517.16, with interest accruing at the rate of $7.04 a day from and after April 19, 1982. ³

17. The United States may proceed of collect this amount by foreclosing its tax liens against the subject property. To this end, the United States will forward a proposed order of sale to the court within 30 days from the date of this opinion.

Order

It is ORDERED that the United States of America shall collect $21,517.16, plus interest accruing at the rate of $7.04 per day after April 19, 1982, from Muriel Robinson Estes. If the said sum is not paid, the United States Government may proceed to foreclose its tax liens against the subject property. This case is closed.

¹ Tract 11 contains approximately 5.7 acres; Tract 12 approximately 12.34 acres; and Tract 13, 31.10 acres.

² One deed transferred his interests in Tracts 12 and 13 already held as tenants by the entireties.

³ These amounts were computed by the Internal Revenue Service.

 

 

 

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

U. S. District Court, No. Dist. Ia., East. Div, No. C 79-2074, 6/30/81

[Code Sec. 7403]

Tax liens: Actions to enforce: Standing to contest assessment: Fraudulent conveyance of property.--The widow of a corporate officer who had failed to pay over withholding and FICA taxes from the wages of the corporation's employees, did not have standing to contest the taxes assessed against her deceased husband. The husband's conveyance of the family residence without consideration to his wife prior to his death was constructively fraudulent because his widow failed to show that he had sufficient property remaining to pay his debts at the time the conveyance was executed. Accordingly, the husband's estate was indebted to the government in the amount of the tax lien and the family residence could be used to satisfy the government's claim.

United States Attorney, Cedar Rapids, Ia. 52407, Richard Gregory, David Slacter, John F. Murray, Robert Livingston, Department of Justice, Washington, D. C. 20530, for plaintiff.

Lance P. Lorentzen, Isadore Meyer, Meyer, Isadore & Associates, 101 1/2 E. Water St., Decorah. Iowa 52101, for defendant.

Findings of Fact, Conclusions of Law and Order

MCMANUS, Chief Judge:

This action to reduce a tax assessment to judgment and to set aside as fraudulent certain conveyances made to defendant by Lloyd Brown was tried to the court on March 19, 1981. Briefs, arguments, proposed findings of fact and conclusions of law having been received, the case is now ready for decision.

Findings of Fact

1. Plaintiff is the United States of America.

2. Defendant is Lily C. Brown.

3. At all material times defendant was married to Lloyd Brown who died on March 12, 1975.

4. On July 27, 1973, Lloyd Brown became President Pro Tem of Brown Electric & Appliance, Inc., (Brown Electric). ¹

5. As President Pro Tem of Brown Electric, Lloyd Brown was responsible for withholding income and Federal Insurance Contributions Act (FICA) taxes from the wages of Brown Electric employees and for paying them over to plaintiff.

6. Income and FICA taxes withheld from Brown Electric employees were not paid over to plaintiff for the third and fourth quarters of 1973.

7. On February 4, 1974, Brown Electric filed for bankruptcy.

8. On February 28, 1974, Lloyd Brown transferred two certificates of deposit in the amounts of $6,000.00 and $11,000.00 to defendant without consideration. ²

9. On June 26, 1974, Lloyd Brown transferred his interest in the family residence to defendant without consideration.

10. When Lloyd Brown conveyed his family residence to defendant without consideration, he did not retain sufficient assets to pay his debts. ³

11. On August 23, 1974, Lloyd Brown was assessed $10,938.97 in overdue internal revenue taxes. Notice of a lien in favor of plaintiff upon Lloyd Brown's property was filed December 12, 1974.

12. Lloyd Brown died on March 12, 1975.

Conclusions of Law

1. The court has jurisdiction pursuant to 26 USC §§ 7401, 7403 and 28 USC §1345.

2. Lloyd Brown is the only person who may contest the internal revenue taxes assessed against him; defendant does not have standing to litigate the merits of this tax assessment. Graham v. United States [57-1 USTC ¶9645], 243 F. 2d 919, 922 (9th Cir. 1957).

3. An assessment of taxes is presumptively correct, see United States v. Jarvis, 428 U. S. 433, 440-41 (1966); because defendant has no standing to litigate the merits of this tax assessment against Lloyd Brown, the presumption is unrebutted and the assessment is valid.

4. Lloyd Brown's conveyance of the family residence without consideration is constructively fraudulent as to existing creditors; the burden is upon defendant to show the grantor had sufficient property to pay his debts at the time the conveyance was executed. Commercial Savings Bank of Marion v. Balderston, 260 NW 728 (Iowa 1935); Wagener, Inc. v. Krage, 178 NW2d 404 (Iowa 1970).

5. Defendant has failed to show that Lloyd Brown had sufficient property remaining to pay his debts at the time he conveyed the family residence; therefore, the conveyance is fraudulent as to plaintiff.

It is therefore

ORDERED

1. The Estate of Lloyd Brown is indebted to plaintiff in the amount of its valid federal tax lien of $10,938.97, plus unassessed statutory additions.

2. Lloyd Brown's fraudulent conveyance of the family residence is set aside. The property may be used to satisfy plaintiff's claim.

¹ Brown Electric was a corporation engaged in the electrical supply business in Decorah, Iowa. Upon his appointment, Lloyd Brown was authorized to manage the business, sign checks, check assets and liabilities, and to operate the business as he deemed necessary.

² Prior to the transfers, the certificates were jointly owned.

³ In the fall of 1975, Lloyd Brown personally guaranteed loans from Security Bank & Trust Company to Brown Electric for $23,524.18 and for $10,204.85. On July 5, 1974, judgment was entered against Lloyd Brown on the Security Bank & Trust Company loans in the amount of $32,122.25.

The 1973 income and FICA taxes withheld from Brown Electric employees were payable to plaintiff for the third quarter on October 15, 1973 and for the fourth quarter on January 15, 1974.

Defendant's brief indicates that Lloyd Brown's assets at the time he transferred title to the family residence were $24,179.72. At the same time, his debts, including the unpaid taxes and the Security Bank & Trust notes amounted to $49,050.18.

 

 

 

Mary F. Kennedy v. United States of America; Betty J. Ardini; William F. Ardini

U. S. District Court, Dist. N. H., Civil No. 80-258-D, 2/2/82

[Code Secs. 6321 and 6323]

Lien for taxes: Property subject to lien: Transfered title intended as security: Bona fide purchaser v. bona fide lender.--A conveyance of title to a home from a husband to his wife was not made, under New Hampshire law, with an intent to defraud future creditors. His assets, at the time of the initial transfer, were sufficient to meet his anticipated debts. However, a later conveyance of title by the wife to another party failed to divest her of her valid interest in her home. She had intended or believed that she would be unable to pay debts as they matured and, thus, her transfer was made to hinder, delay, or defraud either present or future creditors. Her intent was established by (1) her contemporaneous conveyance of other property in response to a threatened suit, and (2) the fact that her personal liabilities exceeded her assets at the time of transfer. The transferees' intent was to advance funds with the expectation of repayment. That intent was established by (1) the testimony of the transferee's husband, and (2) the fact that the transferor retained possession. The property was thus subject to a tax lien.

Shaines, Madrigan & McEachern, 25 Maplewood Avenue, Portsmouth, New Hampshire 03801, for plaintiff. John P. McAllister, Department of Justice, Washington, D. C. 20530, for defendant. William F. Ardini, Betty J. Ardini, pro se.

Memorandum Opinion

DEVIN, Chief Judge:

Mary F. Kennedy, the plaintiff in this litigation, seeks to quiet her title ¹ to certain residential real estate located at 40 Sea Road, Rye Beach, New Hampshire. By its counterclaim, the defendant United States seeks adjudication of certain unpaid income taxes to it owed by added third-party defendants William F. Ardini and Betty J. Ardini. ² The thrust of the defendant's counterclaim is that certain conveyances in the plaintiff's chain of title should be set aside as fraudulent. The legal issues thus raised are before the Court for resolution following trial.

[Facts Leading to Initial Transfer]

Primarily employed in retail automobile sales or leasing through the course of his adult life, William F. Ardini came from Massachusetts to Portsmouth, New Hampshire, in 1956, and was there employed as general manager at Kenneth Edwards, Inc., a Lincoln-Mercury automobile franchise. On the recommendation of Ardini, his former employers, Ralph and Arthur Cote, ³ purchased this franchise in 1957, changing its name to Cote Lincoln-Mercury, Inc., in 1959.

When the Cotes took over operation of the Portsmouth Lincoln-Mercury franchise, William F. Ardini continued as general manager, and at the end of the first full year of operation, he was granted a ten percent stock interest in lieu of cash bonus. On September 4, 1963, the residential property at 40 Sea Road, Rye Beach, New Hampshire, was conveyed to William F. and Betty J. Ardini as joint tenants by warranty deed of Margaret Petzold. Defendants' Exhibit V. The purchase price was $42,000, which was made up of $8,000 loaned to William F. Ardini by Ralph Cote and a first mortgage of $34,000 procured from the Piscataqua Savings Bank in Portsmouth, New Hampshire. Defendants' Exhibit W. On March 6, 1964, William F. Ardini quit-claimed his interest in the premises to Betty J. Ardini without transfer of funds from grantee to grantor. Defendants' Exhibit Y.

In 1963, William F. Ardini purchased the stock interest of Ralph Cote in Cote Lincoln-Mercury, Inc., and in 1964 Arthur Cote, its remaining principal, retired his stock in exchange for the equity in the real estate which housed the franchise, thereafter charging monthly rent to Cote Lincoln-Mercury, of which William F. Ardini had become sole principal.

Generally fairly prosperous between 1957 and 1967, Cote Lincoln-Mercury, as do most automobile dealers, purchased and sold its behicles through a "floor plan" with various financial institutions. Thereunder, the financial institution would advance the funds necessary to purchase automobile inventories, and upon resale of an automobile at retail, Cote Lincoln-Mercury would repay the financial institution. ⁴

[Facts Leading to Second Transfer]

In 1967, a disastrous strike occurred at Ford Motor Company, and in October of that year, Cote Lincoln-Mercury ceased its sale of new vehicles because of lack of product. In his attempts to keep his business afloat, William F. Ardini sought funds by virtue of a second mortgage to his brother, Defendants' Exhibit JJ, ⁵ and a first mortgage to the Manchester Savings Bank, Defendants' Exhibit KK. ⁶ Needing additional funds, William F. Ardini turned to an old friend, William J. Kennedy, who is the spouse of the plaintiff herein. Following discussions between Ardini and Kennedy, it was agreed that Betty J. Ardini would convey the Rye Beach property to Mary F. Kennedy, and that Mr. Kennedy in turn would alvance to Mr. Ardini the sum of $10,000. ⁷

On October 9, 1967, Betty J. Ardini accordingly conveyed the premises by warranty deed to Mary F. Kennedy. Plaintiff's Exhibit 1. The arrangement between the parties provided that the Ardinis would remain resident on the premises, would pay no interest to the Kennedys, but would continue payments of real estate taxes, mortgages, insurance, and all necessary maintenance and improvements to the property. On the same date (October 9, 1967), Betty J. Ardini also transferred to Leland W. Davis of Portsmouth, New Hampshire, by warranty deed certain interests she then purportedly possessed in property situate on Atlantic Avenue in North Hampton, New Hampshire. Defendants' Exhibit LL. ⁸ This latter transfer was made upon advice of counsel because of threats of suit against the Ardinis resulting from their personal guarantees to financing institutions.

William F. Ardini operated a used car business at the location of Cote Lincoln-Mercury for several months into the year 1968. He subsequently entered into an automobile leasing venture, which tragically terminated with his indictment and subsequent imprisonment for fraud. While he was so incarcerated, he was unable to provide support for his wife and children, who remained residents of the premises at Rye Beach. Accordingly, Mr. Kennedy then advanced to Mrs. Ardini the necessary funds to continue the mortgage and other payments previously advanced by Mr. Ardini until the premises were ultimately sold in 1981.

[IRS's Position]

The Internal Revenue Service has made assessments for unpaid income taxes, penalties, and interest for William F. and Betty J. Ardini, which liabilities, having been litigated in the United States Tax Court, have resulted in substantial pending income tax liabilities as against both William F. and Betty J. Ardini. Seeking to procure payment of these tax liabilities, the Government here urges that both the conveyance of March 6, 1964, from William F. to Betty J. Ardini, Defendants' Exhibit Y, and the conveyance from Betty J. Ardini to Mary F. Kennedy, Plaintiff's Exhibit 1. were in fraud of creditors and should be thus set aside.

Title 26, United States Code, Section 6321, provides in pertinent part:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. [Emphasis added.]

[Controlling Law]

It is well established that "rights to property", as set forth in the statutory language above emphasized, are to be determined in accordance with the law of the state in which the real property is situate. Acquilino v. United States, 363 U. S. 509, 512-14 (1960); United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55 (1958). Applicable here is the Uniform Fraudulent Conveyances Act, which was enacted in 1919 in New Hampshire, Reen v. Berton, 115 N. H. 424, 426, 342 A. 2d 650, 651 (1975), and is now codified in Chapter 545, New Hampshire Revised Statutes Annotated. Defining "creditors" therein as including persons "having any claim, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent", the statute further states:

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

N. H. RSA 545:7 (emphasis added).

Under the aforesaid statute, N. H. RSA 545, the Government here assumes the burden of proving by clear, convincing, and direct evidence the existence of a fraudulent intent. Chagnon Lumber Company, Inc. v. DeMulder, 121 N. H. 173, 176, 427 A. 2d 48, 51 (1981); Jenney v. Vining, 120 N. H. 377, 381, 415 A. 2d 681, 683 (1980); Hoyt v. Horst, 105 N. H. 380, 390, 201 A. 2d 118, 125 (1964). However, circumstantial evidence is sufficient to prove the requirement of the direct evidence of a fraudulent conveyance. Kenneth E. Curran, Inc. v. Salvucci, 426 F. 2d 920 (1st Cir. 1970); Hoyt v. Horst, supra; Ricker v. Mathews, 94 N. H. 313, 53 A. 2d 196 (1947); Kelley v. Simoutis, 91 N. H. 407, 20 A. 2d 628 (1941). ⁹ It is with these preliminary requirements in mind that we turn our attention to the legal issues that have been presented for resolution.

[Husband's Transfer While Solvent]

Our initial focus is directed to the circumstances surrounding the conveyance of March 6, 1964. Defendants' Exhibit Y. From 1955 until April 1977, when she resumed her premarital career as a registered nurse, Mrs. Ardini was busily engaged in her familial household, raising five children. She contributed no funds to the original purchase of the Sea Road property, recalls no payment whatsoever from her to her husband for the 1964 transfer, and had no outside source of income to fund any purchases of real estate at times pertinent to this litigation. During the period of time under scrutiny, William F. Ardini, who was in the process of acquiring one hundred percent interest of Cote Lincoln-Mercury, was potentially obligated for at least $32,000 on the mortgage to Piscataqua Savings Bank, Defendants' Exhibit W, for at least $35,000 for his stock purchase from Ralph Cote, ¹⁰ and for approximately $85,000 for his guarantee of the floor plan of Cote Lincoln-Mercury. ¹¹ Against these potential liabilities of $152,000, William F. Ardini had available to him as the sole owner of Cote Lincoln-Mercury the annual sum of approximately $156,000. ¹²

N. H. RSA 545:4 provides

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

N. H. RSA 545:2 I defines insolvency as when the "present fair saleable value of [one's] assets is less than the amount that will be required to pay his probable liability on his existing debts as they became absolute and matured". And "existing debt" under the aforesaid statute has been interpreted to encompass an existing legal liability whether matured or unmatured. Zuck v. Hale, 114 N. H. 813, 715, 330 A. 2d 448, 450 (1974). Insolvency under N. H. RSA 545:4 must be determined as of the time of the alleged fraudulent conveyance.

Applying the aforesaid principles to the March 6, 1964, conveyance from husband to wife, it is clear that such conveyance is not fraudulent, for the evidence demonstrates that as of said time and date, the business of Cote Lincoln-Mercury was prospering, and William F. Ardini clearly did not have an amount of "unreasonably small capital", N. H. RSA 545:5 for the continuation of such business. No taxes were then due and owing, ¹³ and no evidence has been adduced to demonstrate that, whatever the reason for the transfer between husband and wife, ¹⁴ it was fraudulent as to any present or future creditors of William F. Ardini. Accordingly, while there are clearly cases wherein circumstances are such that a transfer of real estate between husband and wife may be demonstrated to be fraudulent and ordered set aside, see Rice v. Snow, 116 N. H. 69, 352 A. 2d 729 (1976), the Court here finds that the transfer of the Sea Road property from William F. Ardini to Betty J. Ardini under date of March 6, 1964, was not fraudulent within the meaning of the Uniform Fraudulent Conveyances Act of New Hampshire, RSA 545.

[Wife's Transfer While Insolvent]

Markedly different circumstances, however, pertain to the transfer of October 9, 1967, from Betty J. Ardini to Mary Frances Kennedy, plaintiff herein. Plaintiff's Exhibit 1. For as of that date, Betty J. Ardini had outstanding potential obligations on the $50,000 mortgage to the Manchester Savings Bank, Defendants' Exhibit KK; the balance of the $20,000 mortgage to the Manchester Federal Savings and Loan, Defendants' Exhibit CC; the balance of the $5,000 mortgage to the Portsmouth Cooperative Bank, Defendants' Exhibit II; a personal guarantee which exceeded $118,000 to Ford Motor Company, Defendants' Exhibits MM and NN; and a similar substantial guarantee to the National Shawmut Bank upon which suit was brought slightly over a month after the conveyance in the amount of $85,000, Defendants' Exhibit OO. ¹⁵ Thus, even if one were to accept Mr. Ardini's testimony that he valued the real estate on Sea Road at approximately $100,000, and giving full credit to the testimony of the Ardinis' attorney that Mrs. Ardini's conveyance on the same date (October 9, 1967) of the premises on Atlantic Avenue to one Leland Davis, Defendants' Exhibit LL, ultimately brought to her approximately $3,000 as her share of the proceeds of the sale of this property, the circumstances surrounding the transaction clearly demonstrate that at the time thereof, Mrs. Ardini's assets, which were comprised solely of real estate, did not exceed $103,000, against which were debts or potential liabilities pending in excess of $250,000.

[Transferee's Intent]

Plaintiff misplaces stress upon the testimony of Mr. Kennedy to the effect that the conveyance to his wife was a straight purchase in the amount of $10,000, with assumption of a $50,000 mortgage rather than a loan. The background of the situation is that Ardini had, on previous occasions, loaned Mr. Kennedy some money, that he needed money for use in his business, and that Kennedy, who was "not engaged in the real estate business", desired some security for the $10,000, part of which he had in turn to borrow from others than himself. Having, as he testified, some experience in real estate, and aware that the first mortgage to the Manchester Savings Bank was in the amount of $50,000, Kennedy estimated that such mortgage was approximately eighty percent of true value of $60,000 and that Ardini could probably develop equity therein sufficient to repay the sum of $10,000 advanced him by Kennedy. No interest-bearing note was drafted, and Kennedy intended that, provided the Ardinis made payment of all mortgages, taxes, maintenance, and insurance on the premises, they would be entitled to remain resident upon the premises and would have the right of first refusal if in the interim approach was made to Kennedy by a prospective purchaser. The Court finds that, while the Kennedys were not aware that the conveyance to them would be a fraud on creditors, they were aware that the funds advanced were to be used in Ardini's business and that it was their pure intent to advance same as a loan to him, expecting repayment when his business got back on its feet. Such loan being existent, plaintiff herein is entitled to a first priority for payment thereof out of the proceeds of the sale of the subject real estate. See 26 U. S. C. §6323(a); N. H. RSA 545:9.

The Court finds and rules that the third party, Betty J. Ardini, is indebted to the United States of America for unpaid income taxes, penalties, and interest for the years 1970 through 1975, in an amount in excess of $111,000, for which payment is to be made subject to the first priority of Mary Frances Kennedy for repayment of her loan herein. The Court further finds and rules that the United States has demonstrated by clear, convincing, and direct evidence that the conveyance of Betty J. Ardini to Mary Frances Kennedy on October 9, 1967, Plaintiff's Exhibit 1, was in fraud of creditors and must be set aside, as such conveyance at the time made was incurred without fair consideration when the person making the conveyance intended or believed that she would incur debts beyond her ability to pay as they matured, N. H. RSA 545:6, and was incurred with actual intent to hinder, delay, or defraud either present or future creditors, N. H. RSA 545:7.

The foregoing shall comprise the findings and rulings of the Court pursuant to the applicable provisions of Rule 52(a), Fed. R. Civ. P. Any requests for findings or rulings on the part of any of the parties hereto which are not hereinabove inferentially granted are herewith denied. Counsel for the defendant United States of America is directed herewith to prepare and file with the Court a proposed order of judgment not later than Wednesday, February 24, 1982, which order of judgment shall set forth therein the order of distribution and the amounts thereof of the proceeds of the sale of the real estate here at issue, which proceeds are currently on deposit pursuant to the escrow agreement previously entered into between and among the parties.

SO ORDERED.

¹ The instant action was originally filed in the Superior Court of Rockingham County, New Hampshire, and from there was removed to this court. While the action was here pending, the estate at issue was sold for a price agreed to be fair between and among the parties, and the funds from the sale were placed at interest pursuant to an escrow agreement.

² At all times here pertinent prior to 1981, William F. Ardini and Betty J. Ardini were husband and wife, but dissolution of the marriage occurred through divorce proceedings in 1981.

³ Ralph Cote was the father of Arthur Cote, and they operated a substantial motor vehicle franchise in Massachsuetts under the name and style of Cote Motor Company, Inc.

⁴ In the earlier years, the described financing was furnished by a subsidiary of the National Shawmut Bank, and subsequently the "floor plan" was taken over by Ford Motor Credit Company. At times pertinent to this litigation, the financing institutions required personal guarantees as security for their advancement of funds, and such personal guarantees were executed by both William F. and Betty J. Ardini.

⁵ The second mortgage, Defendants' Exhibit JJ, was executed on January 27, 1967, for the total amount of $20,000.

⁶ The first mortgage to Manchester Savings Bank, Exhibit KK, was executed on April 27, 1967, for funds totalling $50,000. From such funds, the balance remaining on the prior mortgage to Piscataqua Savings Bank, Exhibit W, was paid, and the rest, per the testimony of Mr. Ardini, was used toward payment of his business creditors.

⁷ The $10,000 thus advanced was made up in part of funds already possessed by Kennedy, and the remainder of the total was comprised of funds by him borrowed from others.

⁸ Defendants' Exhibit LL is a copy of the above-referenced deed from Betty J. Ardini to Leland W. Davis, and bears thereon certification such that clearly the document complies with the requirements of Rules 1005 and 902, Fed. R. Evid. Accordingly, the identification is herewith stricken from Exhibit LL, and it becomes a full exhibit.

⁹ Or as has been elsewhere stated:

Proof, however, need not be absolute; it may be founded on circumstances when "the defendant's motive to mislead was strong and his conduct both before and after the misrepresentation complained of evinced a controlling intent to look after his own interest rather than carry out his commitments to the plaintiff." Brochu v. Ortho Pharmaceutical Corp., 642 F. 2d 652, 662 (1st Cir. 1981) (citing Lampesis v. Comolli, 101 N. H. 279, 283, 140 A. 2d 561, 564 [1958]).

¹⁰ Ardini testified that he borrowed $50,000 to pay for Ralph Cote's share of stock, but Arthur Cote (in his deposition, Plaintiff's Exhibit 6) testified that the amount paid to Ralph Cote was approximately $35,000, and we adopt the lower figure.

¹¹ Arthur Cote also testified that the annual floor plan of Cote Lincoln-Mercury averaged $85,000 to $100,000, and we adopt the lower figure of $85,000.

¹² Arthur Cote testified that Cote Lincoln-Mercury averaged gross motor vehicle sales of $1,800,000 and an additional $150,000 of sales of service and parts. Of this total of $1,950,000, the net profit was eight percent, or $156,000.

¹³ Ardini testified that an income tax audit in 1965 failed to develop any liabilities by him owed to the United States, and the first year for which the Government here seeks to establish an income tax liability is 1969, some five years after the 1964 transfer.

¹⁴ Ardini's attorney testified that he suggested this transfer in accordance with his philosophy (somewhat startling in the modern age) to the effect that a wife should have the residential home but no interest whatsoever in her husband's business. Ardini's testimony was similar; he felt that as his wife had no interest in the business, the house should be hers without business entanglements. Subsequent requirements that Mrs. Ardini execute personal guarantees of the business proved these suggestions to be somewhat illusory.

¹⁵ For the reasons set forth in n. 8, supra, the Court herewith strikes identification from Defendants' Exhibits CC, II, MM, and OO. As to Exhibit NN, the identification is stricken based on the acknowledged testimony of Mr. Ardini as to the guarantee, Mrs. Ardini's refusal to deny that she made such guarantee, the hearsay exceptions pursuant to Rule 803(14), (15), and the clear indication by stamps and the signature of a Justice of the Superior Court that said exhibit is a proper document from the Superior Court of Rockingham County.

 

 

 

Glenn C. Stophel, Substitute Trustee for First National Bank of Polk County, Tennessee, and First National Bank of Polk County, Tennessee, Plaintiffs v. United States of America, Shannon Internationale, Inc. and Mike Shular, d/b/a Shular Realty & Auction Company, Defendants

U. S. Dist. Court, East. Dist. Tenn., So. Div., CIV-1-79-166, 6/16/81

[Code Secs. 6321 and 6323]

Validity of lien: Fraudulent conveyance of real estate: Indicia of fraudulent intent: Third-party contract interest in attached property: Security interest: Estoppel.--A transfer of real property from a corporate taxpayer to a corporation which it controlled was void because it was made with an intent to defraud creditors. The following circumstances indicated an intent to defraud: (1) the close relationship between the taxpayer and the transferee, (2) the retention by the taxpayer of control over the property, (3) the lack of adequate consideration and (4) the pendency of litigation regarding the taxpayer's failure to pay income taxes. Further, a federal tax lien on the property filed against the controlled corporation as nominee of the taxpayer took priority over the interest of an individual who had auctioned the property pursuant to a contract with the controlled corporation. The interest of that individual in the property for his commission and expenses did not qualify as either a security interest or as a common law auctioneer's lien. Finally, the IRS was not estopped from claiming priority for its tax lien.

Gus A. Wood III, 736 Georgia Avenue, Chattanooga, Tennessee 37402, for plaintiffs. John H. Cary, United States Attorney, John F. Murray, Assistant United States Attorney, Chattanooga, Tennessee 37402. William Estabrook, Michael L. Paup, Department of Justice, Washington, D. C. 20530, for defendants. Richard Banks, P. O. Box 1333, Cleveland, Tennessee 37311, for Shannon Internationale, Inc.

Findings of Fact and Conclusions of Law

DICKSON, Magistrate:

This is an action for interpleader and jurisdiction of the Court is invoked pursuant to 28 U. S. C. §2410(b) and is not in dispute. Glenn C. Stophel, Substitute Trustee for the First National Bank of Polk County, Tennessee ("Bank") brought this interpleader action and deposited into Court the sum of $75,478.44. The United States is claiming an interest in this amount to the extent of its asserted federal tax lien against Shannon Internationale, Inc. ("Shannon") as nominee of Wilmart & Associates, Inc. ("Wilmart") and Mike Shular, d/b/a Shular Realty & Auction Company ("Shular") is claiming an interest in the proceeds pursuant to a contract with Shannon. This matter was tried before the United States Magistrate by agreement of the parties sitting without a jury. The Court now enters the following findings of fact and conclusions of law based upon the full record in the case.

Findings of Fact

1. The United States makes a claim on the amount deposited into Court by the Bank for taxes due by Wilmart for the years 1967 and 1968. Wilmart was a company substantially owned and controlled by William Held. The tax indebtedness of Wilmart was for corporate income taxes for the taxable periods ending 10/31/67 and 10/31/68. The amounts assessed and unpaid for these periods are $14,872.96 and $47,292.98 respectively. These amounts include taxes, penalties and interest up to 11/28/77, the date of the assessments.

2. Subsequent to 1968, Wilmart owned a promissory note in a face amount in excess of one million dollars due from Southeastern Properties, Inc. Wilmart transferred this note in exchange for eight parcels of real estate ("property") and cash. Title to the property was placed in the name of James Henry, Trustee, ("Henry") as Trustee for Wilmart in 1974. Title was placed in the name of Henry because William Held was anticipating going to jail for six months and wanted the property to be easily transferable to satisfy the tax liability of Wilmart.

3. On March 3, 1975, Wilmart's corporate charter was revoked by the State of Tennessee for failure to pay franchise taxes or failure to file a franchise tax return. The last federal income tax return filed by Wilmart was for the year ending October 31, 1971.

4. In July of 1975, at the instruction of William Held, Henry prepared deeds to transfer the property to Lawyers Title Company. Mr. Henry executed deeds transferring the property to Lawyers Title Company; however, Lawyers Title Company would not accept title to property in its name because Wilmart's corporate charter had been revoked. The name of the grantee on the deed was then changed from Lawyers Title Company to Shannon without Mr. Henry's knowledge. No consideration was given for the transfer from Henry to Shannon. Mr. Henry testified that other than the property he knew of no assets of Wilmart. Shannon was controlled by William Held.

5. The property, now titled in the name of Shannon, was then pledged by William Held as security for a loan from the Bank to Rebel Industries, another corporation controlled by Held. A deed of trust for the property was executed in favor of the Bank on March 14, 1977, and was recorded on March 21, 1977.

6. After the completion of many years of litigation in Federal Tax Court over Wilmart's tax liability, the taxes due against Wilmart for the calendar years 1967 and 1968 were assessed on November 28, 1977.

7. On March 16, 1978 and June 8, 1978, Notices of Federal Tax Liens were filed against Wilmart as to the property with the Register of Deeds of Hamilton County, Tennessee, and with the Clerk of the Superior Court, Catoosa County, Georgia, by the Internal Revenue Service ("IRS").

8. Rebel Industries defaulted on the note after a few months and the Bank sought enforcement of the note from William Held. After some discussions with Mr. Held, the Bank agreed to allow the property to be auctioned instead of foreclosing on the property.

9. On September 15, 1978, Shannon entered into a contract with Shular whereby the property would be auctioned. Shular was to develop and advertise the property and was to be reimbursed for such expenses and was to be entitled to a commission on the sale of the property.

The contract between Shular and Shannon provides in part as follows:

FOURTH--Second Party will furnish all labor and materials for dividing property into tracts and/or developing in such a manner as in the opinion of the Second Party will result in the highest return. Contractors, subcontractors, engineers and other professionals will be selected by the Second Party. The Second Party will stake and number the tracts, furnish auctioneer, ring men, prepare necessary deeds, trust deeds and notes and supervise closings, all at the expense of the Second Party. Second Party will also provide adequate directional signs for the auction, all at their own expense. Second Party shall be the sole and exclusive judge as to whether to subdivide or sell as a whole, date, time, place and manner of sale, and as to the nature and extent of any clearing, grading, drainage, roads and other physical improvements to the property.

4a:--First Party will pay all cost of necessary improvements as set out in the above paragraph and all amounts so expended (including engineering fees, professional fees and costs incident to the approval of any subdivision or rezoning which Second Party deems advisable), shall constitute reimbursable expense under Paragraph 5 below. All such sums so expended shall bear interest at Ten (10%) percent per annum from the date of disbursement to the date of reimbursement.

FIFTH--Proceeds from the sale will be divided as follows:

1. Payment of accrued taxes and mortgage to First National Bank of Polk County, Tennessee, in the approximate amount of $230,000.00.

2. Reimbursement to Second Party for all monies advanced by him for development, professional service and advertising up to $20,000.00 plus interest on such reimbursement at Ten (10%) percent per annum from the date disbursed to the date of reimbursement. (Advertising above $20,000.00, if any, shall be at the expense of Second Party).

3. Payment of Second Party's compensation which shall be Ten (10%) percent of the gross sales price.

4. Balance to First Party.

10. The Court finds that the terms of the contract provided for proceeds from the sale of the property to be apportioned first to the Bank for real estate taxes and payment of the note on which the property was pledged, then to Shular for all monies advanced by him for the development and professional service. In addition, Shular's advertising costs up to $20,000 shall be reimbursed and Shular is entitled to 10% of the gross sales as commission. The balance would then be paid to Shannon.

11. Subsequent to entering into the contract, Shular began expending money for advertising and developing the property for the auction. At some time subsequent to this the IRS learned of the contract between Shular and Shannon and the steps being taken by Shular in preparation for the auction.

12. In 1978, Doris Evans, a revenue officer with the Internal Revenue Service, attempted to collect the outstanding tax liabilities of Wilmart. Ms. Evans was unable to find any assets belonging to Wilmart. On December 1, 1978, the IRS filed a Notice of Tax Lien on the property against Shannon as nominee for Wilmart. Also on December 1, 1978, Ms. Evans contacted Verlin Watson, an employee of Shular concerning the tax liens. On December 4, 1978, Ms. Evans notified Michael Shular of the tax liens against Shannon and Wilmart.

13. On December 6, 1978, an auction sale was held at which time parcels of the property were sold at Lee Highway and at Shallowford Road in Hamilton County, Tennessee, and at Scruggs Road in Catoosa County, Georgia. The parcel of land at Shallowford Road was divided into three tracts for sale and Michael Shular purchased two of these three tracts at the auction. The total selling price for the parcels sold on December 6, 1978, was Two Hundred Sixteen Thousand Six Hundred Twenty-five ($216,625.00) Dollars.

14. The proceeds from the auction sale were placed with Stophel, Caldwell & Heggie as Trustee for both the Bank and Shular in order to close the auction sales.

15. The sum realized from the auction sale was insufficient to satisfy the real estate taxes and debt secured by the mortgage held by the Bank. The remaining parcels were sold at foreclosure on May 3, 1979, to Michael Shular who purchased the property for One Hundred Thirty-one Thousand Three Hundred Sixty Seven Dollars and Ninety-eight Cents ($131,367.98). After the payment of the debt due the Bank for its note, interest and attorney's fees, the sum of Seventy Five Thousand Four Hundred Seventy-eight and Fourty-four Cents ($75,478.44) remained in the hands of the law firm of Stophel, Caldwell & Heggie.

16. On May 7, 1979, the IRS issued a levy on the excess proceeds in the hands of Stophel, Caldwell & Heggie for taxes allegedly due from Shannon as nominee for Wilmart. Subsequently Stophel, Caldwell & Heggie filed this interpleader action to determine the rights of various parties to the $75,478.44.

17. Shular testified that he had expended or become liable for $13,210.93 plus interest of $1,216.47 for advertising expense and $36,152.31 plus interest of $2,368.08 for development costs pursuant to the terms of the contract. Shular further testified that he was entitled to a commission in the amount of $21,662.50. The Court finds that these expenditures by Shular were within the terms of the contract and were reasonable and made to enhance the value of the property so as to increase the price for which the property could be sold. Shular further testified that his expenses to Stophel, Caldwell & Heggie in connection with the preparation of deeds, notes, deeds of trust and the supervision of closing was $1,350.00. Shular and Shannon stipulated that the amount due Shular under the terms of the contract would be $70,000.00.

Conclusions of Law

1. This action, in the nature of an interpleader, is properly before the Court and the Court has jurisdiction in this case.

2. The IRS contends that the funds deposited in Court are subject to a Federal Tax Lien for all taxes owed by Wilmart. The United States contends that the transfer from James Henry, Trustee, to Shannon was a fraudulent conveyance and that Wilmart was rendered insolvent by the conveyance. The IRS contends that its tax lien takes priority over any claim to the fund by Shular or Shannon.

3. Shular contends that the transfer from James Henry, Trustee, to Shannon was a valid transfer and that it has a contract lien or a possessory lien which takes priority over the IRS tax lien for the funds deposited in Court. Shular further contends that the Notice of lien by the IRS to Wilmart was not valid and that the United States' lien is void because Wilmart was not a corporation at the time of the Notice. Shular also contends that the United States is estopped to challenge the amounts claimed by Shular because of its actions in allowing Shular to make expenditures for the development of the property and advertising the auction sale and then claiming the proceeds from the sale.

4. Shannon claims that it is the owner of the property which was sold and the proceeds from the sale are not subject to a tax lien in favor of the IRS. Shannon contends that it is entitled to any amounts in excess of the amount stipulated to be due to Shular.

5. The first question to be resolved is whether the transfer from Henry to Shannon was a valid transfer. Before this transfer can be rendered void it must be shown that either the transfer rendered Wilmart insolvent or that the transfer was made with the intent to hinder, delay or defraud creditors. Under either of these theories the burden of proof is on the IRS. Hux v. Butler, 220 F. Supp. 35 (W. D. Tenn. 1963) rev. on other grounds 339 F. 2d 696 (6th Cir. 1964).

6. To attempt to prove that the transfer rendered Wilmart insolvent the only testimony offered by the IRS was from James Henry that he knew of no other assets of Wilmart other than the property and from Doris Evans that she could not locate any assets of Wilmart. The Court concludes that this testimony falls short of carrying the burden of proof by a preponderance of the evidence that Wilmart was rendered insolvent by the transfer. There was no testimony from any shareholder of Wilmart concerning its solvency or insolvency. The Court concludes that these two witnesses did not have enough knowledge of the affairs of Wilmart to warrant a conclusion that Wilmart was rendered insolvent by the transfer.

7. The second method of voiding the transfer from Henry to Shannon would be to show that the conveyance was made with an intent to burden, delay or defraud creditors. This method of avoiding a transfer is covered by statute in Tennessee, 64 T. C. A. 301 which provides in part as follows:

Conveyances and fraud of creditors or purchasers void.--Every gift, grant, conveyance of land . . . had or made and contrived, of malice, fraud, covin, collusion or guile, to the intent or purpose to delay, hinder or defraud creditors of their just and lawful actions, suits, debts, accounts, damages, penalties, forfeitures . . . shall be deemed and taken only as against the person, his heirs, successors, executors, administrators and assigns whose debts, suits, demands, estates or interest, by such guileful and covinous practices as aforesaid, shall or might be in anywise disturbed, hindered, delayed or defrauded, to be clearly and utterly void . . .

8. Violations of this statute are referred to as "fraud in law". It is not necessary to prove the actual intent to defraud by direct and express evidence but intent may be proved by circumstantial evidence. Where circumstances surrounding a transaction are suspicious, the burden of proof may shift to the defendant to show the validity of the transfer. Gurlick's, Inc. v. Myrick, 388 S. W. 2d 365 (Tenn. Ct. App. 1964).

9. Evidence which might indicate fraud and create suspicious circumstances surrounding a transfer are as follows:

(1) Close relationship between the grantor and the grantee;

(2) Inadequate consideration for the transfer;

(3) Retention by transferor of control of property;

(4) Pendency of litigation;

(5) Indebtedness of transferee;

(6) Transferor of a debtor's entire estate. 36 Am. Jur. 2d Fraudulent Conveyance, §10; Bank of Blount County v. A. D. Dunn, 10 Tenn. App. 95 (1929).

10. In the instant case, Henry was holding the property for Wilmart which was controlled by William Held. Shannon was also controlled by William Held. Therefore, there was a close relationship between the grantor, Henry as trustee for Wilmart and the grantee, Shannon. The testimony was that there was no consideration for the transfer. The fact that William Held was able to negotiate a $200,000.00 loan secured by the property owned by Shannon for a debt to Rebel Industries also controlled by Held indicates that there was retention by the transferor, Wilmart, of control over the property. At the time of the transfer there was litigation pending in the tax court concerning Wilmart's indebtedness for failure to pay income taxes and there was also testimony that the transfer depleted all the assets of Wilmart. Therefore, the Court concludes that almost all the factors which are considered badges of fraud and which indicate that a transfer is suspicious have been met. The burden then shifts to the defendant to show the validity of the transfer. The Court concludes that the defendant has not carried the burden of showing the validity of the transfer. The transfer from James Henry, trustee, to Shannon is void pursuant to 64 T. C. A. §301.

11. This brings us to the consideration of the validity and priority of the lien asserted by the IRS. 26 U. S. C. §6321 provides that there will be a lien in favor of the United States upon property or rights to property of any person who is liable to pay taxes and neglects or refuses to pay the taxes on demand. 26 U. S. C. §6322 provides that the lien imposed pursuant to §6321 shall arise at the time the assessment is made and shall continue until a liability for the amount assessed is satisfied or becomes unenforceable by reason of lapse of time. In the instant case, IRS assessed the taxes against Wilmart on November 28, 1977, and filed notice of liens in the Hamilton County Register's Office, Tennessee and Catoosa County Register's Office, Georgia, against the property in question on March 16, 1978.

12. On December 1, 1978, the IRS filed Notice of Tax Liens against Shannon as nominee of Wilmart. As previously determined the transfer of the property in question from Henry as trustee for Wilmart to Shannon was a void transfer and therefore the true owner of the property at the time of filing of this lien was Wilmart. A nominee lien such as the lien filed against Shannon is a valid method for the IRS to place lien on property which has been conveyed to avoid creditors. See Baldassari v. United States, 78-2 USTC ¶9560 (Cal. Ct. of App. 1978); Avco Delta Corp. v. United States [76-2 USTC ¶9570], 540 F. 2d 258 (7th Cir. 1976).

13. Having found that a valid lien was placed against the property and that the property was in fact owned by Wilmart, the priority of any interest of Shular as opposed to the interest of the IRS is the next matter to be determined. Federal law controls with respect to matters of priority once it is determined that a Federal Tax Lien has attached to property. Randall v. H. Nakoshimer & Co. Ltd. [76-2 USTC ¶9770], 548 F. 2d 270 (5th Cir. 1976).

13a. Shular first relies on 26 U. S. C. §6323(a) to assert a priority over the IRS's lien. 26 U. S. C. §6323(a) profices that a lien imposed by §6321 shall not be valid against any purchaser, holder of a security interest, mechanic's lienor or judgment lien creditor until Notice thereof which meets the requirements of the federal tax law has been filed by the IRS.

14. Shular contends: (1) that it was the holder of a security interest; and (2) that proper notice was not given of the tax lien by the IRS because Wilmart's corporate charter had been revoked at the time the Notice of Federal Tax Lien was filed against Wilmart in Hamilton County, Tennessee and Catoosa County, Georgia. Whether proper notice was given will be considered initially. Wilmart was a Tennessee corporation. At the time Wilmart's charter was revoked, on March 3, 1975, Wilmart ceased to be a corporation for the purposes of receiving notice. Any shareholders, officers or directors of the defunct Wilmart would be the correct person to give Notice of a Federal Tax Lien. United States v. Glenn Upton, Inc., 378 F. Supp. 1028 (W. D. Mo. 1974). Therefore, the Notice of Tax Liens filed against Wilmart after it ceased to be a valid corporation would be ineffective. Shular contends that since Shannon was named as a nominee of Wilmart in the Notice of Tax Lien filed against Shannon this Notice of Tax Lien is invalid also. No authority is cited for this proposition. The Notice of Federal Tax Lien filed against Shannon listed the taxpayer as being Shannon Internationale, Nominee of Wilmart, and was filed against Shannon at a time Shannon was a valid corporation and existent. The Court concludes that proper notice pursuant to §6323 was given to Shannon.

15. In addition, to be entitled to a priority over the IRS pursuant to the provisions of §6323(a), Shular must be a holder of a security interest in the property. A security interest as it relates to 26 U. S. C. §6323(a) is defined in 26 U. S. C. §6323(h)(1) as follows:

The term "security interest" means any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. . . .

The contract between Shannon and Shular had no provisions giving Shular a security interest in the property for his commissions and expenses. Shular contends that an auctioneer has a secured interest by virtue of an auctioneer's lien at common law. If Shular had any type of lien on the property it would have been acquired pursuant to common law and would not be a security interest as it was not acquired by contract as defined in 26 U. S. C. §6323(h)(1).

16. Shular next contends that, even though notice of the lien may have been properly given, its interest in the property is entitled to priority over the Federal Income Tax Lien. Shular asserts this priority under several theories. Shular first contends that it is entitled to a priority pursuant to 26 U. S. C. §6323(b)(5). This provision relates to a lien on "tangible personal property" securing a reasonable price for the repair or improvement of such property. The property in question in the instant lawsuit is real property. Clearly, this code section is not applicable and provides, no basis for priority on the part of Shular.

17. Shular next contends that it would be entitled to priority over the Federal Tax Lien by reason of a contract or equitable lien which it has on the property. Such a lien would arise only pursuant to the terms of a written contract or one which is implied or declared by a court of equity out of general consideration of right and justice as applied to the relations of the parties and the circumstances of the dealings. Bennett Construction Co., Inc. v. Allen Gardens, Inc., 433 F. Supp. 825 (W. D. Mo. 1977). There must be an intent on the part of the parties, either express or implied that certain property serve as security for payment of a debt or obligation. 51 Am. Jur. 2d, Liens, §24. As previously set out, there is no provision in the contract which specifically grants a lien on the property or from which an intention to place a lien on any property can be implied. An equitable lien will not be implied merely by showing a breach of contract or a failure to pay an indebtedness. 51 Am. Jur. 2d, Liens, §24. There is no proof that the parties to the contract contemplated such an equitable lien and the relationship of the parties and circumstances of the dealings do not justify such a lien. The Court further notes that even if Shular was entitled to an equitable lien on the property it would not take priority over the IRS's lien. As will be discussed in detail below in connection with an auctioneer's lien, such an equitable lien would be an inchoate lien because the amount of the lien would be uncertain.

18. Shular also contends that his interest in the property takes priority over the government's interest pursuant to 26 U. S. C. §6323(c). This section provides that even though notice of a lien has been given the lien shall not be valid with respect to a security interest which came into existence after a tax lien filing but which is in qualified property covered by the terms of a written agreement entered into before the tax lien filing and constituting among other things an "obligatory disbursement agreement". The term obligatory disbursement agreement is defined in 26 U. S. C. §6323(c)(4)(A) as being an agreement entered into by a person in the course of his trade or business to make disbursements, but only such disbursements which are required to be made by reason of the intervention of the rights of a party other than the taxpayer. Treasury Regulation §301.6323(c)-3(b) further explains and defines an obligatory disbursement agreement by providing that the obligation to pay must be conditioned upon an event beyond the control of the obligor. The agreement between Shannon and Shular was not entered into as part of Shannon's trade or business and the obligation to pay was not beyond the control of the taxpayer, in this instance Shannon. The Court concludes that the agreement between Shannon and Shular is not an obligatory disbursement agreement, and that §6323(c) does not give Shular's interest in the property priority over the IRS's lien.

19. Shular next contends that it had a common law auctioneer's lien against the property in question and that this lien took effect at the time Shular entered into its contract with Shannon on September 15, 1978. Shular contends that this lien has priority over the lien asserted by the IRS. It has been held in some jurisdictions that an auctioneer has a lien on property entrusted to him for his expenses and commissions. 7 Am. Jur. 2d, Auctions and Auctioneers §62. There are no Tennessee cases indicating whether or not Tennessee recognizes such a common law auctioneer's lien. However, assuming that Tennessee would recognize such an auctioneer's lien the question becomes whether this lien is a choate lien or an inchoate lien. S & S Gasket Co., Inc. v. United States, 79-1121 (6th Cir. decided Dec. 11, 1980). The Court has previously concluded that the notice of lien filed against Wilmart in March, 1978, was not a valid notice since Wilmart was no longer a corporation at that time and notice was not given to Wilmart's shareholders, directors or trustees. However, the Court further concluded the notice filed against Shannon as nominee of Wilmart on December 1, 1978, was a valid notice. Therefore, if Tennessee recognizes an auctioneer's lien and if such a lien was a choate lien prior to December 1, 1978, it would take priority over the tax lien of the IRS. Before a competing nonfederal lien is held to be a perfected choate lien so as to take priority over a Federal Tax Lien it must be definite in three respects: (1) the identity of the lienor; (2) the property subject to the lien; and (3) the amount of the lien. 94 A. L. R. 2d 755; 35 Am. Jur. 2d, Federal Tax Enforcement, §21; S & S Gasket Co., Inc. v. United States, supra. The amount of the lien must be clearly established, must not be subject to change and must not be dependent upon any contingency. In the instant case the amount of Shular's lien would clearly not be definite. The entitlement to commissions and the amount would be contingent upon the sale of the property. Until the property was sold Shular would not be entitled to any commissions and the amount of commissions to which Shular would be entitled would be entirely dependent upon the amount received for the property at the auction. Therefore, if there is a common law auctioneer's lien in Tennessee it would not be choate until the time of the auction on December 6, 1978. Shular's lien would have been inchoate at the time of the filing of the Notice of Federal Tax Liens on December 1, 1978, and would not have priority over the federal tax liens.

20. The last ground asserted by Shular is that the IRS is estopped to assert a claim to the proceeds due to Shular by its conduct of not advising Shular of its tax lien against the property until December 1, 1978. Initially, it should be noted that the only amounts to which the government could possibly be estopped from asserting would be expenditures by Shular prior to December 1, 1978. Subsequent to this time, Shular was advised and had actual knowledge of the IRS' claim to a Federal Tax Lien on the property and any expenditures or commissions earned after that date would have been incurred or earned by Shular after Shular's actual knowledge of the government's position.

As a general rule estoppel may be asserted against the United States only under special circumstances. Automobile Club of Michigan v. Commissioner [57-1 USTC ¶9593], 353 U. S. 180 (1957). In addition, at times silence or inaction may be grounds to assert estoppel. However, before silence or inaction may work as an estoppel there must be some element of moral turpitude or negligence in connection with the silence or inaction by which the other party is misled to his detriment. 28 Am. Jur. 2d, Estoppel and Waiver, §53. Before a party may be estopped by silence there must be an intent on the party's part to mislead and the silence must amount to bad faith. 28 Am. Jur. 2d, Estoppel and Waiver, §53.

There has been no finding in this case that the IRS, through its agents, misled or misrepresented any matters to Shular. The only action taken by the IRS agents involved attending the auction and explaining the tax lien situation to prospective purchasers. Shular apparently contends that the government would be estopped because the agents did not advise Shular of tax lien and stood by and allowed him to expend monies in preparation for the auction sale. The Court found that the IRS was aware of the contract between Shular and Shannon and was aware that expenditures were being made on the property; however, there is no proof in the record as to when the IRS actually learned of the contract and learned of the expenditures. The only matter of which the IRS could have advised Shular was that they were asserting a tax lien against the property. There is no proof as to when in time this could have been done. Whether or not the assertion against Shannon as a nominee was valid and whether or not their tax lien would take priority over the interest of Shular were legal questions of which Shular could not be advised by the IRS. These questions of fraudulent transfer, notice and priority are legal questions to be resolved by this Court. The IRS' failure to advise Shular of these matters will not operate to estop the IRS from asserting its tax lien and contending that it is a prior lien to the interest claimed by Shular. There are no special circumstances in this case which would justify asserting estoppel against the United States.

The Court concludes that the Federal Tax Lien has priority in this case and that the IRS is entitled to recover $62,165.94 plus any interest and penalty according to law against the funds deposited into Court by the Bank. Within 20 days from the date of the entry of these findings of fact and conclusions of law the parties shall file a stipulation as to the proper amount of interest and penalty due to the IRS. All additional funds shall be paid to Shular pursuant to his contract with Shannon. Subsequent to the entry of the stipulation a final judgment will be entered.

 

 

 

United States of America, Plaintiff v. Jake E. Wilson, et al., Defendants

U. S. District Court, No. Dist. Tex., Lubbock Div., Civil Action No. CA-5-78-23, 500 FSupp 831, 11/10/80

[Code Secs. 6323 and 6502]

Lien for taxes: Foreclosure: Fraudulent conveyance: Statute of limitations.--A conveyance of real property by the taxpayers to their children was void as a fraudulent conveyance because the consideration paid by the children for the property was for less than its fair market value, and the lien of the United States on the property was foreclosed. The action to foreclose the lien was not barred because it was filed within six years of the assessment of the tax. The four-year Texas statute of limitations for fraudulent conveyances was inapplicable because the United States, acting in its sovereign capacity, was not bound by a state statute of limitations. The taxpayers were in possession of the property at all pertinent times and the property was a homestead and was not abandoned by the taxpayer's purported sale to their children.

Memorandum Opinion

WOODWARD, Chief Judge:

The above case came on to be tried on the 3rd day of November, 1980, with all parties still subject to suit appearing in person or by and through counsel. After hearing and considering the evidence, pleadings, and argument and briefs of counsel, the court files this memorandum which shall constitute the court's findings of fact and conclusions of law.

In addition to the findings herein stated, those findings of fact and conclusions of law attached hereto are made a part hereof and the stipulations of the parties are included as a part of the court's findings of fact.

Briefly, the Government seeks to foreclose its tax lien on property purchased in 1961 by Jake Wilson and wife, Betty Wilson. The Wilsons have resided on this property from the date of its purchase until the present time and this property constitutes their homestead under the laws of the State of Texas.

On October 6, 1971, Mr. and Mrs. Wilson conveyed the property in question to their four children reserving a life estate unto themselves. The only consideration paid for the transfer was the assumption by the taxpayers' children of a $5,000.00 purchase money mortgage and the ad valorem taxes. Prior to the conveyance, the Government and the Wilsons informally agreed upon a settlement of tax claims pending against the Wilsons and the tax liabilities were then properly assessed on February 28, 1972 and May 2, 1974. A notice of federal tax liens was recorded on June 28, 1972 and June 12, 1974. On January 18, 1973 the Government learned of the property transfer from Mr. and Mrs. Wilson to their children and subsequently filed this suit on February 27, 1978 to set aside the conveyance as fraudulent and to foreclose on their tax liens.

According to Texas law, a transfer of real property is void with respect to a creditor if it was intended to delay or hinder a creditor from obtaining that to which he is, or may become entitled or to defraud a creditor of that to which he is, or may become entitled. TEX. BUS. & COM. CODE §24.02(a). The stipulated facts indicate that before the conveyance in question, the Wilsons and the Government had informally agreed to settle pending tax claims. The Wilsons then knew about their pending liability prior to making the conveyance to their children and their actions were an attempt to defraud the United States of property to which it was entitled. Texas Sand Co. v. Shield, 381 S. W. 2d 48 (Tex. 1964). Although the stipulated Tax Court decisions as well as the formal assessments were not rendered until after the property transfer, the liability was already well-established. Viles v. Commissioner [56-1 USTC ¶9539], 233 F. 2d 376 (6th Cir. 1956).

Furthermore, a transfer by a debtor is also considered void if it is not made for fair consideration, unless, in addition to the property transferred, the debtor has at the time of transfer enough property to pay all of his debts. TEX. BUS. & COM. CODE §24.03(a). The consideration in this case was the assumption of a $5,000.00 mortgage and the ad valorem taxes amounting to $5,867.77. The estimated fair market value of the property at the time of transfer was stipulated as $45,000.00. Because of the large disparity in consideration amount and the fair market value, the transfer must be deemed void especially in light of the taxpayers' tax settlement which led to a Tax Court decision against them for $93,181.95. The Wilsons admitted their inability to provide a listing of assets owned on the date of the transfer, indicating an insufficiency of assets with which to pay debts.

The court therefore finds and concludes that the conveyance by Mr. and Mrs. Wilson to their children of this land was a fraudulent conveyance in an effort to defraud creditors including the United States of America on its income tax claims. Since a fraudulent conveyance of real property is null and void as to a creditor, the conveyance of October 1971 was void as to the United States and its liens properly attached to the property in 1972 and 1974.

The defendants' main contention is that because this is a suit to set aside a fraudulent conveyance, the Texas four-year statute of limitations. TEX. REV. CIV. STAT. ANN. §5529, precludes the action, and that the Government should be barred because it did not file suit within four years after it first learned of the transfer. On the other hand, the Government argues that the Federal Statute 26 U. S. C. §6502 (1967) applies in this case allowing suit to be filed within six years of the assessment.

Although state law may be controlling in the determination of a taxpayer's interest in property, the United States is acting within its sovereign capacity in enforcing its lien and is not bound by a state statute of limitations. United States v. Summerlin [40-2 USTC ¶9633], 310 U. S. 414 (1940); United States v. West Texas State Bank [66-1 USTC ¶9285], 357 F. 2d 198 (5th Cir. 1966). Additionally, liens for Federal taxes and the manner of their enforcement are controlled by Federal law. Folsom v. United States [62-2 USTC ¶9648], 306 F. 2d 361 (5th Cir. 1962), S. D'Antoni, Inc. v. Great Atlantic and Pacific Tea Co., Inc. [74-2 USTC ¶9552], 496 F. 2d 1378 (5th Cir. 1974). Section 6321 of the Internal Revenue Code allows a lien to arise in favor of the United States on the taxpayers' property when the tax has not been paid. In the case of income taxes, the lien arises at the time the tax assessment is made and continues until the liability is satisfied or becomes unenforceable by reason of lapse of time. 26 U. S. C. §6322 (1967). The statute giving substance to the phrase "lapse of time" is 26 U. S. C. §6502(a) which permits a period of six years after the assessment of the tax in which to collect by levy or by a proceeding in court. Moyer v. Mathas [72-1 USTC ¶9342], 458 F. 2d 431 (5th Cir. 1972).

The present case has been filed within the six-year time frame and is thus not precluded under the Federal statute of limitations.

Further, part of the present suit is considered ancillary since it is brought against third persons in aid of collecting a judgment against a taxpayer, namely to set aside a fraudulent conveyance. Hall v. United States [68-2 USTC ¶9665], 403 F. 2d 344 (5th Cir. 1969). The Fifth Circuit has held that a suit of this nature may even be filed after the six-year period contemplated by 26 U. S. C. §6502. Hall, supra. Again, the Government's suit against the taxpayers and the third parties was filed within six years of the assessments and could not be considered time-barred under the Hall reasoning.

Based upon the Wilsons' possession of the property from the date it was acquired until the present time, the court holds that the property in question was a homestead at all pertinent times and was not abandoned by the purported sale to the Wilsons' children. See Floyd v. Rice, 444 S. W. 2d 834 (Tex. Civ. App.--Beaumont 1969, writ refd. n. r. e.); Franklin v. Woods, 598 S. W. 2d 946 (Tex. Civ. App.--Corpus Christi 1980) (abandonment requires both cessation of use as homestead and intent to permanently abandon). Thus, the lien sought by Simons & Company has never attached to the property due to the Texas homestead exemption and all relief prayed for by this defendant is denied. The homestead defense is likewise available against other judgment lien creditors of the Wilsons and these creditors are not in a position to claim any part of the proceeds on the foreclosure sale.

Therefore, based upon the above and the attached findings of fact and conclusions of law which are here adopted and incorporated herein for all purposes, as well as the stipulations in this case, judgment will be entered in favor of the Government against Jake Wilson and wife, Betty Wilson, in the amount of $264,221.83 plus interest from September 9, 1977 at the rate of $29.56 per day to the date of entry of judgment plus interest at the legal judgment rate thereafter. The court will enter an order of foreclosure ordering the property to be sold to satisfy the judgment. The Plainview Independent School District, the City of Plainview, Texas, and the County of Hale will recover out of the first moneys from the foreclosure sale amounts sufficient to pay any and all taxes and penalties owing upon the property. This payment of property taxes will be prior to the claims of the Government on its income tax assessments and liens. As the children of Mr. and Mrs. Wilson are the transferees under a null and void conveyance, they are not entitled to recover any amounts of money they may have paid to third parties in satisfaction of the purchase money mortgage originally placed against the property.

The Government will hereby prepare a judgment setting forth the proper description of the property to be entered in accordance with this memorandum.

All costs will be taxed against the defendants, Jake E. Wilson and wife, Betty Wilson.

 

 

 

Eva Bretz, Plaintiff v. United States of America, Defendant v. Lavon R. Bretz and Union Trust Company, Counterclaim Defendants

U. S. District Court, Dist. Mont., CV 76-23-GF, 7-22-80

[Code Sec. 6323]

Tax liens: Property interest: Resulting trust: Unpaid taxes.--A taxpayer was held to have a real property interest at the time a federal tax lien was filed against the property because of unpaid income taxes he owed. The court determined that, although the taxpayer had caused the title to be placed in the name of his parents, this was done in an effort to hinder, delay or defraud his creditors, and, thus, constituted a resulting trust in favor of the taxpayer. The court ordered that the amounts from the sale of the property, which were on deposit with the court, were to be applied to the unpaid taxes, interest and penalties.

Richard Martin, Scott, Linnell & Newhall, Box 1484, Great Falls, Mont 59403, for plaintiff. George F. Darragh, Jr., Assistant United States Attorney, Butte, Mont. 59701, William A. Bower, Department of Justice, Washington, D. C. 20530, for defendant.

Findings of Fact and Conclusions of Law

Findings of Fact

SMITH, District Judge:

I. A summary judgment has been entered on the counterclaim of the United States against the cross-defendant Lavon R. Bretz (Lavon) in the amount of $31,311.25 on account of unpaid income taxes owed by Lavon in the years 1966, 1967, 1968, and 1969. Notices claiming a lien for the Lavon R. Bretz taxes on what is known as Lot 8, Block 1, Park Garden Estates, Great Falls, Montana, then standing in the names of Joseph A. and Eva Bretz, was filed in November, 1973. Pursuant to an order of this court, the United States discharged its lien, the real property was sold, and there is now deposited in the registry of this court the sum of $31,604.44 to be disbursed in accordance with the terms of the judgment entered herein.

II. On October 12, 1966, an estimate showing a total of $45,500.00 for the construction of a house in Park Garden Estates was prepared for Lavon by Robert P. Gaither, Inc. (Gaither). On October 14, 1966, Lavon and his wife Mary Ann (Mary) signed a written contract to purchase Lot 8, Block 1, Park Garden Estates from Gaither. On December 1, 1966, Gaither received a deed from one Tom Mather, and on the same day gave a deed of trust to Union Bank and Trust Company of Helena (Union Bank) to secure a loan of $34,900.00. Apparently on the same day Lavon and Mary assumed the obligation of Gaither. Lavon and Mary authorized Union Bank to permit the Land Title Guaranty Company (Guaranty) to disburse the loan proceeds. Guaranty disbursed $37,900.00 of the loan proceeds, and an additional $12,500.00 deposited with it by Bretz, to various persons supplying labor or materials for the house.

III. On February 15, 1968, Gaither quitclaimed Lot 8, Block 1, Park Garden Estates, to Joseph A. and Eva Bretz, the father and mother respectively of Lavon.

IV. From the time the house was ready for occupancy in 1968 until Lavon went to prison, Lavon and Mary occupied the house. Thereafter May lived in the house until it was sold in 1977. Joseph A. and Eva Bretz, except for short visits, never did live in the house.

Lavon or Mary made all of the mortgage and tax payments on the house. Joseph A. and Eva Bretz made none.

Lavon deducted on his income tax returns his tax and interest payments incurred in connection with the house.

In various financial statements Lavon claimed ownership of the house.

V. It cannot be determined from the record whether in February, 1967, Lavon was insolvent. He was in those years conducting a law business. Bank accounts were not carried in his name. From a whole series of complicated and unexplained transactions in which Lavon was involved and in which checks were written by his agents, I conclude that Lavon was endeavoring to hide his resources, whatever they may have been, from his creditors and, from the evidence, I find that Lavon placed the house in the names of his parents to conceal the asset from his creditors.

VI. A series of four checks totaling $30,000.00 was signed by J. A. Bretz between June 16, 1963, and October 8, 1963. Of these, two were payable to cash, one was payable to Lavon, and one was payable to the Bretz Family Fund. The one to Lavon was endorsed by him to the Great Falls National Bank. The one payable to the Family Fund was endorsed in handwriting "Bretz family". The writing does not appear to be that of either Lavon or Mary. The endorsement is not shown on the checks payable to cash. In any event, the total of these checks equals exactly the amount of a check drawn on a Northwest Livestock Sales account to J. A. Bretz on July 11, 1963. That account was maintained by Lavon, and the check was signed by him. I find that Joseph A. and Eva Bretz did not loan or advance to Lavon $30,000.00, or any amount, and that Lavon did not cause the deed to be taken in the names of Joseph A. and Eva Bretz in consideration of previous loans or of some investment that they had made.

VII. The interest of Joseph A. and Eva Bretz has been acquired by a trust in which Mary (now Mary Ann Cline) is beneficiary and cotrustee.

Conclusions of Law

I conclude as a matter of law, or mixed fact and law, as the case may be:

I. The United States is not barred by laches. Under 26 U. S. C. Sec. 6321, the United States has a lien upon "all property and rights to property" of the taxpayer. The rights of the taxpayer to property are determined by reference to state law. In re Crocker National Bank v. Trical Manufacturing Co., 523 F. 2d 1037 (9th Cir. 1975). Hence, how and under what circumstances a resulting trust may arise would depend on state law. Once, however, the property right has been found, then the manner in which that right may be secured to pay the tax is a problem in federal law. The plaintiff asserts laches as a bar to the remedy. The doctrine of laches is not applicable to the United States generally ¹ nor in tax cases. ²

II. Under the law of Montana, when a transfer of property is made to one person but the consideration is paid by another, a resulting trust may arise, and there is a presumption to that effect. MCA Sec. 72-24-104 (1979). If in Montana the presumption of a gift arises out of the relationship between Lavon and his parents ³, the evidence here rebuts it. Lavon's absolute dominion over the property, coupled with the lack of assertion by the parents of any adverse claim prior to the attachment of the lien, plus the affirmative evidence of an intent on the part of Lavon to conceal from creditors, is sufficient. I find the property was subject to a resulting trust in favor of Lavon.

III. It is contended that, while a resulting trust may exist as between the parties to transactions, such as those revealed here, a creditor may not assert a resulting trust and subject it to the satisfaction of his claims. No authority is cited for that contention; there appears to be no reason for it; and the authority is to the contrary. ⁴

IV. When Lavon caused the title to Lot 8, Block 1, Park Garden Estates, to be placed in the names of Joseph A. and Eva Bretz, he intended to hinder, delay, or defraud either present or future creditors, and a constructive trust arose in their behalf as to such property.

V. I conclude therefore, that Lavon Bretz at the time the federal tax liens were filed did have a property interest in Lot 8, Block 1, Park Garden Estates; that, by virtue of the previous orders of the court, that property interest is not represented by the money on deposit with the registry of this court; that the claims of the United States are superior to the interests of the plaintiff and her successors and to the interests of the cross-defendants.

IT IS THEREFORE ORDERED that within 15 days the United States prepare and file with the court a statement showing the amounts now due by reason of all taxes, interest, and penalty owing by Lavon R. Bretz for the years 1966, 1967, 1968, and 1969, and a statement of its costs herein. judgment will then be entered directing the application of the funds now on deposit in this court, including earned interest, to such taxes, penalty, interest, and costs, and in the event of a deficiency, an amended judgment will be entered against Lavon R. Bretz for the amount thereof.

¹ United States v. Summerlin [40-2 USTC ¶9633], 310 U. S. 414, 416 (1940); Silverman v. Commodities Futures Trading Comm'n, 549 F. 2d 28, 34 (7th Cir. 1977); Weiszmann v. District Engineer, 526 F. 2d 1302, 1305 (5th Cir. 1976); Roberts v. Morton, 549 F. 2d 158, 163 (10th Cir. 1976), cert. denied, 434 U. S. 834 (1977); United States v. Florida, 482 F. 2d 205, 210 (5th Cir. 1973); Beaver v. United States, 350 F. 2d 4, 9 (9th Cir. 1965), cert. denied, 383 U. S. 937 (1966); Thompson v. United States, 312 F. 2d 516, 519 (10th Cir. 1962), cert. denied, 373 U. S. 912 (1963).

² See Lucia v. United States [73-1 USTC ¶16,075], 474 F. 2d 565, 569-70 (5th Cir. 1973); Olshausen v. Comm'r of Internal Revenue [60-1 USTC ¶9142], 273 F. 2d 23, 28 (9th Cir. 1959); United States v. DeBeradinis [75-2 USTC ¶9530], 395 F. Supp. 944, 953-54 (D. Conn. 1975), aff'd, [76-1 USTC ¶9298] 539 F. 2d 315 (1976).

³ It is unclear whether Montana law presumes a gift in the case of a transfer to a parent. In Detra v. Bartoletti, 150 Mont. 210, 433 P. 2d 485 (1967), the court, quoting from Clary v. Fleming, 60 Mont. 246, 198 P. 546 (1921), stated in dictum: "If the property is purchased by one with his own money, and the title is placed by him in another to whom he stands in a confidential relation, such as husband, wife, parent, child or such other relation that one may naturally have a claim upon the bounty of the other, than the presumption is that the conveyance is made as a gift." Id. at 216, 433 P. 2d at 488 (emphasis omitted.) This dictum could be construed as recognizing a presumption of a gift where a child transfers title to a parent. However, Clary, which involved a transfer from husband to wife, cited a California case. The Montana statute (MCA Sec. 72-24-104 (1979)) creating the presumption of a resulting trust was taken from California, and the California courts have refused to presume a gift where the transfer was from child to parent. Willard H. George, Ltd. v. Barnett, 65 Cal. App. 2d Supp. 828, 150 P. 2d 591 (1944). California's stance appears to reflect the general rule. See, e.g., Hergenreter v. Sommers, 535 S. W. 2d 513 (Mo. App. 1976); Davis v. Roberts, 365 Mo. 1195, 295 S. W. 2d 152 (1956); Weisberg v. Koprowski, 17 N. J. 362, 111 A. 2d 481 (1965); Market v. Bosley, 2 Ohio Misc. 109, 207 N. E. 2d 414 (1965); Ehnes v. Yowell, 374 Pa. 17, 97 A. 2d 56.

⁴ See e.g., Hillsborough County v. Dickenson, 125 Fla. 181, 169 So. 734 (1936); Florence v. Dunagan, 281 Ky. 25, 134S. W. 2d 970 (1939); Burke v. Tewksbury, 3 Neb. Unoff. 739, 92 N. W. 726 (1902); Duncan v. Laury, 249 App. Div. 314, 292 NYS 138 (1937).

 

 

 

United States of America, Plaintiff v. William E. Cox, Norma J. H. Cox, Ruth Ann Cox, William E. Cox, Jr., William Daniel Cox and State of South Carolina, Defendants

U. S. District Court, Dist. S. C., Florence Div., Civil Action No. 77-133, 5/3/79

[Code Secs. 6321 and 6323]

Collection of tax: Lien for taxes: Validity of lien: Priority under state law: Conveyance of property after assessment.--In the absence of proof of error, the Court upheld a deficiency judgment against the taxpayer for taxes on reconstructed income derived from wagering operations, based on betting slips seized by the FBI in 1971. Moreover, the conveyance of property by the taxpayer to his children in 1973 was fraudulent and null and void under state law. The Federal tax lien was ordered foreclosed by selling the property, and the priority of the United States in distribution of the proceeds was established over the State of South Carolina by the respective dates of filing of their respective tax liens.

[Code Sec. 6653]

Additions to tax: Failure to pay tax: Negligent understatement of gambling income.--The taxpayer failed to keep adequate records of the wagers he received, and the Commissioner's reconstruction of income, based on betting slips, was upheld when the taxpayer could not produce evidence of error in the Commissioner's deficiency determination.

Randall M. Roden, Department of Justice, Washington, D. C. 20530, for plaintiff. E. N. Zeigler, Zeigler, Dees & McEachin, P. O. Drawer 150, Florence, S. C. 29503, for William E. Cox, Norma J. H. Cox, Ruth Ann Cox, William E. Cox, Jr., William Daniel Cox and Ray Roush. E. Lee Morgan, Hyman, Morgan, Brown, Saleeby, Jeffords & Rush, P. O. Box 1770, Florence, S. C. 29503, Joe L. Allen, Jr., Deputy Attorney General, P. O. Box 125, Columbia, S. C. 29214, for South Carolina Tax Commission.

Order

BLATT, JR., District Judge:

This cause came on for trial before the court sitting without a jury, the court hearing evidence and arguments on June 21, 1978, and December 5, 1978. The pleadings were amended at trial dismissing Cornelia Ann Sims, Francis Ann Sims Sports, Cheryl Jean Sims Hobson, and Ray Roush as parties to the action.

Findings of Fact

1. This is a civil action brought by the United States to set aside a fraudulent conveyance, foreclose federal tax liens, and obtain a deficiency judgment. The tax liens and deficiency judgment sought arise from defendant, William E. Cox's, operation of a "numbers" racket in the Florence area. The plaintiff alleged that this defendant failed to report, or underreported, certain income derived from the wagering operation in the period between 1970 and 1973. Plaintiff further alleged that defendant fraudulently conveyed away his real property to avoid subjecting it to liens for tax deficiencies.

2. At trial, plaintiff presented evidence of the following assessments of federal tax, penalties, and interest against defendants William E. Cox and Norma J. H. Cox, and the amounts remaining unpaid on such assessments:

* The assessments and balances owed for income taxes for 1970 and 1973 apply to Norma J. H. Cox and William E. Cox due to their filing status; all others are applicable to William E. Cox alone.

** Figure for 1970 computed exclusive of assessed fraud penalty of $9,099.66 and reflects a payment received February 13, 1978, in the amount of $4,632.21.

3. The defendants challenged the foregoing assessments, claiming that the amounts of the assessments were in error and that a civil fraud penalty was improperly assessed on the 1970 income tax liability. The taxpayer contended that the income from his lottery business was accurately reported on his wagering excise tax and federal income tax returns and that the determination of the Commissioner of Internal Revenue that defendants owned additional tax was erroneous.

4. The defendant, William E. Cox, offered his own testimony and his notebooks, which he testified were weekly summaries of the wagers he received and the amounts paid on winning bets, in support of his contention that the assessments were erroneous. The taxpayer kept no other records of the income or expenses of his lottery business but asserted that he regularly destroyed the individual betting slips and other documents relating to the lottery because he had been advised to do so by a government agent to avoid the danger of state criminal prosecution. ¹

5. The defendant, William E. Cox, admitted that he was in the lottery business during the periods in issue and regularly filed excise tax returns reporting receipts of wagers for the periods and reported income from wagering of his income tax returns, although no return was filed for 1971.

6. In 1971, the Federal Bureau of Investigation, in connection with a criminal investigation, seized from the taxpayer's premises betting slips acquired during four days of the numbers operations. As acknowledged by the taxpayer at trial, the volume of wagers disclosed by the seized wagering slips was much larger than the volume of wagers reported by the taxpayer on his tax returns.

7. The Internal Revenue Service used the seized betting slips as the basis for its computation of defendants' tax liability. The revenue agents calculated from the seized betting slips the average daily wagers received by the taxpayer during those four days and projected the annual income from the lottery based on those figures. The Internal Revenue Service then assessed the tax deficiencies against William E. Cox and Norma J. H. Cox, as well as a civil fraud penalty for the year 1971, due to the discrepancy between the income reported on the defendants' tax return and that disclosed by this income projection.

8. The circumstantial evidence offered by the plaintiff was not sufficient to establish that the defendants' understatement of income was due to fraud. The fraud penalty of $9,099.66 for 1970 is, thus, improperly assessed.

9. The evidence offered by the defendants was insufficient to overcome the presumptive correctness of the assessments against them.

10. Defendant, William E. Cox, is solely indebted to the United States for federal taxes in the total principal amount of $22,477.67 as of January 1, 1979, by virtue of the assessments set forth in Finding No. 2, plus interest and additions thereon according to law.

11. William E. Cox--(in addition to the amount discussed in Finding No. 10)--and Norma J. H. Cox are jointly and severally indebted to the United States for federal taxes in the principal amount of $22,482.37, as of January 1, 1979, plus interest and additions thereon according to law.

12. Notices of federal tax liens pertaining to the assessments set forth in Finding No. 2 were filed with the Clerk of Court for Florence County as shown below:

 

13. Defendant State of South Carolina established records of liens for state taxes which were recorded with the Clerk of Court for Florence County on January 30, 1975, in Tax Lien Book 7, at page 211, and in Tax Lien Book 7, at page 212. The unpaid amounts to which these liens relate, after deducting the fraud penalty and payments, are $3,478.45 for 1970 and $2,863.26 for 1971, for a total of $6,341.71.

14. By warranty deed dated December 5, 1973, defendant, William E. Cox--(also referred to as the taxpayer)--conveyed his real estate at 28191/2 East Palmetto Street, Florence, South Carolina, where his residence and other buildings are located, to his children, defendants Ruth Ann Cox, William E. Cox, Jr., and William Daniel Cox, the deed being recorded at the office of the Clerk of the Court of Common Pleas for Florence County in Book A-139, page 662.

15. The taxpayer's conveyance of real property to his children was made at a time when he was indebted to the United States for federal taxes as described in Finding No. 2 herein. As admitted by the taxpayer at trial, the conveyance in question was a voluntary conveyance to his children made without consideration. The taxpayer and his family have continued to occupy the residence and the taxpayer collected the rent on the other buildings on the property, and he otherwise treated this property as his own. The conveyance by the taxpayer to his children was, therefore, in fraud of his creditor, the United States of America .