Fraudulent Conveyances Part3 page4

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I. STANDARD OF REVIEW

Summary judgment motions are governed by Rule 56 of the Federal Rules of Civil Procedure. Rule 56(c) provides:

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

"[T]his standard provides that the 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) (emphasis in original); Kendall v. Hoover Co., 751 F.2d 171, 174 (6th Cir. 1984).

Summary judgment will not lie if the dispute about a material fact is genuine; "that is, if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248. The purpose of the procedure is not to resolve factual issues, but to determine if there are genuine issues of fact to be tried. See Lashlee v. Sumner, 570 F.2d 107, 111 (6th Cir. 1978). Therefore, summary judgment will be granted "only where the moving party is entitled to judgment as a matter of law, where it is quite clear what the truth is . . . [and where] no genuine issue remains for trial, . . . [for] the purpose of the rule is not to cut litigants off from their right of trial by jury if they really have issues to try." Poller v. Columbia Broadcasting Sys., 368 U.S. 464, 467 (1962) (quoting Sartor v. Arkansas Natural Gas Corp., 321 U.S. 620, 627 (1944)); accord County of Oakland v. City of Berkley, 742 F.2d 289, 297 (6th Cir. 1984).

In making this inquiry, the standard to be applied by the Court mirrors the standard for what was formerly referred to as a directed verdict. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Anderson, 477 U.S. at 250.

"The primary difference between the two motions is procedural; summary judgment motions are usually made before trial and decided on documentary evidence, while directed verdict motions are made at trial and decided on the evidence that has been admitted." Bill Johnson's Restaurants, Inc. v. NLRB, 461 U.S. 731, 745, n.11 (1983). In essence, though, the inquiry under each is the same: whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.

Anderson, 477 U.S. at 251-52. Accordingly, although summary judgment should be cautiously invoked, it is an integral part of the Federal Rules, which are designed "to secure the just, speedy and inexpensive determination of every action." Celotex, 477 U.S. at 327 (quoting Fed. R. Civ. P. 1).

In a motion for summary judgment the moving party bears the "burden of showing the absence of a genuine issue as to any material fact, and for these purposes, the [evidence submitted] must be viewed in the light most favorable to the opposing party." Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970) (footnote omitted); accord Adams v. Union Carbide Corp., 737 F.2d 1453, 1455-56 (6th Cir. 1984). Inferences to be drawn from the underlying facts contained in such materials must also be considered in the light most favorable to the party opposing the motion. See United States v. Diebold, Inc., 369 U.S. 654, 655 (1962); Watkins v. Northwestern Ohio Tractor Pullers Ass'n, 630 F.2d 1155, 1158 (6th Cir. 1980). Additionally, "unexplained gaps" in materials submitted by the moving party, if pertinent to material issues of fact, justify denial of a motion for summary judgment. Adickes, 398 U.S. at 157-60.

If the moving party meets its burden and adequate time for discovery has been provided, summary judgment is appropriate if the opposing party 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. See Celotex, 477 U.S. at 322. The existence of a mere scintilla of evidence in support of the opposing party's position is insufficient; there must be evidence on which the jury could reasonably find for the opposing party. See Anderson, 477 U.S. at 252.

When a motion for summary judgment is made and supported as provided in this rule, 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 affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If the adverse party does not so respond, summary judgment, if appropriate, shall be entered against the adverse party.

Fed. R. Civ. P. 56(e).

II. CROSS-MOTIONS FOR SUMMARY JUDGMENT BY THE UNITED STATES AND DEFENDANTS STEDMAN AND GARLAND

The United States made the first tax assessment at issue in this case in 1979. A federal tax lien arises upon assessment and attaches to all property and rights to property belonging to the taxpayer, here, Mr. Hans. See 26 U.S.C. §§6321 , 6322. At the time of the first assessment, however, deeds had been filed by Mr. Hans transferring the New Albany property and the Indian Mound property to Ms. Stedman. Ms. Stedman therefore argues that the New Albany property and the Indian Mound property did not belong to Mr. Hans at the time of the assessments, and that the lien did not attach to these properties.

The United States puts forth two bases for foreclosing on the New Albany property and the Indian Mound property. First, the United States argues that the transfers made by Mr. Hans were fraudulent and therefore voidable under the laws of the State of Ohio . Second, the United States argues that Ms. Stedman holds title to these properties merely as a nominee of Mr. Hans. Based upon either of these alternative theories, the United States contends that the New Albany property and the Indian Mound property remained the property of Mr. Hans, and that the liens therefore attached to the two pieces of property.

Defendants Stedman and Garland argue that the fraudulent conveyance claims are barred by the Ohio statute of limitations, and that the United States has not shown that it is entitled to judgment as a matter of law on any of its claims. Defendants Dale and Nancy Oglesby also contest the motion for partial summary judgment filed by the United States .

A. Statute of Limitations

Defendants Stedman and Garland assert that the Ohio fraudulent conveyance claims brought by the United States are barred by the applicable statute of limitations. ⁸ The United States argues that as sovereign, it is not bound by state statutes of limitation. See United States v. Summerlin [40-2 USTC ¶9633 ], 310 U.S. 414, 415 (1940) ("It is well settled that the United States is not bound by state statutes of limitation or subject to the defense of laches in enforcing its rights."). Defendants Stedman and Garland assert that when the United States seeks to enforce a right created solely by a state statute, the United States must be bound by the state statute of limitations, citing United States v. Vellalos [92-1 USTC ¶50,227 ], 780 F. Supp. 705, 708 (D. Haw. 1992), appeal dismissed, 990 F.2d 1265 (9^th Cir. 1993). ⁹

In Vellalos, the district court held that the extension of Summerlin to actions brought pursuant to state real property statutes would improperly strip away state authority to create real property law. See [92-1 USTC ¶50,227 ], 780 F. Supp. at 708. The United States argues that the holding in Vellalos is bad law as it is contrary to Summerlin. The United States asserts that Vellalos has been widely criticized, and that the Vellalos court is the only court in the nation to hold that the United States is subject to state statutes of limitation set forth in state versions of the Uniform Fraudulent Transfer Act. See cases cited in U.S. Supp. Brief at 13.)

The Sixth Circuit has rejected the reasoning of Vellalos, holding that the United States is not subject to the statute of limitations set forth in Kentucky 's version of the Uniform Fraudulent Conveyance Act. See United States v. Isaac, No. 91-5830, 1992 WL 159795, at *2 (6^th Cir. July 10, 1992). Following the Sixth Circuit's decision in Isaac, the United States District Court for the Northern District of Ohio held that the United States is not bound by the limitations period applicable to Ohio 's fraudulent conveyance statute. See Goldstein v. United States [93-2 USTC ¶50,478 ], No. 1:91CV-0969, 1993 WL 388702, at *3 n.1 (N.D. Ohio July 7, 1993). Pursuant to Isaac, this Court also finds that the United States is not bound by Ohio 's statute of limitations. See 1992 WL 159795 at *2.

The United States is subject, however, to statutes of limitations to which it binds itself. See Mullilain [Mullikin] v. United States [92-1 USTC ¶50,020 ], 952 F.2d 920, 926 (6th Cir. 1991). Under the United States Tax Code, the United States in most cases is required to assess a taxpayer's liability within three years of the filing date for the tax year at issue. See 26 U.S.C. §6501(a) (West Supp. 1998). The United States must initiate collection of the tax, by levy or by a court proceeding, within six or ten ¹⁰ years after the date of assessment. See 26 U.S.C. §6502(a) (West Supp. 1998).

In the civil tax case against Mr. Hans, the Sixth Circuit held that the United States had taken timely action against Mr. Hans for the tax years 1975 through 1983. See Hans [90-2 USTC ¶50,600 ], 91 F.2d at 82. A question remains, however, as to whether the United States has taken timely action under the Tax Code against the transferees of Mr. Hans's property. The answer to this question depends upon the means undertaken to recover from the transferees. The United States may proceed against transferees pursuant to 26 U.S.C. §6901 , foreclose on its tax liens, or foreclose on the judgment lien it obtained in 1993. ¹¹

Pursuant to 26 U.S.C. §6901 , income tax liabilities against transferees may be assessed and collected "in the same manner and subject to the same provisions and limitations" as the tax liabilities of the transferor taxpayer. 26 U.S.C. §6901(a) (1989). Section 6901 provides that the period of limitations for assessment against the initial transferee is one year following the expiration of the period of limitation for assessment against the transferor. See 26 U.S.C. §6901(c)(1) (1989). If, before the expiration of the period of limitation for the assessment of the transferee, a court proceeding for the collection of the tax liability has begun against the transferor, then the period of limitation for assessment against the transferee expires one year after the return of execution in the court proceeding. See 26 U.S.C. §6901(c).

Although an action against the transferees in this case under 26 U.S.C. §6901 may be barred by the applicable statute of limitations, the United States has represented to the Court that it is not proceeding against Ms. Stedman pursuant to §6901, (U. S. Supp. Mem. of Dec. 3, 1998 at 6-7, R. 133), and Defendants Stedman and Garland concede that the §6901 limitation period is not applicable. (Stedman & Garland Dec. 7, 1998 Supp. Mem. at 7, R. 134.) The Court therefore will not apply the §6901 limitation period to the government's claims.

The complaint filed by the United States in this action states that its claims are brought "to set aside the fraudulent conveyances of real property made by Joseph H. Hans, and to foreclose federal tax liens and judgment liens upon such property;" (U.S. Ans. and Counterclaims at 5-6, R. 6). An action to set aside the conveyances is an alternative to the provisions for direct transferee liability in §6901. See United States v. Percina, 877 F. Supp. 215, 217 (D. N.J. 1994). The United States does not seek through this action to impose personal liability on the transferees. The action brought by the United States is an in rem action to set aside fraudulent conveyances of property rather than an in personam action to make the transferees personally liable for Joseph Hans's taxes. See Hall v. United States [68-2 USTC ¶9665], 403 F.2d 344, 345-46 (5th Cir. 1969).

The United States may also bring an action to foreclose on its tax liens. A federal tax lien arises upon assessment and attaches to all property and rights to property belonging to a taxpayer. See 26 U.S.C. §§6321, 6322. The Tax Code provides that the lien "shall continue until the liability for the amount so assessed . . . is satisfied or becomes unenforceable by reason of lapse of time." 26 U.S.C. §6322. Once valid, the lien survives as long as liability for the underlying tax is enforceable. See United States v. Hodes [66-1 USTC ¶9232], 355 F.2d 746, 748 (2d Cir. 1966).

As previously stated, the United States is required to initiate collection efforts against a taxpayer within six or ten years of the date of assessment. See 26 U.S.C. §6502(a). The United States initiated collection against Mr. Hans within the period stated in §6502, but did not file claims against the transferees until December 11, 1995, sixteen years after the earliest relevant assessment against Mr. Hans in 1979.

In United States v. Updike [2 USTC ¶533], 281 U.S. 489 (1930), the Supreme Court held that the then six-year limitation period on collection proceedings was applicable to an action to collect corporate taxes brought against stockholders as transferees of the defunct corporation's assets:

[T]he present suit, though not against the corporation but against its transferees to subject assets in their hands to the payment of the tax, is 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.

Updike [2 USTC ¶533], 281 U.S. at 368. Having found that the action against the transferees was one to collect a tax, the Supreme Court held that the statute fixing the limitations period for collection proceedings was applicable. See id. at 368-69. Because the United States failed to bring a collection proceeding against the corporation within the limitation period, the United States was precluded from bringing a collection proceeding against the transferee stockholders. See id. The transferees of Mr. Hans in the action before this Court argue that the United States is barred from bringing a collection action against them because it failed to initiate this action within the required period after assessment against Mr. Hans. See id.; 26 U.S.C. §6502(a). ¹²

The United States argues that Updike is distinguishable from the case before this Court because in Updike, no timely action was filed against the transferor. The Supreme Court in Updike held that because the period of limitation had run in favor of the corporation, it had also run in favor of the transferees. See [2 USTC ¶533], 281 U.S. at 369. The United States therefore reasons that because it brought an action against Mr. Hans within the limitation period, its action against the transferees is timely. The Fifth Circuit made this same distinction in Hall v. United States [68-2 USTC ¶9665], 403 F.2d 344, 346 (5th Cir. 1969). In Hall, the United States sought to set aside conveyances fraudulently made to transferees, but did not make assessments against the transferees within the six year period of §6502. The Fifth Circuit held that the statute of limitation in §6502 was inapplicable. See Hall [68-2 USTC ¶9665], 403 F.2d at 346. The court in Hall found that the case was distinguishable from Updike for two reasons. First, in Updike there was no timely suit against the transferor, and the action against the transferee was the first effort at collection of the tax liability. Second, the court made a distinction between a suit to collect a tax from a third party successor to the assets of the taxpayer corporation, and a suit against a transferee under conveyances made to defraud the United States as a judgment creditor. See Hall [68-2 USTC ¶9665], 403 F.2d at 347. The court held that the action against a successor is a suit to collect taxes, and the suit against a transferee is a suit to follow assets in order to collect a judgment. See id. The court found that the successor action would be barred by §6502, but that the limitation period in §6502 is not applicable to the transferee action. See id.

Similarly, in United States v. Brickman [97-1 USTC ¶50,350], 906 F. Supp. 1164, 1169 (N.D. Ill. 1995), the district court held that once the United States obtained judgment against the transferor, the statute of limitations in §6502 stops running, and the United States can enforce judgment at any time. Based upon this reasoning, the United States argues that its action against the transferees is timely.

The United States can also proceed under 26 U.S.C. §6332, which provides that "any person in possession of . . . property subject to levy upon which a levy has been made shall, upon demand . . . surrender such property . . . to the Secretary." 26 U.S.C. §6332(a). Section 6332 further provides that a person in possession who fails to surrender the property is personally liable for the tax liability underlying the levy. See 26 U.S.C. §6332(c). The Sixth Circuit has held that the six year limitation period of §6502 is not applicable to actions bought under §6332. See United States v. Weintraub [80-1 USTC ¶9172], 613 F.2d 612, 620 (6th Cir. 1979). The Sixth Circuit in Weintraub further held that where a timely collection is brought against a taxpayer, there is no time limitation on §6332 actions against third parties to enforce liability:

[T]he only limitation of §6502 is that the levy be made or proceeding in court begun against the taxpayer within six years of the assessment. There is no time limit whatsoever on an action against the taxpayer to enforce a timely levy or judgment obtained in a timely filed court proceeding.

Id. at 620-21. The court found that §6502 requires only that a collection action against the taxpayer be brought within six years of the assessment, and that there is no time limit in the Tax Code to enforce a timely levy or judgment obtained in a timely collection proceeding. See id. The court reasoned that even if §6502 could be construed to apply to §6332, the limitation period would be complied with by taking timely collection action against the transferor. See id. at 621.

Defendants Stedman and Garland now concede that the limitations period for the government to proceed against the transferee is the limitations period for the government to proceed against the transferor. (Stedman and Garland Dec. 7, 1998 Supp. Mem. at 6, R. 134.) Defendants Stedman and Garland further concede that because the government has a valid judgment which it can assert against Mr. Hans' estate, there is no limitations bar against the government's fraudulent conveyance claim against Ms. Stedman as a transferee. (Stedman and Garland Dec. 7, 1998 Supp. Mem. at 6-7, R. 134.)

As to the March 15, 1993 judgment lien obtained against Mr. Hans, such liens are valid for twenty years, and the government's efforts to enforce the judgment lien are also timely. See 28 U.S.C. §3201(c)(1). Unlike other liens, tax liens do not merge into judgment liens and both the tax liens and the judgment liens remain simultaneously enforceable. See Bank of Celina [87-2 USTC ¶9440], 823 F.2d at 913.

The Court finds that the United States has shown as a matter of law that its claims are not barred by a state or federal statute of limitations.

B. Merits of the Fraudulent Conveyance Claims

"Where a taxpayer has fraudulently disposed of property prior to the existence of federal tax liens, the United States has standing to seek relief under the fraudulent conveyance laws of the particular State in which the property is located." United States v. Hughel, 20 F. Supp.2d 1154, 1157 (S.D. Ohio 1997) (citing Commissioner v. Stern [58-2 USTC ¶9594], 357 U.S. 39 (1958) and United States v. Fernon [81-1 USTC ¶9287], 640 F.2d 609 (5th Cir. 1981)). The United States accordingly brings state law claims against Stedman, Garland , and the Oglesbys as transferees to alleged fraudulent conveyances made prior to the existence of the federal tax liens.

The substance of the United State 's fraudulent conveyance claim is governed by Ohio law. The transfers sought to be avoided took place in 1977. The law in effect at that time was the Ohio Uniform Fraudulent Conveyances Act ("UFCA"). See Ohio Revised Code §1336.01 et seq., ( Anderson 1979) (repealed 1990). In order to clarify certain provisions of the UFCA, the UFCA was replaced by the Ohio Uniform Fraudulent Transfer Act ("UFTA") in 1990. See Ohio Revised Code §1336.01 et seq., ( Anderson 1992). The United States argues that the UFCA, rather than the UFTA, is applicable in this case because the UFTA is not retroactive. The bankruptcy division of this Court has previously held that the UFTA is not retroactive, In re Taubman, 160 B.R. 964, 989 (Bankr. S.D. Ohio 1993), and Defendants Stedman and Garland concede that the UFCA provides the applicable law. (Stedman and Garland Oct. 16, 1998 Mem. at 2 n.1, R. 125.) The Court will therefore apply the UFCA rather than the UFTA.

The UFCA provides that:

Where a conveyance or obligation is fraudulent as to a creditor, such creditor, when his claim has matured, may, as against any person except a purchaser for fair consideration without knowledge of the fraud at the time of the purchase, . . . :

(1) Have the conveyance set aside or obligation annulled to the extent necessary to satisfy the claim; or

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

Ohio Rev. Code Ann. §1336.09(A) (Anderson 1979) (repealed 1990).

Defendants Stedman and Garland argue that the 1977 transfers cannot be considered fraudulent as to the United States because the United States was not a creditor of Mr. Hans until it filed its first tax assessment against him in 1979. However, Ohio Revised Code §1336.07, under which the United States brings its claim, expressly applies to future creditors:

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

Ohio Rev. Code Ann. §1336.07 ( Anderson 1979) (repealed 1990). In addition, the United States is deemed a creditor for income taxes on the last day of the taxable period, or at least no later than the date the return is originally due, i.e., April 15 of the next year. See United States v. Adams Bldg., Inc. [76-1 USTC ¶9221], 531 F.2d 342, 343 n.2 (6th Cir. 1976) (taxes are due and owing on the date on which a tax return is due to be filed); In re Certified Credit Corp. [71-1 USTC ¶9446], 329 F. Supp. 1402, 1403-04 (S.D. Ohio 1971) (United States is creditor of income tax debt upon close of tax year, or no later than date return is due). Accordingly, in May 1977 when Mr. Hans transferred the two properties to Ms. Stedman, the United States was a present creditor of Mr. Hans as to the 1975 and 1976 income taxes and a future creditor as to the 1977 through 1983 income taxes. Thus, the United States may invoke the remedies of the UFCA if it can show that Mr. Hans transferred the properties to Ms. Stedman with actual intent to hinder, delay, or defraud present or future creditors, including the IRS.

The party asserting fraudulent intent in order to void a conveyance of property pursuant to the Ohio UFCA bears the burden of proving the elements of the fraud by clear and convincing evidence. See United States v. Berman [89-2 USTC ¶9524], 884 F.2d 916, 921 (6th Cir. 1989); Household Finance Corp. v. Altenberg, 214 N.E.2d 667, 669 ( Ohio 1966). The Supreme Court of Ohio has recognized, however, that with respect to the issue of actual intent, direct proof may be impossible:

Due to the difficulty in finding direct proof of fraud, courts of this state began long ago to look to inferences from the circumstances surrounding the transaction and the relationship of the parties involved.

Stein v. Brown, 480 N.E.2d 1121, 1124 ( Ohio 1985).

In McKinley Fed. S. & L. v. Pizzuro Enterprises, Inc., 585 N.E.2d 496, 500 (Ohio Ct. App. 1990), the Ohio appellate court noted that in fraudulent conveyance cases,

[C]ertain traditionally designated "badges" or indicia of fraud, circumstances which usually or frequently attend a conveyance designed to hinder, delay, or defraud creditors, in concert with other suspicious circumstances, have generally been held to be sufficient to show fraud and invalidate the transfer of property.

These "badges" of fraud include, but are not limited to: inadequate consideration, transfer of the debtor's entire estate, insolvency resulting from the transfer, the relationship of the parties, the debtor's retention of an interest, benefit or control in the transferred property, and a threat or pendency of litigation. See Wagner v. Galipo, 646 N.E.2d 844, 849 (Ohio Ct. App. 1994); Cardiovascular & Thoracic Surgery of Canton, Inc. v. DiMazzio, 524 N.E.2d 915, 918 (Ohio Ct. App. 1987); United States v. Mantarro, No. 88CV871, 1992 WL 551483, at *4 (N.D. Ohio June 19, 1992).

The United States argues that the following badges of fraud are present in this case: relationship of the parties, threat of litigation, retention of possession or control of the property, dealings in cash, the use of nominees or fictitious parties, and inadequate consideration.

The Court first notes that the two pieces of property were not transferred directly from Mr. Hans to Ms. Stedman. In September of 1976, Mr. Hans recorded a quitclaim deed transferring a one-half interest in the New Albany property to Rino Borean. ( U.S. Ex. 26.) Title to the New Albany property was later conveyed to Ms. Stedman by means of two deeds, a quitclaim deed from Mr. Hans to Ms. Stedman, and a quitclaim deed from Rino Borean to Ms. Stedman. ( U.S. Exs. 27, 33.) During the pendency of the dissolution action, deeds were recorded which transferred title to the Indian Mound property to Rino Borean, and then to the Billy G Corporation. ( U.S. Exs. 10, 11, 12.) Following the entry of dissolution, quitclaim deeds were recorded transferring title from the Billy G Corporation to Mr. Hans, from Mr. Hans to Ms. Stedman, and from the Billy G Corporation to Ms. Stedman. ( U.S. Exs. 13, 14, 15.)

It is undisputed that an intimate relationship existed between Mr. Hans and Ms. Stedman, and Ms. Stedman alleges that they lived as husband and wife for four months prior to the transfers. Moreover, following the alleged dissolution, they lived together for 17 years until Mr. Stedman's death. The undisputed evidence shows that there was a relationship between Mr. Hans and Ms. Stedman, a badge of fraud under the UFCA.

As to the threat of litigation, Mr. Hans was contacted by an agent of the Criminal Investigation Division of the IRS on January 9, 1976, and on November 8, 1976, he was advised that the IRS would be contacting third parties due to his lack of cooperation. Both of these contacts took place prior to the transfer of the two properties in May of 1977. The undisputed evidence shows that prior to the transfers, Mr. Hans was aware of a criminal IRS investigation against him for unpaid taxes. The Court finds that Mr. Hans's knowledge of the criminal IRS investigation prior to the transfers constitutes a badge of fraud.

The evidence further demonstrates that Mr. Hans retained possession or control of the properties. On May 5, 1977, three days after the decree of dissolution was entered, a building permit was filed for the New Albany residence, listing Mr. Hans as the owner. ( U.S. Ex. 60.) In September of 1997, Mr. Hans and Ms. Stedman jointly signed a $65,000 promissory note to obtain a construction loan for the New Albany residence. ( U.S. Ex. 61.) Ms. Stedman admits that Mr. Hans paid for some of the cost of constructing the residence, but she cannot remember which items he paid for. (Stedman Dep. at 87, U.S. Ex. 42.) Thomas Culp, an owner of National Wood Products, the company that supplied the wood for the New Albany residence, testified that he dealt with and was paid by Mr. Hans, not Ms. Stedman. (Culp Dep. at 8-9, 12-13, 18, U.S. Ex. 48.) Mr. Hans, not Ms. Stedman, signed an "affidavit of owner and/or original contractor," which stated that the architect was paid in full. ( U.S. Ex. 63.) The address for the real estate tax bill was Mr. Hans's business address on High Street. ( U.S. Ex. 64.) Mr. Hans and Ms. Stedman moved into the New Albany residence in July of 1978, and Mr. Hans continued to live there until his death in 1994. (Stedman Dep. at 298, U.S. Ex. 43.) The Court finds that the evidence on the record shows that Mr. Hans retained possession or control of the New Albany property after he transferred title to the property.

As to the Indian Mound property, following the dissolution, Mr. Hans lived on the property in the party house behind the main residence. (Stedman Dep. at 17, U.S. Ex. 42.) He later moved back into the main residence on the Indian Mound property until both he and Ms. Stedman moved to the New Albany residence. (Stedman Dep. at 18, 298, U.S. Exs. 42, 43.) Pursuant to the land contract, Nancy Oglesby made payments by check to Ms. Stedman, but many of the checks were endorsed by Mr. Hans. ( U.S. Ex. 71.) Ms. Stedman testified at her deposition that she probably asked Mr. Hans to cash some of the checks for her, and that is why his signature appears on the checks. (Stedman Dep. at 192-93, U.S. Ex. 43.) The Court finds that the evidence is equivocal regarding Mr. Hans's alleged possession or control of the Indian Mound property.

There is evidence in the record of dealings in cash. At the time of the allegedly fraudulent transactions, neither Mr. Hans nor Ms. Stedman had savings or checking accounts, and both dealt in cash. (Stedman Dep. at 20-21, 180, U.S. Exs 42, 43.) Ms. Stedman testified that Mr. Hans paid her in cash, and that she borrowed money for the construction of the residence on the New Albany property, and kept the borrowed money in cash form. (Stedman Dep. at 62-63, U.S. Ex. 42.) Ms. Stedman further testified that she paid for the construction bills by cash, money orders, or cashiers' checks. (Stedman Dep. at 61-62, 88-90, U.S. Ex. 42.) The Court finds that the undisputed evidence shows dealings in cash.

The record also contains evidence of the use of nominees or fictitious parties. As previously discussed, the properties were not transferred directly to Ms. Stedman, but were first transferred to third parties, Rino Borean and the Billy G Corporation. Mr. Borean testified at his deposition that Mr. Hans asked him to place the Indian Mound property in his name because Mr. Hans was about to go through a divorce. (Borean Dep. at 17, 20, U.S. Ex. 49.) Mr. Borean was not aware that Mr. Hans also placed the New Albany property in Mr. Borean's name. (Borean Dep. at 10, 30-31, U.S. Ex. 49.) Mr. Borean testified that he never took possession of either the Indian Mound property or the New Albany property, and that he considered both of the properties to be owned by Mr. Hans. (Borean Dep. at 10, 30-31, U.S. Ex. 49.) Mr. Borean testified that Mr. Hans later directed him to sign the property over to Billy G Corporation, and Mr. Borean did so. Ms. Stedman testified that Mr. Hans transferred the property to the Billy G Corporation in order to facilitate a sale of the property to Mr. Garland. (Stedman Dep. at 217, U.S. Ex. 43.) Ms. Stedman testified that the deal did not go through, so the property was then transferred to Ms. Stedman pursuant to the dissolution decree. (Stedman Dep. at 221, U.S. Ex. 43.) Ms. Stedman has offered no explanation, however, for the transfers to Rino Borean. The Court finds that the undisputed evidence shows the use of nominees or fictitious parties, a badge of fraud.

The United States also argues that inadequate consideration was given for the transfers. As to the transfers to and from third parties, Mr. Borean and the Billy G Corporation, there is no evidence of monetary consideration over one dollar for each transaction.

It is undisputed that no monetary consideration was given for the transfers to Ms. Stedman. Ms. Stedman argues, however, that the transfers were made pursuant to the divorce settlement between herself and Mr. Hans, and that the dissolution of the common law marriage was consideration for the transfers. Under the common law, a transfer made pursuant to a bona fide separation agreement is for fair consideration. See Marine Midland Bank- New York v. Batson, 332 N.Y.S.2d 714, 718 (N.Y. Sup. Ct. 1972); Mitchell v. Wilmington Trust Co., 449 A.2d 1055, 1060 (Del. Ch. 1982) (conveyance is for fair and valuable consideration if made in contemplation of divorce which is subsequently obtained).

The United States has offered evidence, however, tending to show that the separation agreement and divorce settlement were not bona fide and made in good faith. First, there is some dispute as to whether Ms. Stedman and Mr. Hans actually entered into a common law marriage. They did not inform their family or friends that they were holding themselves out as husband and wife. (Stedman Dep. at 13-14, 182-83, 233-35, 264-66, U.S. Exs. 42, 43; Tokar Dep. at 23-25, U.S. Ex. 45.) The purported common law marriage lasted only four months, allegedly beginning three days before the IRS's contact with Mr. Hans. Second, it is not clear whether the dissolution proceeding was entered into in good faith. If no valid marriage existed, then the agreement to dissolve the marriage had no effect. An agreement to dissolve an association that does not exist has no value, and cannot constitute consideration. Even if Mr. Hans and Mr. Stedman had a valid common law marriage, the circumstances surrounding the dissolution are suspect. The petition for dissolution was filed three days after the court decision finding that Mr. Hans was entitled to the Indian Mound property and the New Albany property. Moreover, Mr. Hans continued to live with Ms. Stedman for seventeen years after the purported dissolution.

Ms. Stedman attempts to explain the circumstances by alleging that she became pregnant in 1976 and wanted to get married because of the child. Soon after, Mr. Hans allegedly began drinking heavily, and Ms. Stedman decided to terminate the pregnancy and the marriage. Following the dissolution, Mr. Hans stopped drinking, and she allowed him to move back in the house.

Although the timing of these events makes Ms. Stedman's explanation suspect, Ms. Stedman has produced some evidence showing that the marriage and dissolution were valid. The Court therefore finds that the United States has not shown as a matter of law that no consideration was given for the transfers. The United States has, however, demonstrated the following badges of fraud in relation to the conveyances: relationship between the parties, threat of litigation, retention of possession or control as to the New Albany property, dealings in cash, and the use of nominees or fictitious parties.

Ohio courts have held that evidence of a sufficient number of badges of fraud can shift the burden to the transferor to show that the conveyance is not fraudulent. See, e.g., Cardiovascular & Thoracic Surgery, 524 N.E.2d at 918; Cresho v. Cresho, 646 N.E.2d 183, 186 (Ohio Ct. App. 1994); Baker & Sons Equipment Co. v. GSO Equip. Leasing, Inc., 622 N.E.2d 1113, 1118 (Ohio Ct. App. 1993); see also Rabin v. Delacruz, No. 94-3943,1996 WL 6531, at *4 (6th Cir. Jan. 8, 1996) (applying Ohio's Uniform Fraudulent Transfer Act).

The Court finds that the United States has demonstrated sufficient badges of fraud to shift the burden to Ms. Stedman to show that the transfers were valid. Ms. Stedman has, to meet that burden, offered evidence to rebut the presumption arising from the badges of fraud surrounding the transfers, specifically that the transfers were made in consideration of a dissolution of marriage and pursuant to a decree of the Common Pleas Court of Franklin County, Ohio.

Although the United States has produced evidence sufficient to create a presumption of fraud on the part of Mr. Hans, Ms. Stedman has produced some evidence to rebut the presumption. The Court therefore finds that a genuine issue of material fact exists as to whether Mr. Hans acted with intent to defraud the United States in transferring the properties to Ms. Stedman. The Court further notes that the United States moves for summary judgment as a plaintiff on the UFCA claims. A plaintiff moving for summary judgment has a heavy burden. See Nicholas Acoustics & Specialty Co. v. H & M Constr. Co., 695 F.2d 839, 844 (5^th Cir. 1980). Moreover, under Ohio law, a plaintiff seeking to void a conveyance in a UFCA case has the burden to demonstrate fraud by clear and convincing evidence. See Berman [89-2 USTC ¶9524 ], 884 F.2d at 921; Household Finance, 214 N.E. 2d at 669. The Court finds that a genuine issue of material fact exists on the UFCA claims, and that the United States has not met its burden to demonstrate fraud as a matter of law by clear and convincing evidence. The motion of the United States for summary judgment on the UFCA claims is therefore denied.

C. Merits of Nominee Claims Against Defendant Stedman

As an alternative to the UFCA claims, the United States contends that the tax liens at issue attach to the New Albany property and the Indian Mound property pursuant to the nominee doctrine. The United States asserts that, under the nominee doctrine, the United States may foreclose on property titled in the name of a third party, where the third party, or nominee, "is merely the titular, and not the factual, owner of the property," and the true owner is a taxpayer subject to a tax lien. United States v. Dusterberg, No. C-2-95-976, 1997 WL 327395, at *2 (S.D. Ohio Mar. 12, 1997). The United States asserts that the tax lien on Mr. Hans's property attached to the Indian Mound property and the New Albany property because Ms. Stedman held title to those properties as a nominee of Mr. Hans.

The United States cites to federal case law in support of its assertion that federal tax liens attach to property that is held by a taxpayer's nominee. See G. M. Leasing Corp. v. United States [77-1 USTC ¶9140 ], 429 U.S. 338, 351 (1977); Shades Ridge Holding Co. v. United States, 888 F.2d 725, 728 (11th Cir. 1989). It is clear, however, that in the application of a federal revenue act, "state law controls in determining the nature of the legal interest which the taxpayer had in the property." United States v. [National] Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 722 (1984) (citing Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513 (1960)). The Court must therefore apply Ohio law in considering the United States ' nominee theory.

In an unreported opinion, a judge in this district has stated that "[f]ederal courts recognize the nominee doctrine as part of Ohio law." Dusterberg, 1997 WL 327395, at *2. In support of this statement, the court in Dusterberg cited to United States v. Weber, No. 94-3253, 1995 WL 35636 (6th Cir. Jan. 30, 1995), and United States v. Miller [96-2 USTC ¶50,445 ], No. 3:95CV7041, 1996 WL 571654 (6th Cir. July 18, 1996). This Court finds, however, that neither of the Sixth Circuit cases cited in Dusterberg recognizes the nominee doctrine, as asserted by the United States , as part of Ohio law.

In Weber, the Sixth Circuit held that certain property transferred by the taxpayer to a trust was subject to a federal tax lien because the trust did not satisfy the elements of a valid trust under Ohio law, and because the property was transferred with the intent to defraud creditors in violation of Ohio Revised Code §1336.07 . See 1995 WL 35636, at *2. The holding was therefore based upon Ohio trust law and the Ohio fraudulent conveyance statute, not on the nominee doctrine.

In Miller, the Sixth Circuit considered whether a corporation held title to certain property as the nominee or alter ego of the taxpayer. The Sixth Circuit first determined that the government had not shown that the corporation was an alter ego of the taxpayer because it had failed to demonstrate the factors necessary under Ohio law to pierce the corporate veil. See Miller [96-2 USTC ¶50,445 ], 1996 WL 571654, at *4. ¹³ The Sixth Circuit then considered whether the corporation was an alter ego of the taxpayer under the factors set forth in Michigan law. See Miller [96-2 USTC ¶50,445 ], 1996 WL 571654, at *4-5. The Sixth Circuit discussed whether the corporation was a nominee of the taxpayer, but cited to a federal district court case applying Montana law. See [96-2 USTC ¶50,445 ], 1996 WL 571654, at *5 (citing Towe Antique Ford Foundation v. IRS [92-1 USTC ¶50,115 ], 791 F. Supp. 1450 (D. Mont. 1992)). The Sixth Circuit pointedly noted that the government "cite[d] no Ohio law in support of this [nominee doctrine] argument." Miller [96-2 USTC ¶50,445 ], 1996 WL 571654, at *5.

In neither Weber nor Miller did the Sixth Circuit recognize and apply the nominee doctrine as part of Ohio law. Furthermore, this Court has found no reported federal opinions recognizing the nominee doctrine under Ohio law. This Court therefore respectfully disagrees with the statement in Dusterberg that federal courts recognize the nominee doctrine as part of Ohio law. As for Ohio case law, the United States has cited no Ohio court case applying the "nominee doctrine" as applied in the Montana case, Towe Antique Ford, and this Court has found no such case.

Moreover, the Court has an alternative justification for questioning the applicability of the nominee doctrine in this case. Where, as here, there is a conveyance of real estate claimed to be fraudulent and where, as here, Ohio statutory law not only provides the remedy (Ohio Rev. Code §1336.09), but also sets forth the standards for when a transfer is deemed to be fraudulent (Ohio Rev. Code §§1336.04, 1336.06, 1336.07), this Court is of the opinion that the statutory requirements govern the transfer to the exclusion of some other theory such as the nominee theory. As stated previously, Ohio law--and not the law of some other state--controls the issue of whether the Hans estate can claim a property interest in the disputed real estate. The United States has not cited Ohio authority that would permit a circumvention of the UFCA where that statute is applicable.

In short, the United States has cited no Ohio law--and the Court has found none--that stands for the proposition that in a case involving an allegedly fraudulent transfer of real estate which could be set aside under Ohio statutory provisions governing fraudulent transfers of real estate, the government can proceed to circumvent the statutory provisions by relying upon a "nominee" theory. The Court is of the opinion that--absent Ohio case law to the contrary--this cannot be done. Accordingly, the Court declines to consider or apply the nominee theory in the present case. The Court notes, however, that the relevant factors for the nominee theory set forth by the United States are virtually identical to those necessary for a UFCA claim, and the Court has found that the United States has not established as a matter of law the elements of a UFCA claim. Thus, even if the Court found that the nominee theory was applicable in this case, the United States would not be able to prevail on the claim on summary judgment.

The Court has found that the United States has failed to meet its burden to establish as a matter of law the elements necessary for a fraudulent conveyance claim under the UFCA. The Court further finds that the nominee theory is not applicable in this case. Accordingly, the United States ' motion for partial judgment is denied as to both of these claims.

D. Garland as Nominee of Defendant Stedman

In Count Six, the United States brings a claim against Defendant Garland as a nominee of Defendant Stedman. The Court has held that the nominee doctrine, as asserted by the United States against Defendant Stedman as a nominee of Mr. Hans, is not a viable theory in Ohio . However, the means of piercing a corporate veil to hold owners of a corporation liable for the actions of the corporation is sometimes referred to as the nominee or alter ego doctrine. See supra note 13. Ohio law does permit the piercing of a corporate veil where the corporation is the nominee or alter ego of its shareholders. See Belvedere Condominium Unit Owners' Assn. v. R.E. Roark Cos., 617 N.E.2d 1075, 1086 ( Ohio 1993). Here, Defendant Stedman is the owner of Garland , a corporation, and the nominee or alter ego theory, as used in this sense, may apply.

In order to prove that it is entitled to pierce the corporate veil, the United States must demonstrate the following:

(1) control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will, or existence of its own;

(2) control over the corporation by those to be held liable was exercised in such a manner as to commit fraud or an illegal act against the person seeking to disregard the corporate entity; and

(3) injury or unjust loss resulted to the plaintiff from such control and wrong.

Belvedere, 617 N.E.2d at 1086. Although there is evidence on the record to show that Garland has no existence separate from its owner, Ms. Stedman, the Court cannot say that the United States has demonstrated each of the required elements as a matter of law. Because genuine issues of material fact exist as to these elements, the Court cannot hold on summary judgment that the corporation is a nominee or alter ego of Defendant Stedman and that the corporate veil can be pierced. The United States ' motion for summary judgment on this claim is therefore denied.

E. Recovery Value

Defendants Stedman and Garland argue that if the United States prevails at trial, the United States' interest in the property at issue should be limited to the value of the property at the time of the transfers in 1977, with the balance of the proceeds being returned to the current property holders.

Defendants Stedman and Garland first argue that the UFCA requires that the recovery value be limited to the value of the property at the time of transfer. Former Section 1336.09 of the Ohio UFCA provides:

(1) Where a conveyance or obligation is fraudulent as to a creditor, such creditor, when his claim has matured, may . . .

(a) Have the conveyance set aside or obligation annulled to the extent necessary to satisfy his claim, or

(b) Disregard the conveyance and attach or levy execution upon the property conveyed.

Ohio Rev. Code Ann. §1336.09 ( Anderson 1979) (repealed 1990). Defendants Stedman and Garland acknowledge that the statute is silent as to whether the creditor's "claim" is measured at the time of conveyance or the time of recovery. Defendants Stedman and Garland argue, however, that language contained in Ohio 's UFTA, as well as case law interpreting the UFCA, suggests that the time of conveyance is the relevant time.

Defendants Stedman and Garland point to the following language in the Ohio UFTA, the statute promulgated to clarify certain provisions of the Ohio UFCA:

(1) Except as otherwise provided in this section, to the extent a transfer is voidable in an action by a creditor . . ., the creditor . . . may recover a judgment for the value of the asset transferred, as adjusted under division (B)(2) of this section, or the amount necessary to satisfy the claim of the creditor . . ., whichever is less. . . .

(2) If the judgment under division (B)(1) of this section is based upon the value of the asset transferred, the judgment shall be in an amount equal to the value of the asset at the time of the transfer, subject to adjustment as the equities may require.

Ohio Rev. Code Ann. §1336.08(B) (Anderson Supp. 1998) (emphasis added).

The Ohio UFTA provides for various remedies: avoidance of the transfer, attachment or garnishment against property of the transferee, an injunction against further disposition of the property, appointment of a receiver, a levy of execution on the asset or its proceeds, or a money judgment for the value of the asset. See Ohio Rev. Code Ann. §§1336.07, 1336.08. The language cited by Defendants Stedman and Garland in §1336.08(B) refers only to the remedy of a money judgment. In the case before this Court, although the United States makes use of Ohio 's UFCA statute to reach property in the hands of the transferees of Mr. Hans, the United States does not seek to obtain a money judgment against the transferees, but merely seeks to foreclose on the liens it holds on property formerly owned by Mr. Hans. Accordingly, §1336.08(B), which provides for money judgment against transferees, is not applicable, and the Court finds the argument of Stedman and Garland premised on this language to be without merit.

Defendants Stedman and Garland cite to one case in support of their argument, United States v. Fernon [81-1 USTC ¶9287], 640 F.2d 609 (5th Cir. 1981), a Fifth Circuit case interpreting Florida 's version of the UFCA. In Fernon, the United States brought a fraudulent transfer action against the transferees of property transferred by a delinquent taxpayer. The Fifth Circuit stated in a footnote:

In view of the fact that the trial court properly concluded that the appellants knew or should have known that tax deficiencies were pending against their transferors, then they could not have possibly been said to be innocent purchasers for value as their grantees were found to be. Thus, appellants were correctly found liable as constructive trustees for the value of the property at the time of transfer plus interest from the time the Government filed suit.

Id. at 614 n.11.

Although the Fifth Circuit stated that the appellants were liable for the value of the property "at the time of transfer," this language is dicta. The issue of the appropriate time of valuation was not specifically before the appellate court. See id. at 611 ("The following three issues were raised before this court: (1) whether the Government's cause of action was barred by state statute of limitations or common-law doctrine of laches; (2) whether prejudicial error affecting the substantial rights of the appellants was committed at trial; and (3) whether the conveyance in question was made in fraud of creditors.").

In addition, the holding in Fernon is distinguishable on the facts. The appellant-transferees involved in the fraudulent transfer had subsequently transferred the property to bona fide purchasers for value, and no longer had possession of the property at issue. Thus, the United States did not foreclose on property in the hands of the fraudulent transferees, but apparently obtained a judgment against the fraudulent transferees for the value of the property. See id. at 611. Defendants Stedman and Garland have pointed to no Ohio case, and this Court has found none, holding that in a UFCA action to void a fraudulent conveyance, the creditor is limited to the value of the property at the time of transfer.

Moreover, federal law contains no such limitation on the government's recovery upon execution of a tax lien. In Han v. United States [91-2 USTC ¶50,486], 944 F.2d 526 (9th Cir. 1991), the Ninth Circuit reversed the district court's ruling that the IRS's recovery was limited to the value of the taxpayer's holding at the time of sale. The appellate court in Han held:

[T]he IRS . . . is not limited to the value of [the taxpayer's] interest at the moment of sale. A tax lien "shall continue until the liability for the amount so assessed . . . is satisfied or becomes unenforceable by reason of lapse of time." 26 U.S.C. §6322 (1988). The IRS is authorized to seize liened property even if it has been sold to a third party. Nowhere in the statutory or regulatory scheme is there a provision limiting the IRS's recovery. A lien continues unabated regardless of sale, so long as it is property recorded. Because the lien is unaffected by sale, we see no basis for fixing the amount of the lien at the time of sale. We decline to legislate where Congress has failed to do so.

Furthermore, the fact that the IRS may recoup more than it would have if it had foreclosed while [the taxpayer] still held the property does not affect our analysis. . . . [W]here the IRS receives a "bonus" because of a sale, if the extra proceeds are applied to reduce a legitimate tax lien, the IRS has not necessarily been unjustly enriched.

Han [91-2 USTC ¶50,486], 944 F.2d at 528-29 (citations omitted). The Third Circuit in United States v. Avila [96-2 USTC ¶50,357], 88 F.3d 229 (3d Cir. 1996), adopted the reasoning of the Ninth Circuit in Han, stating "we are aware of no case which says that the value of the property securing a tax lien must be frozen when the taxpayer transfers it. Overall, we are satisfied that the lien continues to attach to [the taxpayer's] entire former interest in the property, limited only by the amount of the debt it secures. . . ." This Court agrees with the reasoning of the appellate courts in Han and Avila .

The Court further notes that a federal tax lien applies to property acquired by the taxpayer after the lien is perfected. See United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 453-54 (1993); Redondo Constr. Corp. v. United States [98-2 USTC ¶50,841], 157 F.3d 1060, 1067 n.11 (6th Cir. 1998). The appreciation in value of the New Albany property and the Indian Mound property could be considered to be after-acquired property of Mr. Hans, subject to tax liens previously filed against him.

For these reasons, the Court holds that federal tax law contains no provision limiting the amount of recovery upon execution of a lien to the value of the property at the date of transfer.

Defendants Stedman, Garland , and the Oglesbys assert equitable reasons why the United States should not benefit from the appreciation in value of the property, particularly the government's delay in bringing this action. Although the United States admittedly could have pursued these claims at an earlier date, they were not required to do so. ¹⁴ In addition, if the United States prevails in this case, the balance of equities on this issue would perhaps favor the IRS, which was merely slow to take action, rather than Defendants Stedman and Garland , who, if the United States should prove all of its allegations, were participants in fraud.

Defendants also point to improvements they have made which have allegedly enhanced the value of the properties at issue. The Court's ruling in this order on the issue of recovery value does not preclude a finding at trial that Defendants are entitled to an adjustment for improvements they have made to the properties, should the balance of the equities require such an adjustment. See United States v. Scheve [99-1 USTC ¶50,129], No. Civ. A. CCB-97-556, 1998 WL 919873, at *3 (D. Md. Nov. 20, 1998) ( Avila and Han are distinguishable because in those cases it was not clear whether the increase in property was due to improvements made by the transferees). However, to the extent that the increased value of the properties was not caused by contributions of Defendants, it is not inequitable for the United States to benefit from the appreciation in value. As stated in Han, "if the extra proceeds are applied to reduce a legitimate tax lien, the IRS has not necessarily been unjustly enriched." Han [91-2 USTC ¶50,486], 944 F.2d at 529.

The Court cannot resolve the balance of the equities in this case on a motion for summary judgment; the facts related to the balance of equities will be determined at trial. The Court merely holds at this time that no Ohio or federal law requires that the Government's recovery be limited to the value of the property at the time of the transfers.

III. MOTION TO DISMISS OR FOR SUMMARY JUDGMENT BY DEFENDANTS DALE AND NANCY OGLESBY

On October 19, 1998, Defendants Dale and Nancy Oglesby filed a motion to dismiss or for summary judgment against the United States and Plaintiff Kaiser. (R. 126.) The United States objects that the motion is untimely. The Court notes that the Magistrate Judge permitted the parties to file supplemental memoranda in opposition to motions previously filed in this case, see supra note 5, but did not grant leave to the Oglesbys to file a case-dispositive motion. The Court finds, however, that the issues in the Oglesbys' motion have been fully briefed, and the opposing parties are not prejudiced by the late filing of the Oglesbys' motion. The Court will therefore consider the Oglesbys' motion for summary judgment.

The Oglesbys argue that Nancy Oglesby is a bona fide purchaser for value without notice and that her claim to the Indian Mound property is therefore superior to the federal government's interest in the property arising from the federal tax lien.

Evaluation of the priority of a federal tax lien is a question of federal law. See Aquilino [60-2 USTC ¶9538], 363 U.S. at 514. The federal tax code, 26 U.S.C. §6323, provides that a federal tax lien is not valid as against "any purchaser . . . until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary." 26 U.S.C. §6323(a). The Oglesbys argue that they are entitled to judgment as a matter of law because the notice filed by the United States did not meet the requirements of 26 U.S.C. §6323(f). The United States argues that the requirements of §6323(f) were met, and further argues that Nancy Oglesby is not a "purchaser" entitled to protection under 26 U.S.C. §6323(a).

A "purchaser" is defined in the Internal Revenue Code as "a person who, for adequate and full consideration in money or money's worth, acquires an interest . . . in property which is valid under local law against subsequent purchasers without actual notice." 26 U.S.C. §6323(h)(6). The United States argues that Nancy Oglesby, who stopped paying on the land contract in 1989, has not paid adequate and full consideration for the Indian Mound property.

In order to determine whether Nancy Oglesby paid adequate and full consideration for the Indian Mound property, the Court must determine the fair market value of the property at the time of purchase. The only evidence in the record concerning the fair market value of the property is the agreed purchase price under the land contract, $109,585. The United States has offered no evidence that the agreed purchase price is not the fair market value of the property at the time of purchase, or that Nancy Oglesby, at the time of purchase, did not intend to make all payments required under the contract. Although Ms. Oglesby stopped making payments on the contract in 1989, there is no evidence to contradict the Oglesbys' claim that she would have paid the balance of the loan if the tax lien had not been discovered and Mr. Hans had not told the Oglesbys to stop making payments until good title could be conveyed. Under the circumstances, it is reasonable for the purchaser to cease making payments until clear title could be conveyed.

Nancy Oglesby in fact made substantial payments on the contract. According to the undisputed evidence on the record, Ms. Oglesby made an initial down payment of $9,585, monthly payments totaling $55,900, and a one-time payment of $17,410.66, for a total of $82,895.66. (D. Oglesby Dep. at 52, U.S. Ex. 46; Oglesby Ex. 7.) The Oglesbys paid the real estate taxes and utility bills for the property. (D. Oglesby Dep. at 84, U.S. Ex. 46.) In addition, the Oglesbys have offered evidence that they have spent over $100,000 on improvements to the property. (Oglesby Ex. 9.) Neither the United States nor Plaintiff Kaiser have offered any evidence to contradict the amount of payments and improvements made by the Oglesbys. The Court therefore finds that the Oglesbys have demonstrated as a matter of law that they provided adequate and full consideration for the Indian Mound property.

To show that Nancy Oglesby is a "purchaser" under 26 U.S.C. §6323, in addition to showing that Nancy Oglesby paid adequate and full consideration for the property, the Oglesbys must also show that her interest in the property "is valid under local law against subsequent purchasers without actual notice." 26 U.S.C. §6323(h)(6). The land contract between Shirley Stedman and Nancy Oglesby was properly recorded on September 27, 1983, giving any subsequent purchaser constructive notice under Ohio law. Nancy Oglesby's interest is therefore valid under Ohio law against a subsequent purchaser without actual notice.

Under §1336.09 of the Ohio UFCA, the Oglesbys must show that Nancy Oglesby did not have knowledge of the alleged fraud at the time of purchase. See Ohio Rev. Code Ann. §1336.09(A) (Anderson 1979) (repealed 1990). Nancy Oglesby has testified that she had no such knowledge. (N. Oglesby Dep. at 35-36.) The United States insinuates that the Oglesbys did not purchase the property in good faith without knowledge of the fraud because of several events indicating that Dale Oglesby "had a complicated and a dependent relationship with Joe Hans." (U.S. Oct. 27, 1998 Mem. in Opp. at 6.) Although the circumstances cited by the United States may indicate that Dale Oglesby and Mr. Hans had a complicated relationship, none of these circumstances show that Nancy or Dale Oglesby had knowledge that the transfer of the Indian Mound property from Mr. Hans to Shirley Stedman, or the transfer from Ms. Stedman to Nancy Oglesby, was made with intent to defraud the United States or any other creditor. The Court finds that the United States has not offered any evidence to contradict the evidence offered by the Oglesbys evidence that Nancy Oglesby had no knowledge of the fraud at time of purchase. Thus, the Oglesbys have demonstrated as a matter of law that Nancy Oglesby is a purchaser for fair consideration without knowledge of the fraud at the time of purchase under §1336.09(A) of the Ohio UFCA and is a "purchaser" as defined in 26 U.S.C. §6323(h)(6).

In order for Nancy Oglesby's interest to be superior to that of the United States, the Oglesbys must also show that the notice filed by the United States did not meet the requirements of 26 U.S.C. §6323(f). Subsection (f) of §6323 provides that notices for liens on real property may be filed in accordance with state law in the county in which the property is situated. See 26 U.S.C. §6323(f)(1)(A)(i) (1989).

Section 6323 further provides that in order to meet the notice requirement of §6323(f)(1)(A)(i), the fact of filing must be entered and recorded in a public index "in such a manner that a reasonable inspection of the index will reveal the existence of the lien." 26 U.S.C. §6323(f)(4). The Oglesbys argue that the notice of lien was not filed in such a manner that a reasonable inspection would reveal the existence of the lien. (Oglesbys Ex. 11.)

The Oglesbys contend that a reasonable inspection would not reveal the existence of the tax lien because the notice was filed against "S. Ann Douglas and Rino Borean" and the Indian Mound property was held in the name of Shirley Stedman Hans prior to the transfer to the Oglesbys. The United States argues that a reasonable inspection would reveal the existence of the lien. The United States contends that a searcher doing a reasonable inspection would have found as the last entry under the name "Shirley Stedman" a mortgage deed recorded on September 23, 1977. The mortgage deed lists as the mortgagor "Shirley Stedman a/k/a/ Shirley Stedman Hans, unmarried a/k/a S. Ann. Douglas." ( U.S. Ex. 19.) The United States argues that a reasonable inspection would require that the searcher look at the mortgage document and search the index for the alternative names for Shirley Stedman.

The notice filed by the United States must meet the requirements of 26 U.S.C. §6323(f), which provides:

In the case of real property, if--

(A) under the laws of the State in which the real property is located, a deed is not valid as against a purchaser of the property who (at the time of purchase) does not have actual notice or knowledge of the existence of such deed unless the fact of filing of such deed has been entered and recorded in a public index at the place of filing in such a manner that a reasonable inspection of the index will reveal the existence of the deed, and

(B) there is maintained . . . an adequate system for the public indexing of Federal tax liens,

then the notice of lien referred to in subsection (a) shall not be treated as meeting the filing requirements under paragraph (1) unless the fact of filing is entered and recorded in the index referred to in subparagraph (B) in such a manner that a reasonable inspection of the index will reveal the existence of the lien.

26 U.S.C. §(f)(4) (emphasis added).

Under the law of the State of Ohio , it is not disputed that the provision of (4)(A) is met, and the "adequate system for the public indexing of Federal tax liens" is set forth in Ohio Revised Code §317.09, which, at the time of the filing of the notice of lien in 1983, provided:

(A) Notices of liens for internal revenue taxes and of any other lien in favor of the United States . . . may be filed, by mail or otherwise, in the office of the county recorder of the county in which the property subject to the lien is situated. . . . Except as provided in division (B) of this section, when notice is filed with him, the recorder shall enter it in a book known as the "federal tax lien index," in alphabetical order, showing on one line the name and residence of the taxpayer named in the notice, the district director's serial number of the notice, and the amount of tax and penalty assessed. . . .

(B) If a county recorder records all instruments in two sets of record books pursuant to division (F) of section 317.08 of the Revised Code, notices of liens for internal revenue taxes and of any other lien in favor of the United States, as provided in the statues of the United States or in any revision of the statutes, and certificates discharging or certificates of release and the liens that are filed with a county recorder shall be recorded in the "official records" set of books.

Ohio Rev. Code Ann. §317.09 ( Anderson 1987) (amended 1991). Therefore, in Ohio , the index referred to in 26 U.S.C. §6323(f)(4) is the "federal tax lien index" set forth in Ohio Revised Code §317.09, not a deed index or mortgage index or any other index maintained by the County Recorder .

In the view of the Court, the government has the burden to prove in the present case that it filed its notice on the Indian Mound property in the federal tax lien index in such a manner that a reasonable inspection of that index would reveal the existence of its lien on the Indian Mound property.

Although the government presumably was aware that Mr. Hans had conveyed an interest in the Indian Mound property to S. Ann Douglas and also to Rino Borean, the deed records further showed that S. Ann Douglas and Rino Borean had conveyed their interests to the Billy G. Corporation, which later conveyed its interest to Shirley Stedman Hans. Of even greater importance is the fact that the record shows that the government was aware of the relationship between the taxpayer, Mr. Hans, and his alleged common law wife, Shirley Stedman, prior to the filing of the lien. Speculation aside as to why the United States failed to include Shirley Stedman and Shirley Stedman Hans in its notice, the fact remains that the notice filed by the government did not reveal or cause a reasonable inspection of the federal tax lien index to reveal the existence of a tax lien on property owned by Shirley Stedman.

The government relies heavily on Kivel v. United States [89-2 USTC ¶9415], 878 F.2d 301 (9th Cir. 1989), to support its position that a reasonable inspection would have revealed the existence of a mortgage deed recorded on September 23, 1977 from Shirley Stedman, a/k/a Shirley Stedman Hans, a/k/a S. Ann Douglas. In Kivel, the Court described the issue in that case as follows: "The case turns on what, under federal tax law, is a 'reasonable inspection' of the public index of deeds to real property in Orange County , California ." Kivel [89-2 USTC ¶9415], 878 F.2d at 301 (emphasis added).

Whether the county recorder of Orange County, California, maintained a separate index for the filing of federal tax liens is not mentioned in the opinion, and the "system for the public indexing of federal tax liens" may have required a searching of the index of deeds in that state. In any event, as stated earlier, this Court believes that in Ohio the index referred to in 26 U.S.C. §6323(f)(4) is not the index of deeds but the federal tax lien index. In the view of this Court, subsection (f)(4) does not contemplate nor require that a purchaser of real estate in Ohio who wants to know if that real estate is encumbered by a federal tax lien must conduct a full-blown title search, even when there is a absolutely nothing in the federal tax lien index to put a reasonable person on notice that such a lien exists.

The government has offered no evidence that any entry in Ohio 's federal tax index would reveal to a searcher that a tax lien had been filed against Shirley Stedman. The Court therefore finds the government has failed to present evidence that a "reasonable inspection" of the federal tax lien index would reveal the existence of the lien. Accordingly, the Court finds that the filing of the tax lien on the Indian Mound property did not meet the filing requirements of subsection (f)(4) and therefore is not a valid lien as against the purchaser of that property, Nancy Oglesby. ¹⁵

IV. CONCLUSION

The August 29, 1997 motion of the United States for partial summary judgment, (R. 91), and the August 31, 1998 motion of the United States for oral hearing on the motion, (R. 120), are DENIED.

The October 22, 1997 motion of Defendants Stedman and Garland , (R. 98), is GRANTED IN PART AND DENIED IN PART. The motion is GRANTED as to the claims brought by the United States against Defendant Stedman pursuant to the nominee doctrine, but is DENIED as to the remaining claims against Defendants Stedman and Garland.

The October 19, 1998 motion by Defendants Dale and Nancy Oglesby for summary judgment or to dismiss, (R. 126), is hereby GRANTED. The tax lien filed on August 24, 1983 is declared invalid insofar as it purports to assert a property interest superior to the property interest of Nancy Oglesby in the Indian Mound property.

IT IS SO ORDERED.

¹ Shirley Stedman is also known as S. Ann Douglas.

² On January 29, 1997, the Court granted Defendant National Wood Products, Inc.'s motion asking that judgment by default be entered against it and dismissing it as a party to this litigation. (R. 63.)

³ On August 3, 1998, the Department of Taxation for the State of Ohio filed an amended answer to the complaint in which it disclaimed any interest in the subject property in this case. (R. 113.)

⁴ According to Plaintiff and Defendant United States, Defendant Stedman considers the New Albany property to be her property and that title is only nominally in the name of Garland by the Sea, Ltd. During Stedman's deposition, she testified that the fact that the property is titled in the name of Garland by the Sea, "doesn't mean a thing." (U. S Ex. 42 at 163.)

⁵ At the direction of the Magistrate Judge, the parties have filed supplemental memoranda discussing the application of a state statute of limitations to the United States, sufficiency of notice in relation to the Indian Mound property, and calculation of the remedy should the United States prevail on its fraudulent conveyance claim. At the direction of the District Judge, the parties filed subsequent memoranda discussing the application of federal statutes of limitation to the government's claims.

⁶ S. Ann Douglas is a name used by Defendant Shirley Stedman during her marriage to William Douglas.

⁷ National Wood Products, Inc. has disclaimed any interest in the New Albany property and has been dismissed as a party.

⁸ The Oglesbys state that they "agree" and join with the arguments advanced by Defendants Stedman and Garland on the statute of limitations issues, but also state in their memorandum that they "must concede that the government's analysis of the federal statute of limitations is essentially correct." (Dec. 9, 1998 Mem. of Nancy and Dale Oglesby at 2, 4, R. 135.)

⁹ Defendants Stedman and Garland presented this argument in their supplemental memorandum of October 16, 1998, but now concede that the United States is not bound by the state statute of limitations on its fraudulent conveyance claim. (Stedman and Garland Dec. 7, 1998 Supp. Mem. at 6, R. 134.)

¹⁰ On November 5, 1990, the limitations period for collection was extended from six to ten years. See 26 U.S.C. §6502(a) (1989) (amended Nov. 5, 1990).

¹¹ Tax liens, unlike most liens under state law, do not merge into judgment liens, but continue to exist independently of a suit or judgment which has extended their existence. See United States V. Bank of Celina [87-2 USTC ¶9440], 823 F.2d 911, 913 (6th Cir. 1986).

¹² Defendants Stedman and Garland put forth this argument in their supplemental memorandum of October 16, 1998. Defendant Stedman and Garland now concede that because the government can still assert its tax liability against Mr. Hans' estate, the government can also assert its fraudulent conveyance claim against them as transferees. (Stedman and Garland Dec. 7, 1998 Supp. Memo. at 6.)

¹³ The alter ego doctrine typically appears in cases in which a corporation is unreal or a sham and is deemed to be the alter ego of the taxpayer. In such cases, the corporate veil can be pierced and assets of the corporation deemed to be assets of the taxpayer. The other federal cases cited by the United States , G.M. Leasing and Shades, discuss the nominee or alter ego theory as it relates to piercing of the corporate veil. See G. M. Leasing [77-1 USTC ¶9140], 429 U.S. at 351; Shades, 888 F.2d at 729.

¹⁴ See discussion of statute of limitations issues, supra at 23-31.

¹⁵ The Court notes that Defendants Stedman and Garland state in their supplemental memoranda that they join in the Oglesbys' motion on "the issue of the sufficiency of the notice of [the] federal tax lien relating to the Indian Mound property." (Stedman and Garland Oct. 16, 1998 Mem. at 4, R. 125.) It is unclear whether Defendants Stedman and Garland join the Oglesbys in their argument that Nancy Oglesby is a purchaser entitled to protection under 26 U.S.C. §6323, or whether Stedman and Garland are asserting that they themselves are purchasers under 26 U.S.C. §6323. Assuming that Stedman and Garland contend that they are purchasers under 26 U.S.C. §6323, the Court finds that genuine issues of material fact preclude summary judgment on this issue. As discussed previously in relation to the fraudulent conveyance claim brought by the United States , supra at 40-42, the Court has found that genuine issues of material fact exist as to whether Ms. Stedman provided consideration for the Indian Mound property. Because such issues exist, the Court cannot find as a matter of law that Defendants Stedman and Garland are purchasers who paid adequate and full consideration and are therefore entitled to protection under 26 U.S.C. §6323.

 

 

 

United States of America v. George T. Kattar, et al

U.S. District Court, Dist. N.H., Civ. 95-221-JD, 8/19/99, 81 FSupp 2 d 262

[Code Secs. 6203 , 6303 and 6501 ]

Summary judgment: Tax lien: Timely assessment: Notice and demand: Statute of limitations: Exceptions: Fraudulent intent to conceal income: Waiver: Fraudulent transfers: Trusts.--The government was not entitled to summary judgment that federal tax liens attached to property transferred by married taxpayers to a family trust. Genuine issues of material fact existed as to whether the statutory requirements for assessment, notice and demand for payment were met for three of the tax years at issue because the government failed to produce Forms 23C (summary records of assessment) for those years. However, assessments for seven other tax years were timely. The taxpayers agreed to extend the assessment period for one year, and the Tax Court had already determined that assessments for the other six years were not barred by the statute of limitations because the taxpayers had fraudulently attempted to conceal their true income. Further, IRS records and computer transcripts established that the taxpayers received adequate and timely notice of those assessments.

[Code Sec. 6321 ]

Summary judgment: Tax lien: Property subject to: Fraudulent transfers: Trusts: Fraudulent intent: Insolvency: Nominee of taxpayer: Alter ego.--The government was not entitled to summary judgment that federal tax liens attached to property transferred by married taxpayers to a family trust. Genuine issues of material fact existed as to whether the taxpayers' transfers were fraudulent under state ( New Hampshire ) law. The government did not prove that the transfers were made with the intent to defraud the taxpayers' creditors; although several indicia of fraud were present, the taxpayers presented credible evidence of lawful justifications for their actions. The government also failed to prove that the transfers left the taxpayers insolvent. Finally, the government failed to prove that the trust was the nominee or the alter ego of the taxpayers.

ORDER

DICLERICO, JR., District Judge:

The United States of America ("government"), brought this action against George T. Kattar, Phyllis Kattar, Personally and as Trustee, Mary Abdoo, Trustee, George P. Kattar, Trustee, Kevin Kattar, Trustee, the Seven Children Trust, and the Town of Meredith, seeking to reduce to judgment certain assessments of tax liabilities made by the Internal Revenue Service ("IRS"), to have a tax lien declared against certain property, and to render void certain fraudulent transfers of property. Before the court is the motion of the government for summary judgment (document no. 90).

Background ¹

I. Tax Proceedings

On January 16, 1969, Special Agent McNally and Revenue Agent Chernosky contacted George T. Kattar and informed him he was to be investigated for income tax liability based upon allegations of fraud. The investigation initially focused upon tax years 1962 through 1967 and included review of a number of George T. Kattar's business enterprises, and his income and deductions therefrom. On November 11, 1971, George T. Kattar was informed by IRS agents that it was likely they would recommend prosecution for willful tax evasion. The record indicates that prosecution was indeed recommended in the late winter or early spring of 1972. On April 13, 1972, George T. Kattar was indicted by a federal grand jury for the District of Massachusetts on six counts of tax evasion, charging among other things personal income tax evasion for the years 1965, 1966, 1967, and 1968. On December 10, 1973, George T. Kattar plead guilty to two counts of subscribing to federal income tax returns which he did not believe to be correct.

After completion of the criminal proceedings, George T. and Phyllis Kattar (alternately the "Kattars") litigated their civil tax liabilities for 1963 through 1967, and 1970, in the United States Tax Court. ² See George T. Kattar and Phyllis Kattar v. Commissioner [CCH Dec. 41,372(M)], 48 T.C.M. 629, (filed July 26, 1984). After a trial, the tax court determined that there were tax deficiencies of approximately $170,000 for those years. As a result, on April 29, 1985, and September 26, 1985, the IRS made assessments for tax, penalties, and interest totaling $505,626.68 for the years 1963 through 1967, and on April 29, 1985, the IRS made an assessment of $70,645.41 for the tax year 1970.

The IRS asserts that on April 12, 1985, it also issued a notice of deficiency for 1971, identifying a deficiency of $18,586, along with statutory additions for negligence. See 26 U.S.C.A. 6653(a). The Kattars do not dispute that they never filed a petition in the Tax Court in connection with this notice. Thereafter, on August 23, 1985, the IRS asserts it issued a deficiency assessment for 1971 in the amount of $50,562.04.

II. Property Transfers

On March 31, 1969, approximately two months after being contacted by Special Agent McNally regarding the investigation for tax evasion, George T. Kattar created seven trusts titled the "Meredith Clifford Trusts" and numbered them one through seven. Each child of George T. Kattar was designated the sole beneficiary of one of the trusts. George T. Kattar then attempted to transfer over to the Meredith Clifford Trusts the value of certain stock which was owned by him, including stock in the Tri-State Development Corp., the Northeast Investment Co., Inc., the Community Investment Corp., North American Enterprises, Inc., and the Kattar Realty Trust, Inc. On May 6, 1976, the Kattars belatedly filed a 1969 federal gift tax return indicating that the total value of stock transferred to the trusts was $133,392.00, with the value of the Kattar Realty Trust stock transferred being $0.00.

The trustees of the trusts were the Kattars' attorneys, Jerome Rosen and Henry Hyder, Jr., and George T. Kattar's sister, Mary Abdoo. Phyllis Kattar was designated the successor trustee. Although Mary Abdoo signed trust documents, she testified at her deposition that she had not heard of the Meredith Clifford Trusts or that she could not recall the trusts. Similarly, Henry Hyder testified during his deposition that although he was a trustee, he had little recollection of the trusts or of taking any actions as a trustee. He stated that he was not involved with and had no records concerning the trusts' books, records, distributions, trustee meetings, or the management of trust assets. Jerome Rosen testified similarly as to his limited involvement with the trusts, although he also testified that trust records and books were maintained by a secretary of George T. Kattar's corporations.

Kevin Kattar, one beneficiary of the Meredith Clifford Trusts, never received any benefit from the trusts. Another beneficiary, Kimberly Kattar, had never heard of the trusts, while a third beneficiary, Meredith Kattar, was similarly unaware of their existence.

Also in 1969, Phyllis Kattar signed an affidavit stating that she had signed a purchase and sale agreement to sell the Kattars' residence in Methuen Massachusetts to a neighbor by July 30, 1969. However, she testified in this case that she did not recall selling or offering to sell the Methuen residence to her neighbor.

On December 31, 1970, Phyllis Kattar transferred the title to the Kattars' Methuen residence to George T. Kattar's attorney Henry Hyder. The consideration given was less than $100. However, she testified that she was unaware of ever holding title to the Methuen property or of transferring any real property to Hyder, that a signature on what apparently was the deed was not hers, and that she was unaware until the date of the deposition that title to the property rested in Hyder. Hyder testified that he was holding the property as a nominee for the Kattar family and never used the property. Despite both of the purported transfers, the Kattar family continued to live in and reside at the Methuen property.

On June 20, 1972, two months after George T. Kattar was indicted for tax evasion on joint tax returns for George T. and Phyllis Kattar, they formed the Seven Children Trust ("Trust"). The initial trustees were George T. and Phyllis Kattar, and Mary Abdoo. The current trustees are Phyllis Kattar, Mary Abdoo, and George P. and Kevin Kattar, two of the Kattars' children. The Seven Children Trust was created pursuant to the advice of one of George T. Kattar's attorneys, apparently Henry Hyder, although Hyder could not testify about the reason for the creation of the Trust because of attorney-client privilege. George T. Kattar testified that the Trust was created as an inheritance device. The Trust was structured to issue certificates of interest to beneficiaries of the Trust, denominated shareholders. Pursuant to the terms of the Trust, all property conveyed to the Trust was to vest in the trustees, as joint tenants with right of survivorship as trustees of the Trust, to manage and administer the assets for the benefit of the shareholders. The record indicates that no shares were issued or distributed by the Trust before November 15, 1983, and beneficiaries were not identified until a November 15, 1983, amendment. ³

Approximately one week after the Seven Children Trust was created, Phyllis Kattar transferred real estate known as "Clovelly," along with the contents of the residence, to George T. Kattar, Phyllis Kattar, and Mary Abdoo as trustees of the Seven Children Trust. The Clovelly residence is a 12 room year-round residence with a recreation building, a boat house, boat slips, and garage. The record indicates that the consideration given for the transfer was less than $100, and was made upon the advice of attorneys as relayed to Phyllis through George T. Kattar.

On June 27, 1972, Hyder transferred his interest in the Methuen property, supposedly conveyed to him earlier by Phyllis Kattar, to the Seven Children Trust for less than $100 consideration. Also on the same day, June 27, 1972, Phyllis Kattar conveyed real property located in Andover , Massachusetts , to the Seven Children Trust, for less than $100 consideration. Phyllis testified that she did not know why she transferred the property to the Seven Children Trust, and George T. Kattar testified that it was his brother's property and that he did not know why the property would have been transferred to the Seven Children Trust. Indeed, on November 30, 1973, the Seven Children Trust transferred the Andover property to Suzanne M. Kattar, the wife of Peter Kattar, the brother of George T. Kattar. Peter Kattar never knew that the property had been held by the Seven Children Trust, and Suzanne Kattar testified that she was unaware that she acquired her title to the property from the Seven Children Trust, although they both have generally resided there at least since the late 1960's, Peter Kattar having initially acquired it in 1957. The record is unclear what consideration was given, although Hyder testified that he was unaware of any consideration being given.

Finally, in 1980 or 1981, after the death of her daughter, Phyllis Kattar transferred her jewelry and furs to the Seven Children Trust.

Standard

The role of summary judgment is "to pierce the boilerplate of the pleadings and assay the parties' proof in order to determine whether trial is actually required." Snow v. Harnischfeger Corp., 12 F.3d 1154, 1157 (1st Cir. 1993) (quoting Wynne v. Tufts Univ. Sch. of Med., 976 F.2d 791, 794 (1st Cir. 1992)). The court may only grant a motion for summary judgment where the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The party seeking summary judgment bears the initial burden of establishing the lack of a genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Quintero de Quintero v. Aponte-Roque, 974 F.2d 226, 227-28 (1st Cir. 1992). The court must view the entire record in the light most favorable to the non-movants, " 'indulging all reasonable inferences in [their] favor.' " Mesnick v. General Elec. Co., 950 F.2d 816, 822 (1st Cir. 1991) (quoting Griggs-Ryan v. Smith, 904 F.2d 112, 115 (1st Cir. 1990)). However, once the plaintiff has submitted a properly supported motion for summary judgment, the defendants "may not rest upon mere allegation or denials of [their] pleading, but must set forth specific facts showing that there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986) (citing Fed. R. Civ. P. 56(e)).

Fraud must be proven by clear and convincing evidence. See Snow v. American Morgan Horse Assoc. Inc., 141 N.H. 467, 468 (1996) (fraudulent misrepresentation); Chagnon Lumber Co. v. DeMoulder, 121 N.H. 173, 176 (1981) (context of New Hampshire Revised Statutes Annotated ("RSA") ch. 545) (repealed 1987, effective Jan. 1, 1988); Jenney v. Vining, 120 N.H. 377, 381 (1980) (clear and convincing evidence required to show "existence of fraud or actual fraudulent intent") (context of then extant RSA ch. 545); Hoyt v. Horst, 105 N.H. 380, 390 (1964) ("Fraud is never to be presumed, but must be established by clear and convincing proof."); see also, Loyal Cheese Co. v. Wood County Nat'l Bank and Trust Co., 969 F.2d 515, 518 (7th Cir. 1992) (Wis. Fraudulent Conveyance Act, insolvency provisions); Benson v. Richardson, 537 N.W.2d 748, 758 (Iowa 1995) (Iowa common law); Territorial Sav. & Loan Assoc. v. Baird, 781 P.2d 452, 458 ( Utah . Ct. App. 1989) (Utah Fraudulent Conveyance Act) (clear and satisfactory standard context of insolvency provisions); Transamerica Ins. Co. V. Trout, 145 Ariz. 355, 360 (Ariz. Ct. App. 1985) (Arizona Uniform Fraudulent Conveyance Act); Furniture Mfrs. Sales, Inc. v. Deamer, 680 P.2d 398, 399 (Utah 1984); FDIC v. Proia, 663 A.2d 1252, 1254 n.2 (1995) (Maine Uniform Fraudulent Transfer Act) (Act does not change clear and convincing burden of proof). Cf. Warner v. Warner, 65 B.R. 512 (S.D. Ohio 1986) (preponderance of evidence applies to insolvency provisions under Ohio law); United States v. Edwards [83-2 USTC ¶9719], 572 F. Supp. 1527, 1534 (D. Conn 1983) (applying preponderance of evidence standard under Conn. law); First Nat'l Bank v. Hoffines, 429 P.A. 109, 114 (1968) (Pennsylvania Uniform Fraudulent Transfer Act) (where grantor is in debt at time of transfer, grantee must prove solvency or fair consideration by clear and convincing evidence).

Discussion

In this action the government seeks, inter alia, to reduce to judgment tax assessments that were made on April 29, 1985, August 23, 1985, and September 26, 1985, against George T. and Phyllis Kattar, for tax years 1963, 1964, 1965, 1966, 1967, 1970, and 1971. The government further moves to establish tax liens against all the property and rights to property of George T. and Phyllis Kattar. In order to collect the tax debts, the government seeks to set aside certain transfers of property made by George T. and Phyllis Kattar. Specifically, the government asks the court to set aside as fraudulent the June 27, 1972, transfer by Phyllis Kattar of real property, together with the contents therein, located on Powers Road , Meredith , New Hampshire ("Clovelly"), to George T. Kattar, Phyllis Kattar and Mary Abdoo as trustees of the Seven Children Trust. Alternatively, the government argues that because beneficiaries of the Seven Children Trust were not identified until 1983, when the Trust was amended to identify beneficiaries, the transfer to the Seven Children Trust of the real property and its contents took place in 1983, was fraudulent at that time, and should be set aside. ⁴ Further, the government seeks to render void, as fraudulent, transfers of personal assets made by Phyllis Kattar to the Seven Children Trust in 1980. Finally, the government seeks such other relief as might be just, including, in particular, a determination that the trustees of the Seven Children Trust are personally liable for any diminution in the value of Trust assets after the government notified them of its contentions.

I. Assessment and Notice

The defendants assert that summary judgment should be denied because the government has failed to offer proof that the tax assessments have been properly or timely filed, or that requisite statutory notice has been given to the taxpayers. They do not offer any evidence that the government did not provide the requisite notice, failed to make the required assessments, or that the assessments were inaccurate or invalid. ⁵ Neither has the government addressed these issues.

26 U.S.C.A. §6501(a) (West 1999) provides:

Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 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.A. §6501(c)(1) (West 1999) provides that in "the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time." Pursuant to 26 U.S.C.A. §6501(c)(4), taxpayers and the government can agree to an extension of time in which tax assessments can be made and notice given.

Section 6203 provides that assessment "shall be made by recording the liability of the taxpayer in the office of the Secretary in accordance with rules or regulations prescribed by the Secretary. . . ." 26 U.S.C.A. §6203 (West 1999). ⁶ Pursuant to section 6303, the government must then "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. . . ." 26 U.S.C.A. §6303 (West 1999).

Courts have held that IRS "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) (quoting Hughes v. United States [92-1 USTC ¶50,086], 953 F.2d 531, 540 (9th Cir. 1992)); see also, Pursifill v. United States [93-2 USTC ¶50,584], 849 F. Supp. 597 (S.D. Ohio 1993); Bassett v. United States, 782 F. Supp. 113 (M.D. Ga. 1992). Cf. Blackston v. United States [91-2 USTC ¶50,507], 778 F. Supp. 244 (D. Md. 1991) (4340 inadequate where government unable to explain irregularities in computer generated form). Under First Circuit jurisprudence "Certificates of Assessments and Payments are routinely used to prove that tax assessment has in fact been made . . . [and] are presumptive proof of a valid assessment." Geiselman v. United States [92-1 USTC ¶50,200], 961 F.2d 1, 6 (1st Cir. 1992) (citations and quotations omitted). Moreover, the "Certificates of Assessments and Payments, which list[] 'First Notice' dates for each assessment, also constitute[] presumptive proof that the IRS gave notice of the assessments and made demands for payment" from the taxpayers. Id. Computer transcriptions of IRS records showing that taxpayers were sent notices of assessments and demands have also been accepted as evidence of compliance with section 6303 notice requirements. See, e.g., Schmidt v. United States [89-2 USTC ¶9529], 717 F. Supp. 763, 764-65 (D. Kan. 1989) ("It has been held that the computerized transcriptions are sufficient evidence to establish a prima facie case that notice of assessment and demand for payment was sent to the taxpayer.") (citing In re Saunders, 26 A.F.T.R. 2d 70-5388, 70-5389 (N.D. Cal. 1970)). ⁷ Moreover, as the court in Schmidt recognized, the government enjoys the presumption of procedural regularity. Id. at 765.

A. Timeliness

The record belies the defendants' contention that the government has supplied no evidence reflecting that timely assessments and notices were made. As discussed above, the government seeks to reduce to judgment tax assessments that relate to years 1963, 1964, 1965, 1966, 1967, 1970, and 1971. After a trial the United States Tax Court determined that Phyllis and George T. Kattar fraudulently attempted to conceal their true income for the years 1963, 1964, 1965, 1966, and 1967. See George T. Kattar and Phyllis Kattar v. Commissioner [CCH Dec. 41,372(M)], 48 T.C.M. (CCH) at 638, 641 (filed July 26, 1984). The Tax Court concluded that the exception provided for in 26 U.S.C.A. §6501(c) to the limitations on assessments and collections was applicable to those years, see id., the three year period of limitations for years 1963, 1964, 1965, 1966, and 1967 is inapplicable, and the assessments could be made "at any time." 26 U.S.C.A. §6501(c)(1) (West 1999).

Although the tax court did not explicitly discuss the issue of fraud and the timeliness of the assessment for 1970, the court found in favor of the government for 1970 and sustained the deficiency determination the government made in its notice of deficiency. See id. at 642. The defendants cannot now collaterally attack that judgment. See Commissioner v. Sunnen [48-1 USTC ¶9230], 333 U.S. 591, 597-98 (1948). Furthermore, in this action the timeliness issue for the 1970 assessment was addressed earlier in the context of the defendants' motion to dismiss. See United States v. Kattar [97-1 USTC ¶50,132], Civ. No. 95-221-JD, 1996 WL 784587, at *3 (D.N.H. Dec. 31, 1996).

Finally, as to the timeliness of the 1971 assessment, the Kattars filed their return for 1971 on April 15, 1972. The record indicates that on June 6, 1981, the defendants signed an agreement (Form 872-A) with the government providing that any federal income tax due for 1971 may be assessed on or before the ninetieth day after "the Internal Revenue Service mails a notice of deficiency for such period." United States Memorandum in Opposition to the Defendants' Motion to Dismiss, Ex. 3. The record contains a Certificate of Assessments and Payments (Form 4340) for 1971 showing that the first notice was issued August 23, 1985, the same day the assessment was made. Therefore, the government's initial assessment for 1971 was timely. See Ward v. Commissioner of Internal Revenue [90-2 USTC ¶50,430], 907 F.2d 517, 522 n.7 (5th Cir. 1990) ("The waiver of a limitations period under Form 872-A does not terminate until after the IRS sends a valid notice of deficiency to the taxpayer.").

B. Assessment, Notice and Demand

Certificates of Assessments and Payments (Form 4340) filed by the government for 1966, 1967, and 1970 indicate that an assessment was made on April 29, 1985, and notice sent to the Kattars on that date. ⁸ Plf. Ex. 1 at 4-6. The government has similarly filed a Form 4340 for 1971 indicating notice, assessment, and "23C" dates as August 23, 1985. Id. at 7. As discussed above, these Certificates of Assessments and Payments constitute presumptive proof that a valid assessment has been made, and that notice and demand for payment was given, as to those assessments listed. See Geiselman [92-1 USTC ¶50,200], 961 F.2d at 6.

As for the years 1963, 1964, and 1965 the government has filed certified computer transcripts which contain notations indicating that assessments were made on September 26, 1985, and that notice was sent to the Kattars' address on that date. Plf. Ex. 1 at 1-3. However, there is no mention of Form 23C or a "23C date," and therefore no certification that the 23C Form was completed and signed by the assessment officer. See Brewer [91-2 USTC ¶50,379], 764 F. Supp. at 315 (S.D.N.Y. 1991) (denying summary judgment where there was "no indication in the record before us that the 'Summary Report of Assessments', known as Form 23C, was completed and signed by the assessment officer as required by 26 C.F.R. §301.6203-1."); cf. Geiselman [92-1 USTC ¶50,200], 961 F.2d at 6. Moreover, where the government has successfully relied upon computer transcriptions to establish assessment, notice, and demand for payment, such transcriptions have been accompanied by other evidence, such as affidavit testimony, addressing the significance of the transcripts and regular IRS procedures. See, e.g., Schmidt [89-2 USTC ¶9529], 717 F. Supp. at 764-65.

The court concludes, therefore, that the government has met its burden of establishing that a timely and proper assessment was made for years 1966, 1967, 1970, and 1971, and that notice and demand for payment was sent to the Kattars. See, e.g., United States v. Barretto [89-2 USTC ¶9646], 708 F. Supp. 577, 579 (S.D.N.Y. 1989) (where assessment placed in evidence and no material issues of fact exist, government entitled to judgment). However, the government has not met its burden for years 1963, 1964, and 1965, and genuine issues of material fact exist concerning statutorily required assessments, notice, and demand for payments as to those years.

II. Insolvency

The government argues that the 1972 transfer of Clovelly in Meredith, New Hampshire, and the contents therein, by Phyllis Kattar to the Seven Children Trust was fraudulent under New Hampshire Revised Statutes Annotated ("RSA") §545:4. RSA §545:4 provided that

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

(1974) (repealed 1987, effective January 1, 1988). ⁹ As noted earlier, under RSA §545:4, fraud must be proved by clear and convincing evidence. See, e.g., Chagnon Lumber Co., 121 N.H. at 176; Jenney v. Vining, 120 N.H. at 381; Furniture Mfrs. Sales, Inc. v. Deamer, 680 P.2d 398, 399 (Utah 1984) (Utah Fraudulent Transfer Act).

In support of their contention that Phyllis Kattar was not rendered insolvent by her transfer of Clovelly and its contents, the defendants have submitted the report and affidavit of Philip W. Grow, a certified public accountant at the firm of Nathan Wechsler & Co. Defs.' Ex. B. Based largely upon Phyllis Kattar's interest in the Kattar Realty Trust, which in turn held shares of the Tri-State Development Corporation, Grow concluded that Phyllis Kattar was still solvent after the 1972 transfer of Clovelly and its contents.

The record is ambiguous regarding Phyllis Kattar's ownership of Kattar Realty Trust stock, Kattar Realty Trust's ownership of Tri-State Development Corporation's stock, and the value of Tri-State Development Corporation's stock. The document establishing the Kattar Realty Trust shows that there were initially one thousand shares issued, and a stock certificate indicates that Phyllis Kattar held those one thousand shares as of October 6, 1961. Defs.' Ex. C. The government has identified no evidence that those shares were then transferred to George T. Kattar. The government has argued, however, that George T. Kattar owned the entire interest of Kattar Realty Trust, although the deposition of George T. Kattar that it relies upon does not support the government's assertion. See United States Renewed Mot. For Summ. J. at 6 n.4. Instead, George T. Kattar stated that he did not know if his wife had an interest in the Kattar Realty Trust, and he deduced that because he started Kattar Realty Trust he must have had an interest in it at some time. See George T. Kattar Dep., Vol. II at 160-61. Phyllis Kattar testified as to her belief that George T. Kattar had an interest in Kattar Realty Trust at some time, but that she was unsure if she did. See Phyllis Kattar Dep., Vol. I at 29.

Other evidence also indicates that George T. Kattar may have held an interest in Kattar Realty Trust. Upon establishing the Meredith Clifford Trusts, George T. Kattar purported to transfer one thousand shares of Kattar Realty Trust to the Meredith Clifford Trusts, despite the lack of any evidence that he held any interest in the Kattar Realty Trust. Plf.'s Ex. 9, 10. Indeed, George T. Kattar identified the value of the Kattar Realty Trust shares transferred as "$0.00" in his gift tax returns. Plf.'s Ex. 10. The court, therefore, finds a triable issue concerning whether Phyllis Kattar actually held an interest in the Kattar Realty Trust in 1972, and what that interest was.

Grow based his determination of the value of Kattar Realty Trust, and Phyllis Kattar's interest in it, largely on the shares of Tri-State Development Corporation ("Tri-State"). Defs'. Ex. B at 2. The summary of the stock record book of Tri-State indicates that 286,568 shares were issued to Phyllis Kattar, Trustee of Kattar Realty Trust. Id. at 16. Although the date of the transfer is not listed, the stock certificates are generally issued sequentially and certificate number thirty one, representing the shares issued to Phyllis Kattar, is listed between the years 1967 and 1969. Id. Of greater significance is a notation "Certificate #31, Spoiled--not issued," although the record indicates that the shares were indeed issued. Id. Finally, the basis for Grow's conclusion that the total book value of Tri-State and its subsidiaries was $1,027,742 is unclear. However, he attests that his analysis included review of the financial statements dated February 29, 1972, and February 28, 1973, of Tri-State and its subsidiaries. Id. at 6, 10. Furthermore, he attested to his ultimate conclusion that Phyllis Kattar had assets remaining sufficient to satisfy her debts, including her tax obligations, after the transfer of Clovelly. Id. at 6. This conclusion was dependent upon his review of the financial statements of Tri-State and its subsidiaries. Id. at 2, 5-6. The court therefore concludes that on this record there are genuine issues of material fact regarding the issuance of Tri-State stock to Phyllis Kattar, as trustee of the Kattar Realty Trust, and the value of that stock. ¹⁰

Given the above discussion, the court concludes that the issue of insolvency has not been established by clear and convincing evidence and that triable issues remain concerning whether Phyllis Kattar was rendered insolvent by her transfer of the Clovelly residence in 1972. Summary judgment premised upon RSA §545:4 is therefore inappropriate.

III. Intent to Defraud

The government, relying upon RSA §545:7 (repealed 1987, effective January 1, 1988), next asserts that summary judgment is warranted because there are no genuine issues of material fact concerning the Kattars' intent to defraud in transferring Clovelly. ¹¹ RSA §545:7 provided

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

(1974) (repealed 1987, effective January 1, 1988).

In support of its motion, the government argues that the transfer of Clovelly was made for inadequate consideration, was essentially made to an insider, and constituted virtually all of Phyllis Kattar's assets. Moreover, the government identifies the chronology of events present in this case. The transfer of the Kattars' assets began almost immediately after George T. Kattar was contacted by the government concerning a criminal investigation for tax evasion. Clovelly was transferred just two months after George T. Kattar's tax indictment. Finally, the government points to the Kattars' continued enjoyment of transferred assets for residences and as security for loans, to the Kattars' failure to identify beneficiaries of the Seven Children Trust until 1983, and to the Kattars' leases for Clovelly. The leases spanned ten years, were retroactive, and were executed shortly after an $800,000 judgment was rendered against George T. Kattar on May 3, 1983. The government argues that the indicia, or badges, of fraud present in this case give rise to a presumption of fraud that shifts the burden to the Kattars to dispel.

The Kattars assert that the transfers of assets identified by the government, including the transfer of Clovelly, were executed as part of the Kattars' estate planning for inheritance tax purposes. George T. Kattar testified that the transfers were done pursuant to the advice of attorneys and accountants for inheritance tax purposes. Mary Abdoo, the sister of George T. Kattar and a trustee of the Seven Children Trust, testified that when she was asked in 1972 to be a trustee, George T. Kattar stated that the Seven Children Trust was created for the benefit of his children and that he wanted her to be the trustee because she would protect the children's welfare. Similarly, George P. Kattar, one of the Seven Children Trust's beneficiaries, testified that he was told by his father, around the time of the Trust's creation, that the Trust was for the benefit of the children and to preserve a residence that would always be theirs.

A plaintiff asserting that a transfer was fraudulent pursuant to RSA §545:7 "has the burden of proving by clear, convincing and direct evidence the existence of a fraudulent intent." Chagnon Lumber Co. v. Demulder, 121 N.H. 173, 176 (1981); Jenney v. Vining, 120 N.H. 377, 381 (1980) (plaintiff must show by "clear, convincing and direct evidence, the existence of fraud or actual fraudulent intent" in context of RSA ch. 545); cf. Snow v. American Morgan Horse Assoc. Inc., 141 N.H. 467, 468 (1996) ("fraud must be proved by clear and convincing evidence, but such proof may be founded upon circumstantial evidence") (context of fraudulent misrepresentation) (citations and quotations omitted). But see, Krinsky v. Mindick, 100 NH 423, 425 (1957) ("Direct evidence of fraud however is not essential for the issue of fraudulent intent or knowledge can be determined on the facts and circumstances of the particular situation."); Curran v. Salvucci, 426 F.2d 920, 922 (1st Cir. 1970) (direct evidence not necessary). "Fraud is never to be presumed, but must be established by clear and convincing proof." Hoyt, 105 N.H. at 390. "Ordinarily, the issue of fraudulent intent cannot be resolved on a motion for summary judgment, being a factual question involving the parties' states of mind." Golden Budha Corp. v. Canadian Land Co., 931 F.2d 196, 201-02 (2d Cir. 1991); see also, Int'l Shortstop, Inc. v. Rally's, Inc., 939 F.2d 1257, 1265 (5th Cir. 1991) ("we have emphasized repeatedly that cases which turn on the moving party's state of mind are not well-suited for summary judgment."); Commodity Futures Trading Comm'n v. Savage, 611 F.2d 270, 283 (9th Cir. 1980); Jackson v. Star Sprinkler Corp., 575 F.2d 1223, 1231 (8th Cir. 1978) ("Ordinarily, fraudulent intent is a question to be determined by a jury or by the court as fact-finder and not on a motion for summary judgment."). As the Fifth Circuit explained, this is because "[w]hen state of mind is an essential element of the nonmoving party's claim, . . . [the] party's state of mind is inherently a question of fact which turns on credibility." Int'l Shortstop, 939 F.2d at 1265. "Credibility determinations, of course, are within the province of the fact-finder." Id.

Issues of credibility are squarely before the court in this summary judgment motion. The Kattars' testimony concerning motivations and intent are corroborated by the testimony of Mary Abdoo and George P. Kattar about statements made contemporaneously with the creation of the Seven Children Trust. As discussed above, triable issues exist about the financial condition of Phyllis Kattar at the time of the Clovelly transfer. Furthermore, lawful justifications can be offered to explain a number of the indicia of fraud relied upon by the government. If, indeed, the Kattars sought to transfer the assets as part of their estate planning, the "insider" recipients of the transfers, the consideration given in exchange for the transfers, and the Kattars' continued enjoyment of the assets may possibly, given all reasonable inferences, be understood to be motivated by something other than an intent to defraud creditors. However, other factual issues, such as the chronology of events, cannot be so readily interpreted as motivated by lawful interests. In short, the court concludes that on this record and in the context of summary judgment, where all reasonable inferences are drawn in favor of the non-movants and credibility issues abound, granting summary judgment as to Phyllis Kattar's allegedly fraudulent intent would be inappropriate.

IV. Trust Amendment

The government argues in the alternative that the transfer of Clovelly did not occur until 1983 because of the failure of the Seven Children Trust to adequately identify its beneficiaries. Therefore, it argues, the 1983 transfer was fraudulent pursuant to RSA §§545:4 and 545:7.

Under Massachusetts law, "[w]hether a trust is created depends primarily upon the manifestation by the [settlor] of an intention to create a trust." Ventura v. Ventura, 407 Mass. 724, 726 (1990) (quoting Russell v. Meyers, 316 Mass. 669, 672 (1944)). "In order for a trust to be valid in the Commonwealth, it must unequivocally show an intention that the legal estate be vested in one person to be held in some manner or for some purpose on behalf of another." Id. (citations and quotations omitted) (holding trust valid where it specified the trust's res, duration, beneficiaries, and the trustees' powers and duties). The beneficiary must be "a person who is to have a right to enforce the trust." Restatement (Second) of Trusts §112 cmt. a (1959); McLemore v. McLemore, 675 So.2d 202, 204 ( Fla. 1st Dit. Ct. App. 1996) (quoting Kunce v. Robinson, 469 So.2d 874, 877 (Fla. 3d Dist. Ct. App. 1985)); Fitzsimmons v. Harmon, 108 Me. 456 (1911).

"Members of a definite class of persons can be the beneficiaries of a trust," Restatement (Second) of Trusts §120 (1959), if "the identity of all the individuals comprising its membership is ascertainable," id., cmt. a. Under Massachusetts law, where the trust does not establish a definite, limited class of beneficiaries such that the beneficiaries are ascertainable and capable of enforcing the trust, the trust fails. See Old Colony Trust Co. v. Wardell, 293 Mass. 310, 313 (1936). Therefore, in circumstances where a trust provided for the issuance of shares to beneficiaries but no shares are ever issued, no trust is formed. See Kaufman v. Federal Nat'l Bank, 287 Mass. 97, 98 (1934) ("No shares were ever issued, and no cestui que trust over [sic] existed."). As the Massachusetts Supreme Court has stated

As [the settlor] never designated a beneficiary as required by the declaration of trust, the [trust] never came into existence and the attempted conveyance fails for lack of a cognizable recipient.

Arlington Trust Co. v. Caimi, 414 Mass. 839, 848 (1993). Although the Kattars argue that the trust document evinces a clear intent to create a trust, under Massachusetts law such an intent must be sufficiently manifested to give rise to a valid trust. See infra.

Again, the government's argument in the alternative relies upon RSA §§545:4 and 545:7, and turns upon either Phyllis Kattar's insolvency or her fraudulent intent in 1983. The court finds that on this record triable issues exist as to Phyllis Kattar's solvency in 1983. As previously noted, the issue of her ownership of Kattar Realty Trust stock cannot be resolved on the record before the court. The IRS document filed by the Kattars setting forth their net worth, as submitted to the court, lacks a date next to their signatures. See App. to United States Mot. for Summ. J., Ex. 29 at 2. However, it identifies 1984 as the last year for which the Kattars filed an income tax return, which would indicate that the form presumably represented the Kattars' assets sometime after April 1985. Finally, the declaration of Marc Payeur, signed in 1996, states that after his assignment to the Kattars' account in 1988 he did not find any material assets owned by Phyllis Kattar. However, this does not bear on the status of her assets in 1983.

The court concludes that the government has not established the lack of a genuine issue of material fact regarding the solvency of Phyllis Kattar in 1983, and therefore on this record the court cannot conclude that a conveyance in 1983 would be fraudulent under RSA §545:4. Moreover, given the considerations discussed more fully in the context of the purported 1972 transfer, summary judgment as to Phyllis Kattar's fraudulent intent in 1983 is inappropriate on this record. ¹²

V. Nominee and Alter Ego

The government also argues in the alternative that the Seven Children Trust can be considered the nominee of George T. and/or Phyllis Kattar. State law controls the determination of whether an entity or individual is the nominee of another and liable for the other's tax debts. See Sequoia Property and Equip. Ltd. Partnership v. United States [98-1 USTC ¶50,460], No. CV-F 97-5044 OWW SMS, 1998 WL 471643 at *3 (E.D. Ca. May 13, 1998). Although none of the parties have identified the controlling state law on the issue, both the government and the defendants agree that the issue is governed by the following factors:

A) No consideration or inadequate consideration is paid by the nominee;

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

C) A close relationship between the transferor and the nominee exists;

D) Conveyances were not recorded;

E) The transferor retained possession of the property; and

F) The transferor continued to enjoy the benefits of the transferred property.

See United States ' Renewed Mot. For Summ J. at 45 (citing LiButti v. United States [97-1 USTC ¶50,235], 107 F.3d 110 (2d. Cir. 1997)); Defs'. Obj. to United States Renewed Mot. For Summ. J. at 16 (citing Sequoia Property [98-1 USTC ¶50,460], 1998 WL 471643 at *3)).

Despite the government's considerable evidence, when all reasonable inferences are drawn in the favor of the non-movants the court finds that there is a genuine issue of material fact as to the alleged nominee status of the Seven Children Trust. Some indicia, such as the consideration given in exchange for the assets and the close relations between the beneficiaries, the trustees, and the transferors, may be interpreted in a light favorable to the Kattars given evidence that the Trust was intended as an estate planning device. Also, it appears that deeds exist for many of the conveyances. Other indicia exist, however, such as the timing of the transfers, which suggest a nominee status.

Moreover, credibility issues are implicated when considering whether George T. and Phyllis Kattar retain control, possession, and continued enjoyment of the premises. For example, George T. Kattar has testified that he and his wife reside in the Methuen premises by the largess of the beneficiaries and subject to their indulgence. Not only do George T. and Phyllis Kattar live in the Methuen residence, but so do George P. Kattar and his family. Various other Kattars have moved in and out at different times. The record indicates that the Kattars' children do not pay rent when they live there. Similarly, evidence exists that many of the Kattars enjoy Clovelly. Furthermore, evidence exists that Trust assets were not only used to benefit George T. and Phyllis Kattar, but the beneficiaries as well. Among other things, money was transferred not only to George T. and Phyllis Kattar and their enterprises, but to enterprises associated with George P., Kevin, and apparently James Kattar as well.

Although initially George T. and Phyllis Kattar and Mary Abdoo were the trustees of the Seven Children Trust, the record indicates that George T. Kattar resigned his position as trustee in 1984, and that George P. and Kevin Kattar are now trustees of the Trust. ¹³ The record also contains some evidence that Kevin Kattar has assumed substantial control over the Trust assets, including its checking account, and that he has been liquidating Trust assets such as artwork and jewelry in his capacity as trustee to pay bills of the Trust, which include maintenance of the Trust properties. The court concludes that the record contains significant conflicting evidence regarding control of the Trust.

As an alternative to nominee status, the government argues that the Seven Children Trust is the alter ego of George T. and/or Phyllis Kattar. Many courts have determined that state law controls the issue of alter ego in tax collection cases. See, e.g., Wolfe v. United States [86-2 USTC ¶9655], 806 F.2d 1410, 1411 (9th Cir. 1986) ("State law governs the determination of whether there exists an alter ego from whom the government may satisfy the obligation of a taxpayer.") (citing Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 512-23 (1960)); Dean v. United States, 987 F. Supp. 1160, 1164 (W.D. Mo. 1997); Sequoia Property [98-1 USTC ¶50,460], 1998 WL 471643 at *3. However, courts have also referred to federal law and have found the distinctions inconsequential. See Dean, 987 F. Supp. 1164 (citing cases). In either case, when courts have considered the alter ego issue in the context of trusts, they have relied upon law governing the disregard of the corporate form. See, e.g., id. at 1164-65; William L. Comer Family Equity Trust v. United States [90-1 USTC ¶50,142], 732 F. Supp. 755, 759 (E.D. Mi. 1990); Loving Saviour Church , 556 F. Supp. at 691-92; see also, Village Press Inc. v. Stephan Edward Co., 120 N.H. 469 (1980). The parties do not address the issue of the governing law, although the government relies upon federal law and the Kattars upon New Hampshire law. ¹⁴ Both parties analogize to and rely upon the doctrine of piercing the corporate veil.

Under either Massachusetts or New Hampshire law, a court may pierce the corporate veil to prevent an injustice or fraud on the plaintiff. See Terren v. Butler, 134 N.H. 635, 639 (1991); Village Press, Inc., 120 N.H. at 471 ("plaintiff must establish that the corporate entity was used to promote an injustice or fraud"); My Baking Bread Co. v. Cumberland Farms, Inc., 353 Mass. 614, 620 (1968) ("in rare particular situations in order to prevent gross inequity"); New England Theatres, Inc. v. Olympia Theatres, Inc., 287 Mass. 485, 493 (1934) ("It is only where the corporation is a sham, or is used to perpetrate deception to defeat a public policy, that it can be disregarded."). "The burden rests upon the party who seeks to pierce the corporate veil to establish by uncontroverted facts (for purposes of summary judgment) the activities of the individual which demonstrate a virtual disregard of the existence of the corporate entity behind which he seeks to hide." Sherman Williams Co. v. H & R Painting Co., No. 9128, 1992 WL 14090, *2 (Mass. App. Div. Jan. 16, 1992).

Under Massachusetts law, a corporate form may be disregarded where:

(1) "there is active and pervasive control of [] business entities by the same controlling persons and there [are] fraudulent or injurious consequences by reason of the relationship . . .;" or (2) "there is a []confused intermingling of activity . . . [and] a common enterprise with substantial disregard of the separate nature of the [corporation], or serious ambiguity about the manner and capacity in which [] corporations and their representatives are acting."

Balcor Company v. Daejen ( Massachusetts ) Inc., No. 915835E, 1994 WL 879679, *5 ( Mass. Super. Ct. Mar. 30, 1994)) (citations and quotations omitted) (disregarding distinctions between corporate entities); see also, My Bread Baking Co., 353 Mass. at 619. Similarly, the New Hampshire Supreme Court has considered such factors as whether "a shareholder suppresses the fact of incorporation, misleads his creditors as to the corporate assets, or otherwise uses the corporate entity to promote injustice or fraud," see Druding v. Allen, 122 N.H. 823, 827 (1982), whether formalities were adhered to, see id., and "whether the stockholder [was] using the corporation to further his own private business rather than that of the corporation," see Village Press, 120 N.H. at 471.

While the record clearly contains evidence supportive of the government's position that the Seven Children Trust was the alter ego of George T. and Phyllis Kattar, the record also contains sufficient countervailing evidence to preclude summary judgment against the defendants, as discussed more fully above in the sections concerning fraudulent intent and nominee status.

Conclusion

In light of the above discussion, the court concludes that the government is entitled to judgment as to its assessments and corresponding statutory additions for years 1966, 1967, 1970, and 1971. However, the court otherwise denies the government's motion and concludes that summary judgment on this record would be inappropriate. Given the court's conclusion in this regard, at this time the government's request for litigation expenses is denied, as is its request for a determination that the trustees are personally liable for any diminution of value of Trust assets (document no. 90).

SO ORDERED.

¹ The following does not constitute findings of fact of the court and is provided for context purposes only.

² The record indicates that George T. and Phyllis Kattar file joint tax returns.

³ The record indicates that the Trust was inadvertently created as a real estate trust, and it was subsequently modified.

⁴ The government also argues in the alternative that the Seven Children Trust is the alter ego and/or nominee of George T. and Phyllis Kattar.

⁵ As a preliminary issue, the court notes that "[i]t is settled law that taxpayers bear the burden of proving that a tax deficiency assessment is erroneous." Delany v. Commissioner of Internal Revenue [96-2 USTC ¶50,576], 99 F.3d 20, 23 (1st Cir. 1996). In this case the Kattars have not submitted any evidence challenging the accuracy of the tax assessments, nor do they dispute the merits of the assessments.

⁶ The applicable regulation provides that "[t]he assessment shall be made by an assessment officer signing the summary record of assessment. The summary record . . . . shall provide identification of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessment. . . . The date of the assessment is the date the summary record is signed by an assessment officer." 26 C.F.R. §301.6203-1 (1999). The summary record is known as Form 23C. See Brewer v. United States [91-2 USTC ¶50,379], 764 F. Supp. 309, 315 n.3 (S.D.N.Y. 1991).

⁷ The court notes the computer transcripts in Schmidt were also accompanied by the affidavits of IRS officials concerning IRS procedures and the forms provided. See [89-2 USTC ¶9529], 717 F. Supp. at 76465. In this case the government has not provided any affidavit testimony.

⁸ As in Geiselman, "the government did not provide the district court with an actual Form 23C, but it did submit several Certificates of Assessments and Payments (Form 4340) which listed the '23C date' (the date the assessment officer signed the Form 23C) for the initial assessments." Geiselman [92-1 USTC ¶50,200], 961 F.2d at 5-6.

⁹ The government and the Kattars agree that RSA ch. 545 controls the conveyances during the time periods in issue.

¹⁰ The court also notes the Tax Court's conclusion that George T. Kattar engaged in fraudulent book-keeping practices. See Kattar [CCH Dec. 41,372(M)], 48 T.C.M. at 642.

¹¹ Although the record indicates that Phyllis Kattar was the transferor, the government does not consistently distinguish between Phyllis or George T. Kattar in this regard.

¹² The above-discussed considerations likewise preclude granting summary judgment on the government's claims concerning the transfer of personal property in 1980 or 1981.

¹³ The record indicates, however, that George T. Kattar remains a signatory on the Trust bank account.

¹⁴ No mention is made of Massachusetts law in this regard. The court need not resolve the issue of whether Massachusetts or New Hampshire law controls as it concludes that summary judgment is unwarranted under either of the standards.

 

 

 

United States of America , Plaintiff v. Stephen J. Dellaquila, Donna Lord Dellaquila, Security Pacific National Bank, First Federal Savings of the Palm Beaches , Russel N. Olderman, Jean K. Olderman, Defendants

U.S. District Court, So. Dist. Fla., 97-8739-CIV-MORENO, 1/14/99

[Code Secs. 6321 and 7402 ]

Summary judgment: Denial of: Material issues of fact: Jurisdiction: District court: Tax liens: Fraudulent conveyances: Statute of limitations: State law inapplicable.--The existence of material issues of fact precluded entry of summary judgment for an individual in the government's action to set aside a fraudulent conveyance and foreclose on federal tax liens. Although the individual's previously executed prenuptial agreement required him to promptly convey the property at issue to his new wife, he did not make the conveyance until years later. Moreover, the transfer occurred only after the individual's net worth declined and his tax liabilities skyrocketed. Thus, a genuine issue of fact existed as to whether, at the time of the transfer, he knew or should have known that he was about to incur debts beyond his ability to pay. The four-year state ( Florida ) statute of limitations on fraudulent transfer actions did not bar the government's suit because, absent a congressional enactment, a government action is not subject to any time limitation.

Thomas E. Scott, Christopher M. Pietruszkiewicz, Department of Justice, Washington , D.C. 20530 , for plaintiff. Robert A. Smith, Jr., Smith & Hiatt, 2691 East Oakland Park Blvd., Fort Lauderdale, Fla. 33306, George P. Ord, Murphy, Reid, Pilotte, Ord & Austin, 340 Royal Palm Way, Palm Beach, Fla. 33480, for defendants.

ORDER DENYING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT

MORENO , District Judge:

THIS CAUSE came before the Court upon Defendants Stephen J. Dellaquila and Donna Lord Dellaquila's Motion for Summary Judgment, filed on June 17, 1998.

THE COURT has considered the Motion, responses and the pertinent portions of the record, and is otherwise fully advised in the premises.

LEGAL STANDARD

Summary judgment is authorized when there is no genuine issue of material fact. Fed. R. Civ. P. 56(c). The party seeking summary judgment bears the initial burden of demonstrating the absence of a genuine issue of material fact. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970). The party opposing the motion for summary judgment may not simply rest upon mere allegations or denials of the pleadings; the non-moving party must establish the essential elements of its case on which it will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986). The nonmovant must present more than a scintilla of evidence in support of the nonmovant's position. A jury must be able reasonably to find for the nonmovant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 254 (1986).

FACTUAL BACKGROUND

This is an action to reduce tax liabilities to judgment, set aside a fraudulent conveyance of real property in Palm Beach County , Florida ("the subject property"), and foreclose federal tax liens on the subject property.

On October 15, 1987, defendant Stephen J. Dellaquila and his then wife Margaret Dellaquila purchased the subject property from Russell and Jean Olderman. On June 29, 1988, Margaret Dellaquila died. On August 30, 1990, defendants Stephen Dellaquila and Donna Lord executed a prenuptial agreement to convey the subject property to himself and Donna Lord as joint tenants with the right of survivorship. Stephen Dellaquila and Donna Lord were married on September 1, 1990.

On June 29, 1992, a warranty deed dated June 29, 1992 was recorded in the official records of Palm Beach County , memorializing a conveyance of the subject property from "STEPHEN J. DELLAQUILA, joined by his wife, DONNA DELLAQUILA" to "STEPHEN J. DELLAQUILA and DONNA DELLAQUILA, his wife."

On May 23, 1995, a delegate of the Secretary of the Treasury made assessments of income tax, penalties, and interest against defendant Stephen Dellaquila. Notice was given and demand for payment was made; however, defendant Stephen Dellaquila has refused and neglected to pay the balance due: $401,943.01 as of May 23, 1995, plus accrued interest and statutory additions according to law.

LEGAL ANALYSIS

A. The government is subject to no statute of limitations

Defendants argue that they are entitled to summary judgment on the government's claim of fraudulent conveyance because it is barred by Fla. Stat. §726.110, which establishes a four-year limitations period for commencing an action to set aside a fraudulent transfer under Fla. Stat. §726.105. This argument fails because it is a well-established rule that an action on behalf of the United States in its governmental capacity is subject to no time limitation, in the absence of a congressional enactment clearly imposing it. See United States v. Banks, 115 F.3d 916, 919 (11^th Cir. 1997); United States v. Alvarado, 5 F.3d 1425, 1427 (11^th Cir. 1993); United States v. Margolis, 758 F. Supp. 1482, 1484 (S.D. Fla. 1991). Therefore, the state statute of limitation does not bar the government's fraudulent conveyance claim against Defendants.

B. Genuine issues of material fact exist

It appears from a careful review of the motions, filings and attachments that genuine issues of material fact remain in dispute. Hence, the moving party is not entitled to summary judgment as a matter of law. Fed. R. Civ. P. 56; Celotex Corp. v Catrett, 477 U.S. 317 (1986).

Much of the factual dispute centers on whether Stephen Dellaquila knew or reasonably should have known at the time of the transfer of the subject property that he was about to incur debts beyond his ability to pay. The government argues that Stephen Dellaquila knew or reasonably should have known as early as 1991 that his construction business, which was his sole source of income, was going to be unable to pay its own debts, much less his personal debts. The government also alleges that Stephen Dellaquila had serious tax problems and that his personal tax liabilities as of June 30, 1992, coupled with the corporate tax liabilities, were approximately $2.5 million. The government contends that Stephen Dellaquila's net worth dropped from $5.8 million to $841,592 between December 1989 and August 1993.

Defendant Stephen Dellaquila, on the other hand, argues that he was contractually obligated to convey the subject property to Donna Dellaquila by the prenuptial agreement he had signed on August 30, 1990. According to Defendant, at the time he entered into the prenuptial agreement he had substantial property and a net worth in excess of $5,800,000. The government questions the timing of the transfer of the subject property given that the prenuptial agreement called for the transfer to be made within ten days of the couple's wedding, but in fact the deed was not signed and recorded until almost two years later.

CONCLUSION

For the reasons stated above, it is

ADJUDGED that Defendants' Motion for Summary Judgment is DENIED.

 

 

 

United States of America , Plaintiff v. Edgar Butts, et al., Defendants

U.S. District Court, West. Dist. Wash. at Seattle, C97-1952C, 11/18/98

[Code Secs. 6321 and 7403 ]

Fraudulent conveyance: Alter ego: Deemed admissions.--Married taxpayers, through their failure to respond to the IRS's requests for admissions, were deemed to have fraudulently conveyed under state (Washington) law real property to their alter ego for the purpose of preventing the IRS from seizing and selling the property. Accordingly, the mortgage on the property was set aside as a fraudulent conveyance.

[Code Sec. 6651 ]

Deficiencies: Penalties, civil: Deemed admissions.--Married taxpayers who failed to respond to the government's motion for summary judgment were liable for several years of unpaid income taxes and assessed penalties.

[Code Sec. 7403 ]

Foreclosure: Creditors: Priority.--The government's motion for the foreclosure of its tax lien on real property that had been fraudulently conveyed by married taxpayers was denied pending the determination of any tax lien or other interest asserted by a county.

W. Carl Hankla, Department of Justice, Washington , D.C. 20530 , for plaintiff.

ORDER

COUGHENOUR, Chief District Judge:

This case involves a claim by the United States against Edgar Butts and his wife Doris Butts for several years of unpaid income taxes. In this summary judgment motion, the government requests that judgment be entered for the amounts of the taxes due, and seeks to begin foreclosure proceedings on a piece of real property owned by Mr. and Ms. Butts. The defendants have filed no opposition to this motion, and the defendants' previous objections to this claim have been overruled by the Court in earlier orders. Having reviewed the papers filed by the United States in support of this motion, and papers filed by the United States and by the defendants in previous motions, the Court GRANTS the motion in part.

Summary judgment is appropriate when 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). The United States has provided evidence of income tax assessments owed by Edgar Butts for the years 1983 through 1992, civil penalties owed by Mr. Butts for the years 1983, 1987, 1998, and 1989, and income tax assessments owed by Doris Butts for the years 1988 through 1991. The Butts have failed to provide any evidence that these amounts have been paid or any other reason that judgment should not be entered for these amounts. The Court GRANTS the United States request for summary judgment on this issue and DIRECTS the Clerk to enter judgment against Edgar Butts for unpaid income tax for the following periods and in the following amounts:

TAX YEAR                                                            AMOUNT

1983 ............................................................ $17,347.84.

1984 ............................................................ $38,523.54.

1985 ............................................................ $45,068.54.

1986 ............................................................ $30,152.37.

1987 ............................................................ $34,495.49.

1988 ............................................................ $ 1,453.53.

1989 ............................................................ $15,877.82.

1990 ............................................................ $ 3,038.68.

1991 ............................................................ $ 2,774.28.

1992 ............................................................ $26,414.78.

 

The Clerk is DIRECTED to enter judgment against Edgar Butts for civil tax penalties in the following amounts:

TAX YEAR                                                             AMOUNT

1983 ............................................................. $   526.00

1987 ............................................................. $ 1,000.67

1988 ............................................................. $   500.00

1989 ............................................................. $   500.00

 

The Clerk is DIRECTED to enter judgment against Doris Butts for unpaid income tax for the following periods and in the following amounts:

TAX YEAR                                                             AMOUNT

1988 ............................................................. $ 1,449.27

1989 ............................................................. $16,161.03

1990 ............................................................. $ 3,038.68

1991 ............................................................. $ 2,774.28

 

The United States has also moved for a finding that a mortgage entered into by Edgar and Doris Butts on a piece of real property in Spokane County , Washington is a fraudulent conveyance. The property at issue is recorded with the Spokane County Auditor in a statutory warranty deed including the legal description, "[l]ot 4, Block 3, Rivermere Estates, Except the East 55 feet thereof, according to plat recorded in Volume 7 of Plats, Page 98, in Spokane County Washington." The mortgage is evidenced by an agreement dated August 21, 1986, and signed by Edgar and Doris Butts in favor of defendant Debs Co. The United States has named Debs Co. as a party to this suit and has properly served Debs Co. by publication. Debs Co., however, has failed to make an appearance in the case. The United States served requests for admission on Edgar and Doris Butts including the following: "Debs Co. has never had an existence as an independent entity"; "Debs Co. is your nominee or alter ego"; and "You executed and recorded the Real Estate Mortgage intending to prevent, discourage, or delay the Internal Revenue Service from seizing and selling the property." The Butts have not responded to these requests. The Court finds that, under Fed. R. Civ. P. 36, these requests are deemed admitted.

Washington law applicable to the mortgage in question states:

Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay or defraud either present or future creditors, is fraudulent as to both present and future creditors. R.C.W. 19.40.070.

The Court finds that the Butts' admissions with regard to Debs Co. and the mortgage are sufficient to establish that the encumbrance of the property was fraudulent under this standard and that the mortgage must, therefore, be set aside in favor of the United States claim for taxes.

The United States has also moved for the foreclosure of its tax lien on this piece of real property. The United States obtains an automatic lean on all real and personal property owned by any taxpayer who has failed to pay taxes due after demand. 26 U.S.C. §6321. The Court finds that the United States lien has attached to the property in the amounts of past taxes due described above. Under 26 U.S.C. §7403, the Court may order foreclosure of this lien and direct the U.S. Marshall's Service to sell the property. However, §7403(c) requires that all parties having liens upon the property or asserting an interest in the property be joined as parties. The United States ' brief in support of its motion for summary judgement dated July 22, 1998, indicates that the County of Spokane may have a tax lien or other interest in the property that has a higher priority than the federal tax lien. See 18 U.S.C. §6323(b)(6). Because the County of Spokane is not presently a party, the Court DENIES the United States ' request to proceed with foreclosure at this time. The United States is directed to notify the County of Spokane of this action. If the County claims an interest in the property in question, the Court will allow the County to join as a party to this action so that the amount and priority of its interest may be determined.

In sum, the United States ' motion for summary judgment on the issue of Edgar and Doris Butts' income tax and tax penalty obligations is GRANTED. The Clerk is DIRECTED to enter judgment in the amounts described above. The United States ' request to have the mortgage on the Butts' real property set aside as a fraudulent conveyance is also GRANTED. The United States' request that the Court proceed with a foreclosure on its lien on the Butts' real property is DENIED pending the determination of any tax lien or other interest asserted in the property by the County of Spokane. The trial date is this matter is STRICKEN. If necessary, a date for a hearing on the foreclosure proceeding will be set at a later time.

SO ORDERED.

 

 

 

United States of America , Plaintiff v. Elwyn S. Dubey, et al., Defendants

U.S. District Court, East. Dist. Calif. , CV S-94-417 GEB/PAN, 10/19/98, Related opinion at (DC) 97-1 USTC ¶50,392 .

[Code Sec. 6212 ]

Notice of deficiency: Proof of mailing.--Married taxpayers were unable to support their contention that they did not receive notice of deficiencies, and the IRS offered sufficient evidence to prove that notice had been properly mailed.

[Code Sec. 6321 ]

Liens and levies: Fraudulent conveyances: Real property: Trust: Alter ego: Nominee status.--Conveyances of real property by married taxpayers to trusts that qualified, under state ( California ) law, as alter ego and nominee trusts were set aside as fraudulent. As a result, the properties were subject to federal tax liens. The trusts paid no consideration for the transfers, and the taxpayers maintained possession and control of the properties after the conveyances. Moreover, a trustee of three of the four trusts at issue was a sibling of one taxpayer, and another trustee admitted to having no trust duties.

G. Patrick Jennings, Department of Justice, Washington , D.C. 20530 , for plaintiff. Jeannine M. Dubey, Elwyn S. Dubey, P.O. Box 1756, Georgetown, Calif. 95634, pro se. Duane A. Woodman, 8258A Fair Pines Lane, Garden Valley, Calif. 95633, pro se. Dixie Woodman, 201 Mine St., Vallejo, Calif. 94570, pro se. David Warner Livingston, P.O. Box 60007, Sacramento, Calif. 95860-0007, pro se.

ORDER

BURRELL, JR., District Judge:

This action was tried to the bench on September 1, 1998. Only the United States and pro se defendants Elwyn S. and Jeannine M. Dubey (jointly referred to as the "Taxpayers") appeared at the trial. ¹ The trial principally concerned the Taxpayers' liability to the United States government for taxes in the 1981 tax year and the government's allegations that the Taxpayers fraudulently conveyed real properties in Vallejo and Sacramento , California , to other named defendants in this action. See Final Pretrial Order (FPO) filed August 5, 1997, Section VII at 7 where these issues are preserved for trial.

Following the trial the parties were granted leave by Order filed September 2, 1998, to file additional documents augmenting their respective proposed findings and conclusions of law. In response to this leave the Taxpayers filed a "Notice of Protest" to which the government objected; the government also filed supplemental proposed findings of fact and conclusions of law. This decision resolves the issues tried.

FACTUAL FINDINGS

The undisputed facts set forth in the FPO follow.

A. Duane A. Woodman is the brother of Jeannine M. Dubey. Elwyn S. Dubey and Jeannine M. Dubey are married and have been married at all times relevant herein.

B. Dixie Garzione is the mother of Jeannine M. Dubey and Duane A. Woodman.

C. Real property that is the subject of this action, located at 728 Marine World Parkway , Vallejo , California (herein referred to as the "Vallejo Property") is situated in the County of Solano , State of California , and is more particularly described as follows:

ALL THAT REAL PROPERTY IN THE COUNTY OF SOLANO , STATE OF CALIFORNIA DESCRIBED AS FOLLOWS:

PORTION OF SECTION 11, TOWNSHIP 3 NORTH, RANGE 4 WEST, M.D.B. & M., MORE PARTICULARLY DESCRIBED AS FOLLOWS:

COMMENCING AT THE POINT OF INTERSECTION OF THE NORTHERN LINE OF COUNTY ROAD NO. 594, AND THE NORTHWESTERN LINE OF THE STATE HIGHWAY JOINING SEARS POINT ROAD AND COUNTY ROAD NO. 85; RUNNING THENCE ALONG SAID NORTHERN LINE, SOUTH 89* 13' WEST, 464.78 FEET; THENCE SOUTH 64* 12' WEST 599.6 FEET; THENCE NORTH 78* 35' WEST, 177.9 FEET TO A POINT ON THE BANK OF NAPA RIVER THENCE NORTH 14* 07' EAST 455.9 FEET ALONG SAID BANK TO A POINT IN THE CENTER OF A DRAINAGE DITCH; THENCE ALONG SAID DITCH, SOUTH 70* 57' EAST 93.65 FEET; THENCE SOUTH 89* 14' EAST 1124.4 FEET TO A POINT IN THE NORTHWESTERN LINE OF SAID HIGHWAY; THENCE SOUTH 41* 25' WEST 219.30 FEET ALONG SAID NORTHWESTERN LINE TO THE POINT OF COMMENCEMENT.

EXCEPTING THEREFROM ALL THAT REAL PROPERTY DESCRIBED IN THAT DEED TO VALLEJO SANITATION AND FLOOD CONTROL DISTRICT, A PUBLIC CORPORATION, DATED FEBRUARY 23, 1959 AND RECORDED APRIL 28, 1959 IN BOOK 972 OF OFFICIAL RECORDS, PAGE 278 AS INSTRUMENT NO. 8790.

D. Real property that is the subject of this action, located at 3400 Montclaire Street , Sacramento , California 95821 , (herein referred to as the "Sacramento Property") is situated in the County of Sacramento , State of California , and is more particularly described as follows:

IN THE STATE OF CALIFORNIA , COUNTY OF SACRAMENTO , AND BEING:

THE SOUTH 60 FEET OF THE WEST 220 FEET OF LOT 11 AS SHOWN ON THE "PLAT OF OAK PLAINS SUBDIVISION NO. 1", FILED IN THE OFFICE OF THE RECORDER OF SACRAMENTO COUNTY , CALIFORNIA , ON MAY 6, 1913, IN BOOK 14 OF MAPS, MAP NO. 16; SAID WEST 220 FEET BEING MEASURED FROM THE CENTER LINE OF MONTCLAIR STREET, FORMERLY FRANKLIN AVENUE, 60 FEET IN WIDTH, AS SHOWN ON SAID PLAT.

E. By Deed recorded April 18, 1991, in the Solano County Recorder's Office, Elwyn S. Dubey and Jeannine M. Dubey purported to convey or transfer an interest in the Vallejo Property to "Delta Investment."

F. By Grant Deed recorded May 16, 1968, Charles H. Seaich and Ethel I. Seaich conveyed an interest in the Sacramento Property to Elwyn S. Dubey and Jeannine M. Dubey, as joint tenants.

G. By Deed recorded April 17, 1991, in the Sacramento County Recorder's Office, Elwyn S. Dubey and Jeannine M. Dubey purported to transfer or convey an interest in the Sacramento Property to "Twin Rivers Investment, David Livingston Trustee."

H. Garden Valley Investments alleges in the complaint in the related case of Garden Valley Investments v. Twin Rivers Investment, et al., Civil No. CV-S-93-1984 GEB/PAN (E.D. Cal.) that Elwyn S. Dubey and Jeannine M. Dubey, by an unrecorded Deed dated January 31, 1985, purported to convey or transfer an interest in the Sacramento Property to Garden Valley Investments.

TAX LIABILITIES

The government's tax liability claim is governed by federal law and presents the issue whether sufficient evidence exists to establish proper assessment and notice.

In the taxable year ending December 31, 1980, the Taxpayers invested in a tax shelter named "Brein-Warsky Associates No. 1" involving the movie "Caddyshack". The tax benefits of the investment were subsequently disallowed by the Internal Revenue Service (IRS) for the taxable years ending December 31, 1980 and 1981. The Taxpayers litigated the tax deficiency in a Tax Court case, Docket No. 23540-84. The Taxpayers filed the Tax Court Petition July 6, 1984, and the Tax Court Decision was entered April 8, 1993. Plaintiff's Exhibits 5 and 6.

In a "Closing Agreement" with the IRS signed by the Taxpayers in March 1993, the Taxpayers admitted the tax deficiency for 1980. Paragraph 3 of the Closing Agreement reduces the tax liability for 1980 because the 1981 deficiency was assessed in an amount higher than the Closing Agreement treatment would allow. Plaintiff's Exhibit 11. The Closing Agreement allowed the Taxpayers to decrease their tax deficiency in the 1980 year by the present value of the difference between the assessment for the 1981 year already made and the amount which would have been due if the 1981 year were open and the settlement were applied. Id. The Taxpayers agreed in the Closing Agreement to be "barred from filing a claim for refund for the 1981 year." Id.

The Taxpayers, jointly and severally, owe the following taxes, plus interest and statutory additions according to law:

 TAX    TYPE OF  ASSESSMENT      TAX       TOTAL BALANCE

PERIOD    TAX       DATE      ASSESSED        DUE  2 

 1980   INCOME      8-2-93   $  9,902.00    $ 81,949.99

 1985   INCOME    12-10-90    109.649.44     294,108.69

 1986   INCOME     8-24-92     58,758.00     237,856.19

 1987   INCOME     8-24-92     60,945.00     222,352.50

 1988   INCOME     8-24-92     25,353.00      75,153.37

TOTAL:                                      $911,420.74

The assessments were established when summary judgment was granted in favor of the United States on March 25, 1997.

Elwyn S. Dubey owes the United States the Trust Fund Recovery Penalty in the amount of $96,404.36, plus interest and other statutory additions, as provided by law, that have accrued since December 31, 1993. The penalty was assessed against Elwyn S. Dubey as a responsible person who willfully failed to collect, truthfully account for and pay over the withheld income and FICA taxes of Dubey Enterprises, Inc., for the calendar quarters ending March 31, 1988, through and including December 31, 1989.

Jeannine M. Dubey owes the United States the Trust Fund Recovery Penalty in the amount of $96,404.36, plus interest and other statutory additions, as provided by law, that have accrued since December 31, 1993. The penalty was assessed against Jeannine M. Dubey as a responsible person who willfully failed to collect, truthfully account for and pay over the withheld income and FICA taxes of Dubey Enterprises, Inc., for the calendar quarters ending March 31, 1988, through and including December 31, 1989.

Because of their concerns about enforcement action against their assets, the Taxpayers hired Barbara Wilson, an "enrolled agent," to assist them with this problem. Ms. Wilson testified that she was authorized to practice before the IRS and has several years of tax experience where she practices in Fayetteville , Arkansas . The Taxpayers hired Ms. Wilson for the purpose of filing amended returns to reduce the tax they owed. Ms. Wilson testified at trial that to halt IRS collection efforts, she assisted the Taxpayers in preparing a financial statement, IRS Form 433, which the Taxpayers signed in October 1993.

This financial statement admits that the two properties at issue in this case, 3400 Montclaire Street, Sacramento, California, and 728 Marine World Parkway, Vallejo, California, belonged to Elwyn S. Dubey and Jeannine M. Dubey in 1993, and that there were no mortgages on the properties. Plaintiff's Exhibit 13.

Other properties owned by the Taxpayers are also listed on the financial statement as owned by the Taxpayers in 1993. In particular, the Taxpayers owned in 1993 the following properties: (1) 3400 Montclaire Street, Sacramento, California; (2) 728 Marine World Parkway, Vallejo, California; (3) 8285 Fair Pines Lane, Garden Valley, California; (4) 7498 Wentworth Springs Road, Georgetown, California; (5) 5 acres of land in Coloma, California; (6) 1285 8th Street, Florence, Oregon; (7) 88841 Rhododendron Lane, Florence, Oregon; and (8) 7481 Wentworth Springs Road, Georgetown, California.

Ms. Wilson testified that she communicated with Ms. Dubey about the ownership status of these properties and during that communication Ms. Dubey said something about trusts. Ms. Wilson was curious as to whether bona fide trusts had anything to do with the subject properties she questioned Ms. Dubey about. Other than producing a piece of paper with the word "trust" on it (Plaintiff's Exhibit 18), Ms. Dubey told Ms. Wilson that trust information "did not exist." But Ms. Wilson probed Ms. Dubey further to assure herself that no trust relationship existed concerning the listed properties and concluded none existed.

Ms. Wilson further testified that Elwyn S. Dubey faxed to her office in Arkansas accounting ledgers which set forth rental income and expense payments with respect to the Sacramento Property and Vallejo Property, as well as the other properties on the financial statement. These business records evidence that the Taxpayers never relinquished control of the properties. ³

Elwyn S. Dubey admitted during his testimony that no consideration was paid by the trusts in exchange for the transfers of the properties listed on the financial statement. Jeannine M. Dubey, asserting her Fifth Amendment privilege against self-incrimination, declined to answer questions regarding the trusts. Although parties are free to invoke the Fifth Amendment in civil cases, "the court is equally free to draw adverse inferences from their failure of proof." S.E.C. v. Colello, 139 F.3d 674, 677 (9th Cir. 1998). Ms. Dubey's silence in the face of evidence that the trusts to which the Taxpayers conveyed their property are shams and alter egos of the Taxpayers warrants inferring that she agrees with that evidence. This inference merely discloses "a realistic reflection of the evidentiary significance of the choice to remain silent." Baxter v. Palmigiano, 425 U.S. 308, 318 (1976).

Further, David Warner Livingston, ⁴ trustee for Twin Rivers Investment, the trust to which the Taxpayers conveyed their property located at 3400 Montclaire Street in Sacramento, California, testified that he did not know why the trust was created, he had no trust duties, and never filed tax returns for the trust. He simply became a nominal trustee because Ms. Dubey asked him to be a trustee. He said nothing to support the notion that the purported placement of this property in trust with Twin Rivers Investment had the effect of divesting control of the property from the Taxpayers. ⁵ The 1992 Mortgage Interest Statement which shows the Taxpayers as having a mortgage also belies their claim that they owned no property. See Government Exhibit 20.

The record reveals that the transfers to the nominee trusts were made without fair consideration or any other reasonably equivalent value for the exchange. Further, at the time of the property transfers, the Taxpayers intended to incur, or believed or reasonably should have believed that they would incur, debts beyond their ability to pay. Therefore, these transfers left the Taxpayers with remaining assets which were unreasonably small or insufficient to pay their then-current and future debts, including their lawful tax liabilities.

1981 NOTICE OF DEFICIENCY

Although the Taxpayers disputed receiving a statutory notice of deficiency for the year 1981, their position on this dispute was not supported with probative evidence. Ms. Dubey did not remember whether she received a statutory notice of deficiency for the 1981 tax year. The government proved in its summary judgment motion that a statutory notice of deficiency had been mailed for the years 1985, 1986, and 1987, through a certified mailing list. At trial the government produced a copy of a date-stamped statutory notice of deficiency for 1981. The government also called two IRS Revenue Officers to testify. Revenue Officer Dean Prodromos testified that the Taxpayers owed the debt for deficiency assessed for taxable year 1981 at least by January 1981. Revenue Officer Charles Slater testified that a copy of the date-stamped statutory notice of deficiency for 1981, marked as Plaintiff's Exhibit 7, but not introduced into evidence, had been timely mailed under applicable law. He explained that the notice contained all the necessary information, including the necessary date stamp, to evince it was duly sent by certified mail. The government's evidence on this issue is sufficient to establish that the procedures for mailing the notice were followed in this case. United States v. Zolla [84-1 USTC ¶9175], 724 F.2d 808 (9th Cir.), cert. denied, 469 U.S. 830 (1984) (official government acts, such as the mailing of a notice of deficiency, are presumed to have been accomplished correctly); Fisher v. United States [94-2 USTC ¶50,369], 860 F. Supp. 680 (D. Ariz. 1994) (this presumption can be overcome only by clear evidence to the contrary).

Thus, Elwyn S. Dubey and Jeannine M. Dubey, jointly and severally, owe the following taxes, plus interest and statutory additions according to law:

                 1981 TAX LIABILITY

                 ------------------

 TAX    TYPE OF  ASSESSMENT     TAX         TOTAL

PERIOD    TAX       DATE      ASSESSED   BALANCE DUE

 1981    1040      8/23/85   $25,421.00  $108,307.67 6 

CONCLUSIONS OF LAW

The United States seeks to reduce to judgment the outstanding federal tax assessments against the Taxpayers, to set aside what it characterizes as fraudulent conveyances, and to foreclose federal tax liens. Pursuant to 26 U.S.C. §§6321 and 6322, tax liens arose in favor of the United States upon the Taxpayers' properties. The United States argues that the Taxpayers fraudulently conveyed the Vallejo and Sacramento properties by falsely asserting that defendants other than the Taxpayers hold title to the properties as the Taxpayers' alter egos and nominees. The United States contends that since the conveyance of these properties was fraudulent as to the United States , they should be set aside.

NOMINEE STATUS

"[ California ] law governs the determination of whether there exists an alter ego from whom the government may satisfy the obligation of a taxpayer." Wolfe v. United States [86-2 USTC ¶9655], 806 F.2d 1410, 1411 (9th Cir. 1986).

It is firmly established in [California] that when there is a unity of ownership and interest in a corporate entity, and when giving substance to such an entity which in fact has none, works as a fraud or injustice on third persons, the separate entity will be disregarded and the individuals operating it will be looked upon as the actual owners. . . . [T]he application of the doctrine to the field of taxation has long been recognized.

People v. Clauson, 231 Cal. App. 2d 374, 378 (1965); Towe Antique Ford Foundation v. I.R.S., 791 F. Supp. 1450, 1454 (D. Montana 1992), affirmed 999 F.2d 1387 (9th Cir. 1993); cf., Taylor v. Newton , Sr., 117 Cal. App. 2d 752 (1953).

Property held by nominees are subject to the tax liens of the Taxpayers, G.M. Leasing Corp. v. United States, 429 U.S. 338 (1977), if the United States proves that the tax claim arose before or after the transfer, and that the debtor made the transfer with the actual intent to hinder, delay, or defraud the United States. California Civil Code §3439.04(a). Severance v. Knight-Counihan Co., 29 Cal. 2d 561, 567 (1947). Under the "nominee" doctrine in California , "a person cannot place his property . . . beyond the reach of his creditors so long as he himself retains the right to . . . use it. . . ." In re Camm's Estate, 76 Cal. App. 2d 104 (1946); Baldassari v. United States, 79 Cal. App. 3d 267 (1978). Here, the Taxpayers retained control of the subject property long after it was purportedly conveyed. The sham transfers at issue began after the IRS asserted tax deficiencies against the Taxpayers. The government proved that the "trust" defendants were nominees who held the subject property for the Taxpayers' benefit. Thus, in substance the nominee trusts were alter-egos of the Taxpayers. Therefore, the tax liens attached to the true owner of the property--the Taxpayers--and attached to the subject property at the time they arose.

For the stated reasons, Twin Rivers Investment, Delta Investment, Garden Valley Investment, and Pacific Property Management are the nominees of the Taxpayers.

ACTUAL FRAUD

The government also contends that the transfers were intended to defraud the government of assets that could be used toward payment of tax liabilities. California has adopted the Uniform Fraudulent Conveyance Act ("Uniform Act"). Kirkland v. Risso, 98 Cal. App. 3d 971, 977-78 (1979); Cal. Civ. Code §3439.07. Under this law, the United States has the burden of establishing the "actual intent" of such fraudulent transfers by a preponderance of the evidence. Liodas v. Sahadi, 19 Cal. App. 3d 278 (1977). Intent may be established from the circumstances surrounding the transfers. Menick v. Goldy, 131 Cal. App. 2d 542, 547 (1955). Section 4(b) of the Uniform Act lists several circumstances to consider when deciding whether there was actual intent to hinder, delay, or defraud. Wyzard v. Goller, 23 Cal. App. 4th 1183, 1190 n.4 (1994). Those circumstances include:

1. whether the transfer or obligation was to an insider;

2. whether the debtor had retained possession or control of the property transferred after the transfer;

3. whether the transfer or obligation was disclosed or concealed;

4. whether the debtor was sued or threatened with suit before the transfer was made or obligation was incurred;

5. whether the transfer was of substantially all the debtor's assets;

6. whether the debtor has absconded;

7. whether the debtor had removed or concealed assets;

8. whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

9. whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;

10. whether the transfer had occurred shortly before or shortly after a substantial debt was incurred.

Id.

Several of these circumstances are evident in this case. Jeannine M. Dubey's brother, Duane A. Woodman, was the trustee of three of the four trusts at issue. As observed in Wood v. Kaplan, 178 Cal. App. 2d 227, 231 (1960), this sibling relationship, "when coupled with other suspicious circumstances, may be sufficient to raise an inference of fraud in the conveyances. Any relation . . . strengthens the presumption [of fraud] that may arise from other circumstances, and serves to elucidate, explain or give color to the transaction." Id. "[A]lthough there is no presumption that transactions between close relatives are per se fraudulent, when such a confidential relationship is shown to exist, the parties are held to a fuller and stricter proof of the consideration and the fairness of the transaction. Kirkland , 98 Cal. App. 3d at 978-79.

Further, the Taxpayers retained possession or control of the property transferred after the transfer. This is evidenced by Plaintiff's Exhibit 13, in which the Taxpayers listed all their real properties and monthly income and expenses for the same, when they thought this listing was in their best interest. This evinces possession and control of the assets.

It is abundantly clear from the record that it is the Taxpayers who, in reality, dominate and control the affairs of the properties set forth in Plaintiff's Exhibit 13. Since the Taxpayers have not offered a reasonable business purpose for allegedly transferring control of their property to sham trust entities, the false statement that transfers occurred are also indicia of fraud which supports a finding that the Taxpayers engaged in intentional fraud.

For the stated reasons, the Taxpayers engaged in actual fraud by feigning to transfer their United States income and assets to nominees and alter egos, which were established to hide the true ownership of the same from creditors, including the government.

CONSTRUCTIVE FRAUD

Lastly, the government argues that the Taxpayers' conveyance of the subject properties was constructively fraudulent as to the government. This argument is based on California Civil Code §3439.04, the constructive fraud statute. Kirkland , 98 Cal. App. 3d at 976.

In order to establish a conveyance as fraudulent under section 3439.04 of the Civil Code, it must appear that the transferor is insolvent at the time of the conveyance or will be rendered insolvent thereby and that the conveyance was made without a fair consideration.

A person is insolvent under the Uniform Fraudulent Conveyance Act "when the present fair salable value of his assets is less than the amount that will be required to pay his probable liability on his existing debts as they become absolute and matured." (Civ. Code, S 3439.02, subd. (a).)

. . .

When the conveyor is in debt at the time of the conveyance, the burden rests upon the grantee to establish by clear and convincing evidence that either the conveyor was solvent, and was by such conveyance not rendered insolvent; or that a fair consideration had been paid for the conveyance.

Id. at 976 and 978.

Here, when the Taxpayers conveyed the subject property they had debts owed to the United States . Thus, the burden rested with the transferee to establish either that the Taxpayers were solvent at the time of the transfer, and by such transfer were not rendered insolvent, or that the conveyance was supported by fair consideration.

Under California law, "[a] debtor who is generally not paying his or her debts as they become due is presumed to be insolvent." Cal. Civ. Code §3439.02(c). Since the tax assessments show the Taxpayers were not paying their taxes as they became due, they are presumed to have been insolvent at the time of the transfer. Nor was a fair consideration made for the conveyance.

Since all of the tax liabilities were incurred before the date on which the properties were transferred to the subject sham trust entities, the conveyances to the nominee trusts are fraudulent and are hereby set aside.

CONCLUSION

The government has shown by a preponderance of the evidence that the Taxpayers have fraudulently transferred assets to nominees, in an attempt to defeat tax collection. The Taxpayers own the Sacramento Property and the Vallejo Property free and clear of the interests of the other named defendants. The conveyances are hereby set aside. The United States is entitled to a money judgment against the Taxpayers and has valid and subsisting federal tax liens against all property and rights to property of the Taxpayers. The United States is entitled to sell the subject property to enforce its lien. The United States is directed to lodge a proposed judgment and Order of Judicial Sale no later than November 15, 1998.

IS SO ORDERED.

¹ Since no trust defendant has appeared through counsel, the trust defendants are unable to defend against the government's claims. See C.E. Pope Equity Trust v. United States , 818 F.2d 696 (9th Cir. 1987). Yet the government has failed to pursue applicable default procedures as to the trust defendants. Because this decision finds that the trust defendants are sham entities, there is no need to reach the default question.

² Total balance due includes penalties, lien fees, and accrued interest up to May 15, 1997, less any credits on IRS records.

³ The Taxpayers' failure to relinquish control of certain of these properties was also evidenced in the testimony of Christopher Jecks-Wright, who testified that Ms. Dubey showed him the residence at 3400 Montclaire Avenue before he rented it. Rita Robenson also testified at trial that Ms. Dubey had allowed her to use the property at 728 Marine World Parkway as a business and a residence.

⁴ Although David Warner Livingston, trustee for defendant and denominated "David Warner Livingston as Trustee for Twin Rivers Investment," was called as a witness by the government at the trial, Mr. Livingston left the courtroom after he testified.

⁵ The Court infers that none of the other defendant trustees' testimony would have been different since none of them appeared at the trial. " 'When a party fails to call a witness who may reasonably be assumed to be favorably disposed to the party, an adverse inference may be drawn regarding any factual question on which the witness is likely to have knowledge.' " Underwriters Laboratories, Inc. v. National Labor Relations Board, 147 F.3d 1048, 1054 (9th Cir. 1998). The discretionary decision of whether to draw an adverse inference focuses on the failure of a party to produce "a material witness who could elucidate matters under investigation. . . ." United States v. Noah, 475 F.2d 688, 691 (9th Cir. 1973). Here, the government was unsuccessful in its efforts to subpoena Ms. Dubey's brother, Duane Woodman, a named trustee defendant for the other three trustee defendants. Based on the relationship Ms. Dubey had with Mr. Woodman concerning the alleged trusts at issue, the Court concludes the Taxpayers could have produced Mr. Woodman as a witness at trial and failed to do so. This "gives rise to a presumption that . . . [Mr. Woodman's] testimony . . . would [have been] unfavorable to the [Taxpayers]. . . ." Id.

⁶ This balance includes penalties, lien fees, and accrued interest up to December 31, 1993.

 

 

 

United States of America , Plaintiff-Appellee, Cross-Appellant v. Jules W. Noble, Defendant-Appellant, Cross-Appellee. Esther K. Noble, Great Lakes National Bank, Constitutional Church of America , Defendants

(CA-6), U.S. Court of Appeals, 6th Circuit, 99-2032, 99-2259, 1/29/2001, 2001 U.S. App. LEXIS 1824. Affirming an unreported District Court decision. Prior decisions in this same case 98-2 USTC ¶50,642 and 99-1 USTC ¶50,173

[Code Sec. 6203 ]

Liens and levies: Assessment reduced to judgment: Prima facie case: Burden of proof: Meritless arguments.--The district court properly granted summary judgment in favor of the government and properly reduced tax assessments against an individual to judgment. The Certificates of Assessment and Payment offered as evidence by the IRS were presumptively correct and enabled the government to establish a prima facie case of tax liability. The taxpayer failed to meet his burden of rebutting this presumption, merely asserting frivolous arguments.

[Code Sec. 6321 ]

Liens and levies: Conveyance: Interest in levied property.--The district court properly concluded that proceeds from the sale of levied real property, after expenses, were to be divided equally between the government and a third party. The third party held title to the property, as a result of a conveyance by the taxpayer and his wife, subject to the rights of the government, as the taxpayer's creditor, thus entitling it to one-half of the proceeds from the sale of the property.

David English Carmack, John A. Dudeck, Thomas P. Cole, Department of Justice, Washington, D.C. 20530, for plaintiff-appellee, cross-appellant. Jules W. Noble, Lake Forest , Ill. , pro se.

Before: BATCHELDER and CLAY, Circuit Judges, POLSTER, District Judge. ^*

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

ORDER

Jules W. Noble, proceeding pro se, appeals a district court order against him in a tax action filed by the United States pursuant to 26 U.S.C. §§7401 and 7403 to reduce tax assessments to judgment and foreclose tax liens upon Noble's property. The United States has filed a cross-appeal from the district court's order for judicial sale of Noble's property. This case has been referred to a panel of the court pursuant to Rule 34(j)(1), Rules of the Sixth Circuit. Upon examination, this panel unanimously agrees that oral argument is not needed. Fed. R. App. P. 34(a).

On December 17, 1997, the United States of America (" United States " or "government") filed a complaint against Jules W. Noble ("Noble"), Esther K. Noble ("Esther"), Great Lakes National Bank, and the Constitutional Church of America ("CCA"). The complaint sought to reduce to judgment unpaid federal income tax assessments against Noble for the years 1973, 1974, 1975, and 1984; to set aside as fraudulent Noble's conveyance of his interest in certain property located at 169 Honey Lane in Battle Creek, Michigan, which Noble and his wife, Esther, acquired in 1976 and conveyed to CCA in 1977; and to foreclose its federal tax liens upon Noble's interest in the Honey Lane property in order to satisfy Noble's federal tax liabilities. The United States contended that the amount of Noble's outstanding federal tax liabilities was $ 408,569.06, plus statutory interest and additions.

Great Lakes National Bank was voluntarily dismissed from the action on May 13, 1998, and Esther was dismissed from the suit on June 8, 1999. On July 23, 1998, the district court granted the government's motion for summary judgment as to the amount of the federal tax assessments against Noble and reduced that amount to judgment. Noble's Fed. R. Civ. P. 60(b) motion for relief from judgment was denied on September 29, 1998. A scheduling conference was subsequently held to address the remaining unresolved issues. However, because CCA did not appear through an attorney and Noble failed to attend, the magistrate judge rescheduled the conference and directed CCA to appear through an attorney and Noble to attend. When both CCA and Noble failed to abide by the magistrate judge's order, the magistrate judge filed a report recommending that a default judgment be entered against CCA. On January 13, 1999, the district court adopted the magistrate judge's report and recommendation and entered a default judgment against CCA.

Thereafter, the United States filed a motion for final judgment and order for judicial sale of the Honey Lane property. On June 8, 1999, the district court found that Noble's conveyance of the Honey Lane property to CCA was fraudulent, but sought supplemental briefing on the appropriate distribution of the proceeds from the sale of the property. Following supplemental briefing, the district court ordered the sale of the property, with the proceeds, after expenses, divided equally between the United States and CCA. Both Noble and the government have filed timely appeals. Within his notice of appeal, Noble requests a stay of the sale of the Honey Lane property. The United States has filed motions to strike portions of Noble's opening brief and his cross-appellee brief, to which Noble has responded.

The government's motions to strike are granted. Our review of the record indicates that the documents that are the subject of the government's motions were not submitted to the district court and made part of the record below. "This Court will not entertain on appeal factual recitations not presented to the district court any more readily than it will tolerate attempts to enlarge the record itself." Guarino v. Brookfield Township Trs., 980 F.2d 399, 404 (6th Cir. 1992).

Upon de novo review, we conclude that the district court properly granted summary judgment in favor of the United States and reduced the tax assessments to judgment. See EEOC v. Northwest Airlines, Inc., 188 F.3d 695, 701 (6th Cir. 1999). The government presented certificates of assessment and payment for the tax years 1973, 1974, 1975, and 1984, in support of the amount of taxes, interest, and penalties it claimed Noble owed. Certificates of assessment are presumptively correct and enable the government to establish a prima facie case of tax liability. Gentry v. United States [92-1 USTC ¶50,225], 962 F.2d 555, 557 (6th Cir. 1992); United States v. Walton [90-2 USTC ¶50,429], 909 F.2d 915, 918-19 (6th Cir. 1990). The burden is on the taxpayer to produce evidence to the contrary. Walton [90-2 USTC ¶50,429], 909 F.2d at 918-19. Noble submitted no evidence to refute the government's position. Instead, Noble merely asserted various arguments as to why he is not liable for payment of the alleged taxes owed. All of Noble's arguments, however, are frivolous. In addition, we find no merit to Noble's claim that summary judgment was prematurely granted in favor of the government because he did not have an adequate opportunity for discovery.

We further conclude that the district court properly concluded that the proceeds from the sale of the Honey Lane property, after expenses, should be divided equally between the United States and CCA. Because the government sought to collect unpaid federal income taxes from Noble's interest in the property, the government and CCA are equally entitled to the proceeds from the sale of the property, as CCA still holds title to the property subject to the rights of the government, as Noble's creditor. Mich. Comp. Laws Ann. §552.102 (West Group 2000); Brownell Realty, Inc. v. Kelly, 103 Mich. App. 690, 303 N.W.2d 871, 875 (Mich. Ct. App. 1981). The government's alter ego and nominee theories do not compel a different result, as the government may only proceed against Noble's interest in the property. The default judgment against CCA did not establish that Noble's interest included CCA's interest because the default judgment concerned fraudulent conveyance, not CCA's alter ego or nominee status. Thus, the remaining one-half interest belongs to CCA as a result of Noble and Esther's conveyance of the property to CCA. See Mich. Comp. Laws Ann. §552.102; Brownell Realty, 303 N.W.2d at 875.

Accordingly, the government's motions to strike are granted, the district court's orders are affirmed, and Noble's motion to stay is denied as moot. Rule 34(j)(2)(C), Rules of the Sixth Circuit.

^* The Honorable Dan A. Polster, United States District Judge for the Northern District of Ohio, sitting by designation.