Fraudulent Conveyances Part2 page6

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United States of America , Plaintiff v. Robert S. Waltman, Loretta J. Waltman, Helen Pratt Vogel, and C.E. Development Corporation, Defendants

U.S. District Court, So. Dist. Ind., Indianapolis Div., IP 96-155-C-T/G, 9/16/97

[Code Secs. 6323 and 7403 ]

Liens: Property or property rights, transfer of: Consideration: Fraudulent conveyances: Tenants by the entirety.--To satisfy outstanding tax liabilities, the IRS was entitled to foreclose on and sell four properties owned and fraudulently transferred by an individual. Since he transferred the properties for no consideration and the transferees quit claimed the properties to his son's corporation for no consideration, each transferee took the properties subject to the tax liens. The transfers were made to reduce the individual's net worth and, thus, were fraudulent. Even though state ( Indiana ) law prevented the seizure and sale of one parcel that was owned by the individual and his wife as tenants by the entirety, the IRS could foreclose on the property since the wife would not be prejudiced. She was not residing in the property and had little interest in it since she deeded it to the corporation and received no money in return. However, the IRS was required to give the wife one half of the sale proceeds derived from that property.

Jeffrey L. Hunter, Assistant United States Attorney, Indianapolis, Ind. 46204, Gerald H. Parshall, Jr., Department of Justice, Washington, D.C. 20530, for plaintiff. Alan L. Crapo, 3035 S. Keystone Ave. , Indianapolis , Ind. 46237 , for defendants.

MEMORANDUM ENTRY FOLLOWING BENCH TRIAL

TINDER, District Judge:

After being assessed for unpaid federal taxes, Robert Waltman transferred four of his properties to various individuals, who have subsequently transferred the properties to C.E. Development Corporation ("C.E."). The United States , through the Internal Revenue Service ("IRS"), now wants to foreclose its liens on those properties, contending that the liens survived the transfers. C.E., of course, wants to keep its properties, or in the alternative, be reimbursed for the amounts spent to improve the properties. After a bench trial in which evidence presented by both parties was heard and a review of the evidence and the law governing this case, the following are issued as findings of fact and conclusions of law pursuant to FED. R. Civ. P. 52(a). ¹

FINDINGS OF FACT

Pursuant to 26 U.S.C. §6672, the IRS assessed Defendant Robert S. Waltman ("Robert") $40, 372.85 for unpaid federal employment taxes on February 3, 1986. To date, only $1,310.00 has been paid against that assessment. The outstanding balance, with interest accruals, was $110,397.57 as of March 1, 1997, and interest continues to accrue. On the day of the assessment, a tax lien arose against all property and rights to property of Robert, in existence at that time and thereafter acquired.

At dispute are four specific properties in which Robert had an ownership interest at some point. The first property, generally known as 1815 North Rural Street , Indianapolis , was received by Robert and Defendant Loretta J. Waltman ("Loretta"), his estranged wife, from their son, David Waltman, on February 1, 1978, and was owned by Robert on the day of the assessment. Robert quitclaimed his interest in this property to Loretta on May, 13, 1986, for no consideration. Loretta then quitclaimed 1815 N. Rural to Defendant C.E. on December 22, 1986. In return, C.E. agreed to assume and be responsible for the mortgages on the property. David Waltman owns all the stock of C.E. and his brother Steve manages the day-to-day operations.

Robert also owned property generally known as 838 North Tacoma Street, Indianapolis, which he received on or about November 6, 1985, from Ruth Lynn, a third party seller, for $5,000.00. He owned this property on the date of the assessment. Robert then quitclaimed this property to Defendant Helen Pratt Vogel ("Helen"), with whom he had been living, on May 2, 1986, for no consideration. Helen quitclaimed this property to C.E. on December 22, 1986. In return, C.E. agreed to take the property and board it up. The property apparently needed significant repairs and was under citation by either the local Board of Health or the local Health and Hospital Corporation for various Indianapolis code violations.

Robert received from a third party the property generally known as 1838 N. Rural Street, Indianapolis on or about December 11, 1985. He owned this parcel on the date of assessment, but quitclaimed his interest to Helen on May 2, 1986, for no consideration. Helen quitclaimed the property to C.E. on December 22, 1986. No consideration was paid, but again, Helen did not want the responsibility for correcting the various Indianapolis code violations.

Finally, Robert received the property generally known as 1028 East Ohio Street, Indianapolis, from David Waltman, his son, on March 25, 1986. Robert again quitclaimed his interest in this property to Helen on May 2, 1986, for no consideration. Helen also quitclaimed this property to C.E. on December 22, 1986, on the understanding that C.E. would take care of citations from the State Board of Health.

At all times relevant to this case, the combined value of the four parcels was greatly exceeded by the outstanding tax assessment and the lien securing it. However, C.E. has invested in the properties and their value has increased since the assessment arose on February 3, 1986. The combined effect of all the transfers of the four properties by Robert was to reduce his net worth.

CONCLUSIONS OF LAW

The introduction of a certified transcript of assessments and payments satisfies the United States' prima facie case for its entitlement to reduce its assessment to a judgment. United States v. Rindskopf, 105 U.S. 418, 422 (1881). Upon making the assessment, and after notice and demand without payment, the United States possessed a tax lien upon all property and rights to property of Robert in the amount of the assessment, and this lien increased as the debt grew by reason of statutory interest. 26 U.S.C. §6321. The federal tax lien against Robert's property is valid until the liability is satisfied or otherwise becomes unenforceable as a matter of law. Id. §6322. Although certain transferees (purchasers, security interest holders, mechanic's lienors or judgment lien creditors) are protected from the federal tax lien in certain circumstances, id. §6323(a), none of the Defendant transferees in this case (Loretta, Helen or C.E.) qualify for this protection, as none of them fit within the definition of any protected category. See 26 CFR §301.6323(h)-1 (defining each category of protected transferee).

Thus, each of the transferees took the properties subject to the tax liens. United States v. Librizzi [97-1 USTC ¶50,263], 108 F.3d 136, 137 (7th Cir. 1997) ("[T]he Supreme Court noted . . . that 'once a lien has attached to an interest in property, the lien cannot be extinguished (assuming proper filing and the like) simply by a transfer or conveyance of the interest.' ") (quoting United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 691 n.16 (1983)). The Defendants do not contest this conclusion as to the properties at 838 North Tacoma Street, 1838 North Rural Street, and 1028 East Ohio Street. However, they do contest the attachment of the lien to the property at 1815 North Rural Street, which Robert held in a tenancy by the entirety with Loretta at the time of the assessment.

The United States insists that its tax lien attached to Robert's interest, whatever it was, in this property at the time of assessment and that, even if a creditor of one spouse cannot seize entirety property, the subsequent transfers fixed Robert's interest at one-half the value of the property. Alternatively, the United States argues that Robert's conveyance to Loretta was fraudulent and void under Indiana law. Rather than reverting back to a status of tenancy by the entirety, the United States argues that the eventual conveyance to C.E. should be treated as a joint conveyance from Loretta and Robert, and Robert's one-half interest conveyed is subject to the tax lien. This prevents Robert from profiting from his fraud. The Defendants contend that the lien never attached to the property and the remedy under Indiana law for a fraudulent transfer is to restore the property to the owner before the transfer. In this case, the owners would be Robert and Loretta as tenants by the entirety, and again, the Defendants argue that "the creditor of one spouse may not seize, sell or attach entirety property." Schoon v. Van Dienst Supply Co., 511 N.E.2d 12, 13 (Ind. Ct. App. 1987) (citing Anuszkiewicz v. Anuszkiewicz, 360 N.E.2d 230, 232 (Ind. Ct. App. 1977)).

It is clear that state law controls in determining a taxpayer's interest in property to which the tax lien may attach. Rodgers [83-1 USTC ¶9374], 461 U.S. at 683; United States v. Davenport [97-1 USTC ¶50,213], 106 F.3d 1333, 1335 (7th Cir. 1997). Even if a creditor of one spouse cannot seize, sell or attach an entire property, each spouse does have an interest in the property, because each tenant has rights in the property, such as those to reside on the property or share in the profits or to convey one's interest to the other spouse. Thus, under Indiana law, Robert had rights to property at 1815 North Rural Street.

Once the incidents of ownership are determined under state law, federal law controls the consequences of the tax lien. Rodgers [83-1 USTC ¶9374], 461 U.S. at 683 & 702-03 n.31. See also United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719 (1985) ("The statutory language 'all property or rights to property,' appearing in §6321 . . ., is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have.") Therefore, the fact that a creditor could not reach Robert's interest in the property under Indiana law is irrelevant to whether the federal tax lien could attach, as the federal statutes apply to the taxpayer's rights to any property, not to his creditors' rights. National Bank [85-2 USTC ¶9482], 472 U.S. at 727. The tax lien attached to Robert's interest in the property and the question becomes whether the United States may foreclose the property to satisfy its lien.

The first step in determining the answer to that question is to assess the validity of Robert's transfer of the property to Loretta, and again, state law controls as to whether the transfer was fraudulent. Commissioner of Internal Revenue v. Stern [58-2 USTC ¶9594], 357 U.S. 39, 42-45 (1958). Whether a transfer was made with a fraudulent intent is a question of fact and, under Indiana law, the "[i]ntent can be inferred from certain indicia called 'badges of fraud.' " U.S. Marketing Concepts, Inc. v. Don Jacobs Buick-Subaru, Inc., 547 N.E.2d 892 (Ind. Ct. App. 1989). The badges include:

the transfer of property by a debtor during the pendency of a suit; a transfer of property that renders the debtor insolvent or greatly reduces his estate; a series of contemporaneous transactions which strip a debtor of all property available for execution; secret or hurried transactions not in the usual mode of doing business; any transaction conducted in a manner differing from customary methods; a transaction whereby the debtor retains benefits over the transferred property; little or no consideration in return for the transfer; a transfer of property between family members.

Id. When several of the badges are present concurrently, an inference of a fraudulent intent is warranted. Id.

Clearly, fraudulent intent exists in this case. Robert made the initial transfers while he was nearly insolvent and after the tax lien was assessed. The effect of the transfers was to further reduce his net worth and he received no consideration in the exchanges. The transfers were each made to his wife or his paramour. All this evidence points to a fraudulent intent, and Robert has offered no innocent explanations to rebut a finding of such an intent. See United States v. Denlinger [93-1 USTC ¶50,040], 982 F.2d 233, 23637 (7th Cir. 1992). Each of the initial transfers by Robert are therefore voidable. See IND. CODE ANN. §32-2-7-17 (Michie 1995).

Nor is C.E. protected by the further transfer of each property by Loretta or Helen. Under Indiana law, a subsequent transferee may be protected from a voiding of the fraudulent transfer if he is "good faith transferee who took for value." Id. §32-2-718(b)(2). C.E., owned by one of Robert and Loretta's sons and run by another, did not take in good faith nor for value. C.E. did not provide consideration other than agreeing to be responsible for the upkeep of the properties. Also, the sons knew their father made the initial transfers in an attempt to reduce his net worth and keep the property from his creditors. Thus, the transfers to C.E. are not protected.

Further, even though the 1815 North Rural Street property would revert to ownership by Robert and Loretta in a tenancy by the entirety, this does not prevent the United States from foreclosing the property, even if Indiana law does not allow the seizure and sale of such property for the benefit of one spouse's creditors. The Internal Revenue Code, on its face, does not grant an exemption to a sale where an innocent third party holds an interest in the property. See 26 U.S.C. §7403; Davenport [97-1 USTC ¶50,213], 106 F.3d at 1336-37. As the Seventh Circuit has explained:

Our path in the face of explicit contradiction between the two statutes [§7403 and state statutes which grant a tenancy by the entirety] is of course lit by the Supremacy Clause. We need not speculate on the textual conflict, however, in light of the Supreme Court's broad and binding interpretation of §7403 announced in United States v. Rodgers.

. . .

The Supreme Court [held] that although the non-delinquent third party interest holder must be compensated for her interest, the Supremacy Clause prevents the use of a state-created interest to block a forced sale under §7403.

. . .

Any language from [state] entireties or homestead law that limits or prohibits sale constitutes a state-created limitation on forced sale, which conflicts with the textually unfettered sale power in §7403. State-created limitations have no force to except federal law, even when an innocent third-party's rights are at issue: "the Supremacy Clause ... is as potent in its application to innocent bystanders as in its application to delinquent debtors."

Id. at 1337 (citations omitted).

However, the Supreme Court did find that district courts retained limited power to refuse to order a sale if it would cause undue hardship to the third party. The Court noted four factors for consideration when deciding whether to order a sale: 1) the extent to which a sale only of the delinquent taxpayer's interest would prejudice the government's interest; 2) whether the innocent third party has a reasonable expectation that the property would not be subject to a forced sale by the taxpayer or his creditors; 3) the potential prejudice to the third party in terms of relocation costs and undercompensation; and 4) the character and value of the liable and nonliable interests in the property. Id. n.6. (citing Rodgers [83-1 USTC ¶9374], 461 U.S. at 710-11).

These factors do not support refraining from an order for sale of the property, as Loretta will not be prejudiced in this case. She is not residing on the property and apparently does not have much interest in it as she deeded it to C.E. and received no money in return. In light of the transfer to C.E. and considering the condition of the property, Loretta in all likelihood would rather have the cash from the sale. Therefore, the United States may sell the property and take one-half of the proceeds, which represents Robert's interest in the property. The other one-half of the proceeds should be distributed to Loretta.

Therefore, as each of the initial transfers was made subject to the federal tax lien, and alternatively, was a fraudulent conveyance, judgment will be ordered for the Plaintiff. The United States may foreclose on the properties and sell them pursuant to 26 U.S.C. §7403. As to 1815 North Rural Street, one-half of the proceeds from the sale is to be distributed to Loretta Waltman to reimburse her for her share of ownership in the property. As to each of the other three properties, should the proceeds exceed Robert's tax liability, which is unlikely, the excess should be distributed to C.E. to reimburse it for improvements made to the properties. The Plaintiff is directed to propose a form of judgment and order for sale within ten days of this date.

ALL OF WHICH IS ORDERED.

¹ Should any of the findings of fact be more appropriately called conclusions of law, or vice versa, then they should be considered by the reader to support the result reached in this entry regardless of how such findings or conclusions are labeled.

 

 

 

United States of America, Plaintiff v. Harold E. Wilfley, et ux., et al., Defendants Harold E. Wilfley and Ellen J. Wilfley, Debtors/Plaintiffs v. United States of America, Department of Treasury, I.R.S., Oregon Department of Revenue, and Oregon Department of Human Resources, Defendants

U.S. District Court, Dist. Ore., Civ. 92-909-HA, 93-96-HA, 5/1/97

[Code Secs. 6203 and 6303 ]

Assessments: Form 4340: Notice and demand.--The Forms 4340, Certificate of Assessments and Payments, submitted by the IRS for married taxpayers provided presumptive evidence that they were given all the documentation of tax assessments they were entitled to receive. Furthermore, the IRS properly issued notices of assessment and demand for payment. Thus, their tax liability was properly assessed. Their tax protestor arguments and their unsupported contentions that they never received notices of assessment were rejected.

[Code Sec. 6321 ]

Liens and levies: Sham transfers to avoid taxes.--Married taxpayers' contentions that assessments were based upon an erroneous determination concerning trust income were rejected. The trust was invalid under state (Oregon) law because it had no identifiable beneficiaries. A deed by which the taxpayers purported to convey real property to the trust was void as a sham transfer because it failed to identify a valid grantee. Therefore, title remained with the taxpayers.

Kristine Olson, United States Attorney, Portland, Ore. 97204-2024, Sanford W. Stark, Department of Justice, Washington, D.C. 20530, for plaintiff. Harold E. Wilfley, Ellen J. Wilfley, 16532 S. Mills Rd., Mulino, Ore. 97402, pro se. John Stuart Salter, Northwest Farm Management, P.O. Box 1111, Mulino, Ore. 97042, pro se. Lowell Becraft, 209 Lincoln St., Huntsville, Ala. 35801, Micaela R. Dutson, 12900 S.W. Pacific Hwy., Tigard, Ore. 97223, for Northwest Farm Management Co. Theodore R. Kulongoski, Attorney General, Mary Lou Haas, Assistant Attorney General, Department of Justice, Portland, Ore. 97201, for State of Oregon.

OPINION AND ORDER

HAGGERTY, District Judge:

The United States filed this action pursuant to 26 U.S.C. §§7401 and 7403 seeking judgment on an outstanding federal tax assessment against defendants Harold and Ellen Wilfley for the tax years 1976-81 and 1983. In relation to the assessment, the government also seeks to foreclose tax liens on property located in Mulino, Oregon by setting aside an alleged sham transfer of that property by the Wilfleys to the Wilfleys' Health Food Trust Organization ("Wilfley Trust"), an entity the government claims is the alter ego of the Wilfleys. The government also seeks to set aside two subsequent transfers of that property from the Wilfley Trust to First National Trust Unincorporated ("First National") and then from First National to Northwest Farm Management Company, Unincorporated ("Northwest Farm Management").

The government's complaint alleges that the trustees of First National are defendants Merlin Harris, Allen Hardy (dba Pacific North West Trust Company), James Carlson and Fred Ortiz, and that the trustees of Northwest Farm Management are defendants Harris and Hardy (dba Pacific North West Trust Company). John Stuart Salter filed a notice of appearance claiming that he is the trustee for Northwest Farm Management.

Subsequently, the government dismissed Carlson from the action due to his death. By opinion dated August 4, 1993, the government's motion to strike the appearance of Hardy was granted on the basis that a trustee with no beneficial interest in the trust could not appear pro se. By order dated October 4, 1993, the government's motion to strike the appearances of Harris and Ortiz was granted with respect to Harris on the ground that he had improperly appeared pro se. With respect to Ortiz, the motion was moot because he had resigned as trustee. Thus, Salter is the only remaining trustee defendant. He is represented by counsel in his capacity as trustee of Northwest Farm Management and he is appearing pro se in his individual capacity.

This civil action was consolidated with an adversary proceeding the Wilfleys initiated in the United States Bankruptcy Court for the District of Oregon. In that adversary proceeding, the Wilfleys sought a determination that the tax liabilities at issue were discharged in bankruptcy and the tax assessments themselves were made after the expiration of the applicable statute of limitations.

The government filed a Renewed Motion For Partial Summary Judgment. Oral argument was heard on these matters. For the reasons that follow the government's Renewed Motion For Partial Summary Judgment is granted.

PROCEDURAL BACKGROUND

By the instant motion, the United States renews its previously-filed Motion For Partial Summary Judgment and Amended Motion For Partial Summary Judgment, filed on March 19, 1993, and April 22, 1993, respectively. Briefly, the procedural history is as follows: On April 27, 1993, Judge Marsh denied the original and amended summary judgment motions as "premature" due to defendant Hardy's pending motion to set aside the default entered against him. Specifically, the April 27, 1993, order issued by Judge Marsh stated as follows:

In light of deft Hardy's pending motion to set aside default and the expressed desire of the successor trustee of Northwest Farm Management to appear in this action, pltf's motion for partial summary judgment and amended motion for partial summary judgment are premature and are DENIED with the right to reraise. Pltf may "reraise" its motion for partial summary judgment and amended motion for partial summary judgment after the resolution of deft Hardy's motion to set aside default.

On May 19, 1993, Judge Marsh issued an order granting defendant Hardy's motion to set aside the default entered against him. The resolution of defendant Hardy's motion allowed the United States to reassert its request for summary judgment. Accordingly, on August 6, 1993, the government filed its Renewed Motion For Partial Summary Judgment, which simply incorporated the original and amended summary judgment motions.

On November 3, 1993, the court entered an order staying the entire action due to the medical condition of Mrs. Wilfley. Based on the stay of proceedings, the court struck the renewed summary judgment motion from the pending motions inventory and indicated that the motion would be "recalendared" when the stay was lifted.

On March 28, 1994, the court lifted the stay of the proceedings. Simultaneously, the court recalendared the government's renewed summary judgment motion by establishing a briefing schedule and setting oral argument on May 23, 1994, along with defendant Salter's cross-motion for summary judgment. The case was transferred to this court in late March 1994. On May 23, 1994, the court heard oral argument on the government's Renewed Motion For Partial Summary Judgment and defendant Salter's Motion For Partial Summary Judgment.

After the hearing, the parties submitted written responses to written questions that the court had propounded at oral argument. Upon receipt of the responses on June 28, 1994, the court issued an order stating that the United States' Renewed Motion For Summary Judgment was under advisement as of the date of oral argument, May 23, 1994. Approximately one year later, on May 24, 1995, the government filed a Motion For Entry Of Order requesting that the court rule on the renewed summary judgment motion that was pending. Approximately 10 months later, the court entered an order denying defendant Salter's partial summary judgment motion pending since May 23, 1994. The court concluded that the government was not time-barred from its right to seek recovery of the Mulino property in satisfaction of the outstanding tax liabilities. In addition, the court determined the Wilfleys' bankruptcy discharge was not a bar to the government's right to recovery.

With respect to the government's renewed summary judgment motion the court stated:

An examination of the court's internal docketing system reveals that the Renewed Motion is not currently pending; rather, it appears to have been resolved. Thus, the government's motion for entry of order is DENIED. However, to the extent that the government believes the issues presented in its Renewed Motion have not been adjudicated, it is hereby granted leave to reassert such issues.

The government accurately submits that the issues presented in its original and amended summary judgment motions, as reasserted in its renewed summary judgment motion, have never been adjudicated by the court.

STANDARD

Summary judgment is appropriate if the court finds that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). There is no genuine issue of material fact where the nonmoving party fails "to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Harper v. Wallingford, 877 F.2d 728, 731 (9th Cir. 1989).

All reasonable doubts as to the existence of genuine issues of fact must be resolved against the moving party. Hector v. Wiens, 533 F.2d 429, 432 (9th Cir. 1976). The inferences drawn from underlying facts must be viewed in the light most favorable to the party opposing the motion. Valandingham v. Bojorquez, 866 F.2d 1135, 1137 (9th Cir. 1989). Where different ultimate inferences can be drawn, summary judgment is inappropriate. Sankovich v. Life Ins. Co., 638 F.2d 136, 140 (9th Cir. 1981).

In responding to a motion for summary judgment, the nonmoving party must set forth specific facts showing that there is a genuine issue for trial. Fed. R. Civ. P. 56(c). "If he does not so respond, summary judgment, if appropriate, shall be entered against him." Oltarzewski v. Ruggiero, 830 F.2d 136, 138-139 (9th Cir. 1987).

DISCUSSION

I. Whether the United States' complaint correctly identifies the amount of taxes, penalties and interest for which the Wilfleys are liable and for which the United States will be entitled to judgment if it prevails in this litigation?

The government seeks a determination that the Wilfleys are liable for the assessments of income tax, interest and penalties for the tax years 1976-1981 and 1983 as set forth in its complaint. In support of its motion for partial summary judgment, the United States submitted exhibits that establish that the taxes at issue, in fact, have been assessed. Specifically, the government has presented a copy of Form 4340, Certificate of Assessments and Payments, for Harold E. & Ellen J. Wilfley, for United States Individual Income Tax Return for tax periods December 31, 1976 through December 31, 1981, and December 31, 1983.

Certificates of Assessments and Payments are an accepted method of establishing the fact that assessments were made and that notices and demand for payment were sent. Koff v. United States [93-2 USTC ¶50,520], 3 F.3d 1297, 1298 (9th Cir. 1993), cert. denied, 511 U.S. 1537 (1994); Hughes v. United States [92-1 USTC ¶50,086], 953 F.2d 531, 535 (9th Cir. 1992). A properly certified assessment for unpaid federal taxes is presumptively correct evidence of a taxpayer's liability. United States v. Janis [76-2 USTC ¶16,229], 428 U.S. 433, 440-41 (1976); Koff [93-2 USTC ¶50,520], 3 F.3d at 1298; Hughes [92-1 USTC ¶50,086], 953 F.2d at 540. If the taxpayer fails to meet his burden of showing the assessments to be incorrect, summary judgment in favor of the Government is appropriate upon submission of the Certificates of Assessments and Payments. Adams v. United States, 358 F.2d 986, 994 (Ct.Cl. 1966). The government's submission of these documents adequately evidences the Wilfleys' tax liability. Accordingly, the government has satisfied its initial burden for summary judgment.

To defeat summary judgment, the Wilfleys must present specific facts that show there is a genuine issue for trial related to whether the assessments are correct. See Fed. R. Civ. P. 56(e). Although the Wilfleys' are pro se defendants in this matter, it is clear from their pleadings filed in opposition to the government's motion for partial summary judgment that they understand their burden on summary judgment. Indeed, the Wilfley's set forth a detailed explanation of the mechanics for summary judgment, including appropriate legal citations, the form of evidence that must be submitted, the proper view of the evidence, the inferences to be drawn and the shifting burdens. The court is satisfied that the Wilfleys' understand their burden on summary judgment.

As a threshold matter, the court will not consider the discredited arguments frequently used by tax protestors and consistently rejected by the Ninth Circuit. All of the Wilfleys challenges to this action based on constitutional grounds and subject matter jurisdiction grounds are wholly without merit.

The Wilfleys vigorously challenged the correctness of the assessments set forth in the government's complaint. Although it is not entirely clear from their pleadings, it appears the Wilfleys oppose summary judgment on this issue for the following reasons: 1) the "Assessment Certificate" they requested and received under the Freedom of Information Act ("FOIA") does not include their name, social security number, the assessment amount, a proper signature, and is three years earlier than the date of assessment relied on by the government; 2) they have not received the mandated "Notice of Assessment and Demand" for the taxes summary of assessments as required by 26 U.S.C. §6303; and 3) the underlying computations supporting the government's assessments are based upon an administrative, rather than judicial, determination to disallow the Wilfley Trust.

The first contention of the Wilfleys concerning the discrepancies in the documents they received pursuant to their FOIA request is irrelevant. Here, the government submitted a Form 4340, Certificate of Assessments and Payments, for both of the Wilfleys. These forms set forth, for each of the taxable years: their names and a social security number; the amounts of tax, penalties, and interest assessed; the type of tax assessed; the period for which the tax was assessed; the date on which the tax was assessed (the "23C date"); and the dates various notices were issued. Thus, the government submitted presumptive evidence that it properly assessed the Wilfleys' taxes for the years in question.

Furthermore, because the Forms set forth all the information that section 6203 requires, the government submitted presumptive evidence that the Wilfleys were given all the documentation they were entitled to under section 6203. See Koff [93-2 USTC ¶50,520], 3 F.3d at 1298 (citing James v. United States [92-2 USTC ¶50,389], 970 F.2d 750, 755 (10th Cir. 1992) ("notices [of assessment] also satisfy 26 U.S.C. §6203, the requirement that the IRS provide a copy of the record of assessment")). The Wilfleys do not present sufficient evidence to rebut the presumption that the assessments were valid. Apart from their own conclusions, the Wilfleys fail to come forward with either evidence or legal authority to challenge the validity of the Form 4340 certificates submitted by the government. Accordingly, the Wilfleys cannot avoid summary judgment solely on the ground that the Certificates submitted by the government are not valid.

The Wilfleys next contend that the Internal Revenue Service ("IRS") failed to properly issue the notices of assessment and demand for payment pursuant to section 6303. This contention also lacks merit. Section 6303 requires that a notice of assessment must be sent to the taxpayer within 60 days after making an assessment pursuant to section 6203. 26 U.S.C. §6303. "Form 4340 is probative evidence in and of itself and, in the absence of contrary evidence, [is] sufficient to establish that notices and assessments were properly made." Hansen v. United States, 7 F.3d 137, 138 (9th Cir. 1993).

Here, Form 4340 supports the government's contention that timely notices and demands were sent to the Wilfleys for the tax years in question. The Wilfleys contend that they never received the notices of assessment. They failed, however, to present any specific facts showing that the IRS did not send the notices and demands. Accordingly, the Wilfleys cannot avoid summary judgment solely on the ground that they did not receive the notice of assessments.

Finally, the Wilfleys insist that the underlying computations supporting the government's assessments are based upon an erroneous determination to disallow the Wilfley Trust. Specifically, the Wilfleys contend that the amounts of the tax assessments are incorrect because the trust is a valid trust and so trust income was improperly imputed to them. The Wilfleys fail to support this defense to the tax assessments with competent evidence.

The government acknowledges that the tax assessments against the Wilfleys are based, in part, upon the IRS's finding that certain income allegedly earned by the Wilfley Trust should be included in the Wilfleys' personal gross income on the theory, inter alia, that such trust is invalid. In support of its theory, the United States has supplemented the record with complete copies of two Declarations of Trust, Exhibits T and U to Amendment to Declaration of Mark E. Nebergall. Exhibit T is dated March 17, 1976, and was recorded with the Sacramento, County, California recorder's office on September 30, 1976. Exhibit U is dated May 15, 1976, approximately four and one-half months prior to the recording of the March 17, 1976 Declaration, and is not recorded.

The parties dispute which Declaration of Trust actually governs the Wilfley Trust. The court need not resolve that issue because, regardless of which Declaration actually governs, the Wilfley Trust is invalid as a matter of law. Various treatises on the law of trusts define a trust as "a fiduciary relationship with respect to property subjecting the person to whom the title to property is held to equitable duties to deal with the property for the benefit of another person, which arises as a result of a manifestation of an intention to create it." See, e.g., Restatement 2d, Trusts §2; W. Fratcher, Scott on Trusts §2.3 (4th ed. 1987). See also Templeton v. Bockler, 73 Or. 494, 506, 144 P. 405, 409 (1914); accord Shipe v. Hillman, 206 Or. 556, 562, 292 P.2d 123, 126 (1955).

In Oregon, four elements are necessary to create a valid trust: 1) property, 2) a trustee, 3) identifiable beneficiaries, and 4) some manifestation of intent by the grantor to create the relationship. See United States National Bank of Portland v. Krautwashl, 221 Or. 609, 611, 351 P.2d 947, 948 (1960). The burden is on the Wilfleys to establish that each of the requirements were satisfied with respect to the Wilfley Trust. The Wilfleys simply do not meet that burden on summary judgment.

Relevant to this case is the requirement that there exist identifiable beneficiaries before a trust can be created. See, e.g., United States v. Spurgeon [88-2 USTC ¶9583], 861 F.2d 181, 183 (8th Cir. 1988); see generally Agan v. United States Nat'l Bank, 227 Or. 619, 626, 363 P.2d 765, 769 (1961); Endicott v. Bratzel, 145 Or. 654, 658, 27 P.2d 883, 885 (1933); In re Johnson's Estate, 100 Or. 142, 156, 196 P. 385, 389 (1921). Neither of the Declarations of Trust for the Wilfley Trust provides a means for identifying the Wilfley Trust's beneficiaries. Although the Declarations of Trust provide the trustees with authority to issue 100 interim certificates of beneficial interest, there is no means for identifying the Trust's intended beneficiaries. The Wilfleys point out that Exhibit U references an "Attachment C" that lists the certificate holders. The Wilfleys, however, failed to submit this document in opposition to the government's motion for summary judgment.

On the record before the court, it is impossible to determine the persons to whom the certificates may be issued. Indeed, there is no description of the class of persons to whom the trustees may issue the certificates, and there is no method by which the certificates will be issued to the class. Thus, there are no identifiable beneficiaries and the Wilfley Trust is invalid under Oregon law. See Agan, 227 Or. at 626, 363 P.2d at 769; Endicott, 145 Or. at 658, 27 P.2d at 885; In re Johnson's Estate, 100 Or. at 156, 196 P. at 389. The court notes that the result would be the same under California law. See Chang v. Redding Bank of Commerce, 29 Cal.App.4th 673, 684, 35 Cal.Rptr.2d 64, 70 (1994) ("A trust is created by a manifestation of intention of the settlor to create a trust, trust property, a lawful trust purpose, and an identifiable beneficiary.").

As stated above, the government presented presumptive evidence that the amount of the tax assessments set forth in its complaint were correct. The burden shifted to the Wilfleys to prove that the challenged assessments are improper. They have not been able to carry their burden of rebutting the presumption of correctness by presenting competent and relevant evidence to establish that there is a material question concerning whether the assessments were arbitrary or erroneous. See United States v. Stonehill [83-1 USTC ¶9285], 702 F.2d 1288, 1293-94 (9th Cir. 1983), cert. denied, 465 U.S. 1079 (1984). Thus, summary judgment is granted in favor of the government on the question of whether the United States' complaint correctly identifies the amount of taxes, penalties and interest for which the Wilfleys are liable and for which the United States will be entitled to judgment if it prevails in this litigation.

II. Whether the deeds by which the Wilfleys purported to convey the real property at issue are void, such that title to the property remains with the Wilfleys.

The government contends that the deed by which the Wilfleys purported to convey the property at issue is void because it fails to identify a valid grantee. The government argues alternative theories for its contention that the deed at issue in this case is void: 1) the deed purports to convey the property to a trust, but a trust is legally incapable of holding title to property; or 2) even if a trust were legally capable of holding title to property, the trust to which the Wilfleys purported to transfer the subject property is invalid. Because the court has determined that the Wilfley Trust is invalid, it need not determine whether the Wilfley Trust was legally capable of holding title to the property.

The deed by which the Wilfleys purported to convey their property to the Wilfley Trust is void because the Trust was invalid. As such, any subsequent conveyances of the property by the Wilfley Trust must be declared void as well. Thus, summary judgment is granted in favor of the government on the question of whether the deeds by which the Wilfleys purported to convey the real property at issue are void, such that title to the property remains with the Wilfleys.

CONCLUSION

Based on the foregoing, the government's Renewed Motion For Partial Summary Judgment (doc. #428) is GRANTED. The remaining issue for trial is whether the Wilfleys' tax liabilities at issue are excepted from discharge pursuant to certain provisions of the United States Bankruptcy Code. The 10-day trial is set to begin at 9:00 am on August 5, 1997, in Portland, Oregon.

IT IS SO ORDERED.

 

 

 

United States of America, Plaintiff-Appellee v. Gerald J. Landsberger, Betty A. Landsberger, John Wilde, Eileen Lipari, Defendants-Appellants

(CA-9), U.S. Court of Appeals, 9th Circuit, 98-15176, 98-15299, 98-15573, 2/12/99, Affirming a District Court decision, 97-2 USTC ¶50,822

[Code Sec. 6321 ]

Property subject to lien: Trusts: Nominee or alter ego.--The IRS was entitled to foreclose on residential property held by a trust that qualified as delinquent taxpayers' alter ego. Tax liens on the property were properly ordered enforced because the trust and the alleged transfers of ownership to it were invalid.

[Code Sec. 7402 ]

Property subject to lien: Trusts: Nominee or alter ego: Appeal: Extension of time: Amended judgment: Jurisdiction.--A trial court did not err in denying married taxpayers' motions to extend the period of time in which they could appeal a foreclosure order on residential property held by their alter ego trust or amend the judgment. Its determination that it lacked subject matter jurisdiction over the taxpayers was sustained.

Before: CANBY, O'SCANNLAIN and WARDLAW, Circuit Judges. ¹

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

MEMORANDUM ²

Gerald and Betty Landsberger, John P. Wilde and Eileen Lipari (collectively "Landsbergers") appeal pro se three orders of the district court. We affirm the district court's decree of foreclosure allowing enforcement of federal tax liens on the Landsbergers' property and finding the tax liens valid, because the district court properly concluded the subject trust and alleged transfers of ownership were invalid since the trusts were alter egos for the Landsbergers. See G.M. Leasing Corp. v. United States [77-1 USTC ¶9140], 429 U.S. 338 (1977); Towe Antique Ford Foundation v. I.R.S. [93-2 USTC ¶50,430], 999 F.2d 1387, 1391 (9th Cir. 1993); Hughes v. United States [92-1 USTC ¶50,086], 953 F.2d 531, 537 (9th Cir. 1992).

The district court did not err by denying the Landsbergers' motion to extend time to appeal the district court's January 5, 1996 Order, and the district court did not err by denying the Landsbergers' Fed. R. Civ. P. (60(b) motion to alter or amend judgment for lack of subject matter jurisdiction over them.

Accordingly, the district court's orders are

AFFIRMED.

¹ The panel unanimously finds this case suitable for decision without oral argument. See Fed. R. App. P. 34(a).

² This disposition is riot appropriate for publication and may not be cited to or by the courts of this circuit except as may be provided by 9th Cir. R. 36-3.

 

 

 

United States of America, Plaintiff v. Gerald J. Landsberger, et al., Defendants

U.S. District Court, Dist. Ariz., CIV 94-0883-PHX-SMM, 9/30/97

[Code Sec. 6321 ]

Property subject to lien: Trusts: Nominee or alter ego: Economic realty: Sham transactions.--The IRS was entitled to foreclose on residential property that was held in a married couple's nominee or alter ego trust. The nominee or alter ego theory applied because the creation of the trust did not coincide with economic realty and the trust was, in effect, a sham. The husband admitted that the trust was set up as a shell for the purpose of keeping his property at arm's length from potential creditors, including the IRS, and the undisputed facts established that he maintained active and substantial control over the trust. Since the trust was the nominee or alter ego of the couple, the timing of its creation was irrelevant.

[Code Sec. 6323 ]

Validity of lien: Priority over third-party interests: Bona fide purchaser.--Pursuant to both federal and state (Arizona) law, federal tax liens on residential property took priority over any interest held by alleged bona fide purchasers who took title with full knowledge of the tax liens.

ORDER

I. INTRODUCTION

MCNAMEE, District Judge:

On September 29, 1995, this Court entered an Order holding that the United States' tax assessments against Defendants Gerald and Betty Landsberger for the years of 1979, 1980, 1981 and 1982 could be reduced to judgment. Additionally, the Court held that the United States could foreclose its tax liens on the Landsberger's residential property related to the assessments made against them for the years of 1979 and 1980. However, subsequent to the entry of judgment, the United States moved to enter default judgment against Defendants Nancy Fieldman and Jeffrey Fadden as trustees of the trust that held the residential property. The Court denied the motion for default judgment and order and decree of foreclosure with respect to the property, and set discovery deadlines for this action to proceed forward on the issue of foreclosure of the property.

Currently pending before this Court is Plaintiff's Renewed Motion for Summary Judgment on a different theory again seeking an Order that would allow the United States to foreclose on the tax liens arising from the 1979 and 1980 income tax assessments. ¹

II. RELEVANT FACTS

The following facts are undisputed. In October of 1961, Defendants Gerald and Betty Landsberger took title to property at 1677 West County Road F in St. Paul, Minnesota ("St. Paul Property"), and lived in the property until March of 1982. In January of 1981, the Landsbergers transferred the St. Paul property to the G. J. Landsberger Family Trust 2-372 ("Trust #2-372") for "$1.00 and other good and valuable consideration"). See Deposition Transcripts Filed in Support of the United States Renewed Motion for Summary Judgment, Deposition of Gerald J. Landsberger ("Depo. G. Landsberger"), at p. 19 at ll. 2-4, p. 23 at ll. 6-23, and Exh. 2. The St. Paul property was worth in excess of $100,000 at the time of the transfer. See id. at p. 25, ll. 4-7. Gerald Landsberger was the trustee of Trust #2-372 and directed the activities of the trust. See id. at p. 24, ll. 2-4, and p. 3, ll. 6-20.

Mr. Landsberger has maintained and espoused tax protester-type beliefs since the late 1970's. See id. at p. 20, ll. 1-15, p. 21, ll. 7-21, p. 22, ll. 8-17, p. 52, ll. 1-7, p. 53, ll. 7-23, and Exhs. 13-15; see also United States v. Gerald Landsberger [82-1 USTC ¶9171], 534 F.Supp. 142 (D. Minn. 1981). Mr. Landsberger had many trusts set up in 1977, the purpose of which was to keep himself an "arms length" from any transaction related to the subjects of the trust, in order to protect the properties from potential creditors including the IRS. See Depo. of G. Landsberger, at p. 49, l. 9-p. 51, l. 25. Mr. Landsberger did not at that time have any tax deficiency assessments against him. See id. at p. 51, ll. 1-2.

Shortly after the transfer of the St. Paul property to Trust #2-372, the trust sold the property to an unrelated third party for a cash down payment of approximately $37,000, plus monthly payments and assumption of the mortgage. See id. at p. 29, ll. 23-25, p.30, ll. 1-20, and Exh. 3. After the sale of the property, the proceeds and all future payments for the property were transferred to Gerald Landsberger Investments, a Trust under Trust #2-988 (Trust #2-988), with the beneficiary being Constitutional Trust #1-988. Second Declaration of Gerald J. Landsberger ("Sec. Decl. G. Landsberger"), at ¶4; see also, Depo. G. Landsberger, at p. 30, ll.21-25, p. 31, ll. 1-25, p. 32 ll. 1-25, and p. 34, ll. 6-18. Mr. Landsberger was also the trustee of Trust #2-988, and directed the trust's activities. See id. at p. 32, ll. 12-14, p. 33, ll. 21-25, p. 34, ll. 1-2 and 19-25, and p. 35, ll. 1-4.

Sometime in 1981 or 1982, Trust #2-988 used the proceeds of the sale of the St. Paul property to purchase the residential real property at 4502 Cortez in Phoenix Arizona, also referred to as Lot No. 127, Village Fairways ("Cortez property"). See id. at p. 34, ll. 6-18, and Exh. 4. The Landsbergers resided at the Cortez property. See id. at p. 6, ll. 10-21; Deposition Transcripts Filed in Support of the United States Renewed Motion for Summary Judgment, Deposition of Nancy (Landsberger) Fieldman ("Depo. N. Fieldman"), at p. 6, ll. 11-24.

On or around November 21, 1984, Mr. Landsberger received a Notice of Deficiency from the IRS pertaining to the tax years of 1979 and 1980. See Depo. G. Landsberger, at p. 16, ll. 13-25, p. 17, ll. 1-17, and Exhs. 14 & 15. On January 4, 1985, Trust #2-988 transferred the Cortez property to Esther, a Trust under Trust #2-1703 (the "Esther trust"). See id. at p. 37, ll. 1-10, and Exh. 17; Sec. Decl. of G. Landsberger, at ¶5.

Nancy Fieldman, the Landsberger's daughter, and Jeffrey Fadden were co-trustees of the Esther trust. Depo. G. Landsberger, at p. 38, ll. 5-7. Fieldman never had a communication with Fadden, and knew of him only by her father's mention of him. See Depo. N. Fieldman, at p. 12, ll. 1-10. Fieldman became a co-trustee of the Esther trust at the behest of her father. See id. at p. 10, ll. 10-25.

In July of 1985, Fieldman signed a "Joint Tenancy Deed" as trustee of the Esther trust conveying the Cortez property to an unrelated third party. In June of 1986, the Esther trust used the proceeds of the Cortez property sale to purchase the residential real property located at 11815 North 91st Place, Scottsdale, Arizona ("91st Place"). Sec. Decl. G. Landsberger, at ¶6; see also, Depo. N. Fieldman, at p. 17, ll. 23-25, p. 18, ll. 1-11, and Exh. 5. The Landsbergers then moved into the 91st Place property where they continue to reside today. See Sec. Decl. G. Landsberger, at ¶5; Depo. G. Landsberger, at p. 5, ll. 18-25, p. 6, ll. 1-2.

The Landsbergers do not pay rent to live on the 91st Place property. See Depo. G. Landsberger, at p. 56, ll. 21-23; Depo. J. Wilde, at p. 55, ll. 2-25, and p. 56, ll. 18-24. The Landsbergers pay all the utilities and maintenance costs of the property as they did with the Cortez property. See Depo. G. Landsberger, at p. 56, ll. 24-25, and p. 57, ll. 1-10; Deposition Transcripts Filed in Support of the United States Renewed Motion for Summary Judgment, Deposition of John Wilde ("Depo. J. Wilde"), at p. 56, ll. 1-20.

On June 16, 1988, Nancy Fieldman signed her resignation as trustee of the Esther trust. See Depo. N. Fieldman, at p. 29, ll. 2-10, and Exh. 27. She was replaced by Jimmy C. Chisum. Sec. Decl. G. Landsberger, at ¶9.

On September 29, 1988, the Arizona Tax Court upheld the deficiency determination for the tax years of 1979 and 1980, and found Betty and Gerald Landsberger liable for deficiencies of $13,554.00 for the taxable year of 1979 and $55,631.00 for the taxable year of 1980, with a fraud addition of $34,593.00. See Court's Order of Sept. 29, 1995, at p. 3. On February 13, 1989, the IRS assessed Gerald and Betty Landsberger's deficiency for 1979 and 1980, plus interest, and sent a demand for payment to the Landsbergers. Id.

In November of 1995, the title to the 91st Place property was transferred to John Wilde and Eileen Lipari for "ten dollars and other valuable considerations." See Depo. J. Wilde, at p. 10, ll. 3-9, p. 59, ll. 9-25, p. 62, ll. 17-21, and Exhs. 10 & 11. John Wilde is a "very good friend" of Mr. Landsberger who also assists Mr. Landsberger in this litigation although he is not a lawyer. See Depo. J. Wilde, at p. 13, ll. 17-25, and p. 14, ll. 1-13. Mr. Wilde decided that the property should be transferred to him, and his friend Eileen Lipari, as a litigation tactic to so that they could join in this action as defendants and proceed pro se as the owners of the property. See id. at p. 59, l. 9-p. 60, l. 18. At the time of the transfer the property was worth in excess of $100,000. See id. J. Wilde, at p. 65, ll. 12-18.

Around October of 1995, the Arizona Tax Court ordered Mr. Landsberger incarcerated for failure to comply with the court's order compelling him to comply with a subpoena for tax records. Declaration of James A. Susa ("Susa Decl."), at ¶3. In an attempt to comply with the subpoena and to have him released from jail, in December of 1995, Mr. Landsberger's attorney submitted a document to James M. Susa, an Assistant Attorney General for the State of Arizona. Id. at ¶4. The document, signed under penalty of perjury on, lists the 91st Place property under Real Estate assets of Mr. Landsberger, and states that he is the one half owner of the property. See id., Exh. A. ²

III. STANDARD OF REVIEW

A court must construe a pro se litigant's pleadings and papers liberally. McGuckin v. Smith, 974 F.2d 1050, 1055 (9th Cir. 1992). Nevertheless, a pro se litigant is held to the same legal standard in determining whether summary judgment should be granted. See King v. Atiyeh, 814 F.2d 565, 567 (9th Cir. 1987). Where a motion to dismiss contains matters outside the pleadings, a court must construe the motion as a motion for summary judgment and give the parties "reasonable opportunity" to present all material pertinent to a motion for summary judgment. Fed. R. Civ. P. 12(b) (1995).

A court must grant summary judgment if the pleadings and supporting documents, viewed in the light most favorable to the nonmoving party, "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c) (1995); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Jesinger v. Nevada Federal Credit Union, 24 F.3d 1127, 1130 (9th Cir. 1994). Substantive law determines which facts are material. Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986); see also Jesinger, 24 F.3d at 1130. "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson, 477 U.S. at 248. The dispute must also be genuine, that is, "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id.; see also Jesinger, 24 F.3d at 1130.

A principal purpose of summary judgment is "to isolate and dispose of factually unsupported claims." Celotex, 477 U.S. at 323-24. Summary judgment is appropriate against a party who "fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Id. at 322; see also Citadel Holding Corp. v. Roven, 26 F.3d 960, 964 (9th Cir. 1994). The moving party need not disprove matters on which the opponent has the burden of proof at trial. Celotex, 477 U.S. at 317. The party opposing summary judgment "may not rest upon the mere allegations or denials of [the party's] pleadings, but . . . must set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e); see also Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 585-88 (1986); Brinson v. Linda Rose Joint Venture, 53 F.3d 1044, 1049 (9th Cir. 1995).

IV. DISCUSSION

Plaintiffs are attempting to foreclose on the tax lien on the 91st Place property for the tax assessments made on Defendants for the tax years of 1979 and 1980 reduced to judgment on February 13, 1989. Section 6321 of Title 26 of the United States Code reads:

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

26 U.S.C. §6321. Defendants in this action allege that the 91st Place property belonged to another since before the time of the assessment through today, and that accordingly, the government cannot foreclose on the lien on the property.

The United States seeks to foreclose on the tax lien on the 91st Place property under three alternative theories. The government first argues that the Esther Trust was the nominee of the Landsbergers who held equitable title to the property on the date that the tax assessments were made. Accordingly, under 26 U.S.C. §6321, the government may foreclose on the property. Alternatively, Plaintiff argues that the transfer of the Cortez property from Trust #2-998 was fraudulent, and should be set aside under the Arizona Uniform Fraudulent Transfer Act, A.R.S. §44-1001, et seq. Finally, Plaintiff argues that any interest held in the property by John Wilde and Eileen Lipari is inferior to the Federal tax liens under 26 U.S.C. §6323(a) and Arizona property law.

Defendant makes three counter arguments. First, Defendant argues that Plaintiff impermissibly amends its Complaint in this action without leave of Court by including its claim under the Arizona Fraudulent Transfer Act. Secondly, Plaintiff argues that under Arizona law the "nominee/alter ego theory" can only arise against a corporation. In any event, the theory is not available where the transfer took place before the tax assessment. Finally, Plaintiff argues that assuming arguendo that either the nominee/alter ego theory or the fraudulent transfer theory can be raised, genuine issues of material fact exist precluding summary judgment.

A. Nominee/Alter Ego Theory

The "nominee/alter" ego theory is clearly viable in this instance even though the assets are held by a trust, and not a corporation. See e.g., F.P.P. Enterprises and D & S Trust v. United States [87-2 USTC ¶9536], 830 F.2d 114 (8th Cir. 1987); Neely v. United States [85-2 USTC ¶9791], 775 F.2d 1092 (9th Cir. 1985). The underlying principle is the "sham" nature of the arrangement. See F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 117 ("A transaction will not be given effect according to its form if that form does not coincide with the economic reality and is, in effect, a sham."); Neely [85-2 USTC ¶9791], 775 F.2d at 1094 (sham transaction will not be recognized for tax purposes).

In addition, there is no requisite that the nominee/alter ego arrangement come into existence after the assessment of the tax liability. If the Court finds that the Esther trust was the alter ego of the Defendant existing at the time of the assessment simply to avoid creditors, then the timing of its creation has no import. See G.M. Leasing Corp. v. United States [77-1 USTC ¶9140], 97 S.Ct. 619, 627 (1977) (under §6321 assets of alter ego are properly levied as assets to satisfy tax liability of tax payer) (F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 118 (property held by alter ego trusts not held by "separate persons" apart from taxpayer, and therefore, my be levied). The timing of the trust arrangement, may however, be a factor for the Court to consider in determining whether the trust is actually a nominee or alter ego.

"Property held in the name of an entity which is the alter ego of the taxpayer may be levied on to satisfy the tax liabilities of the taxpayer." F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.3d at 118; See G.M. Leasing Corp. v. United States [77-1 USTC ¶9140], 97 S.Ct. 619, 627-28 (1977); Shades Ridge Holding Co, Inc. v. United States [89-2 USTC ¶9472], 888 F.2d 725, 728 (11th Cir. 1989). The Court may find that an entity is the alter ego of the taxpayer where:

(1) the taxpayer treats the property as it belongs to him, See F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 116, Shades Ridge Holding Co., Inc. [89-2 USTC ¶9472], 888 F.2d at 729;

(2) minimal or no consideration is paid by the entity in consideration for the property, see e.g., F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 116;

(3) the taxpayer has expressed the intent to shelter the asset via the trust mechanisms, see, F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 116,

(4) the taxpayer maintains "active" or "substantial" control over the operations and decisions of the property, see Valley Finance, Inc. v. United States [80-2 USTC ¶9554], 629 F.2d 162, 172 (1980), Shades Ridge Holding Co. [89-2 USTC ¶9472], 888 F.2d at 728 (11th Cir. 1989);

(5) a family or close relationship exists between the taxpayer and the holding entity, see Shades Ridge Holding Co. [89-2 USTC ¶9472], 888 F.2d at 729.

There is substantial evidence in this action that the Esther trust, as well as the many other Landsberger trusts, existed as the alter ego or nominee of Mr. Landsberger. He specifically states that the trusts were set up as "shells" for the purpose of keeping his property at an "arms length" to shelter them from potential creditors including the IRS. Nor has he attempted to argue any other reason for the existence of his trusts. Under these facts alone it is difficult to see how any court could find a question of fact with respect to the alter ego/nominee status of the Landsbergers' trusts.

Further, the Landsbergers continued to treat the property as their own at all times. See F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 117. Despite living in the 91st Place property for over 10 years, they never paid rent, and they paid all the utilities, upkeep, and maintenance costs of the property. See Depo. G. Landsberger, at p. 56.

The main issue Defendants raise as a genuine issue of material fact is in relation to the contradicting testimony of Mr. Landsberger and his daughter, Nancy Fieldman, regarding her role as a trustee. Fieldman testifies that she became trustee at the request of her father, that she felt obligated to do so because she was living in their home, that she believed he chose her because she was family which allowed him to maintain control over the trust. Mr. Landsberger does not dispute any of these facts.

However, in addition, Fieldman testified that she performed no duties as trustee other than signing her name as trustee wherever and whenever her father requested, that she never had control over the trust or made any decisions regarding the transactions of the trust, that her father made all decisions regarding the trust including the decision to sell the Cortez property and purchase the 91st Place property. See Depo. Fieldman, at p. 12, ll. 11-18, pp. 13-15, pp. 17-25. She testifies that she never had any checks for the Trust account, and that she never saw nor had control over the $100,000 used by the trust as a downpayment on the 91st Place property. Id. at 23-25. Additionally, she testifies that Mr. Landsberger signed her signature on at least two documents conducting trust business without her knowledge or permission. See Depo. p. 27, ll. 23-25; p. 28, ll. 11-17; Exhs. 24 & 25.

Mr. Landsberger admits that he signed his daughter's signature on several occasions, but testifies that he did so to help her out and with her permission. He testifies that because she was inexperienced in her knowledge and duties as trustee, that she relied heavily on his advise and guidance as she carried out her duties. He also testifies that he drafted the majority of the trust documents in the record. Ultimately, however, Mr. Landsberger states that his daughter had control over the trust and could do whatever she wanted. Depo. G. Landsberger, at p. 43.

With respect to the Cortez property, Mr. Landsberger testifies that he had nothing to do with the transfer of the property, and that Mr. Fadden and his daughter, as co-trustees handled the transfer. The deed transferring the Cortez property to the third party, however, bears only the signature of Nancy Landsberger (Fieldman). Mrs. Fieldman testifies that she never had a conversation with Mr. Fadden. Plaintiff provides no evidence to support Mr. Fadden's involvement or otherwise controvert Mrs. Fieldman's statements that she never spoke with Mr. Fadden. From the evidence, the Court must conclude the no reasonable jury could find that Mr. Fadden was involved in the transaction where the relevant trust transaction documents bear only the signature of Nancy Landsberger as co-trustee, and avers that she never had a conversation with Mr. Fadden.

Nonetheless, accepting as true Mr. Landsberger's testimony, the remaining undisputed facts show that he maintained active and substantial control over the trust through his involvement. Moreover, the degree of control Mr. Landsberger maintained is not dispositive. There are a multitude of undisputed facts in this litigation supporting the conclusion that the Esther trust, and others, were alter egos of Mr. Landsberger. Mr. Landsberger's own admission as to his purpose and intent for creating and operating the trust is the most probative of all. Nowhere does Mr. Landsberger provide controverting evidence establishing any legitimate purpose for the trust. Accordingly, Plaintiff is entitled to summary judgment in its favor on the theory that the Esther trust was a mere nominee/alter ego of the Landsbergers at the time the tax was assessed in February of 1989.

B. John Wilde and Eileen Lipari's Interest

The Internal Revenue Code provides that a federal tax lien takes priority over an interest held by an alleged bonafide purchaser when the purchaser acquired the property with notice of the lien. 26 U.S.C. §6323(a). Arizona law on judgments is consistent with this principle. See Warren v. Whithall Income Fund, 823 P.2d 689 (Ariz. App. 1991); Hatch Companies contracting Inc. v. Arizona Bank, 826 P.2d 1179 (Ariz. App. 1991).

The property was conveyed to Wilde and Lipari for "ten dollars and other valuable considerations." See Depo. J. Wilde, at p. 10, ll. 3-9, p. 59, ll. 9-25, p. 62, ll. 17-21, and Exhs. 10 & 11. It is undisputed that Mr. Wilde and Ms. Lipari took title to the 91st Place property with full knowledge that the property was subject to the federal tax liens. See Depo. J. Wilde, at p. 59, l. 9-p. 60, l. 18. Accordingly, any interest these third parties may have in the property is clearly subordinate.

V. CONCLUSION

There is no genuine issue of material fact in dispute that precludes summary judgment in Plaintiff's favor on the issue of the trust functioning as the alter ego or nominee of Gerald Landsberger. In addition, there is no dispute that any interest in the 91st Place property the current title holders may have is subordinate to the federal tax liens. ³ Accordingly, Plaintiff is entitled summary judgment as a matter of law, and may foreclose on the 91st Place property accordingly. For the foregoing reasons,

IT IS THEREFORE ORDERED Defendant's Renewed Motion for Summary Judgment filed on September 3, 1996 is GRANTED. [doc. #106].

IT IS FURTHER ORDERED the United States shall lodge and serve a copy upon all Defendants, a Proposed Order and Decree of Foreclosure pursuant to 28 U.S.C. §2001 no later than October 31, 1997.

IT IS FURTHER ORDERED the Clerk of the Court shall MAIL copies of the Order to each Defendant and to all counsel of record.

¹ This motion was stayed pending resolution of a series of motions that may ultimately have affected its resolution. See Order of August 19, 1997. The previous issues now resolved, the Court lifts the stay as to Defendant's renewed motion for summary judgment.

² Mr. Landsberger disputes the accuracy of this document on the grounds that the information was provided by his wife, and that she does not understand how the Trusts operate. See Depo. G. Landsberger, at pp. 85-88.

³ Because it is unnecessary to the resolution of this action, the Court declines to determine the remaining issues raised by the parties pleadings.

 

 

 

United States of America, Plaintiff v. Neil Nirelli and Christine Nirelli, Defendants

U.S. District Court, West. Dist. N.Y., 92-CV-563C, 9/16/97

[Code Sec. 6321 ]

Lien for taxes: Real property: Fraudulent conveyances: Inadequate consideration: Intent to defraud creditors.--A husband's transfer of his interest in their house to his wife was set aside because the transaction was a fraudulent conveyance under state (New York) law. The husband was insolvent at the time of the transfer, and the most credible testimony indicated that he simply gave her the interest so that her father would lend her money to stave off foreclosure by his creditors. An alleged oral agreement in which the wife agreed to pay outstanding tax and mortgage liabilities and to forgive her husband's failure to pay child support in consideration for the transfer was not supported by any documentary evidence, and the deed stated that no consideration other than one dollar was given. The fact that there was no appraisal of the parties' assets and liabilities in the transaction was a further indication that the oral agreement did not occur.

Philip J. Berkowitz, Department of Justice, Washington, D.C. 20530, for plaintiff. Joseph W. Keefe, 1720 Liberty Bldg., Buffalo, N.Y., for Neil Nirelli, Sabatino Santarpia, Feuerstein & Santarpia, 17 St. Louis Place, Buffalo, N.Y., for Christine Nirelli.

BACKGROUND

CURTIN, District Judge:

In August 1992, the plaintiff United States instituted this action to (1) reduce to judgment the outstanding federal tax liabilities of defendant Neil Nirelli, (2) set aside as fraudulent the transfer by Neil Nirelli to his ex-wife and co-defendant Christine Nirelli of his interest in their home, (3) have Neil Nirelli declared the true owner of that interest, (4) foreclose the federal tax liens on Neil Nirelli's interest in the property, and (5) have the court order a judicial sale of the home and the distribution of the proceeds pursuant to court order. Item 16.

At this stage, the government seeks to set aside as a fraudulent conveyance the transfer of defendant Neil Nirelli's interest in the house.

Defendant Neil Nirelli was assessed a penalty pursuant to 26 U.S.C. §6672 (the Internal Revenue Code) as a responsible person who willfully failed to withhold, truthfully account for, or pay over to the United States withheld income and FICA taxes of the employees of Empire State Tire & Automotive Supplies, Inc. ("Empire") for several periods ending before January 1, 1986. Notice of the assessment and demand for payment was given to defendant. As of May 17, 1995, with interest accrued through that date, the IRS claimed defendant owed the United States $29,284.96. Item 16, p.2.

Neil and Christine Nirelli, husband and wife, purchased a house at 145 Caesar Boulevard, Amherst, New York in July 1975. They lived in the house with their two daughters. On March 28, 1986, after accruing the above tax liabilities, but before the couple divorced in 1992, defendant transferred his ownership interest in the residence to his ex-wife for the stated consideration of one dollar. Item 16, p.3.

The government states that as of the date of transfer, defendant was already indebted to the United States for a 100 percent penalty for the withholding taxes of Empire, for periods during 1983, 1984, and 1985. By June 2, 1986, the government claims his assessed liability for taxes alone was $16,599.35. Item 16, p.11.

In a deposition conducted on May 14, 1993, defendant testified that at the time of the transfer, he owned no property other than the house. Item 17, Exh. C., p.35. Christine Nirelli, defendant's wife, testified that in addition to the residence, she and her husband owned no property, except possibly two ten-year-old cars. Item 17, Exh. D, p.24. Consequently, this court held, on the government's motion for summary judgment, that Neil Nirelli was insolvent as a matter of law at the time of the transfer.

Neil Nirelli entered into an installment agreement with the government to satisfy his outstanding tax liability. The Form 433-D agreement was signed by defendant Neil Nirelli on November 18, 1991. Item 19, Exh. 5. The agreement provided for monthly payments of $200.00 until the alleged debt is satisfied. The agreement also provided that "1992 and future years taxes [are] to be paid in full via estimated tax payments as required by law," and that "[i]f the Terms or Conditions of this Installment Agreement are not met, it will be terminated and the entire tax liability may be collected by levy on income, bank accounts, or any other assets, or by seizure of property." Defendant defaulted on the installment agreement by failing to timely pay his personal income taxes in 1991, 1992, 1993, and 1994. Item 22, Exh. I, ¶¶4, 5, 6.

The IRS may unilaterally terminate, alter or modify the installment agreement upon default by the taxpayer. Treas. Reg. §301.6159-1(c)(2). In addition, a Form 433-D installment agreement, which is the form signed by the defendant, is not a closing agreement and does not represent the IRS's final agreement concerning the tax payer's tax liability. Pearson v. Commissioner [CCH Dec. 42,064(M)], 49 T.C.M. 1391, T.C. Memo 1985-211 (1985).

Of the $9,359.27 defendant has paid in installments, $3,116.50 was applied to the penalty assessment against Empire's tax liability; the balance of the payments, $6,242.77, were applied to defendant's personal tax liabilities. Accounting for the installment payments made by the defendant, he continued to owe the IRS a total of $29,284.96 in outstanding federal tax liabilities, as of the government's last submission. Item 16, p.1.

A bench trial was held before this court on July 29 and August 19, 1996, on the issue of whether the transfer of the house was a fraudulent conveyance under New York State law. Both parties submitted proposed findings of fact and conclusions of law. In an order dated February 18, 1997, the court stated that defendants' submissions were inadequate and did not comport with the order of the court. The court granted defendants leave to file further submissions, but defendants filed nothing. The court therefore considers the matter fully submitted.

DISCUSSION

I. The transfer of the house was a fraudulent conveyance.

Section 273 of New York Debtor and Creditor Law states:

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

There are three elements to a fraudulent conveyance claim. The transfer must be (1) a conveyance within the meaning of the Debtor and Creditor Law; (2) made by a person who is or will thereby be rendered insolvent, and (3) made without consideration. Only the third point is at issue here.

Although the burden is generally on the government to prove that a conveyance is without consideration, that burden may be shifted "where the evidentiary facts as to the nature and value of the consideration are within the transferee's control, [in such cases] the burden of coming forward with evidence on the fairness of the consideration shifts to the transferee." ACLI Government Securities, Inc., 653 F. Supp. 1388, at 1391 (S.D.N.Y. 1987), aff'd, 842 F.2d 1287 (2d Cir. 1988). The court noted in an earlier order that the defendants have never contested this shifted burden.

The transfer to an ex-wife by a husband of all of his interest in marital property as payment for child support is not a fraud on creditors, as it is supported by valid consideration. First Federal Sav. and Loan Ass'n of Rochester v. Kasmer, 528 N.Y.S.2d 216 (N.Y.A.D. 3d Dep't 1988). In addition, discharge of antecedent debt is fair consideration for a conveyance even though the debt arises out of the husband's obligation of support. Vinlis Const. Co. v. Roreck, 325 N.Y.S.2d 457 (N.Y. Supreme Court 1971), aff'd, 351 N.Y.S.2d 648, appeal dismissed in part. denied in part, 361 N.Y.S.2d 1026, appeal dismissed in part, denied in part, 361 N.Y.S.2d 645. Finally, when a deed specifies that the property was transferred for nominal consideration, it is proper to show by separate evidence what the actual consideration was. Medical College Laboratory v. New York University, 178 N.Y. 153, 70 N.E. 467 (1904).

Defendant Neil Nirelli testified at trial that between 1982 and 1986, he failed to meet any of his financial responsibilities to his family. July 29 Tr. p. 41. He stated that at the time he abused drugs and alcohol, and that consequently he was not paying the mortgage or taxes on the family home and was paying utility bills only sporadically when service was about to be cut off. July 29 Tr. pp. 41-42.

On June 13, 1985, Neil Nirelli met with IRS agents to discuss the tax liability. He testified that it was at this meeting that he first understood that he might be personally liable for the tax in question. July 29 Tr., p. 46.

By October 1985, over $6,758.00 was due in back taxes on the property. Neil Nirelli stated that this debt was paid by Christine Nirelli from money given to her by her father and brother. Christine's father also paid past due mortgage payments. July 29 Tr., pp. 60-61.

Neil Nirelli further testified that at that time his financial straits, coupled with criminal charges for disorderly conduct, caused him to realize that his "life was at the bottom." July 29 Tr., p. 63. At the same time, he testified that his marriage was over. Id.

On March 28, 1986, Neil Nirelli recorded an indenture for the transfer of the property to his wife, Christine Nirelli. This deed was recorded on April 15, 1986. Plaintiffs Ex. 2; July 29 Tr., p. 33. At the time of the transfer, Neil and Christine were still married. According to the indenture, Neil transferred his interest to Christine for one dollar. Ex. 2.

Although he stated that he entered preliminary consultation with several attorneys concerning his tax problems and the transfer, none of these attorneys ever suggested that he put the terms of the agreement in writing. July 29 Tr., p. 77. At the time of the transfer, there was no court order of support, nor was there a support agreement. July 29 Tr., pp.63-64,

Neither party had the property appraised prior to the transfer, and neither knew the precise value of the property, or the precise value of Neil's interest. July 29 Tr., p. 40. When both Neil and Christine were asked at their respective depositions if Neil was given anything of value in exchange for his interest in the property, both answered that he had not. Plaintiffs Ex. 14, p.33; Plaintiffs Ex. 15, p.21.

Christine Nirelli testified that when the couple divorced in 1992, Neil Nirelli was ordered to pay her $500 per month in child support and maintenance. In addition, she testified that she took less than the amount to which she was legally entitled in order to keep the house. July 29 Tr., p. 29.

Alan Feuerstein, an attorney who represented the Nirellis on various matters, prepared the deed that transferred the interest to Christine. He testified that he stated that the consideration was one dollar because "[t]here was no consideration that was being passed from Christine Nirelli to Neil Nirelli at that point." August 19 Tr. p. 12. Feuerstein then testified that by no consideration, he meant no "actual dollars." Id. at 13. Feuerstein also testified that he never prepared any document that showed that Mr. Nirelli was no longer obligated to pay Mrs. Nirelli the hypothetical debt for past support that allegedly formed the true consideration for the transaction. August 19 Tr., p. 25.

The government argues that the parties entered into the transfer agreement because Christine Nirelli's family told her that they would not lend her the money to save the house from the government as long as her husband was the co-owner. Consequently, according to the government, Neil Nirelli received no consideration for the transfer.

The Nirellis argue that Christine Nirelli demanded that Neil Nirelli "sign over his undivided one half interest in the residence ... and in turn she would not require him to pay the $10,858.88 needed to get the home out of tax and mortgage foreclosure. Additionally, she agreed to forgive his failure to pay any and all child support for the four (4) years prior." Item 39, p. 2.

The evidence supports the government's argument. First, although Neil was represented by counsel at the time of the transfer, there is no record of a release of antecedent serving as consideration. The only record is that the consideration was "one dollar and no more." Neil, Christine, and attorney Alan Feuerstein all first said that nothing of value was given by Neil for the transfer. Each then said they meant that no money was exchanged. The court has noted that such an oversight is perhaps understandable in the case of Neil and Christine, though it is less understandable in the case of their attorney. In any event, had the release been the actual consideration, it is impossible to believe that no one would have thought of and mentioned it.

It is also significant that neither Christine nor Neil ever had the property appraised or had any detailed idea of the amount of Neil's debt to Christine. The court acknowledges that the transaction was an informal one, concluded at a difficult time in their lives. But it is difficult to believe that they would not have made some rudimentary effort to figure out what Neil was giving and what Christine was getting.

According to Neil Nirelli's testimony at trial, he and Christine "entered into an oral agreement that [they] both realized the marriage was over, and that her family was willing to come up with the taxes and the mortgage, and that at that point she wouldn't be coming after [him] legally for support and maintenance to her for that period," on the condition that he turn his interest in the house over to her. July 29 Tr., pp. 65, 66.

More credible was Christine Nirelli's testimony that the transfer was required because she told Neil that there was "absolutely no way that [her] father would give any more money to this house unless it was fully in [her] name." July 29 Tr. pp. 98-99. Christine Nirelli also testified that the purpose of the transfer was to protect the house from Neil Nirelli's creditors. July 29 Tr. pp. 101-102. In addition, she testified that prior to the transfer she said to her husband: "[I]f you really want to make an effort [to reconcile], let's get the house transferred into my name and I'll go to my father to get the money to stop the foreclosure so our girls can live comfortably." July 29 Tr., pp. 116-17.

Examining all the testimony and exhibits, the Nirellis failed to bear the burden of persuading the court that the transfer was made for the consideration alleged. There was no documentary evidence of such consideration, and the deed actually states that no consideration other than one dollar was given. There was no appraisal of the parties' assets and liabilities in the alleged transaction. And the most credible testimony supports the conclusion that Neil Nirelli simply gave his interest in the house to Christine so that her father would lend or give her the money to stave off foreclosure. Such a conveyance, when made by an insolvent creditor, is a fraudulent transaction under New York law.

CONCLUSION

For the foregoing reasons, the court finds that the transfer of defendant Neil Nirelli's interest in the property at 145 Caesar Boulevard, Amherst, New York was a fraudulent conveyance as defined by section 273 of the New York Debtor & Creditor Law. The transfer is therefore set aside, and Neil Nirelli is found to be the owner of the transferred interest.

A telephone conference will be held on September 29, 1997, at 3:30 p.m. Buffalo counsel shall attend in chambers.

SO ORDERED.

 

 

 

United States of America, Plaintiff-Appellee v. Thomas P. Sheridan and Diane M. Sheridan, Defendants-Appellants

(CA-7), U.S. Court of Appeals, 7th Circuit, 96-3804, 8/21/97, Affirming an unreported District Court decision

[Code Sec. 6321 ]

Tax liens: Fraudulent conveyance.--Under state (Illinois) law, a husband's transfer of his interest in his home to his wife was a fraudulent conveyance. The amount paid by the wife for the interest was inadequate consideration, and the government was actively seeking to collect the back taxes owed by the husband at the time he sold his interest in the home. Moreover, following the transfer, the husband retained insufficient property to satisfy his tax obligations.

[Code Sec. 7402 and Fed. R. App. P. 38 ]

Constitutional arguments: Seventh Amendment: Right to a jury trial: Summary judgment: Frivolous appeal: Sanctions: Default judgment: Sufficiency of complaint.--Tax liabilities of married taxpayers who failed to file income tax returns for several years were not eliminated when the lower court vacated an earlier default judgment in favor of the government. The vacation was not a judgment in favor of the taxpayers. Furthermore, the lower court's subsequent grant of summary judgment in favor of the government did not deprive the taxpayers of their Seventh Amendment right to a jury trial and was properly granted. Even assuming that the government misinformed the taxpayers as to the dates of status hearings and failed to serve them with discovery requests, as alleged by the taxpayers, they failed to allege that they suffered any prejudice from those actions. Moreover the taxpayers' appeal was deemed frivolous. Therefore, absent a showing by the taxpayers that they should not be sanctioned, the court of appeals indicated that sanctions will be imposed.

Before: CUMMINGS, BAUER, and WOOD, Circuit Judges.

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

ORDER ^*

Thomas Sheridan decided that federal income taxes are voluntary, and so, beginning in 1979, he stopped filing complete federal tax returns or paying income taxes. The IRS made annual tax and penalty assessments against Sheridan from 1981 through 1993. Sheridan refused to pay the assessments, and in March 1995 the United States commenced this civil action against him to reduce to a judgment more than $230,000 in taxes and penalties that he owed. (As of October 1996, Sheridan's debt had increased to more than $250,000.) The government also named as a defendant Sheridan's wife, Diane, and sought a judgment setting aside as fraudulent Sheridan's 1985 conveyance of his interest in his house to Diane for $2.00. Finally, the government sought the foreclosure of various tax liens on Sheridan's house and its judicial sale.

After this suit was commenced, the Sheridans ignored the government's requests for discovery, though the Sheridans claim that the government did not properly serve various discovery requests upon them. In any case, the government moved for an order compelling the Sheridans to respond to its discovery requests. The Sheridans still refused to cooperate with discovery, and the government moved for and was granted a default judgment. The court later vacated the default judgment, apparently either because the Sheridans had begun to cooperate with discovery, or because they had agreed to do so in the future.

Discovery proceeded, the government moved for summary judgment, and the Sheridans responded. In September 1996, the district court granted summary judgment in favor of the United States. The court entered judgment against Mr. Sheridan for the amount of $259,642.96. The court ruled that Mr. Sheridan's purported transfer of his interest in his home to his wife was fraudulent under state law, and that Mr. Sheridan therefore retained his interest in the property. Finally, the court ordered the foreclosure of the tax liens and the sale of the house. This appeal followed.

The Sheridans' appellate brief consists largely of personal attacks and accusations against the district court judge and the government attorneys who litigated this case before the district court and this court. Such ad hominem attacks are wholly inappropriate and completely unfounded.

Beside personal attacks, the Sheridans' appellate brief contains only baseless factual assertions and erroneous legal conclusions; it is devoid of any citations to authorities, statutes or parts of the record relied upon. See Fed. R. App. P. 28(a)(6). Accordingly, they have failed to preserve any argument for appellate review. See Gagan v. American Cablevision, Inc., 77 F.3d 951, 965 (7th Cir. 1996) (failure to cite any factual or legal basis for an argument waives it); Bratton v. Roadway Package Sys. Inc., 77 F.3d 168, 173 n.1 (7th Cir. 1996) (argument that is not developed in any meaningful way is waived); Freeman United Coal Mining Co. v. Office of Workers' Compensation Programs, Benefits Review Bd., 957 F.2d 302, 305 (7th Cir. 1992) ("[W]e have no obligation to consider an issue that is merely raised on appeal, but not developed in a party's brief"); United States v. Haddon, 927 F.2d 942, 956 (7th Cir. 1991) ("A skeletal 'argument', really nothing more than an assertion, does not preserve a claim [for appellate review]").

Even if we were to consider the Sheridans' arguments, however, they are utterly meritless. Their principal argument is that the district court terminated the case in their favor and eliminated any underlying debt they owed to the United States when it vacated the default judgment it had previously entered against them. According to the Sheridans, "[w]hen the 'so called' judgment was vacated[,] so was the so called or assumed debt to the United States. [The government] never legally re-opened the case. . . ." This assertion is simply wrong. The district court's vacation of the default judgment against the Sheridans was not a judgment in their favor. Rather, the vacation merely relieved them from the judgment that had been entered against them, see Fed. R. Civ. P. 55(c), 60(b), and afterward, the case properly proceeded. See McCall-Bey v. Franzen, 777 F.2d 1178, 1186 (7th Cir. 1985) (effect of vacation of default judgment is to restore case to trial calendar); see also Thompson v. American Home Assurance Co., 95 F.3d 429, 434 (6th Cir. 1996) (same); Civic Center Square Inc. v. Ford (In re Roxford Foods Inc.), 12 F.3d 875, 881 (9th Cir. 1993) (same); Joseph v. Office of Consulate General of Nigeria, 830 F.2d 1018, 1028 (9th Cir. 1987) (same), cert. denied, 485 U.S. 905 (1988). Thus, the government did not need to "re-open" the case because it was never "closed."

The Sheridans next argue that the district court denied them their Seventh Amendment right to a jury trial when it granted summary judgment in favor of the government. However, it has long been held that resolution of a case on summary judgment does not violate the Seventh Amendment. Fidelity & Deposit Co. v. United States, 187 U.S. 315, 319-21 (1902); United States v. Strangland, 242 F.2d 843, 848 (7th Cir. 1957). The Sheridans do not direct our attention to any genuine questions of material fact which should have precluded summary judgment, and thus, the district court properly granted summary judgment in favor of the government. Fed. R. Civ. P. 56(c); Celotex Corp v. Catrett, 477 U.S. 317, 322-23 (1986).

The Sheridans also submit that they were misinformed as to the dates of various status hearings and that the government failed timely to serve them with certain discovery requests. Even if these claims are true, the Sheridans fail to allege that they suffered any prejudice from these errors. All of the alleged errors of which the Sheridans complain occurred before the district court granted the default judgment in favor of the government. Accordingly, any such errors were cured when the court vacated that judgment. The Sheridans do not claim that they were denied notice of the government's motion for summary judgment, or that they were denied the opportunity to respond. Because none of the errors of which the Sheridans complain in any way prejudiced them, they do not state a ground for reversal. Fed. R. Civ. P. 61; Kwasny v. United States, 823 F.2d 194, 196 (7th Cir. 1987).

The Sheridans' final argument is that Mr. Sheridan's transfer of his interest in his home to his wife was a valid conveyance, and that their house is therefore not subject to seizure and sale to satisfy Mr. Sheridan's tax bill. Again, this unsupported assertion is premised on erroneous legal conclusions. The Sheridans' house is in Illinois, and so Illinois law determines whether the transfer was fraudulent. Under Illinois law, a creditor (in this case, the United States) may have a fraudulent conveyance set aside. Ill. Rev. Stat. 1985 ch. 59, ¶4. A conveyance is presumptively fraudulent if, (1) it is made for inadequate consideration; (2) there is an existing or anticipated indebtedness against the transferor; and (3) the transferor did not retain sufficient property to pay his indebtedness. See Gendron v. Chicago & North Western Transp. Co., 564 N.E.2d 1207, 1214-15 (Ill. 1990), Anderson v. Ferris, 470 N.E.2d 518, 521 (Ill. App. Ct. 1984), First Sec. Bank of Glendale Heights v. Bawoll, 458 N.E.2d 193, 197 (Ill. App. Ct. 1983).

All three elements are satisfied in this case. The district court found that the $2.00 Ms. Sheridan paid for Mr. Sheridan's interest in his house was inadequate consideration. On appeal, the Sheridans point to no evidence suggesting the contrary. (In fact, the record indicates that the house is worth between $70,000 and $100,000.) The Sheridans argue that they jointly agreed to the $2.00 sale price, but that fact does not establish that this consideration was "adequate" for the purposes of the fraudulent conveyance statute. See, e.g., Casey Nat'l Bank v. Roan, 668 N.E.2d 608, 611 (Ill. App. Ct.) (father's conveyance of half interest in 60- and 25-acre tracts of land to children for $10 each deemed inadequate consideration for purposes of fraudulent conveyance statute), appeal denied, 675 N.E.2d 631 (Ill. 1996); Effingham State Bank v. Blades, 487 N.E.2d 431, 435 (Ill. App. Ct. 1985) (husband's conveyance of land worth $60,000 to wife for $100 deemed inadequate consideration for purposes of fraudulent conveyance statute).

Second, the Sheridans do not deny that Mr. Sheridan was indebted to the federal government for his back taxes, and that the government was actively seeking to collect that debt from him when he sold his interest in the house. The Sheridans do argue that there was no lien on their house when Mr. Sheridan conveyed his interest, ¹ but that fact is irrelevant to whether the transfer was fraudulent under Illinois law. The only relevant issue is whether Mr. Sheridan was or anticipated being indebted at the time of the conveyance. See Casey Nat'l Bank, 668 N.E.2d at 611 (transfer of real estate when loan was delinquent and bank was pressing debtor to refinance loan held to be transfer while debtor was indebted); Reagan v. Baird, 487 N.E.2d 1028 (Ill. App. Ct. 1985) (indebtedness exists at time of conveyance, for purposes of fraudulent conveyance statute, regardless of whether creditor has reduced claim to a judgment or initiated legal action). As we said above, Mr. Sheridan does not deny that he owed back taxes when he sold his interest in his home.

Third, the district court found that after he sold his interest in the house, Mr. Sheridan retained insufficient property to satisfy his tax obligations. Again, the Sheridans point to no evidence to the contrary. Accordingly, under Illinois law, Mr. Sheridan's conveyance of his interest in his house to his wife was fraudulent in law, see Gendron, 564 N.E.2d at 1214-15, and the district court properly set it aside. See, e.g., United States v. Denlinger [93-1 USTC ¶50,040], 982 F.2d 233 (7th Cir. 1992), cert. denied, 510 U.S. 859 (1993); Indiana Nat'l Bank v. Gamble [84-2 USTC ¶9884], 612 F.Supp. 1272 (N.D. Ill. 1984). Thus, the district court properly ordered the tax liens foreclosed and the house sold.

Finally, we deem this appeal to be frivolous. Accordingly, we believe that a $2,000 sanction may be warranted. See Cohn v. Commissioner [96-2 USTC ¶50,665], 101 F.3d 486 (7th Cir. 1996) (per curiam). We therefore direct the Sheridans to show cause why they should not be sanctioned for filing this appeal. Fed. R. App. P. 38, Cir. R 38. They have 14 days to file a response. We strongly caution them that any further opprobrious or insulting language directed at this court, the district court or the government attorneys will not be tolerated.

AFFIRMED; ORDER TO SHOW CAUSE ISSUED.

^* After an examination of the briefs and the record, we have concluded that oral argument is unnecessary in this case; accordingly, the appeal is submitted on the briefs and the record. See Fed. R. App. P 34(a), Cir. R 34(f).

¹ Under 26 U.S.C. §§6321-22, a lien arises on all of a taxpayer's property for unpaid taxes when the IRS makes an assessment of liability. So far as the record shows, the IRS did not make an assessment of liability against Mr. Sheridan until July 1985--four months after he sold his interest in his house.

 

 

 

United States v. Paul and Louise Marguglio

U.S. District Court, Dist. N.J., Civ. 94-2741 (WGB), 2/13/97

[Code Sec. 6321 ]

Transfers: Property: Fraudulent: Tax avoidance: Liability for deficiencies.--A husband, who had unpaid tax liabilities, fraudulently conveyed under state (New Jersey) law his interest in their personal residence to his wife in an attempt to defraud his creditors, including the IRS. Therefore, the wife, as transferee of fraudulently conveyed property, was liable for her husband's interest in the property at the time of the transfer. The transfer, which was made for one dollar and rendered the husband insolvent, occurred within weeks after the initiation of a Housing and Urban Development audit, undertaken to investigate the staffing of a housing authority for which the husband served as executive director and in which, without the agency's knowledge, he held multiple salaried positions.

Faith S. Hochberg, United States Attorney, Neil R. Gallagher, Assistant United States Attorney, Newark, N.J. 07102, Beverly A. Moses, Department of Justice, Washington, D.C. 20530, for U.S. Paul Marguglio, Louis Marguglio, 1001 Seafarer Circle #506, Jupiter, Fla. 33477, pro se.

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

LETTER-OPINION

LECHNER, JR., District Judge:

Plaintiff, United States of America (the "Government"), commenced this law suit against Paul Marguglio ("P. Marguglio") to reduce tax assessments to judgment and against Louise Marguglio ("L. Marguglio") to obtain a judgment of liability against her as transferee of property which the Government claims was a fraudulent conveyance to her by P. Marguglio.

This matter was and is assigned to William G. Bassler, United States District Judge. Because of a scheduling conflict, I agreed to try this matter for Judge Bassler. The matter was tried on 11 December 1996. Thereafter, the parties were given an opportunity to and, did in fact, submit proposed findings of fact and conclusions of law.

Many of the findings of fact are substantiated with citations to stipulations, or testimony, or documentary evidence or a combination of such authority. Such citations are not meant to be exhaustive concerning the finding. Some findings are based upon the record or inferences from the record which are not cited. Page or document citations are not set forth to support general findings. This opinion, including the introduction, background, discussion and findings of fact and conclusions constitute my Findings of Fact and Conclusions of Law. It is presumed the reader of this opinion is familiar with the earlier opinions of Judge Bassler upon which this opinion is based. All proposed findings of fact and conclusions of law inconsistent with those set forth herein are rejected pursuant to Rule 52 of the Federal Rules of Civil Procedure.

The complaint (the "Complaint") was filed in this matter on 16 June 1994. ¹ It appears L. Marguglio executed a waiver of service on 3 July 1994 and that P. Marguglio was served with a summons and complaint on 8 September 1994. A document styled "Answer of Defendants" was filed 3 November 1994, but was signed only by P. Marguglio, pro se. It was not signed by L. Marguglio. From a review of the file, it appears L. Marguglio has not answered the Complaint. Nevertheless, a motion for summary judgment was filed on 22 February 1995 and signed by both P. Marguglio and L. Marguglio. This motion was denied by Judge Bassler on 10 April 1995. Thereafter, pretrial discovery and motion practice took place.

It does not appear the signature of L. Marguglio is on any additional documents filed with the court, with the exception of the Final Pretrial Order which was signed by both P. Marguglio and L. Margugiio and was filed on 13 March 1996. The Final Pretrial Order sets forth a list of stipulations to which the parties agreed. The Final Pretrial Order left open the scheduling of a trial in this matter.

On 17 July 1996, Judge Bassler decided cross-motions for summary judgment filed by the parties. He granted summary judgment against P. Marguglio "as to tax liability absent interest and penalties accruing from February 14, 1994;" and further granted judgment in favor of the Government against P. Marguglio in the amount of $314,323.14. He denied the motion by the Government for judgment against P. Marguglio as to interest and penalties accruing from 14 February 1994 and further denied the motion by the Government for judgment against L. Marguglio. The cross-motion for summary judgment in favor of L. Marguglio was denied. See Order, dated 17 July and entered 19 July 1996.

This matter was scheduled several times for trial by Judge Bassler. As mentioned, because of a scheduling conflict, Judge Bassler requested I try the matter for him. Accordingly, the matter was tried on 11 December 1996.

L. Marguglio did not appear for trial. P. Marguglio did appear for trial and attempted to represent L. Marguglio. This was addressed at trial. See trial transcript ("Tr.") at 12-16.

At the commencement of trial, counsel for the Government indicated that there was no relief sought against P. Marguglio at trial and that the only relief sought was against L. Marguglio. Tr. at 13-16. This representation by the Government that it sought relief only against L. Marguglio is consistent with the trial brief which states: "Count II against Louise Marguglio on the issue of fraudulent conveyance is left to be tried." Government Trial Brief at 1. Although this appears inconsistent with the Complaint and the issues that apparently remained after the last motion for summary judgment, it is deemed that from the statements of the Government in its trial brief and at trial, as well as from the evidence offered by the Government at trial, that the only relief sought was that against L. Marguglio on the fraudulent transfer, and any remaining issues were, and are, waived by the Government and are dismissed with prejudice.

FINDINGS OF FACT

1. On 30 September 1985, P. Marguglio and his wife, L. Marguglio, purchased a home located at 60 Ivy Place (the "Property") as tenants by the entireties. Tr. at 16, lines 14-17; Stipulation of Fact #1, Final Pretrial Order ("FPO") at 2.

2. At the time of the purchase, the Marguglios placed a down payment of $100,000 in cash and effected a $150,000 mortgage on the Property. Stipulation of Fact #2, FPO at 2.

3. On 8 March 1989, P. Marguglio transferred his interest in the Property to L. Marguglio for one dollar. Tr. at 16, lines 19-21; Stipulation of Fact #3, FPO at 2.

4. P. Marguglio continued to live on the Property after the time of the conveyance. Tr. at 16, lines 23-25.

5. On 8 March 1989, the Property was worth $550,000 and had a $130,000 mortgage balance. Tr. at 17, lines 1-7; Stipulation of Fact #4 and #5; FPO at 2.

6. The value of the Property transferred was one-half of $420,000 or $210,000.

7. P. Marguglio was the Executive Director of the Passaic Housing Authority (PHA) from the early 1970s until January 1990. Tr. at 17, lines 8-10, 24 and at 18, line 2.

8. The Passaic Housing Authority was under contract with the U.S. Department of Housing and Urban Development (HUD) to provide decent, safe and sanitary housing for the benefit of low income families. Tr. at 17, lines 11-19.

9. HUD in turn provides annual subsidies to PHA for this purpose. Tr. at 17, lines 20-23.

10. The program which HUD provides funds is known as the Comprehensive Improvement Assistance Program ("CIAP"). Tr. at 18, lines 3-7.

11. Under its contract with HUD, PHA had to abide by numerous obligations and requirements. Tr. 17, lines 20-23.

12. In order to obtain the subsidies from HUD, PHA and P. Marguglio, as Executive Director, submitted budgets to HUD. Tr. at 17, lines 24 to page 18, line 2.

13. In 1988, P. Marguglio earned a salary of $85,000 as Executive Director of PHA. Tr. at 18, lines 15-19.

14. The position of Executive Director was a full time position. Tr. at 22, lines 16-20.

15. In addition to holding the position of Executive Director, P. Marguglio held various other positions under CIAP, which were not disclosed to HUD. Tr. at 19, lines 2-12 and page 23, lines 15-23.

16. These undisclosed positions included modernization officer, contracting officer and purchasing agent. Tr. at 23, lines 15-23, and page 19, lines 5-12.

17. In total, P. Marguglio held two full time positions and three part time positions with PHA. Tr. at 23, lines 1-9.

18. From August of 1988 until December of 1989, P. Marguglio earned $125,000 from these undisclosed positions. Tr. at 23, lines 10-14.

19. On or about 2 August 1988, P. Marguglio received a letter from HUD asking the names, titles and duties of all persons working under CIAP. Tr. at 23, lines 15-19.

20. P. Marguglio responded to that letter in such a way to conceal the fact that he was holding and being paid for multiple positions. Tr. at 23, lines 20-23.

21. On or about 10 August 1988, HUD made further inquiries concerning the staffing of the CIAP. Tr. at 23, lines 25-24, to page 24, line 3.

22. P. Marguglio and others agreed to respond to HUD in such a ways as to conceal the fact that Marguglio held multiple positions. Tr. at 24, lines 6-10.

23. In February 1989, HUD auditors began an audit of PHA. Tr. at 24, lines 19-21.

24. HUD auditors were present at PHA on a regular basis from February, 1989, until September, 1989. Tr. at 24, lines 22-24.

25. During the course of the audit, P. Marguglio and others took actions to prevent the HUD auditors from discovering that P. Marguglio held multiple positions. Tr. at 24, line 25, to page 25, line 7.

26. In 1987, P. Marguglio received $54,000 in illegal kickbacks which he failed to report on his federal income tax return. Tr. at 25, lines 8-11.

27. As a result of P. Marguglio's actions relating to PHA, he was ultimately removed from the premises of PHA and a criminal information was filed against him. Tr. at 27, lines 3-11.

28. In July 1990, P. Marguglio pleaded guilty to and was convicted of two felonies: one was conspiracy to defraud HUD and the other was income tax evasion. Tr. at 27, lines 7-11.

29. In addition, in July 1990, P. Marguglio filed amended returns for the tax years 1984 through 1988, all of which showed significant additional income ranging from $66,000 to $115,000. Tr. at 27, line 12, to page 29, line 1.

30. As a result of those amended returns, the IRS assessed income taxes against P. Marguglio for an amount in excess of $200,000. Tr. at 29, lines 2-4.

31. In September 1990, HUD instituted suit against P. Marguglio under the False Claims Act. Tr. at 29, lines 6-9.

32. As a result of that suit, HUD has obtained judgments against P. Marguglio in excess of $900,000 for his actions relating to the PHA. Tr. at 29, lines 13-20.

33. The Property was sold by L. Marguglio on or about 15 April 1992 for $490,00 and $33,000 of the proceeds from the sale of the Property were paid over to the Government and credited to P. Marguglio's income tax liability. Stipulation of Fact #6 and 11, FPO at 2.

34. Immediately after the transfer at issue in this suit, on 8 March 1989, P. Marguglio had the following assets and liabilities:

a. 1984 Jaguar valued at $15,000. Tr. at 31, lines 6-7.

b. Florida condominium valued at $115,000 which had a mortgage in the amount of $85,000. Tr. at 31, lines 11-21.

c. 401K retirement account worth approximately $70,000. Tr. at 31, lines 19-24.

d. Savings account with approximately $4,000 on deposit. Tr. at 32, lines 2-4.

e. Income tax liabilities for the tax years 1984 through 1988 in the amount of $209,000. Tr. at 28, line 12, to page 29, line 4.

35. Although P. Marguglio testified that he had numerous other assets on 8 March 1989 after the transfer, he was unable to support such testimony with any credible evidence and it is my finding that he had no other assets at the time.

36. As a result of the transfer of the Property, P. Marguglio's liabilities exceeded the value of his assets.

37. P. Marguglio was fully aware that if the HUD audit revealed that he held multiple positions than he would be both criminally and civilly liable; this is why he attempted on numerous occasions to conceal these facts from the HUD auditors.

38. Just weeks after the HUD audit began, P. Marguglio transferred his interest in the Property to L. Marguglio for one dollar.

39. The transfer of his interest in the Property just weeks after the audit began was done with the actual intent to defraud his creditors.

40. P. Marguglio was not a credible witness when he sought to explain his position and that of L. Marguglio. This determination was based upon the manner in which he testified, including his demeanor and the content of his testimony.

41. Any finding of fact more properly denominated as a conclusion of law is hereby designated as a conclusion of law.

CONCLUSIONS OF LAW

1. In New Jersey, a creditor may obtain judgment against a transferee (of a fraudulent conveyance) for the value of the asset transferred or the amount of the creditor's claim, whichever is less. N.J.S.A. §25:2-30.

2. A transfer of property is fraudulent as to a creditor if the transfer is made with the actual intent to hinder, delay or defraud any creditor, or, as to a creditor whose claim arose before the transfer, if it is made without receiving a reasonable equivalent value in exchange for the transfer and the transfer renders the transferor insolvent. N.J.S.A. §§25:2-25, 25:2-27.

3. There are two ways of proving that a transfer was fraudulent, one by establishing actual fraud and the other by establishing constructive fraud.

4. The Government was a creditor before the transfer occurred. It became a creditor of P. Marguglio when his obligation to pay the income tax accrued. United States v. Klayman, 736 F.Supp. 647, 649 (E.D.Pa. 1990); United States v. St. Mary [72-1 USTC ¶9319], 334 F.Supp. 799, 803 (E.D.Pa. 1971); see also United States v. 58th Street Plaza Theatre, Inc. [68-1 USTC ¶9407], 287 F.Supp. 475, 496 (S.D.N.Y. 1968); Coca-Cola Bottling Co. of Tucson v. Commissioner [CCH Dec. 25,380], 37 T.C. 1006, 1011 (1962), aff'd [64-2 USTC ¶9643], 334 F.2d 875 (9th Cir. 1964).

5. Income tax liabilities accrue at the close of the taxable year at issue. Edelson v. C.I.R. [87-2 USTC ¶9547], 829 F.2d 828, 834 (9th Cir. 1987); In re Ad-Yu Electronics, Inc., 71-1 USTC ¶9132 (D.N.J. 1968); see also, United States v. Jones [95-1 USTC ¶50,190], 877 F.Supp. 907, 914 (D.N.J. 1995), aff'd without op. [96-1 USTC ¶50,056], 74 F.3d 1228 (3d Cir. 1995).

6. P. Marguglio's 1984 tax liability accrued on 31 December 1984, and that is the date upon which the Government became his creditor. In the same manner, P. Marguglio's 1985 liability accrued on 31 December 1985 and his 1988 liability accrued on 31 December 1988.

7. At the time of the transfer, 8 March 1989, P. Marguglio was indebted to the Government for all of the taxes at issue in this case (1984-1988) in the approximate amount of $206,000.

8. A debtor is insolvent if the sum of his debts is greater than all of his assets. N.J.S.A. §25:2-23(a).

9. The calculation of a debtor's solvency does not include the value of any assets transferred and any debts secured by those assets. N.J.S.A. §25:2-23(d) and (e).

10. After the transfer of the Property, P. Marguglio's debts exceeded the value of his assets.

11. The transfer of the Property rendered him insolvent.

12. Because P. Marguglio did not receive reasonably equivalent value in consideration for the transfer and because the transfer rendered P. Marguglio insolvent, as defined by New Jersey Fraudulent Transfer Act, the transfer was fraudulent as to the Government.

13. In addition, the transfer, made just weeks after the HUD audit began, was made with the actual intent to defraud P. Marguglio's creditors.

14. Once a transfer has been determined to be fraudulent, the creditor may obtain judgment against the transferee for the value of the asset transferred or the amount necessary to satisfy the creditor's claim, whichever is less. N.J.S.A. §25:2-30(b).

15. In this case, the Government's claim exceeds the value of the asset transferred. Accordingly, it is entitled to judgment against L. Marguglio for the value of P. Marguglio's interest in the Property at the time of the conveyance.

16. The Marguglios had $420,000 in equity in their home.

17. P. Marguglio's interest in that equity was worth $210,000.

18. The Property was later sold and $33,000 of the net proceeds was paid to the Government on behalf of the Marguglios. Accordingly, L. Marguglio is liable, under the New Jersey Uniform Fraudulent Transfer Act, N.J.S.A. §25:2-1 et seq., for $177,000 ($210,000 minus $33,000) and judgment is entered against her in that amount.

19. Any conclusion of law more properly denominated a finding of fact is hereby designated a finding of fact.

The Government is to submit within seven business days a form of order consistent with this opinion.

¹ The Clerk's file for this matter was misplaced; I attempted to recreate the file from some available filed documents, copies of several documents and from the docket sheet.

 

 

 

United States of America, Plaintiff v. Ross P. Upton, Amelia A. Upton, and James D. Upton, Defendants

U.S. District Court, Dist. Conn., Civ. 3:92CV524 (AWT), 3/18/97

[Code Secs. 6321 and 7402 ]

Fraudulent conveyances: Statute of limitations: State law: Federal Debt Collection Procedure Act.--A state (Connecticut) statute of limitations for setting aside fraudulent transfers was not applicable with respect to the government's fraudulent conveyance claims against a delinquent taxpayer. Moreover, the limitations period prescribed in the Federal Debt Collection Procedure Act did not bar the government's claims.

[Code Sec. 6203 ]

Assessments: Validity of: Form 4340.--A taxpayer failed to show that the IRS's Form 4340 (Certificate of Assessments and Payments), was invalid simply because the information on the form was computer generated, rather than handwritten or typed as provided in the Internal Revenue Manual. Further, the taxpayer failed to meet his burden of proving that the amounts set forth on the form were incorrect.

H. Gordon Hall, John B. Hughes, New Haven, Conn. 06508, John V. Cardone, Keith V. Morgan, Department of Justice, Washington, D.C. 20530, for plaintiff. Ross P. Upton, Amelia A. Upton, 86 Woodpark Dr., Watertown, Conn. 06795, pro se. James D. Upton, Brook Rd., Goshen, Conn. 06756, pro se.

MEMORANDUM OF DECISION

THOMPSON, District Judge:

Plaintiff United States of America moves for partial summary judgment seeking a judgment against defendant Ross P. Upton in the amount of $146,226.69, plus statutory additions from January 23, 1989, for federal income tax liabilities for the tax years 1980, 1981, and 1982. The defendants also move for summary judgment. For the reasons set forth below, the plaintiff's motion should be granted and the defendants' motion should be denied.

BACKGROUND

Defendant Ross P. Upton ("Upton") resides in Watertown, Connecticut. During the years 1980, 1981, and 1982, Upton did business as Upton Products Company. Upton Products Company designed and built special machinery for manufacturing. Upton Products Company was not a corporation or partnership and did not file separate tax returns. In addition, Upton did not file federal income tax returns for 1980, 1981, and 1982.

On January 23, 1989, a delegate of the Secretary of the Treasury made assessments against Upton for unpaid federal income taxes, interest, and penalties, for the tax years 1980, 1981, and 1982. The total of these assessments was $146,226.69. A delegate of the Secretary of the Treasury issued notices of these assessments and made demands for payment. Upton refused or neglected to pay the assessed liabilities and remains indebted to the United States for the total amount of $146,226.69, plus statutory additions from the date of assessment. The Government now moves for partial summary judgment against Upton with regard to this income tax liability. The Government does not seek summary judgment on its fraudulent conveyance claims.

DISCUSSION

Summary judgment shall be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits . . . show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). "[T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). While the court must view the inferences to be drawn from the facts in the light most favorable to the party opposing the motion, Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986), a party may not "rely on mere speculation or conjecture as to the true nature of the facts to overcome a motion for summary judgment." Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 12 (2d Cir. 1986), cert. denied, 480 U.S. 932 (1987).

The non-moving party may defeat the summary judgment motion by producing sufficient specific facts to establish that there is a genuine issue of material fact for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Mere conclusory allegations or denials in legal memoranda or oral argument are not evidence and cannot by themselves create a genuine issue of material fact where none would otherwise exist. Quinn v. Syracuse Model Neighborhood Corp., 613 F.2d 438, 445 (2d Cir. 1980).

The court addresses first the defendants' motion for summary judgment. The defendants argue that Connecticut's three-year statute of limitations applies to the Government's fraudulent conveyance claims. The court previously ruled on this issue in the "Ruling on Pending Motions" dated December 28, 1993 (Document #23). The Connecticut three-year statute of limitations for setting aside fraudulent transfers is not applicable to a suit by the United States to recover the value of allegedly fraudulently conveyed property in partial satisfaction of outstanding tax deficiencies. See United States v. Fernon [81-1 USTC ¶9287], 640 F.2d 609, 612 (5th Cir. 1981).

The defendants also argue that the Federal Debt Collection Procedure Act ("FDCPA"), 28 U.S.C. §§3001-3309, bars the plaintiff's claims. As the defendants recognized in their brief, other district courts in this circuit have held that the FDCPA is not the exclusive judicial means by which the United States may collect its taxes. See United States v. Carney, 796 F. Supp. 700, 703 (E.D.N.Y. 1992); United States v. Bushlow [93-2 USTC ¶50,556], 832 F. Supp. 574, 581 (E.D.N.Y. 1993). This court agrees. The FDCPA specifically provides that:

This chapter shall not be construed to curtail or limit the right of the United States under any other Federal law or any State law to collect taxes or to collect any other amount collectible in the same manner as a tax.

28 U.S.C. §3003(b)(1). Congress clearly intended that the Government retain its option to proceed under other federal or state law. Accordingly, the FDCPA does not apply to this action and the Government is free to proceed under other state or federal law. The court therefore rejects Upton's claim that the periods of limitations prescribed by the FDCPA bar this action.

The court next addresses the plaintiff's motion. As stated in the court's ruling filed on December 29, 1993, a tax assessment is prima facie evidence of liability, United States v. Lease [65-2 USTC ¶9478], 346 F.2d 696, 698 (2d Cir. 1965), and a certificate of assessment is presumptive proof of a valid assessment. United States v. Red Stripe, Inc. [92-1 USTC ¶50,277], 792 F. Supp. 1338, 1341 (E.D.N.Y. 1992). In opposing the Government's claim of tax liability, Upton bears the burden of disproving this liability. See Burke v. Commissioner [91-1 USTC ¶50,179], 929 F.2d 110, 112 (2d Cir. 1991).

Upton's primary opposition to this motion is his argument that the Government is not entitled to a presumption of a valid assessment and therefore it has not proven that there are no genuine issues of material fact. Upton alleges defects in the Government's proof contained in IRS Form 4340. Without a valid Form 4340, Upton argues, a valid assessment does not exist and the court must deny this motion. The court disagrees.

First, Upton has failed to cast doubt on the validity of the Government's Form 4340. He acknowledges that the asserted form labeled 4340 "contains information that might be found on a Form 4340," but relying on the Affidavit of Marsden S. Furlow, asserts that Plaintiff's Exhibit A is invalid because the Internal Revenue Service's manual provides that the information on a Form 4340 is handwritten or typed, not computer generated, and Plaintiff's Exhibit A is computer generated. There is no reason why a computer generated IRS form that has been properly authenticated should be found to be invalid, merely because it was produced on a computer, even if the IRS's manual indicates that the information is not computer generated. The provisions of the IRS's manual are directory rather than mandatory, are not codified regulations, and do not have the force and effect of law. See Pomeroy v. United States [89-1 USTC ¶9168], 864 F.2d 1191, 1994-95 (5th Cir. 1989). Upton has not set forth any other reason why one should doubt that this form is a valid IRS form. Upton does not submit what he considers to be a valid Form 4340. Nor does Upton identify any material difference that would exist between Plaintiff's Exhibit A and a Form 4340 that he would consider genuine. In the absence of more, the court rejects the defendants' challenge to the Government's Form 4340, and the court finds that there is no genuine issue of material fact regarding its validity.

Second, the court also rejects Upton's argument that the amounts set forth in the Form 4340 are incorrect. As the Government correctly asserts in its reply memorandum, Upton's dispute regarding these amounts stems from his misunderstanding and/or misreading of the documents. Even if Upton himself legitimately doubts the accuracy of the figures in Form 4340, he has not presented the court with any reason to question these figures.

Again, in opposing the Government's claim of tax liability, Upton bears the burden of disproving this liability. He has failed to meet this burden.

CONCLUSION

For the foregoing reasons, the United States of America's motion for partial summary judgment (Document #99) is hereby GRANTED and the defendants' motion for summary judgment (Document #107) is hereby DENIED.

It is so ordered.

 

 

 

United States of America, Plaintiff v. Frances A. Brickman, Michael P. Brickman, Robert T. Brickman and William B. Brickman, Defendants

U.S. District Court, No. Dist. Ill., East. Div., 95 C 2843, 11/2/95, 906 FSupp 1164, 906 FSupp 1164

[Code Sec. 6502 ]

Limitations period: Collection after assessment: Liens.--The statute of limitations did not bar an action to collect taxes from members of a family because the IRS was enforcing a tax lien against property fraudulently transferred to them by a deceased individual. The lien arose after the decedent failed to respond to assessments. The court proceeding brought against that individual stopped the running of the limitations period. The IRS obtained a judgment against the individual and was seeking to enforce that judgment.

[Code Sec. 6901 ]

Transferred assets: Family transfers.--The fact that an individual who had transferred property subject to a lien to family members was a transferee of a delinquent corporate taxpayer did not bar the IRS from bringing an action against the transferees of the original transferee. The action against the family members was ancillary to the collection action previously brought against the assessed taxpayer.

[Code Sec. 6321 ]

Liens: Transfer prior to assessment: Fraudulent conveyance: Government as creditor.--A tax lien on property transferred to family members by an individual who was the transferee of property from a delinquent corporate taxpayer prior to the issuance of assessments against the transferee was valid because the conveyances were fraudulent. The government was a creditor as to all of the unpaid tax liabilities belonging to the corporation and assessed against the transferee. The transferee was aware of contemplated or existing indebtedness prior to the assessments.

Ramune Rita Kelecius, Assistant United States Attorney, Department of Justice, Drug Enforcement Agency, Chicago, Ill. 60604, for plaintiff. Harvey M. Silets, Timothy J. Patenode, Sean M. Berkowitz, Katten, Muchin & Zavis, 525 W. Monroe St., Chicago, Ill. 60661-3693, for defendants.

MEMORANDUM OPINION AND ORDER

CASTILLO, District Judge:

Plaintiff United States of America ("United States") brought this action against the defendants Frances A. Brickman, Michael P. Brickman, Robert T. Brickman, and William B. Brickman ("Brickman Family") to enforce federal tax liens on property transferred by Joseph M. Brickman ("J. Brickman") to the defendants, or, alternatively, to set aside the transfers made by J. Brickman to the defendants as fraudulent conveyances. The Brickman Family moves to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), arguing that the United States' claims are time barred by §6501 of the Internal Revenue Code ("IRC"), 26 U.S.C. §6501. Alternatively, the Brickman Family argues that this Court should dismiss that portion of the complaint pertaining to transfers made before J. Brickman was assessed transferee liability for outstanding corporate taxes.

BACKGROUND

Plaintiff's well-pleaded factual allegations, which the Court accepts as true for purposes of deciding the present motion, Sladek v. Bell Sys. Mgt. Pension Plan, 880 F.2d 972, 974-75 (7th Cir. 1989), are as follows. In the 1950s and 1960s, J. Brickman operated various corporate construction and real-estate businesses ("unnamed corporations"). Compl. ¶10. These unnamed corporations were eventually dissolved with all the corporate assets going to J. Brickman. Id. At the time of dissolution, outstanding corporate federal income taxes remained unpaid. Id. The outstanding corporate taxes gave rise to over 160 separate tax assessments against J. Brickman as transferee of the unnamed corporations. Id. The taxes were assessed on the following dates: (1) 39 assessments on November 9, 1962; (2) 35 assessments on September 6, 1963; (3) 55 assessments on September 13, 1963; (4) 13 assessments on December 6, 1963; (5) 8 assessments on December 13, 1963; (6) 14 assessments on December 27, 1963; and (7) 1 assessment on December 9, 1965. Id.

On October 20, 1977, the United States District Court for the Northern District of Illinois entered judgment in favor of the United States and against J. Brickman for the unpaid taxes assessed against J. Brickman. Id. ¶11; see United States v. Brickman, No. 73-C-3244. The amount of the judgment was $1,291,064.22, plus interest at the rate of 6% from the date judgment was entered. Id. J. Brickman failed to pay the assessments and judgment against him, and that judgment, plus statutory interest, remains due and owing. Id. ¶12. To date, the amount outstanding exceeds $3 million. Id. ¶11.

On November 28, 1960, aware that his taxes were being audited and that he had substantial pending federal tax liabilities, J. Brickman formed the J.M. Brickman Mid-West Corporation ("Brickman Mid-West"). Id. ¶13. Brickman Mid-West issued 160,000 shares of common stock. Id. Subsequently, J. Brickman transferred all of his assets to Brickman Mid-West and issued 124,845 shares to himself, 20,385 shares to Frances A. Brickman (his wife) and 2,954 shares to each of his sons, William B. Brickman, Robert T. Brickman, and Michael P. Brickman. Id. The unaccounted for 5,908 shares were apparently issued to J. Brickman who subsequently transferred 130,753 shares to the Brickman Family. ¹ Id. ¶14. At the time the transfers were made, they had a combined value in excess of $1.2 million. Id. ¶15.

From 1963 through 1966, J. Brickman transferred personal assets into Highland Park Country Club, Inc. ("HPCC"), a company in which the Brickman Family owned 72.5% of the stock. Id. ¶16. No consideration was provided for this transfer. Id. From 1964 through 1969, J. Brickman transferred personal assets into Chicagoland Investment Corporation ("Chicagoland"), a company in which the defendants owned 100% of the stock. Id. ¶17. No consideration was provided for this transfer. Id.

J. Brickman failed to pay the federal tax liabilities after notice and demand for payment, giving rise to federal tax liens under 26 U.S.C. §6321. Id. ¶18. The liens attached to all property and rights to property belonging to J. Brickman, including the stock of Brickman Mid-West and the assets transferred to HPCC and Chicagoland. Id. ¶18. The transfers of corporate stock described above were made subject to the federal tax liens securing all assessments made prior to the dates of transfer. Id. ¶19. Additionally, as a result of the October 20, 1977 judgment, the United States gained a judgment lien against the property belonging to J. Brickman which was recorded in Cook County on May 31, 1978. Id. ¶20.

J. Brickman died on December 14, 1977. Id. ¶21. At the time of his death, J. Brickman's estate consisted of personal property valued at approximately $3,000. Id. ¶22. The various transfers of assets from J. Brickman to the companies controlled by the Brickman Family were made without consideration and at a time when J. Brickman was insolvent or was rendered insolvent as a result of the transfers. Id. ¶23. After the transfers took place, the remaining assets of J. Brickman were less than the amount necessary to pay his liabilities then owing to the United States. Id.

The United States alleges that the transfers of J. Brickman's assets were made with the intent to delay, hinder or defraud creditors and, therefore, were null and void. Id. ¶24. The United States filed suit seeking the following: (A) a determination that the transfers of J. Brickman's assets to the Brickman Family were made subject to a federal tax lien or, in the alternative, that the transfers were fraudulent and void as against the United States, id. ¶A; (B) judgment that the United States has valid and continuing liens on all property and rights to property belonging to J. Brickman, including property fraudulently conveyed, id. ¶B; (C) judgment that the Brickman Family became constructive trustees of the property fraudulently conveyed to them by J. Brickman, and, therefore, hold such property, and any proceeds from such property, for the benefit of the United States, id. ¶C; (D) an accounting by the Brickman Family to determine the value of the property fraudulently conveyed to them by J. Brickman as of the dates of the transfers, and to determine the value of the income from the property subject to the constructive trust, id. ¶D; and (E) judgment that the Brickman Family members are jointly and severally liable to the United States for the value of the property fraudulently transferred to them by J. Brickman, to the extent that the value of such property does not exceed J. Brickman's liability to the United States. Id. ¶E.

The Brickman Family subsequently filed a motion to dismiss for failure to state a claim upon which relief can be granted pursuant to Fed.R.Civ.P. 12(b)(6). The Brickman Family argues that in the absence of assessments against the Brickman Family, the United States' claims are time-barred by 26 U.S.C. §6501, since the claims were not brought within three years from the date the corporate tax returns were filed. Defs.' Mem. at 1-2. Alternatively, the Brickman Family argues that this Court should dismiss the portion of the complaint seeking to recover transfers made before J. Brickman was assessed transferee liability for the corporate taxes. Id. at 2.

ANALYSIS

Rule 12(b)(6) Standards

A motion to dismiss tests the sufficiency of the complaint, not the merits of the suit. Triad Assocs., Inc. v. Chicago Housing Auth., 892 F.2d 583, 586 (7th Cir. 1989), cert. denied, 498 U.S. 845, 111 S.Ct. 129, 112 L.Ed.2d 97 (1990). The only question is whether relief is possible under any set of facts that could be established consistent with the allegations. Perkins v. Silverstein, 939 F.2d 463, 466 (7th Cir. 1991) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957)). All well-pleaded facts are taken as true, all inferences are drawn in favor of the plaintiff and all ambiguities are resolved in favor of the plaintiff. Id. A Rule 12(b)(6) motion will only be granted if " 'it is beyond a doubt that the non-movant can plead no facts that would support his claim for relief.' " Palda v. General Dynamics Corp., 47 F.3d 872, 874 (7th Cir. 1995) (quoting Conley, 355 U.S. at 45-46 78 S.Ct. at 101-102)).

The limited questions presently before this Court are (1) whether the United States' complaint is time-barred, and (2) whether the United States may proceed under a "lien" theory or fraudulent conveyance theory as to transfers made prior to the assessments against J. Brickman.

Statute of Limitations

Section 6501 of the IRC requires the United States to assess taxes within three years after the filing of a return. 26 U.S.C. §6501(a). ² Absent such an assessment, Section 6501 requires a proceeding in court to collect the tax to be commenced within three years after the return was filed. 26 U.S.C. §6501(a). Where the assessment of any tax has been made within the three year period, Section 6502 requires the United States to commence an action to collect the assessed taxes within six years of the assessment. 26 U.S.C. §6502(a)(1). ³ Where a timely action has been commenced by the United States, the statute of limitations stops running, and the United States can enforce the judgment at any time. United States v. Ettleson [47-1 USTC ¶9137], 159 F.2d 193, 196 (7th Cir. 1947).

The Brickman Family argues that, because no assessment was made against either the unnamed corporations or the Brickman Family, the United States is time-barred under 26 U.S.C. §6501(a), applied to "transferees of a transferee" by 26 U.S.C. §6901(c)(2), ⁴ from a proceeding to collect taxes against the Brickman Family. Defs.' Mem. at 1-2. The United States, on the other hand, argues that it seeks not to collect taxes from the Brickman Family, but rather to enforce a tax assessment lien levied against J. Brickman and to hold the Brickman Family liable for the value of property fraudulently transferred to them by J. Brickman. Pl.'s Resp. at 4. As such, the United States contends that there is no specific time limitation on the collection of a tax assessment lien. Id. at 5. Instead, it suggests that a lien, once valid, survives so long as the underlying liability for the tax is enforceable. Id. We concur with the government's position.

a. The "Lien" Theory

Section 6321 of the IRC provides that "[i]f any person liable to pay any taxes neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all such property and rights to property, whether real or personal, belonging to such person." 26 U.S.C. 6321. In the present case, J. Brickman failed, after notice and demand for payment, to respond to assessments issued in 1962, 1963, and 1965. Compl. ¶18. As a result, federal tax liens arose under 26 U.S.C. §6321. There is no specific time limitation on the life of an assessment lien. United States v. Hodes [66-1 USTC ¶9232], 355 F.2d 746, 747 (2d Cir.), cert. granted, 384 U.S. 968, 86 S.Ct. 1858, 16 L.Ed.2d 680 (1966), cert. dismissed, 386 U.S. 901, 87 S.Ct. 784, 17 L.Ed.2d 779 (1967); Ettelson [47-1 USTC ¶9137], 159 F.2d at 196; Investment & Secs. Co. v. United States [44-1 USTC ¶9210], 140 F.2d 894, 896 (9th Cir. 1944). Rather, under Section 6322 of the IRC, those liens survive until the underlying liability is satisfied or "become[ ] unenforceable by reason of lapse of time." 26 U.S.C. §6322. ⁵ The phrase "by reason of lapse of time" must be interpreted in light of 26 U.S.C. §6502, Moyer v. Mathas [72-1 USTC ¶9342], 458 F.2d 431, 433 (5th Cir. 1972); United States v. Colamatteo [86-2 USTC ¶9719], No. 83 C 7439, 86-2 U.S. Tax Cas. (CCH) ¶9719, 1986 WL 9752 (N.D.Ill. 1986), which requires that the United States commence its action to collect a tax from an assessed taxpayer within six years of the assessment of the tax. Thus, the appropriate statute of limitations in the present action is Section 6502, not Section 6501(a) as the Brickman Family suggests.

In the present action, the United States assessed J. Brickman as the transferee of the unnamed corporations. Compl. ¶10. Subsequently, the United States brought a suit and obtained a judgment to collect taxes against J. Brickman. Id. ¶11. The court proceeding brought against J. Brickman was sufficient to stop the running of the statute of limitations contained within §6502, and the resulting judgment could thereafter be enforced at any time. United States v. Weintraub [80-1 USTC ¶9172], 613 F.2d 612, 619-20 (6th Cir. 1979), cert. denied, 447 U.S. 905, 100 S.Ct. 2987, 64 L.Ed.2d 854 (1980) ("There is no time limit whatsoever on an action . . . to enforce a timely levy or judgment obtained in a timely filed court proceeding."); United States v. Hodes [66-1 USTC ¶9232], 355 F.2d at 748 ("The institution of a suit to enforce the lien of a tax liability extends the life of an assessment lien beyond the normal six-year period."); Ettelson [47-1 USTC ¶9137], 159 F.2d at 196 (A timely "judgment could thereafter be enforced at any time. There is no federal statutory provision as to the period of limitation on this judgment."). The judgment was a proper claim upon which to assert a lien. Id. Therefore, the tax liens against J. Brickman's property are valid and enforceable.

In its motion to dismiss, the Brickman Family relies on United States v. Continental Nat'l Bank & Trust Co. [39-1 USTC ¶9227], 305 U.S. 398, 59 S.Ct. 308, 83 L.Ed. 249 (1939), United States v. Updike [2 USTC ¶533; 1930 CCH ¶9364], 281 U.S. 489, 50 S.Ct. 367, 74 L.Ed. 984 (1930), and Signal Oil & Gas Co. v. United States, 125 F.2d 476 (9th Cir. 1942) for the proposition that when the original taxpayer has not been assessed, the applicable limitation for a suit against the "transferee of a transferee" is found within Section 6501. Defs.' Mem. at 9. The Brickman Family's reliance on these cases is misplaced.

In none of the cases relied on by the Brickman Family was there a personal judgment against the taxpayer transferor determining the taxpayer's liability for previously assessed taxes. In Updike, for example, a grain company filed income taxes for the year 1917. [2 USTC ¶533; 1930 CCH ¶9364], 281 U.S. at 490, 50 S.Ct. at 367. Three years later, the United States assessed the grain company additional income taxes for the year 1917. Id. The grain company never paid the additional taxes, and, in 1927, the United States first brought suit against the corporate stockholders as transferees of the corporation. Id. The issue, as the Court framed it, was "whether the suit, having been brought more than six years after the assessment, was barred by the provisions of section 278 [now Section 6502]. . . ." ⁶ The Court first determined that the action, though not against the original taxpayer corporation but against its transferees, was "in every real sense a proceeding in court to collect a tax. The tax imposed upon the corporation is the basis of the liability, whether sought to be enforced directly against the corporation or by suit against its transferees." Id. at 494, 50 S.Ct. at 368. The Court then determined that if "the period of limitation had run in favor of the corporation, it had run in favor of the transferees." Id. The Court reasoned that where an assessment "has in fact been made, a proceeding to collect must be begun within six years thereafter. . . ." Id.

Unlike Updike, in the present case the United States assessed the original taxpayers' transferee, filed suit against the transferee, and obtained a judgment against the transferee. Compl. ¶¶10-11. The United States seeks now only to enforce the judgment; it does not seek to collect a tax (that was done in the previous action against J. Brickman). This distinction is critical. Having gained a timely judgment against J. Brickman, the statute of limitations stops running, and the United States can enforce the judgment at any time. Ettelson [47-1 USTC ¶9137], 159 F.2d at 196. Absent such a judgment, we agree with the Brickman Family that the United States would be time-barred from suing the Brickman Family as "transferees of a transferee" to collect the unpaid taxes. See 26 U.S.C. 6901(c)(2). But we must acknowledge the judgment against J. Brickman. As such, the tax liens against J. Brickman's property are valid and enforceable.

The Brickman Family puts much weight on the fact that J. Brickman was not the original taxpayer. See Defs.' Reply at 2-3. For instance, the Brickman Family attempts to distinguish United States v. Ettelson [47-1 USTC ¶9137], 159 F.2d at 193, and United States v. Colamatteo [86-2 USTC ¶9719], No. 83 C 7439, 86-2 U.S. Tax Cas., on the ground that neither case involved a "transferee of a transferee," but rather both cases involved the assessment of an original taxpayer followed by a timely court proceeding against the original taxpayer. See Defs.' Reply at 2-3. This distinction, however, is of no consequence.

The IRC does not require the United States to assess and sue the original taxpayer prior to assessing a transferee. To the contrary, the IRC allows the United States to assess and sue either a transferee or a "transferee of a transferee" so long as the relevant time limitations are followed. Compare 26 U.S.C. §6901(a)(1)(A) (discussing the liabilities of a transferee) ⁷ with 26 U.S.C. §6901(c)(2) (discussing the liabilities of a transferee of a transferee). In the present case, J. Brickman, a transferee of the original taxpayer, was timely assessed followed by a timely court proceeding resulting in a judgment for the United States. The United States is not time-barred from bringing the present action to enforce assessment liens precisely because the United States previously obtained a judgment against J. Brickman as the transferee of the original taxpayer. The United States can enforce that judgment at any time. Ettelson [47-1 USTC ¶9137], 159 F.2d at 196. The fact that J. Brickman was a transferee of the original taxpayer and not the original taxpayer does nothing to undermine this determination which is well supported by precedent. See, e.g., Moyer v. Mathas [72-1 USTC ¶9342], 458 F.2d 431, 434 (5th Cir. 1972) (allowing foreclosure suit brought twenty years after timely lien); United States v. Overman [70-1 USTC ¶9342], 424 F.2d 1142, 1147 (9th Cir. 1970) (holding that foreclosure suit brought six years after judgment in timely suit was not time-barred because tax liens are enforceable at any time); Hodes [66-1 USTC ¶9232], 355 F.2d at 748-49 (finding that the institution of a suit to enforce tax liability extends the life of an assessment lien beyond the six-year period); Hector v. United States [58-1 USTC ¶9372], 255 F.2d 84, 85 (5th Cir. 1958) (holding that suit filed within six years of assessment tolls the limitation period indefinitely); Ettelson [47-1 USTC ¶9137], 159 F.2d at 196 (holding claim filed in probate court within six years of assessment tolls the limitation period so that judgment could be enforced at anytime thereafter); Investment & Secs. Co. [44-1 USTC ¶9210], 140 F.2d at 896 (finding that no federal statutory limitation on enforcing a judgment won in a timely suit exists allowing a tax to be collected at any time); United States v. Mandel [75-1 USTC ¶9141], 377 F.Supp. 1274, 1276-77 (S.D.Fla. 1974) (following Moyer); United States v. American Cas. Co. [65-1 USTC ¶9167], 238 F.Supp. 36, 38-39 (W.D.Ky. 1964) (following Ettelson); United States v. Caldwell [47-2 USTC ¶9363], 74 F.Supp. 114, 117 (M.D.Tenn. 1947) (finding no time limit on enforcing a lien acquired in timely suit). ⁸

b. The Fraudulent Conveyance Theory

Section 6501 is also inapplicable to the United States' fraudulent conveyance theory. In this case, the original taxpayers were the unnamed corporations. Compl. ¶10. J. Brickman was a transferee of the unnamed corporations. ⁹ Id. The Brickman Family is, therefore, a "transferee of a transferee." Section 6901 governs assessments against and collection from transferees of a transferee. 26 U.S.C. §6901(c)(2). However, Section 6901 "does not apply to actions to set aside fraudulent conveyances, actions brought ancillary to collection actions against assessed taxpayers." United States v. Colamatteo [86-2 USTC ¶9719], No. 83 C 7439, 86-2 U.S. Tax Cas. (CCH) at ¶9720; see also, Hall v. United States [68-2 USTC ¶9665], 403 F.2d 344, 345 (5th Cir. 1968), cert. denied, 394 U.S. 958, 89 S.Ct. 1306, 22 L.Ed.2d 560 (1969).

The Brickman Family has not been sued personally as "transferees of a transferee." Rather, the Brickman Family has been sued because the United States seeks to set aside allegedly fraudulent conveyances of property to them and to satisfy J. Brickman's tax liability from that property. Compl. ¶¶A-E. Section 6901 does not bar the present action against the Brickman Family, which is ancillary to the collection action previously brought against J. Brickman, the assessed taxpayer. Thus, we deny the Brickman Family's motion to dismiss the United States' complaint on the ground that the complaint is time-barred.

Property Transferred Pre-Assessment

Having determined that the United States' complaint is not time-barred, we turn now to the Brickman Family's alternative ground for dismissal. The Brickman Family argues that the United States should not be allowed to proceed on the portion of the complaint that seeks to recover conveyances that occurred prior to the assessments against J. Brickman. Defs.' Mem. at 9-10. ¹⁰ We disagree.

Federal tax liens under Section 6321 do not arise until unpaid taxes are assessed. 26 U.S.C. §6321; United States v. Speers [66-1 USTC ¶9101], 382 U.S. 266, 267 n. 1, 86 S.Ct. 411, 412 n. 1, 15 L.Ed.2d 314 (1965); United States v. General Motors Corp. [91-1 USTC ¶50,158], 929 F.2d 249, 253 (6th Cir. 1991); Zeddies v. United States [66-1 USTC ¶9273], 357 F.2d 897, 899 (7th Cir. 1966). As a result, "a tax lien cannot attach to property which has been previously assigned or transferred by the taxpayer at the time the assessment is made. Assignments made prior to a tax assessment preclude lien attachment." General Motors [91-1 USTC ¶50,158], 929 F.2d at 253. Therefore, in the present case, the United States can only recover the property transferred prior to assessment on a theory of fraudulent conveyance. See Zeddies [66-1 USTC ¶9273], 357 F.2d at 899 (noting that where transfer are made prior to assessment, the United States can only recover on a theory that the conveyance was fraudulent).

To set aside transfers as fraudulent conveyances, the United States must establish that its rights as a "creditor" were impaired at the time the conveyances were made. Thus, the limited question that this Court must decide today is whether the United States was a "creditor" whose rights were impaired at the time J. Brickman transferred his property to the Brickman Family. If so, then the United States may be able to invalidate the conveyances as being fraudulent, rendering the property subject to the United States' tax lien (provided that the United States can successfully establish all the elements of fraudulent conveyance, an issue which is not presently before the Court). United States v. Kitsos, 770 F.Supp. 1230, 1236 (N.D.Ill. 1991), aff'd without op., 968 F.2d 1219 (7th Cir. 1992). ¹¹

Courts facing this issue in this district have found that for fraudulent conveyance purposes, the United States is a creditor as to any unpaid tax liabilities prior to the issuance of an assessment. United States v. Brown [93-2 USTC ¶50,375], 820 F.Supp. 374, 383 (N.D.Ill. 1993); United States v. Kitsos, 770 F.Supp. at 1234-35; Indiana Nat'l Bank v. Gamble [84-2 USTC ¶9884], 612 F.Supp. 1272, 1276-77 (N.D.Ill. 1984). The courts reason that such liabilities become due and owing on the date the tax returns are required to be filed, not on the date of assessment. Brown [93-2 USTC ¶50,375], 820 F.Supp. at 383; Gamble [84-2 USTC ¶9884], 612 F.Supp. at 1276. We find these cases to be persuasive and hold that the United States in the instant case is a creditor as to all the unpaid tax liabilities belonging to the unnamed corporations and assessed against J. Brickman.

The Brickman Family attempts to distinguish these cases on the ground that the assessments in the above cited cases were against a taxpayer for deficiencies arising from the taxpayers' own return while the present case involves an assessment against a transferee of a taxpayer's property. Def.'s Mem. at 10. We find this distinction to be without merit.

In the present case, the United States became a creditor of the unnamed corporations on the date the corporate tax returns were required to be filed. See Brown [93-2 USTC ¶50,375], 820 F.Supp. at 383. Subsequently, the corporations dissolved with all the corporate assets going to J. Brickman. As a result, the United States' claims against J. Brickman as transferee of the corporate property arose as soon as J. Brickman obtained the corporate property. Indeed, the United States alleges that as early as November 28, 1960, J. Brickman was "aware that his taxes were under audit by the Internal revenue Service and that he had substantial pending federal tax liabilities. . . ." Compl. ¶13.

Taking all well-pleaded facts as true, as we are required to do in deciding a motion to dismiss, J. Brickman was aware of contemplated or existing indebtedness prior to the assessments. This awareness is sufficient to allow the United States to proceed on a fraudulent conveyance theory. See Gamble [84-2 USTC ¶9884], 612 F.Supp. at 1276-77. Even though the United States' claim against J. Brickman was not reduced to assessments and judgment until after J. Brickman conveyed some of his property to the Brickman Family, "for purposes of a fraudulent conveyance action a 'creditor' becomes such when its claim arises, even if its claim is contingent and regardless of the fact that the claim has not matured or been reduced to judgment until after the conveyance." Brown [93-2 USTC ¶50,375], 820 F.Supp. at 383. Thus, we hold that the United States may proceed on a fraudulent conveyance theory pertaining to all of the allegedly fraudulent transfers. The Brickman Family's motion to dismiss is denied.

CONCLUSION

The Brickman Family's motion to dismiss is denied in all respects.

¹ The 130,753 went to the Brickman sons as well as J. Brickman's wife. The three sons each received an additional 24,690 shares in three increments: (1) 20,000 shares on February 18, 1962; (2) 2,500 shares on December 21, 1968; and (3) 2,460 shares on January 19, 1969. J. Brickman's wife received an additional 55,873 shares in five increments: (1) 2,954 shares on August 5, 1961; (2) 2,954 shares on March 20, 1962; (3) 45,000 shares on April 7, 1965; (4) 2,500 shares on December 21, 1968; and (5) 2,465 shares on January 19, 1969.

² Section 6501(a) provides in pertinent part:

Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within three years after the return was filed (whether or not such return was filed on or after the date prescribed) . . ., and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period.

26 U.S.C. §6501(a).

³ Section 6502 provides in pertinent part:

(a) Where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun--

(1) within [6] years after the assessment of the tax. . ..

26 U.S.C. §6502(a)(1). The current version of Section 6502 provides a ten year limitation period; however, the statute provided a six year limitation period during the times relevant to the current suit.

⁴ Section 6901 provides in pertinent part:

(c) Period of limitations.--The period of limitations for assessment of any such liability of a transferee . . . shall be as follows:

* * * * *

(2) Transferee of transferee.--In the case of the liability of a transferee of a transferee, within 1 year after the expiration of the period of limitation for assessment against the preceding transferee, but not more than 3 years after the expiration of the period of limitation for assessment against the initial transferor; except that if, before the expiration of the period of limitation for the assessment of the liability of the transferee, a court proceeding for the collection of the tax or liability in respect thereof has been begun against the initial transferor or the last preceding transferee, respectively, then the period of limitation for assessment of the liability of the transferee shall expire 1 year after the return of execution in the court proceeding.

26 U.S.C. §6901(c)(2).

⁵ Section 6322 provides:

Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.

26 U.S.C. §6322.

⁶ Section 278 was the predecessor to the current Section 6502 and provided that where an assessment was made, the assessed tax could be collected by a proceeding in court if begun within six years after the assessment. Updike [2 USTC ¶533; 1930 CCH ¶9364], 281 U.S. at 491-91, 50 S.Ct. at 367-68 (quoting and discussing section 278).

⁷ Section 6901(a)(1)(A) provides in pertinent part:

(a) Method of collection.--The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes to which the liabilities were incurred:

(1) Income, estate, and gift taxes.--

(A) Transferees.--The liability, at law or in equity, of a transferee of property--

(i) of a taxpayer in the case of a tax imposed by subtitle A (relating to income taxes). . ..

26 U.S.C. §6901(a)(1)(A)(i).

⁸ In a similar vein, courts have held that the limitations period contained in Section 6502 does not apply to section 6332 actions, 26 U.S.C. §6332, against third parties in possession of a taxpayer's property or property rights. See, e.g., United States v. Weintraub [80-1 USTC ¶9172], 613 F.2d at 619-20; United States v. Marine Midland Bank, N.A. [88-1 USTC ¶9159], 675 F.Supp. 775, 778 (W.D.N.Y. 1987). These courts reason that, unlike suits against taxpayers, Section 6332 actions are not actions to collect taxes but to enforce personal liability for failure to surrender property after receiving a notice of levy. Weintraub [80-1 USTC ¶9172], 613 F.2d at 620.

⁹ The United States erroneously refers to J. Brickman as the original taxpayer. See, e.g., Pl.'s Resp. at 2. This error, however, is of no consequence.

¹⁰ The first assessment against J. Brickman occurred on November 9, 1962. Compl. ¶10. Prior to that assessment, J. Brickman formed Brickman Mid-West, transferred all of his assets to Brickman Mid-West, and issued 20,385 shares to his wife, and 2,954 shares to each of his three sons. Id. ¶13. Three other transfers predated the first assessment against J. Brickman: (1) the transfer of 20,000 shares to each of his sons on February 18, 1962; (2) the transfer of 2,954 shares to his wife on August 5, 1961; and (3) the transfer of 2,954 shares to his wife on March 20, 1962. ¶14. All remaining transfers to the Brickman Family and to corporations controlled by the Brickman Family occurred after the assessments began. ¶¶14, 16-17.

¹¹ The Illinois Supreme Court has succinctly articulated the means by which a plaintiff can establish fraudulent conveyance:

Illinois recognizes two categories of fraudulent conveyances: those which are fraudulent in fact and those which are fraudulent in law. In fraud-in-fact cases a specific intent to "disturb delay, hinder or defraud" must be proved. . .. In fraud-in-law cases, on the other hand, a conveyance may be presumed fraudulent based on certain circumstances surrounding the conveyance. In order to establish that a conveyance is fraudulent in law, three elements must be present: (1) there must be a transfer made for no or inadequate consideration; (2) there must be existing or contemplated indebtedness against the transferor; and (3) it must appear that the transferor did not retain sufficient property to pay his indebtedness.

Gendron v. Chicago & N.W. Transp. Co., 139 Ill.2d 422, 437-38, 151 Ill.Dec. 545, 552-53, 564 N.E.2d 1207, 1214-15 (1990) (citations omitted).

 

 

United States of America, Plaintiff v. Martin Carlin, Barbara Carlin, Park Drive Manor Partnership, Gold Hawk Joint Venture, LRSE Realty Corporation and Free Lunch, Inc., Defendants

U.S. District Court, So. Dist. N.Y., 92 Civ. 8553 (BDP), 11/18/96, 948 FSupp 271, 948 FSupp 271

[Code Sec. 6672 ]

Assessment and collection: Payroll taxes: Partnership: Liability of partner.--An individual was jointly and severally liable, pursuant to state (New York) law, for tax liabilities attributable to a partnership's failure to remit withheld payroll taxes. Although the individual asserted that he never had any association with, or knowledge of, the partnership, he entered into an agreement with the other two partners, was identified by one of the other partners as a co-partner, and was identified in the partnership's federal return, by name and social security number, as a partner.

[Code Sec. 6321 ]

Real property: Fraudulent conveyances: Inadequate consideration: Fraudulent intent.--An the individual's transfer of his interest in realty to his wife was a fraudulent conveyance under state (New York) law because his goal in the transaction was to place the property beyond the reach of his creditors, including the IRS. He conveyed the interest voluntarily and without consideration at a time when he was insolvent. In addition, subsequent conveyances of the interest from the wife to related parties, for inadequate consideration, were attempts to defraud the individual's creditors. Thus, all conveyances of his interest in realty were set aside.

[Code Secs. 6321 and 7425 ]

Tax lien: Priority of: Notice to IRS.--An IRS's lien against realty, in which an individual with outstanding tax liabilities had an interest, had priority over the interests of a judgment creditor. The tax lien arose when the assessments were made, and the IRS filed its notice of lien four months later. The creditor did not record its judgment until nine days after the IRS filing. Since the IRS had a senior lien and since it was not notified of the nonjudicial sale of the property to the creditor, the realty remained subject to the tax lien.

Neil Corwin, Assistant United States Attorney, New York, N.Y. 10007, for plaintiff. Martin Paul Solomon, 286 5th Ave., New York, N.Y., for defendants Martin Carlin, Barbara Carlin, LRSE Realty Corp., Free Lunch, Inc., Michael S. Etkin, Gold & Wachtel, 110 E. 59th St. New York, N.Y. 10022, for defendant Gold Hawk Joint Venture, Adam M. Schuman, Corbin Silverman & Sanseverino, 805 Third Ave., New York, N.Y. 10022, for defendant New York Federal Savings Bk.

MEMORANDUM DECISION AND ORDER

PARKER, District Judge:

The United States of America brings this action (1) to reduce to judgment a federal tax lien filed against defendant Park Drive Manor Partnership ("Park Drive" or "the partnership") and its partners; (2) to set aside the conveyance of Park Drive partner Martin Carlin's interest in real property located at 175 Crary Avenue, Mount Vernon, New York ("Mount Vernon realty") to defendant Barbara Carlin; and (3) for an order declaring that the Internal Revenue Service's ("IRS") lien on the Mount Vernon realty has priority over the interests of defendants Barbara Carlin, LRSE Realty Corporation ("LRSE"), Free Lunch, Inc., and Gold Hawk Joint Venture ("Gold Hawk"). Before the Court is the Government's motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. For the reasons set forth, the Government's motion is granted.

FACTS

Recognizing that on a motion for summary judgment all factual ambiguities and reasonable inferences are drawn in the nonmoving party's favor, see Quinn v. Syracuse Model Neighborhood Corp., 613 F.2d 438, 444-45 (2d Cir. 1980), the following unopposed facts are properly before the Court for purposes of this motion.

In 1985, Martin Carlin, along with two brothers, Vlad Stevens and Steve Stevens, purchased a building complex known as the Park Drive Manor apartments, located at 600 West Harvey Street in Philadelphia, Pennsylvania. A 1985 federal partnership tax return identified Martin Carlin and both Stevens brothers, by name and social security number, as partners of the Park Drive Manor Partnership and lists the partnership's address as 600 West Harvey Street, Philadelphia.

On February 23, 1987, the IRS assessed a tax deficiency against Park Drive in the amount of $22,351.55 for unpaid tax obligations under 26 U.S.C. §§6671-6672. On March 30, 1987, the IRS issued another assessment against Park Drive in the amount of $20,088.98. The assessments against Park Drive and its partners arose out of the partnership's unpaid payroll tax obligations for the taxable quarters ending September 30, 1986 and December 31, 1986. On July 14, 1987, the IRS filed its notice of federal tax lien against Park Drive in the Westchester County Clerk's office.

Approximately six weeks later, on August 26, 1987, Martin Carlin conveyed his interest in the Mount Vernon realty to his wife, Barbara Carlin, a transfer for which he received no consideration. On March 28, 1988, Barbara Carlin, in turn, transferred that interest to an entity appropriately named Free Lunch, of which she was the sole officer. She received no consideration for the transfer. Later that year, Free Lunch conveyed its interest in the property to LRSE, an entity whose sole officer was Martin Carlin's cousin, Michael Jaffe. That conveyance was made for inadequate consideration. ¹ Despite notice and due demand, Park Drive and the partners of Park Drive have neglected to pay in full the outstanding assessed liability and accrued statutory interest.

Meanwhile, in May 1987, Gold Hawk obtained a judgment against Martin Carlin in Texas in the amount of $7,928,519.41. Gold Hawk filed a transcript of judgment in the Southern District of New York on July 14, 1987 and recorded its judgment in the Westchester County Clerk's office on July 23, 1987. On or about July 23, 1987, Gold Hawk delivered its judgment against Martin Carlin for execution to the Westchester County Sheriff, who scheduled and issued a notice of nonjudicial sale of the Mount Vernon realty. No notice of the sale was provided to the IRS. On July 18, 1988, Gold Hawk purchased the Mount Vernon realty by a Sheriff's deed which was recorded in the Westchester County Clerk's office on July 29, 1988.

As of December 22, 1995, the taxpayer liability on the assessments issued against Park Drive, including accrued interest and accrued lien costs, totaled $114,798.58. On November 24, 1992, the Government instituted this action against defendants and, on February 2, 1996, moved for summary judgment, arguing that there were no genuine issues of material fact concerning the underlying tax liability of Park Drive or the priority of its interests in the Mount Vernon realty over those of the defendants.

DISCUSSION

A. Standard For Summary Judgment

Under Rule 56 of the Federal Rules of Civil Procedure, "a motion for summary judgment must be granted if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The moving party must initially satisfy a burden of demonstrating the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323-25, 106 S.Ct. 2548, 2552-54, 91 L.Ed.2d 265 (1986); see also Gallo v. Prudential Residential Servs. Ltd., 22 F.3d 1219, 1223 (2d Cir. 1994). The burden then shifts to the nonmoving party to come forward with "specific facts, showing that there is a genuine issue of fact for trial," Fed.R.Civ.P. 56(e), by a showing sufficient to establish the existence of every element essential to the party's case, and on which the party will bear the burden of proof at trial The Court cannot try issues of fact, but can only determine whether there are issues to be tried. Donahue v. Windsor Locks Bd. of Fire Com'rs, 834 F.2d 54, 58 (2d Cir. 1987). When making that determination, the Court is to inquire whether there is "sufficient evidence favoring the nonmoving party for a jury to return a verdict for the party." Anderson v. Liberty Lobby Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2510-11, 91 L.Ed.2d 202 (1986).

In deciding whether a genuine issue of material fact exists, "the court is required to draw all factual inferences in favor of the party against whom summary judgment is sought." Ramseur v. Chase Manhattan Bank, 865 F.2d 460, 465 (2d Cir. 1989). A genuine issue, however, "is not created by a mere allegation in the pleadings . . ., nor by surmise or conjecture on the part of the litigants." United States v. Potamkin Cadillac Corp., 689 F.2d 379, 381 (2d Cir. 1982) (citations omitted); Knight v. United States Fire Ins. Co., 804 F.2d 9, 11-12 (2d Cir. 1986), cert. denied, 480 U.S. 932, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987). Indeed, Rule 56(e) of the Federal Rules of Civil Procedure requires that affidavits opposing summary judgment "be made on personal knowledge." Fed.R.Civ.P. 56(e). Thus, unsupported denial, upon information and belief, is insufficient to raise any issue of fact so as to defeat a motion for summary judgment. Baker v. Latham Sparrowbush Assoc., 72 F.3d 246, 255 (2d Cir. 1995); Kramer, Levin, Nessen, Kamin & Frankel v. Aronoff, 638 F.Supp. 714, 720 (S.D.N.Y. 1986).

Under Rule 3(g) of the Civil Rules for the United States District Courts for the Eastern and Southern Districts of New York ("Rule 3(g)"), upon any motion for summary judgment, the moving party must submit a statement of the material facts as to which that party contends there is no genuine issue to be tried. The nonmoving party, in response to the movant's statement of facts not in dispute, must submit a counter-statement of facts in dispute. Those facts not disputed are deemed admitted unless controverted by the statement required to be served by the opposing party. Rule 3(g). See Russell v. Selsky, 35 F.3d 55, 58 (2d Cir. 1994).

In support of its motion for summary judgment, the Government submitted a Rule 3(g) statement setting forth the material facts as to which the Government contended there was no genuine dispute. ("Rule 3(g) Statement"). The Government's Rule 3(g) Statement, inter alia, advert to the 1985 federal partnership tax return that clearly identifies Martin Carlin as a partner of the Park Drive Manor Partnership, 600 West Harvey Street in Philadelphia, Rule 3(g) Statement ¶3; the tax assessments made against Park Drive in the total amount of $42,440.53, Rule 3(g) Statement ¶4; and the sequence of events surrounding the multiple, intrafamily conveyances of the Mount Vernon realty. Rule 3(g) Statement ¶¶8-11.

Only defendants Martin Carlin, Barbara Carlin, LRSE, and Free Lunch filed a response to the Government's summary judgment motion. Defendants' 3(g) statement, however, does not controvert any of the material facts supporting the Government's motion for summary judgment. ² Because the defendants' opposing papers raise no genuine issue and fail to controvert the facts recited in the Government's Rule 3(g) statement, those facts are deemed admitted. Rule 3(g); San Filippo v. United States Trust Company of New York, Inc., 737 F.2d 246, 247 (2d Cir. 1984).

B. Federal Tax Liens on the Park Drive Manor Partnership

Under the Internal Revenue Code, employers are required to withhold federal income and social security taxes from their employees' wages. Employers must keep the withheld funds "in trust for the United States," 26 U.S.C. §7501(a), and pay the funds to the IRS on a quarterly basis. Fiataruolo v. United States [93-2 USTC ¶50,627], 8 F.3d 930, 938 (2d Cir. 1993). An employer who fails to pay the withheld funds is liable for their payment. The assessments against Park Drive were made pursuant to 26 U.S.C. §§667-6672 because of partnership's willful failure to collect, truthfully account for, and pay over to the United States the income and Federal Insurance Contributions Act taxes withheld from the wages of employees of Park Manor. ³

Internal Revenue Service tax assessments, like those issued against Park Drive, are entitled to a presumption of correctness. United States v. McCombs [94-2 USTC ¶50,363], 30 F.3d 310, 318 (2d Cir. 1994); Llorente v. Commissioner of Internal Revenue [81-1 USTC ¶9446], 649 F.2d 152, 156 (2d Cir. 1981). Thus, a taxpayer who wishes to challenge the validity of a tax deficiency assessment bears the burden of production and persuasion. United States v. Janis [76-2 USTC ¶16,229], 428 U.S. 433, 440, 96 S.Ct. 3021, 3025, 49 L.Ed.2d 1046 (1976); McCombs [94-2 USTC ¶50,363], 30 F.3d at 318; DeLorenzo v. United States [77-1 USTC ¶16,262], 555 F.2d 27, 29 (2d Cir. 1977). Defendants do not contest Park Drive's tax liability or in any way challenge the accuracy of the assessments made against the partnership.

Martin Carlin alone attempts to immunize himself from liability by calling into question his status as a partner of Park Drive. Martin Carlin asserts, on "information and belief," that he never had any association with, or knowledge of, an entity called Park Drive Manor Partnership. In opposing a summary judgment motion, however, an adverse party "may not rest upon the mere allegations or denials of the adverse party's pleading, but the adverse party's response by affidavit or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e); see Randell v. United States [95-2 USTC ¶50,468], 64 F.3d 101, 108 (2d Cir. 1995), cert. denied, -- U.S.--, 117 S.Ct. 65, 136 L.Ed.2d 26 (1996). Facts alleged in Carlin's affidavit in opposition to the Government's summary judgment motion did not purport to be made on personal knowledge as required under Rule 56(e) of the Federal Rules of Civil Procedure. As unsupported assertions they were inadequate to defeat a motion for summary judgment. Randell [95-2 USTC ¶50,468], 64 F.3d at 109; Potamkin Cadillac Corp., 689 F.2d at 381.

Not only are Martin Carlin's assertions unsubstantiated, but the undisputed facts before this court clearly establishes Carlin's status as a partner of Park Drive. Martin Carlin admits to having entered into a partnership with Vlad Stevens and Steve Stevens for the purpose of purchasing "a building complex known as Park Drive Manor Apartments in Philadelphia, Pennsylvania." Carlin Dep. at 15-16. Vlad Stevens identified Martin Carlin as a co-partner of the Park Drive Manor Partnership. Decl. of Vlad Stevens ¶6. The federal partnership tax returns, IRS Forms 941 and 1065, list Martin Carlin as a partner of the Park Drive Manor Partnership. Those returns contain a partner identification number for each partner, including Martin Carlin.

In light of the presumption of correctness afforded to government tax assessments and the failure of defendants to introduce any evidence rebutting Park Drive's underlying tax liability, the assessments rendered against the partnership are taken as accurate. Furthermore, since Martin Carlin has failed to establish that a genuine issue exists as to his status as partner of Park Drive, this Court finds that he is jointly and severally liable, under N.Y. Partnership Law §26, for the partnership's tax assessments.

C. Conveyances of the Mount Vernon Realty

The Government further moves this Court to set aside the transfer of Martin Carlin's interest in the Mount Vernon realty to his wife Barbara Carlin on the grounds that the conveyance was effected to place the property beyond the reach of Martin Carlin's creditors, including the IRS. The Government argues that the conveyance was constructively fraudulent under New York's Debtor and Creditor Law §273.

Section 273 of New York's Debtor and Creditor Law states:

[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 incurred without a fair consideration.

N.Y.Debt. & Cred.Law §273. Thus, to establish a fraudulent conveyance under this provision, the Government must prove that (1) Martin Carlin conveyed the property to his wife, (2) Martin Carlin was or would thereby have become insolvent at the time he made the conveyance, and (3) he made the conveyance without fair consideration.

The uncontested facts in this case support the Government's claim. It is undisputed that Martin Carlin conveyed his interest in the Mount Vernon realty to his wife voluntarily and without consideration. Furthermore, Martin Carlin conveyed the realty at a time that he was indebted to the United States for federal taxes, and, according to his own testimony, in over $80 million of debt. Carlin Dep. at 35. When a transfer is made without consideration, the initial burden to demonstrate solvency is on the defendant. ACLI Government Securities, Inc. v. Rhoades, 653 F.Supp. 1388, 1393 (S.D.N.Y. 1987), aff'd, 842 F.2d 1287 (2d Cir. 1988).

Here, defendants have adduced no evidence that Martin Carlin was solvent at the time of the conveyance, nor have they otherwise challenged the Government's showing that Martin Carlin was, in fact, insolvent at the time of the conveyance. Accordingly, this Court finds that the August 26, 1987 conveyance was fraudulent under section 273 of the N.Y. Debtor & Creditor Law. ⁴

This Court further finds that the subsequent conveyances of the Mount Vernon realty, first from Barbara Carlin to Free Lunch and then from Free Lunch to LRSE Realty, were fraudulent under section 276 of New York's Debtor & Creditor Law. Section 276 provides that "[e]very 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.Y.Debt. & Cred.Law §276.

Where actual intent to defraud creditors is proven, the conveyance will be set aside regardless of the adequacy of consideration. McCombs [94-2 USTC ¶50,363], 30 F.3d at 328. Under section 276, intent need not be shown by direct evidence and is normally inferred from the circumstances surrounding the transfer. Id.; In re Grand Jury Subpoena Duces Tecum Dated Sept. 15, 1983, 731 F.2d 1032, 1041 (2d Cir. 1984); ACLI Government Securities, 653 F.Supp. at 1394. Factors to consider include close relationships among the parties, secrecy and haste in making transfer, inadequacy of consideration, and the transferor's knowledge of creditor's claims and any inability to pay them. McCombs [94-2 USTC ¶50,363], 30 F.3d at 328. Only an actual intent to hinder and delay need be established, not an actual intent to defraud, and lack of fair consideration gives rise to a rebuttable presumption of fraudulent intent. Atlanta Shipping Corp., Inc. v. Chemical Bank, 631 F.Supp. 335, 346-47 (S.D.N.Y. 1986), aff'd, 818 F.2d 240 (2d Cir. 1987).

The conveyances to Free Lunch and LRSE had all of the indicia of fraudulent intent. On or about March 28, 1988, Barbara Carlin transferred her interest in the Mount Vernon realty to Free Lunch, an entity of which she was the sole officer, for no consideration. Free Lunch's later conveyance of its interest in the Mount Vernon realty to LRSE, an entity whose sole officer was Martin Carlin's cousin, Michael Jaffe, was also for inadequate consideration. Thus, plaintiff has asserted sufficient facts to establish a presumption of fraudulent intent. Those facts remain unchallenged by defendants.

Where a conveyance is fraudulent as to a creditor, that creditor, when his claim has matured, may have the conveyance set aside to the extent necessary to satisfy his claim. N.Y.Debt. & Cred.Law §278(1)(a). Having determined that the conveyances of the Mount Vernon realty to (1) Barbara Carlin, (2) Free Lunch, and (3) LRSE were independently fraudulent, this Court orders that those conveyances be set aside.

D. Priority of the IRS's Lien on the Mount Vernon Realty

The remaining issue is the Government's request for an order declaring that the IRS's lien on the realty has priority over the interests of defendant Gold Hawk.

Section 6321 of Title 26 authorizes the Government to impose a tax lien upon property of defaulting taxpayers. 26 U.S.C. §6321; see McCombs [94-2 USTC ¶50,363], 30 F.3d at 321; United States v. 110-118 Riverside Tenants Corp. [90-2 USTC ¶50,493], 886 F.2d 514, 518 (2d Cir. 1989), cert. denied, 495 U.S. 956, 110 S.Ct. 2560, 109 L.Ed.2d 743 (1990). Courts have long held that priority of federal tax liens is to be determined by the rule of "first in time, first in right." United States v. New Britain [54-1 USTC ¶9191], 347 U.S. 81, 85, 74 S.Ct. 367, 370, 98 L.Ed. 520 (1954); 110-118 Riverside Tenants Corp. [90-2 USTC ¶50,493], 886 F.2d at 518. A federal tax lien is deemed to arise at the time that the assessment is made, even where the lien has not been recorded, and continues until the amount of liability set forth in the assessment is satisfied. McCombs [94-2 USTC ¶50,363], 30 F.3d at 321; Don King Productions, Inc. v. Thomas [91-2 USTC ¶50,474], 945 F.2d 529, 534 (2d Cir. 1991).

Once a lien is imposed, the sale of any property on which the United States has such a lien is subject to notice requirements set forth in 26 U.S.C. §7425(c)(1). Notice of sale must be given in writing, by registered or certified mail or by personal service, not less than 25 days prior to such sale, to the Secretary of Treasury. 26 U.S.C. §7425(c)(1). Moreover, the judicial sale of property in which the United States holds a tax lien is made subject to, and without disturbing, the United States' tax liens. 26 U.S.C. §7425(b); see Berlin v. United States [82-1 USTC ¶9384], 535 F.Supp. 298 (E.D.N.Y. 1982) (holding that sheriff's execution sale, pursuant to a junior judgment lien, did not extinguish the senior tax lien of the IRS even where the plaintiff complied with all federal and state notice requirements).

The uncontested facts before the Court clearly establish the priority of the IRS's tax liens over the interests of defendant Gold Hawk. The IRS made its assessments on February 27, 1987 and March 30, 1987 and, on July 14, 1987, filed a notice of federal tax lien against the partnership in the Westchester County Clerk's office.

Meanwhile, defendant Gold Hawk did not record its judgment in the Westchester County Clerk's office until July 23, 1987, nine days after the IRS filed its notice of lien and almost four months after the IRS made its final assessment against Park Drive. Gold Hawk's judgment lien was, therefore, second in time to the IRS's senior federal tax lien.

Thus, when Gold Hawk subsequently arranged for the Westchester County Sheriff to schedule a nonjudicial sale of the Mount Vernon realty, Gold Hawk was obligated, pursuant to 26 U.S.C. §7425, to provide the IRS, as senior lien holder, with notice of the sale. The sale, of which the IRS received no notice, resulted in the property being sold to Gold Hawk by Sheriff's deed. Accordingly, that sale was made subject to, and without disturbing, the federal tax lien. See 26 U.S.C. §7425(b).

CONCLUSION

For the reasons set forth above, the Government's motion for summary judgment is granted pursuant to Fed.R.Civ.P. 56. The government shall submit a proposed judgment consistent with this opinion by December 2, 1996 on five days notice to defendants.

SO ORDERED.

¹ On September 27, 1995, the Government and counsel for Barbara Carlin appeared before Magistrate Judge Fox for reconsideration of sanctions imposed on Barbara Carlin for her repeated failure to appear for deposition. After determining that Barbara Carlin's noncompliance was due to wilfulness and bad faith rather than any inability to comply, Magistrate Judge Fox made the following findings of fact in accordance with Fed. R.Civ.P. 37(b)(2):

Barbara Carlin can identify no consideration supporting her husband, Martin Carlin's, conveyance of his interest in the reality [sic] located at 175 Creary [sic] Avenue, Mount Vernon New York (the "Realty") to her on August 26 1987. . .. Barbara Carlin's subsequent conveyance of the Realty to defendant, Free Lunch Incorporated ("Free Lunch") . . . was, again, for no consideration. And third, Free Lunch's conveyance of it's [sic] interest in property to LRSE Realty Corporation . . . was for inadequate consideration.

² Without addressing the Government's recitation of facts not in dispute, defendants' 3(g) statement simply asserts that "legal title to [the Mount Vernon realty] was taken in the name of Park Drive Associates, Inc.," and that "equitable title to the property was to be held by Park Drive Associates, Ltd., a California limited partnership." We presume that these statements are intended to call into question the existence of the Park Drive Manor Partnership and to raise the inference that Martin Carlin was not, in fact, a partner of a partnership so named. The statements are supported by a 1994 letter of a non-party attorney who had represented Martin Carlin and the Stevens brothers in connection with their purchase of Park Drive Manor apartments and the purported cover sheet of the closing papers for the purchase of the Park Drive Manor Apartments. This Court finds that neither document raises a genuine issue of material fact that would preclude summary judgment.

The letter merely establishes that an attorney who represented Carlin and the Stevens brothers "as local counsel for limited purposes" was "not aware of the Park Drive Manor Partnership." The attorney's "awareness" of the partnership has no real probative value as to whether the partnership in fact existed or owned the Park Drive Manor apartment complex.

The cover sheet for the closing papers similarly lacks evidentiary value for the purposes of this motion. The cover sheet states: "Property Title: Legal Title, Park Drive Associates, Inc., a Pennsylvania corporation . . . Equitable Title, Park Drive Associates, Ltd., a California limited partnership." It further reflects that the closing date for the sale and purchase of the Park Drive Manor apartment complex was October 30, 1985, over one year before the tax assessments at issue in the underlying action were made. The cover sheet does not dispute the existence of the Park Drive Manor Partnership in 1986, during which the unpaid tax obligations leading to the assessment arose or in any way contradict the facts adduced by the government, most notably the existence of the federal tax return filed by the Park Drive Manor Partnership reporting the income derived from the apartment complex which it owned.

³ 26 U.S.C. §6672 provides in pertinent part: Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully failed to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat such tax or the payment thereof, shall . . . be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid for.

⁴ The Government further contends that the conveyance was fraudulent on the grounds that it was made (1) for inadequate consideration at a time when the transferor believed that he would incur debts beyond his ability to pay, N.Y.Debt. & Cred.Law §275; and (2) with the actual intent to defraud the IRS. N.Y.Debt. & Cred.Law §276. Having determined that the conveyance to Barbara Carlin was fraudulent under section 273, this Court need not consider whether the conveyance was fraudulent under those alternative theories.

 

 

 

United States of America, Plaintiff v. Linda K. Hudnall and Daniel E. Oakes, Defendants

U.S. District Court, So. Dist. Fla., CIV-RYSKAMP 95-14324, 7/23/96

[Code Secs. 6321 and 7403 ]

Liens and levies: Action to enforce lien: Fraudulent transfer.--The conveyance of a personal residence between joint tenants was fraudulent; therefore, the transferor remained the owner of the property in its entirety and a federal tax lien attached to her interest. The transferee recommended that the transfer be made in order to protect it from the tax lien, and no reasonably equivalent value was given for the property.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

RYSKAMP, District Judge:

Following trial of this matter by the Court without a jury on July 16, 1996, the Court enters the following findings of fact and conclusions of law:

FINDINGS OF FACT

This civil action was brought by the United States of America (1) to obtain a judgment against Linda K. Hudnall for her unpaid federal tax liabilities, (2) to set aside a fraudulent transfer of real property from defendant Hudnall to defendant Oakes, and (3) to foreclose a federal tax lien on real property.

Oakes met Hudnall in West Virginia in April 1991, and they began cohabiting before the end of the year. In early 1992, Hudnall withdrew funds from her pension plan and moved to Florida with Oakes. Hudnall received over $300,000 in pension funds but did not pay income taxes on these funds. Hudnall's income tax liability in 1992 was $107,671.82, not including interest and penalties.

On February 4, 1992, Hudnall used some of her retirement funds to purchase a house at 7203 Santa Clara, Fort Pierce, Florida (hereinafter, the "subject property"), whose legal description is:

Lot 24, Block 102, LAKEWOOD PARK, UNIT 9, according to the Plat thereof, recorded in Plat Book 11, Page 27, of the Public Records of St. Lucie County, Florida.

Hudnall paid approximately $67,900 for the house; Oakes provided no funds or other value for this purchase. At Oakes' suggestion, the subject property was deeded to Hudnall and Oakes, as "joint tenants with rights of survivorship and not as tenants in common."

Both Hudnall and Oakes were aware of Hudnall's tax liability, even before Hudnall received any of her pension funds. Oakes told Hudnall not to worry about her tax liability and that he would pay it if necessary.

By quit-claim deed dated July 17, 1992, Hudnall transferred her interest in the subject property to Oakes. This transfer was made at Oakes' insistence, for the purpose of protecting the subject property from the federal tax lien, and Hudnall followed Oakes' recommendation. Oakes did not give reasonably equivalent value for the transferred property.

On the dates and in the amounts set forth in the table on the following page, a delegate of the Secretary of the Treasury made assessments of income tax, penalties, interest and costs against Hudnall:

          Date of    Amount of

Tax Year Assessment Assessment

  1992    05/24/93  $107,671.82  Tax

                         808.26  Interest

                       1,522.85  Penalties

          06/20/94        12.00  Costs

 

Although notice has been given and demand for payment of the liabilities set forth in the preceding paragraph has been made, there is presently due and owing from Hudnall the sum of $110,014.93 plus interest and statutory additions thereon from May 24, 1993, as provided by law, which the defendant Linda K. Hudnall has refused and neglected to pay.

On June 7, 1994, a notice of federal tax lien for the liabilities described above was filed in the official records of St. Lucie County, Florida.

The above-described conveyances of interests in the subject property to Oakes were made with actual intent to hinder, delay, or defraud a creditor of Hudnall, namely, the United States.

The record discloses that Hudnall was served with a summons and complaint in this action on December 7, 1995, and has not answered or otherwise responded to the summons and complaint. Default was entered against Hudnall on May 22, 1996. Hudnall is neither an infant nor an incompetent person.

CONCLUSIONS OF LAW

The Court has jurisdiction over this action pursuant to Sections 1340 and 1345 of Title 28, U.S.C., and Sections 7402 and 7403 of the Internal Revenue Code of 1986 (26 U.S.C), in that this civil action is brought by the United States of America and arises under an Act of Congress providing for Internal Revenue.

The above-described conveyances of interests in the subject property to Oakes were made with actual intent to hinder, delay, or defraud a creditor of Hudnall, namely, the United States.

The federal tax lien for Hudnall's 1992 income tax liability attaches to the subject property.

The purported conveyances at issue are and were fraudulent as to the United States of America, the purported conveyances are null and void, Linda K. Hudnall is the owner of the subject property in its entirety, and the tax lien of the United States attaches to her right, title and interest therein.

The United States of America has a valid federal tax lien by virtue of the assessments set forth above on all property and rights to property belonging to Linda K. Hudnall, including the subject real property.

Said federal tax lien has priority over any claim of defendant Oakes to the subject property.

A separate judgment shall be entered in accordance with these findings of fact and conclusions of law, giving judgment against Hudnall, foreclosing the federal tax lien, and ordering the sale of the subject property.

SO ORDERED.

 

 

 

United States of America, Plaintiff-Appellee v. Ronald L. Bodwell, Defendant-Appellant

(CA-9), U.S. Court of Appeals, 9th Circuit, 97-15316, 1/15/98, Affirming District Court decisions, 96-2 USTC ¶50,592 and 97-1 USTC ¶50,260

[Code Sec. 6203 ]

Assessments: Res judicata: Discovery: Burden of proof.--An individual raising tax protestor arguments was barred by the doctrine of res judicata from challenging the validity of tax assessments that had been reduced to judgment and that he could have contested in an earlier Tax Court action. Additionally, the individual was not entitled to a continuance for further discovery in a suit for tax assessment because he sought information concerning issues that were resolved in an earlier order granting partial summary judgment to the government. He failed to allege on appeal how further discovery would assist him in rebutting the government's evidence.

[Code Sec. 6303 ]

Assessments: Notice and demand for payment: Form 4340.--An individual failed to prove that he was not properly served with notice and demand for payment of a tax assessment. The Form 4340 submitted by the government constituted sufficient evidence of notice and demand for payment.

[Code Secs. 6321 and 6502 ]

Fraudulent conveyances: Statute of limitations.--In a proceeding reducing tax assessments to judgment, the government's complaint against an individual for fraudulently conveying property to third parties was timely filed within the applicable 10-year limitations period.

[Code Sec. 7401 ]

Authorization of government to bring civil suit.--The IRS Chief Counsel and the Assistant Attorney General of the tax division had the authority to commence a tax assessment proceeding against an individual.

[Fed. R. App. P. 38 ]

Frivolous appeal: Sanctions.--The government's motion for sanctions against a taxpayer for filing a frivolous appeal from a district court's tax assessment judgment was denied.

Jeffrey R. Meyer, Robert L. Baker, Department of Justice, Washington, D.C. 20530, for plaintiff-appellee. Ronald L. Bodwell, P.O. Box 41843, Sacramento, Calif. 95841-0843, for defendant-appellant.

Before: BROWNING, KLEINFELD, and THOMAS, Circuit Judges. ^*

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

MEMORANDUM ^**

Defendant Ronald L. Bodwell ("Bodwell") appeals pro se from a grant of summary judgment in favor of the United States reducing a tax assessment for the years 1979, 1980, and 1981 to a federal tax lien on Bodwell's Kyburz property ("Kyburz"). Bodwell also argues that the district court abused its discretion in denying his motions to compel discovery and for a continuance. We have jurisdiction pursuant to 28 U.S.C. §1291. We affirm.

I

We review de novo a grant of summary judgment. Hansen v. United States, 7 F.3d 137, 138 (9th Cir. 1993).

Bodwell argues that the district court failed to review the tax assessment which the government reduced to judgment against him. The district court found that any arguments raised to challenge the tax assessment were barred by the doctrine of res judicata. "Under [the doctrine of res judicata], a final judgment on the merits of an action precludes the parties from relitigating issues that were or could have been raised in that action." Baker v. IRS (In re Baker), 74 F.3d 906, 909-10 (9th Cir. 1996) (emphasis added).

In this case, the tax assessments for the years 1979, 1980, and 1981 were made after Bodwell received a notice of deficiencies which he challenged in federal tax court. See Ronald L. Bodwell and Betty Bodwell v. C.I.R., Docket No. 1113-84, entered on July 17, 1985, aff'd, 798 F.2d 472 (9th Cir. 1986), cert. denied, 479 U.S. 1093 (1987). Thus, the district court was correct in refusing to consider arguments by Bodwell challenging the validity of the tax assessment. We also refuse to consider these arguments on appeal. ¹

Bodwell contends that the court's consideration of the form 4340 submitted by the government to show the tax assessment against Bodwell constituted an improper reliance on hearsay evidence. Bodwell also argues that the form 4340 is insufficient evidence of notice and demand for payment of the tax assessment required by 26 U.S.C. §6303(a). ² We rejected similar arguments in Hansen, 7 F.3d at 138 (9th Cir. 1993) (holding that the computer-generated form 4340 is reliable evidence and sufficient in the absence of contrary evidence to establish that notice and demand were made). Bodwell asserts that notice and demand were not served. Bodwell failed, however, to submit evidence establishing a genuine issue of fact as to service. Id.

II

Bodwell states several additional contentions in support of a reversal of summary judgment. Bodwell first contends that the IRS has no authority to seize Kyburz. We will not consider this argument because the record indicates that it was not raised before the district court. See Speck v. United States [95-2 USTC ¶50,341], 59 F.3d 106, 109 (9th Cir. 1995) (declining to consider argument raised for the first time on appeal where no reason for delay is offered).

Second, Bodwell contends that the government did not have the proper authorization to commence this action against him. Bodwell relies on 26 U.S.C. §7401, which provides:

No civil action for the collection of taxes, or of any fine, penalty, or forfeiture, shall be commenced unless the Secretary authorizes or sanctions the proceedings and the Attorney General or his delegate directs that the action be commenced.

26 U.S.C. §7401 (1997).

We agree with the district court's finding that the government did have the proper authority to commence this action pursuant to §7401. The court referred to a letter from the Chief Counsel of the Internal Revenue Service ("IRS") authorizing the action against Bodwell and a letter from the Assistant Attorney General of the tax division directing commencement of this action against Bodwell. Pursuant to 26 U.S.C. §7701, which provides the definitions for terms used in the Internal Revenue Code, the term "Secretary" shall include "the Secretary of the Treasury or his delegate." 26 U.S.C. §7701(a)(11)(B) (1997). The term "delegate" includes "any officer, employee, or agency of the Treasury Department. . ." 26 U.S.C. §7701(a)(12)(A) (1997). Thus, the Chief Counsel for the IRS and the Assistant Attorney General of the tax division are authorized to direct commencement of this action against Bodwell.

Third, Bodwell contends that summary judgment was inappropriate because the government failed to prove that Bodwell fraudulently conveyed Kyburz to any of the other defendants. The court found that only Bodwell had any remaining interest in Kyburz because default judgments were entered against all other defendants. None of the other defendants have appealed the court's entry of default judgment against them.

"Upon entry of a default judgment, the facts alleged to establish liability are binding upon the defaulting party, and those matters may not be relitigated on appeal." Alan Neuman Prods., Inc. v. Albright, 862 F.2d 1388, 1392 (9th Cir. 1989). The status of the property as to all defaulted defendants is that it was fraudulently conveyed to them by Bodwell. Bodwell's argument that Kyburz was not fraudulently conveyed is tantamount to claiming that he has no interest in Kyburz. This argument is inherently inconsistent. None of the other defendants have come forward to dispute the allegations in the government's complaint asserting that Bodwell is the true owner of Kyburz. In light of this, we conclude that there is no genuine issue of material fact as to Bodwell's ownership of Kyburz.

Fourth, Bodwell contends that the statute of limitations for extinguishing a fraudulent conveyance pursuant to 28 U.S.C. §3306(b), expired three years before the United States filed suit. The district court correctly applied 26 U.S.C. §6502(a)(1) which allows for a ten year statute of limitations in this case. See United States v. Bacon, 82 F.3d 822, 825 (9th Cir. 1996). Therefore, the government's complaint was timely.

III

Bodwell also argues that the district court erred in denying his motions to compel discovery and for a continuance of summary judgment to allow more time for discovery. "We review for abuse of discretion a district court's decision not to permit further discovery." Qualls v. Blue Cross of Cal., Inc., 22 F.3d 839, 844 (9th Cir. 1994). To establish abuse of discretion Bodwell must show, 1) he diligently pursued previous discovery opportunities, and 2) how allowing additional discovery would have precluded summary judgement. Id.

The district court found that a continuance for further discovery was unnecessary because Bodwell sought information only regarding issues already resolved by the court's earlier order granting partial summary judgment. This ruling is not an abuse of discretion. Furthermore, Bodwell fails to allege on appeal how further discovery would assist him in rebutting the government's evidence against him.

The government's request for sanctions against Bodwell for filing a frivolous appeal is denied.

AFFIRMED.

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

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

¹ Bodwell's arguments which are barred by the doctrine of res judicata are: 1) the tax court had no authority and no jurisdiction to implement federal income taxes against him, 2) applicable regulations are invalid for failure to comply with notice and comment procedures, 3) the notice of deficiencies was invalid, thereby depriving the tax court of jurisdiction. All of these are challenges Bodwell could have brought in his petition to the tax court and on appeal from the tax court's decision.

² Section 6303(a) provides:

Where it is not otherwise provided by this title, the Secretary shall, as soon as practicable, and within 60 days, after the making of an assessment of a tax pursuant to section 6203, give notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof. Such notice shall be left at the dwelling or usual place of business of such person, or shall be sent by mail to such person's last known address.

26 U.S.C. §6303(a) (1997).