Fraudulent Conveyances Part3 page6

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CONCLUSION

As a final comment, we note that the precedential value of this opinion is limited by the peculiar facts presented in this appeal. We wish to make perfectly clear that transferees such as the Westleys--those who receive property from a taxpayer who has fraudulently transferred assets for the purpose of evading the payment of taxes--can be compelled to return the property to the transferor to satisfy the transferor's tax obligation. And, in states with laws like those of Tennessee , the transferee is liable even in the absence of actual fraudulent intent by the taxpayer if the conveyance leaves the transferor insolvent. The result we reach today is the direct result of the fact that Supreme Inc.'s property is no longer in the hands of the debtors, and their personal debts have been discharged in bankruptcy. The Government has an arsenal of tools available to collect outstanding taxes; in this case, it simply chose not to use those tools until the debt, through the natural course of events, became uncollectible.

For the foregoing reasons, we AFFIRM the district court's holding, on summary judgment, that Supreme Inc.'s conveyance of assets to the Westleys was fraudulent. However, we REVERSE the district court's conclusion that the Westleys' debt was not discharged in bankruptcy and REMAND this case to the district court for entry of an order that the Westleys' debt arising out of the fraudulent conveyance was included in their Chapter 7 discharge.

¹ Mr. Westley held 14% of the stock; Mrs. Westley, 13%; and Mr. Willis, 73%. The government's brief indicates that Mr. Willis died prior to the Government's filing of this case in 1997, and, therefore, Mr. Willis was not named as a party to the lawsuit.

² Because the Government did not proceed under §6901, we express no opinion regarding any possible effects §6901 would have on the outcome of this case, nor do we express any opinion on whether the nature of the proceeding would be different if the Government had invoked §6901.

³ The relevant portions of Tennessee 's UFCA follow:

TENN. CODE ANN. §66-3-305. Conveyances by insolvent without fair consideration declared fraudulent. Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to such person's actual intent, if the conveyance is made or the obligation is incurred without a fair consideration.

TENN. CODE-ANN. §66-3-308. Conveyances with intent to defraud. 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.

TENN. CODE ANN. §66-3-302. Test for insolvency. A person is insolvent when the present fair salable value of the person's assets is less than the amount that will be required to pay the probable liability on such person's existing debts as they become absolute and mature.

TENN. CODE ANN. §66-3-304. "Fair consideration" defined. Fair consideration is given for property, or obligation: (1) When in exchange for such property, or obligation, as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied; . . .

TENN. CODE ANN. §66-3-310. Remedies of creditor on matured debt. Where a conveyance or obligation is fraudulent as to a creditor, such creditor, when the 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, or one who has derived title immediately or mediately from such a purchaser: (1) Have the conveyance set aside or obligation annulled to the extent necessary to satisfy the creditor's claim; or (2) Disregard the conveyance and attach or levy execution upon the property conveyed.

⁴ Specifically, the Westleys contend that the Government has a legal remedy against the Supreme Partnership under contract law because the Supreme Partnership agreed to assume the tax liability when it accepted the assets. Other than an inference that may be argued from Supreme Partnership's financial statements, there is no evidence whatsoever of a contract between Supreme Inc. and the Supreme Partnership regarding the payment of the corporation's tax liability. Because the Westleys have failed to prove the existence of any such contract, we find this argument irrelevant to the question before us.

Dissenting Opinion

KENNEDY, Circuit Judge

: While I agree with much of the majority opinion, I am unable to concur in full because I am persuaded that the debt here is for a tax and, therefore, not dischargeable in bankruptcy under 11 U.S.C. §523 even though no claim was filed.

Tenn. Code Ann. §66-3-310 permits the creditor of an insolvent person or corporation to proceed against property conveyed to another individual or entity without consideration while the debtor was insolvent. ¹ Further Tennessee law permits a judgment against the creditor when the property has been reduced to cash. Applying Tennessee law, we affirmed the tax court when it required the wife of a taxpayer to surrender cash she received from the taxpayer's insurance policies because the transfer was a fraudulent conveyance. See Bowlin v. Comm'r of Internal Revenue [60-1 USTC ¶9172], 273 F.2d 610 (6th Cir. 1960); accord Vance v. McNabb-Coal & Coke Co. 20 S.W. 424 (1892) (holding that a creditor of insolvent corporation was permitted to sue purchasing corporation which permitted insolvent corporation to distribute assets to shareholders without payment of selling corporation's debt.) ² Thus, I agree with the majority that the fact they received the insolvent's property in cash rather than in kind does not affect the debtor's right to recovery.

But I cannot agree that the debt is for fraud and, therefore, dischargeable. Because it is a claim for a tax, I would hold defendants liable to the extent each individually received assets from the insolvent corporation. While it is true that the district court found that the corporation was insolvent and its conveyance of the property to defendants was a fraudulent conveyance, that finding was necessary only to identify that it was the corporation's property and to determine the amount each defendant received. The debt on which the United States makes its claim is a debt for the corporation's tax. Its right to recover from defendants is because that debt. Were we dealing with tangible property fraudulently conveyed to defendants and the same scenario of an action in equity to set aside the transfer, it would be easier to recognize that the debt is for the tax, not a personal claim against the transferee for fraud. The transferee is only liable for the amount of the insolvent's property transferred while insolvent. Indeed, the transferee would be liable even if not guilty of fraud. The insolvent corporation could transfer assets to innocent shareholders who knew nothing about its insolvency. The creditor would nonetheless be entitled to set aside the transfer as a fraud of creditors without any fraud on the part of the intended shareholder. The fraud would be by the corporation. Yet the creditor would be able to recover the money or property transferred by the insolvent corporation.

Transferee liability is an action against the transferred property, as the majority points out. (Majority Opinion ¶50.) The creditor seeks to recover only the property conveyed by the insolvent corporation. The United States , in its capacity as a creditor of the insolvent corporation, seeks a money judgment only for the amounts transferred to defendants by the insolvent corporation in its capacity as a creditor of that corporation. While the district court made a finding that defendants were guilty of actual fraud in that they intended to evade the corporation's taxes, that finding was not essential to the government's right as creditor to recover the corporation's property transferred to them while the corporation was insolvent.

The debt here is the debt of the corporation for a tax. The property from which the government seeks to recover the tax is the property of the corporation. As a debt for tax, it has not been discharged.

¹ Tenn. Code Ann. §66-3-310 states

Where a conveyance or obligation is fraudulent as to a creditor, such creditor, when the 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, or one who has derived title immediately or mediately from such a purchaser:

(1) Have the conveyance set aside or obligation ammulled to the extent necessary to satisfy the creditor's claim; or

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

² The principle that a creditor in Tennessee may pursue the insolvent corporation's assets in the hands of anyone who is not a purchaser for fair consideration is restated in dicta in Jennings, Neff & Co. v. Crystal Ice Co., 128 Tenn. 231, 159 S. W. 1088 (1913), and applied in circumstances where a corporation purchasing another corporation and taking over all its assets rendering it insolvent failed to pay the debts of the other corporation.

The doctrine that corporate assets are a trust fund, at least to the extent that creditors are entitled to equity to payment of their debts before any distribution of corporate property is made among stockholders, is fully established in Tennessee, and creditors have a right to follow its assets or property into the hands of anyone who is not a holder in good faith in the ordinary course of business.

*****

As such, the purchasing corporation holds the property so acquired impressed with the same trust with which said property was originally charged, and the purchasing corporation is liable to the creditors of the selling corporation to the extent of the value of the property thus obtained.

Id. at 1089.

 

 

 

United States of America , Plaintiff v. Lawrence A. Westley and Cecelia W. Westley, Defendants

U.S. District Court, West. Dist. Tenn. , West. Div., 97-2030 G/A, 6/17/98

[Code Sec. 6321 ]

Fraudulent conveyances: Corporate assets: Shareholders: Successor in interest: Partnership: Government as creditor: Insolvency: Intent to defraud.--A corporation's transfer of assets to its officers without consideration, and the officers' subsequent contribution of those assets to a partnership that continued the corporation's business, was void as a fraudulent conveyance under state (Tennessee) law. Although no deficiencies had been assessed at the time of the transfer, the government qualified as the corporation's creditor because the tax liabilities had accrued, the corporation was under examination, and its officers expected significant assessments. The transfer liquidated and dissolved the corporation and, thus, rendered it insolvent and incapable of paying its assessments, despite the partnership's purported assumption of its liabilities. The evidence also indicated that the transfer was intended to hinder, delay or defraud the government.

[Code Sec. 6871 ]

Fraudulent conveyances: Corporate assets: Shareholders: Bankruptcy: Discharge of tax liability: Who is the taxpayer: Debtor: Valid claim.--The government's claim for taxes against a corporation was not discharged during the bankruptcy of two of its officers. Although the government had notice of the bankruptcy and was listed as an unsecured creditor, it had not sought to collect taxes directly from the officers. Instead, it sought to recover corporate property that had been wrongfully distributed to them. Thus, it did not have an established debt to assert in the bankruptcy proceeding because the corporation's fraudulent transfer of assets to the officers had not yet been voided.

Michael J. Martineau, Department of Justice, Washington , D.C. 20530 , for plaintiff. Allan J. Wade, Baker, Donelson, Bearman & Caldwell, 2000 First Tennessee Bldg., Memphis, Tenn. 38103, for defendant.

ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT

GIBBONS, District Judge:

Before the court are the cross-motions for summary judgment of plaintiff United States of America and defendants Lawrence and Cecelia Westley. For the following reasons, the court grants plaintiff's motion for summary judgment and denies defendants' motion for summary judgment.

Defendants and non-party, A.W. Willis, Jr., were the sole shareholders of Supreme Mortgage and Realty Company, Inc. ("Supreme"), a Tennessee corporation with its principal place of business in Tennessee . Defendants Lawrence and Cecelia Westley respectively owned 14% and 13% of Supreme's stock. (Defs. Mot. Summ. J., Aff. of Lawrence Westley at 2). Willis owned the remaining shares. Plaintiff seeks recovery for unpaid corporate income taxes assessed against Supreme for the years 1979, 1980, and 1981. Plaintiff's theory is that the assets of Supreme were fraudulently conveyed to defendants in violation of the Tennessee Uniform Fraudulent Conveyance Act ("TUFCA"), T.C.A. §66-3-301 et seq., ¹ thus rendering Supreme insolvent and making payment of the assessment by Supreme no longer feasible.

The allegedly fraudulent transfer in this case occurred on May 4, 1984, when defendants and Willis liquidated Supreme and transferred all of its assets to a general partnership they established called the Supreme Mortgage Realty Company ("the partnership"). (Westley Aff. at 1-2; Defs. Ex. 1). Defendants and Willis maintained partnership interests equal to their shareholder interests in Supreme. (Pl. Mot. Summ. J., Ex. 2(b)). Defendant L.A. Westley contends that "It was never the intention of the shareholders to discontinue operating as a real estate mortgage and sales business nor to avoid any of the debts, obligations or tax liabilities (actual or anticipated) of Supreme, Inc." (Westley Aff. at 2).

At the time of the transfer, plaintiff contends that defendants were aware that Supreme's corporate tax returns for the years 1979, 1980, and 1981 were under audit examination by the Internal Revenue Service ("I.R.S."). (Westley Aff. at 2; Pl. Ex. 1A). ² The notes to the financial statements of the partnership for the period ending December 31, 1984 reflect that the partnership was aware that the I.R.S. proposed an assessment plus penalty of approximately $517,549 against Supreme. (Pl. Ex.2(d)). Defendants claim that as of May 4, 1984, the time of liquidation, Supreme had total current assets of $2,800,711 with current liabilities of $368,020, excluding contingent federal income tax. (Westley Aff. at 3; Defs. Exs. 1(b), 5(a)). Upon liquidation, however, the partnership assumed all of Supreme's assets and liabilities, giving the partnership a total current asset value of $2,276,232 with total current liabilities of $1,720,446 in December 1984, excluding contingent federal income tax. (Defs. Ex. 4(a)).

In September of 1988, the I.R.S. allegedly made assessments against Supreme for corporate taxes and statutory additions in the amount of approximately $800,000. (Pl. Ex. 5). On or about January 3, 1994, defendants filed a bankruptcy petition in the United States Bankruptcy Court pursuant to 11 U.S.C. §727(a) and were subsequently released from all of their dischargeable debts, including those assumed under the partnership. (Defs. Ex. 6 and Coll. Ex. 7). A final order of discharge was entered on August 10, 1994. (Defs. Ex. 6). On May 8, 1997, defendants filed a motion to amend their Chapter 7 schedule of creditors to add plaintiff as a creditor. (Defs. Coll. Ex. 7). On June 5, 1997, the bankruptcy court added plaintiff to defendants' list of creditors to discharge the tax assessment imposed by plaintiff against defendants. ( Id. ). In the order adding plaintiff as a creditor, the bankruptcy court indicated that the I.R.S. could file an objection to the dischargeability of its debt on or before August 18, 1997. ( Id. ). The I.R.S. failed to file objections to this discharge. ³

Plaintiff seeks to enforce its federal tax lien against Supreme by setting aside the conveyance of all of Supreme's assets to defendants through the partnership. It asserts that the liquidation and transfer of Supreme's assets to defendants was made without fair consideration and rendered Supreme insolvent, thus constituting a fraudulent conveyance in violation of T.C.A. §§66-3-305 and 66-3-308. Plaintiff seeks to recover from defendants the unpaid and uncollected federal income taxes of Supreme for the years 1979, 1980, and 1981, in the amounts equal to defendants' ownership interests in Supreme based upon defendants' transferee liability under Tennessee law. Thus, plaintiff seeks judgment against Lawrence Westley in the amount of $412,904.52, plus interest, and Cecelia Westley in the amount of $383,411.34, plus interest.

Defendants move for summary judgment, contending that plaintiff cannot recover against defendants as TUFCA only permits the court to set aside the allegedly fraudulent conveyance and obtain possession of the transferred assets rather than to recover a monetary judgment. Defendants assert that plaintiff's claims were discharged upon defendants' Chapter 7 bankruptcy filing. Defendants further contend that plaintiff's claims do not qualify as exceptions to discharge under 11 U.S.C. §532(a)(3). ⁴ Defend ants claim that the addition of plaintiff to defendants' list of creditors does not affect the bankruptcy discharge, given that plaintiff had notice and opportunity to object to the discharge, yet failed to do so. Therefore, defendants argue that the June 5, 1997 order of discharge is res judicata with respect to plaintiff's claims against defendants. Furthermore, defendants contend that plaintiff, as an involuntary creditor, has failed to meet the guidelines for enforcement of tax obligations on non-dischargeable debts defined by 11 U.S.C. §507(a)(8). In addition, defendants argue that they do not have possession of the transferred assets as Supreme's assets were conveyed to the partnership, not defendants. Moreover, defendants contend that they are not the federal tax debtor, therefore plaintiff cannot take action against them for the recovery of Supreme's tax lien.

Summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure is appropriate "if the pleadings, depositions, answers or 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 judgement as a matter of law." Fed. Rule Civ. Pro. 56(c). The party moving for summary judgment "bears the burden of clearly and convincingly establishing the nonexistence of any genuine issue of material fact, and the evidence as well as all inferences drawn therefrom must be read in a light most favorable to the party opposing the motion." Kochins v. Linden-Alimak, Inc., 799 F.2d 1128, 1133 (6th Cir. 1986).

When confronted with a properly supported motion for summary judgment, the non-moving party must set forth specific facts showing that there is a genuine issue for trial. A genuine issue for trial exists if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The party opposing the motion must "do more than simply show that there is some meta-physical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). In short, the non-moving party may not oppose a properly supported summary judgment motion by mere reliance on the pleadings. Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986).

Where a taxpayer has allegedly fraudulently disposed of his property prior to the existence of federal tax liens, the United States may seek relief under the applicable fraudulent conveyance laws of the particular state in which the property is located. See Commissioner v. Stern [58-2 USTC ¶9594], 357 U.S. 39, 45 (1958) (finding that in actions by the federal government for recovery of assessed taxes, "until Congress speaks to the contrary, the existence and extent of liability . . . should be determined by state law."). Accordingly, plaintiff has chosen to pursue the present action under Tennessee's laws against fraudulent conveyances, T.C.A. §66-3-301 et seq. Specifically, plaintiff employs T.C.A. §§66-3-305 (conveyances by insolvent without fair consideration declared fraudulent) and 66-3-308 (conveyances with intent to defraud) in seeking to recover the federal tax liens against Supreme. Plaintiff correctly asserts that conveyances deemed to be fraudulent under these statutes are void. T.C.A. §§66-3-101, 66-3-308; Hicks v. Hicks, 176 B.R. 466, 470 (Bankr. W.D.Tenn. 1995). Therefore, plaintiff may seek to void the transfer of Supreme's assets to defendants through the partnership.

Defendants first argue that plaintiff cannot produce evidence that the transfer of property and money from Supreme to the partnership was made at a time when Supreme was insolvent or was thereby rendered insolvent in violation of T.C.A. §66-3-305. A plaintiff may establish a fraudulent conveyance, under T.C.A. §66-3-305, by showing the conveyance rendered the defendant insolvent if there was no fair consideration, thereby constituting fraud. Macon Bank & Trust Co. v. Holland, 715 S.W.2d 347, 348 (Tenn. App. 1986). According to T.C.A. §66-3-304, fair consideration is given when:

in exchange for such property . . . as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied; or . . . when such property or obligation is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the value of the property or obligation obtained.

See also United States v. Kerr [78-2 USTC ¶9827], 470 F. Supp. 278, 282 (E.D. Tenn. 1978) (finding that debtor was insolvent under the fraudulent conveyance provisions if "the fair market value of his property would not then have covered his obligations as they fell due."). Under Tennessee law, "[a] person is insolvent when the present fair salable value of the person's assets is less than the amount that will be required to pay the probable liability on such person's existing debts as they become absolute and matured." T.C.A. §66-3-302. In testing for insolvency, the court must ascertain both the value of the debtor's assets and the amount of existing liabilities at the time of the conveyance. Crocker v. Ryan, 914 S.W.2d 551, 553 (Tenn. App. 1995) (explaining that the relevant debts are the ones in existence when the conveyance is made even if due and payable at a future date). The burden to establish the insufficiency of consideration with regard to the sale of the debtor's assets rests with the complainant, in this case plaintiff. Ottarson v. Dobson & Johnson, 430 S.W.2d 873, 877-78 (Tenn. App. 1968).

In the present matter, plaintiff asserts that defendants' liquidation and transfer of all of Supreme's assets to the partnership, in which defendants were partners, constitutes a fraudulent conveyance. Plaintiff's burden at this stage is to show that no genuine issue exists as to Supreme's solvency at the time of the allegedly fraudulent transfer.

Defendants admittedly liquidated and dissolved Supreme as a corporate entity with significant federal tax liabilities pending against it. Defendants contend, however, that because the partnership established to function in Supreme's place was capable of assuming any tax liability pending against Supreme, defendants did not render Supreme insolvent for tax purposes. Defendants direct the court's attention to a decision of the United States District Court for the Eastern District of New York, United States v. Red Stripe, Inc. [92-1 USTC ¶50,277], 792 F. Supp. 1338, 1343 (E.D.N.Y. 1992). This case, however, strengthens plaintiff's position. In Red Stripe, a tax debtor corporation was the subject of a fraudulent conveyance action brought by the I.R.S. pursuant to New York law with respect to its transfer of all of its assets to a limited partnership without fair consideration. The transfer left the corporation insolvent and incapable of paying federal tax liabilities accrued at the time of the transaction. The corporation argued that the transfer of assets did not render it insolvent for tax purposes because the agreement between itself and the limited partnership explicitly stated that the limited partnership would assume the corporation's tax liabilities. The Red Stripe court rejected the corporation's argument, stating that, "[The corporation] cannot avoid the obligation to pay federal income taxes through an agreement providing that a third party assumed that obligation. If [the corporation] acquired a right of action against [the limited partnership], it is free to exercise any potential right to indemnification in a separate proceeding" Id.

As in Red Stripe, defendants here argue that because a third party, the partnership, agreed to assume Supreme's liabilities, the alleged transaction between Supreme and the partnership cannot be viewed as a fraudulent conveyance under T.C.A. §66-3-305. The court disagrees. Like the corporation at issue in Red Stripe, Supreme was liquidated and dissolved with the understanding that all of its assets and liabilities would be assumed by the partnership. Therefore, Supreme was necessarily rendered insolvent without fair consideration by its transformation into the partnership. Moreover, the evidence submitted by defendants indicates that defendants agreed to the conveyance with an understanding that Supreme would be assessed significant tax liabilities. For example, the notes to Supreme's financial statements of September 30, 1983 and May 4, 1984 discuss at length expected federal tax liabilities arising from Supreme's sale of mortgaging service contracts. In addition, Mr. Westley, in his affidavit states, "at the time the liquidation plan was adopted Supreme, Inc.'s 1979, 1980, and 1981 U.S. Corporate Income Tax Returns were under audit examination by the IRS, although no assessments were proposed or made at the time of the liquidation." (Westley Aff. at 2). The United States is deemed a creditor from the date when the obligation to pay income taxes accrues. See United States v. Jones [95-1 USTC ¶50,190], 877 F. Supp. 907, 914 (D.N.J.) (citations omitted), aff'd [96-1 USTC ¶50,056], 74 F.3d 1228 (3rd Cir. 1995). While some courts have held that tax liabilities, even if unassessed, are deemed due at the close of the taxable year, Edelson v. Commissioner [87-2 USTC ¶9547], 829 F.2d 828, 833-34 (9th Cir. 1987), other courts hold that taxes accrue on the date the tax returns are due to be filed. United States v. St. Mary [72-1 USTC ¶9319], 334 F. Supp. 799, 803 (E.D.Pa. 1971). Under either theory, the United States was a creditor of Supreme at the time of the 1984 conveyance. The evidence presented by plaintiff indicates that at the time of the conveyance, there existed over $500,000 in contingent federal income tax liability against Supreme for the 1981 tax year.

Defendants fail to offer any evidence which raises a genuine issue of material fact as to Supreme's solvency after the transfer of assets. Defendants do not assert that there was fair consideration for the transfer to the partnership. The court therefore finds that the transfer of assets to the partnership constituted a fraudulent conveyance under T.C.A. §66-3-305 as a matter of law.

Because the conveyance is fraudulent as a matter of law, it is unnecessary to consider whether there is a genuine issue as to defendants' actual intent to defraud. Because the parties have briefed the issue of actual intent, however, the court also analyzes the conveyance under the actual intent test of T.C.A. §66-3-308.

To set aside a conveyance as fraudulent under T.C.A. §66-3-308, a plaintiff must prove that the conveyance was done "with actual intent . . . to hinder, delay, or defraud, either present or future creditors." Whether a transfer is fraudulent due to actual intent to hinder, delay, or defraud is determined by the facts and circumstances of each case. Macon Bank, 715 S.W.2d at 349. As to existing creditors, such as the plaintiff in this case, a voluntary transfer is presumed fraudulent and is voidable unless the debtor proves that his financial condition was such that the transfer did not have the effect of hindering or delaying creditors. In re Turner, 78 B.R. 166, 169 (Bankr. E.D.Tenn. 1987); 37 C.J.S. Fraudulent Conveyances §§100 & 178.

Furthermore, due to the difficulty of finding direct proof of actual intent to hinder, delay, or defraud, Tennessee courts look to reasonable inferences drawn from the surrounding circumstances. Macon Bank, 715 S.W.2d at 349. Circumstances which have been found to imply actual intent to hinder, delay or defraud include: (1) inadequate consideration for the transfer; (2) relationship of the parties; (3) transfer of an entire estate; (4) the failure of the parties to testify or produce an explanation or rebutting evidence; and (5) the transferor is in a precarious financial condition. Id. (listing circumstances and explaining that a " 'badge of fraud' is any fact that throws suspicion on the transaction and calls for an explanation"); Weaver v. Nelms, 750 S.W.2d 158, 160-61 (Tenn. App. 1987); Union Bank v. Chaffin, 147 S.W.2d 414, 418 (Tenn. App. 1940).

As plaintiff points out, defendants were two of the three primary shareholders of Supreme; the transfer was completed through a complete liquidation and dissolution of Supreme upon which the partnership, established by defendants, assumed all of Supreme's assets and liabilities; defendants maintained ownership interests in the partnership identical to those previously held in Supreme; and the transfer occurred at a time when Supreme was expected to be indebted to the United States for at least $500,000. Plaintiff's evidence establishes defendants' actual implied intent to hinder, delay, or defraud, the I.R.S. by transferring Supreme's money and property to the partnership. Despite defendant L.A. Westley's statement that neither he nor his partners intended to avoid any actual or anticipated debts, obligations, or tax liabilities by dissolving Supreme and defendants' argument that their assumption of Supreme's assets and liabilities through the partnership does not constitute a fraudulent conveyance, defendants have provided no other evidence to permit a factual finding in support of their position. On a motion for summary judgment the party opposing the motion, in this case defendants, must set forth specific facts showing that there is a genuine issue for trial. Defendants' conclusory assertion of lack of actual intent is insufficient to rebut plaintiff's evidence of defendants' actual intent to fraudulently convey property in violation of T.C.A. §66-3-308. Accordingly, the court grants plaintiff's motion for summary judgment on this issue.

Defendants, in their motion for summary judgment, assert however, that plaintiff's action is barred by the bankruptcy court's discharge of defendants' debt under 11 U.S.C. §727. Specifically, defendants contend that plaintiff's claims are dischargeable pursuant to 11 U.S.C. §507(a)(8)(A) which governs the discharge and priority of unsecured claims of governmental units for taxes accrued within specific periods of time. As previously discussed in the order denying defendants' motion to dismiss, filed July 30, 1997, the court finds meritless defendants' assertions that plaintiff is barred from bringing its action due to the discharge of defendants' debts in a prior Chapter 7 bankruptcy action. The purpose of this entire action is to determine whether or not the I.R.S. can establish a debt against defendants. As noted previously, this is not an action for collection of taxes directly from defendant. Rather, the fraudulent conveyance action will provide plaintiff with an avenue to recover property wrongfully distributed to defendants by Supreme in order to satisfy the federal tax lien against Supreme.

Until now, the I.R.S. had not established a debt against the defendants which could have been addressed in any of defendants' Chapter 7 proceedings, including defendants' re-opened no-asset Chapter 7 proceeding against plaintiff of June 5, 1997. Therefore, even though plaintiff had actual notice of defendants' Chapter 7 proceedings as of May 8, 1997, at which time plaintiff was officially added as an unsecured creditor, plaintiff did not have an established debt to assert against defendants prior to the filing of this order. Thus, plaintiff's claims did not arise or accrue prior to the filing of defendants' bankruptcy petition in 1994 or subsequent proceedings in bankruptcy court requiring discharge of the debt established in this order. As such, defendants' debt with respect to plaintiff's claim was not discharged under defendants' Chapter 7 bankruptcy order.

Accordingly, the court grants plaintiff's motion for summary judgment as to the claims of fraudulent conveyance under T.C.A. §§66-3-305 and 66-3-308 and denies defendants' motion for summary judgment. The conveyance of Supreme's assets to the partnership is set aside as fraudulent.

IT IS SO ORDERED.

¹ Defendants continue to argue that plaintiff brought this claim under both TUFCA and 26 U.S.C. §6901, which impose transferee liability against transferees of a taxpayer's assets. In its July 30, 1997 order denying defendants' motion to dismiss, however, the court noted, "It is clear from the plaintiff's response to the present motion, however, that the plaintiff is not basing its claim upon §6901. In this case, plaintiff seeks to collect from defendants taxes owed under applicable state law (TUFCA) only.". U.S.A. v. Westley, No. 97-2030 (W.D. Tenn. July 30, 1997) (order denying defendants' motion to dismiss). Since the filing of that order, no circumstances have arisen to change the position of the parties or the court. Accordingly, the court addresses only those claims arising under TUFCA.

² Defendants contend that the declaration of Martineau and all documents attached thereto are inadmissible for failure to conform with the requirements of Federal Rules of Civil Procedure Rule 56(e). The relevant portion of Rule 56(e) provides that, "Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to matters therein." Martineau's declaration is essentially a statement that the documents attached to it are a part of the IRS file in this case. Martineau is a proper custodian of the file for purposes of its introduction. While specific portions of the file may be subject to a meritorious hearsay objection, defendants have not specified any particular documents to which they object. Moreover, it does not appear that reliance on any hearsay document is necessary to establish any pertinent facts.

³ The enforceable debt at issue in this case was not discharged in the bankruptcy court order of June 1997 because such debt had not been established by the I.R.S. Westley, No. 97-2030, at 3 (order denying defendants' motion to dismiss). As will be explained in greater detail infra, the I.R.S. does not seek to enforce a direct tax lien against defendants. Rather, plaintiff has brought this action under TUFCA to void the transfer of Supreme's assets to defendants through the partnership in May of 1984. If the court deems the conveyance fraudulent and voids the transfer, then the I.R.S. may impose a judgement lien against defendants for recovery of Supreme's assets. Then, with Supreme's recouped funds, plaintiff can satisfy the tax lien still pending against Supreme. Defendants argue that the Chapter 7 proceeding to which plaintiff failed to object discharged the liens that plaintiff seeks to impose upon defendants, thus creating a res judicata effect on this case. Defendants are incorrect. The bankruptcy court could not have discharged the debt at issue in this matter because the lien against defendant has yet to be determined or enforced and thus does not constitute "debt." When this order is entered in favor of plaintiff, then and only then, will the lien against defendants for recovery of assets fraudulently conveyed to them by the May 1984 liquidation of Supreme become enforceable debt.

⁴ 11 U.S.C. §523(a)(3) provides in pertinent part:

A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt . . . neither listed nor scheduled under section 521(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit . . . timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing.

 

 

 

Sequoia Property and Equipment Limited Partnership, Plaintiff v. United States of America, Defendant

U.S. District Court, East. Dist. Calif., CV-F 97-5044 OWW SMS, 4/28/98

[Code Secs. 6323 and 7403 ]

Lien for taxes: State law: Alter ego: Nominee: Summary judgment.--Although the IRS's cause of action under state (California) law for fraudulent conveyance had been extinguished by expiration of the statute of limitations, it was not precluded from asserting that a partnership was the alter ego and/or the nominee of its partners. The fraudulent conveyance, nominee and alter ego theories were discrete, despite the similar factual basis necessary to establish each theory. The partnership had transferred real property, which was subject to a federal nominee tax lien, to its general partners. The IRS was not, however, entitled to summary judgment on either theory since issues of material fact remained.

Benjamin P. Ramos, 705-2 E. Bidwell St., Folsom, Calif. 95630, for plaintiff. G. Patrick Jennings, Department of Justice, Washington, D.C. 20530, for defendant.

MEMORANDUM OPINION RE: (1) PLAINTIFF'S MOTION FOR CLARIFICATION OF THE ORDER GRANTING SUMMARY JUDGMENT; (2) DEFENDANT'S MOTION FOR RULE 56(f) RELIEF; (3) DEFENDANT'S MOTION TO AMEND SCHEDULING ORDER TO REOPEN DISCOVERY; and (4) DEFENDANT'S MOTION FOR SUMMARY JUDGMENT.

I. INTRODUCTION

WANGER, District Judge:

Plaintiff Sequoia Property and Equipment Limited commenced this action against the United States to quiet title to real property upon which the IRS has placed a nominee federal tax Lien. Plaintiff now seeks clarification of the Court's March 27, 1998, memorandum opinion granting summary judgment. The government moves for summary judgment on three discrete theories (1) whether the plaintiff is the alter ego of the taxpayers Gilbert and Rhonda Crisp, (2) whether the plaintiff is the nominee of the taxpayers Gilbert and Rhonda Crisp and, (3) whether the conveyance of property was a fraudulent conveyance. ¹ The government also seeks Rule 56(f) relief and an amendment of the scheduling order to reopen discovery.

II. PROCEDURAL BACKGROUND

On December 23, 1997 the government served a Notice of Deposition and Request for Production of Documents and Requests for admissions on the plaintiff. Plaintiff informed defendant that he would not appear for discovery pending a ruling on plaintiff's motion for summary judgment. (Letter dated January 21, 1998 from Mr. Ramos) Plaintiff never responded to the governments request for admissions.

On January 22, 1998, plaintiff filed a notice of motion for summary judgment. Plaintiff's motion for summary judgment concerned whether the conveyance of property from the Crisps to Sequoia was a fraudulent conveyance. On March 2, 1998 the Court heard oral argument on plaintiff's summary judgment motion. On March 27, 1998, the Court issued a memorandum opinion granting summary judgment in favor of the plaintiff on the issue of fraudulent conveyance. ² On February 27, 1998, the government filed a separate motion for summary judgment which is currently before the Court. ³ On March 13, 1998 plaintiff lodged an ex parte application seeking (1) shortening of time for service of motion for relief from admissions; (2) an order granting plaintiff relief from admissions; (3) an order granting plaintiff's request for Rule 56(f) relief; and (4) re-calendering of defendant's summary judgment motion until April 27, 1998. The government did not file objections to the lodged order. On March 20, 1998, the Court granted plaintiff's ex parte motion.

Plaintiff filed a motion for clarification currently before the Court. The government filed its opposition to the motion for clarification. Contemporaneously, the government also filed a motion to amend the scheduling order to re-open discovery and a motion for Rule 56(f) relief. Plaintiff filed an opposition to defendant's motions.

III. FACTUAL BACKGROUND

Sequoia is a California limited partnership. Sequoia's general partners are Gilbert Mark Crisp and Rhonda Crisp ("the Crisps"). The real property that is allegedly subject of the complaint is located at 5036 West Oak Street, Visalia California ("hereinafter referred to as the property"). The Crisps operated a now-defunct California Corporation named Crisp Construction Co., Inc.. On October 10, 1992, the Crisps granted an equitable interest in their residence to Sequoia Properties ("Sequoia"). On January 7, 1994, the government filed a notice of federal tax lien against Crisp Construction Co. On August 27, 1996, the government filed a federal nominee tax lien against Sequoia real property, which includes the Crisp's residence.

Although Sequoia argues the lien is to secure payment of taxes owed by Crisp Construction Co., the government alleges the lien is to secure payment of taxes directly owed by the Crisps. It is undisputed Sequoia received no statutory notices regarding its alleged transferee/nominee tax liability.

IV. LEGAL STANDARD

Summary judgment is appropriate only "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." Fed. R. Civ. P. 56(c); see Maffei v. Northern Ins. Co. of New York, 12 F.3d 892, 899 (9th Cir. 1993). A genuine issue of fact exists when the non-moving party produces evidence on which a reasonable trier of fact could find in its favor viewing the record as a whole in light of the evidentiary burden the law places on that party. Triton Energy Corp. v. Square D Co., 68 F.3d 1216, 1221 (9th Cir. 1995); see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252-56 (1986). The non-moving party cannot simply rest on its allegation without any significant probative evidence tending to support the complaint. U.A. Local 343 v. Nor-Cal Plumbing, Inc., 48 F.3d 1465, 1471 (9th Cir.), cert. denied, 116 S. Ct. 297 (1995).

[T]he plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to the party's case, and on which that party will bear the burden of proof at trial. In such a situation, there can be "no genuine issue as to any material fact," since a complete failure of proof concerning an essential element of the non-moving party's case necessarily renders all other facts immaterial.

Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).

The more implausible the claim or defense asserted by the opposing party, the more persuasive its evidence must be to avoid summary judgment. United States ex rel. Anderson v. Northern Telecom, Inc., 52 F.3d 810, 815 (9th Cir. 1995). Nevertheless, "[t]he evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in its favor." Liberty Lobby, 477 U.S. at 255. A court's role on summary judgment, however, is not to weigh the evidence, i.e., issue resolution, but rather to find genuine factual issues. Abdul-Jabbar v. General Motors Corp., 85 F.3d 407, 410 (9th Cir. 1996).

Evidence submitted in support of or in opposition to a motion for summary judgment must be admissible under the standard articulated in 56(e). See Keenan v. Hall, 83 F.3d 1083, 1090 n.1 (9th Cir. 1996); Anheuser-Busch, Inc. v. Nat'l Beverage Distribs., 69 F.3d 337, 345 n.4 (9th Cir. 1995). Properly authenticated documents, including discovery documents, although such documents are not admissible in that form at trial, can be used in a motion for summary judgment if appropriately authenticated by affidavit or declaration. United States v. One Parcel of Real Property, 904 F.2d 487, 491-492 (9th Cir. 1990). Supporting and opposing affidavits must be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein. Fed. R. Civ. P. 56(e); Connor v. Sakai, 15 F.3d 1463, 1470 (9th Cir. 1993), rev'd on other grounds sub nom. Sandin v. Connor, 115 S. Ct. 2293 (1995).

V. DISCUSSION

A. PLAINTIFF'S MOTION FOR CLARIFICATION OF THE COURT'S MARCH 27, 1998, MEMORANDUM OPINION REGARDING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

Plaintiff seeks clarification and inquires into whether the Courts ruling on plaintiff's summary judgment motion regarding the extinguishment of the fraudulent conveyance issue entitles plaintiff to a judgment quieting title to the subject property in plaintiff. The Court's March 27, 1998 memorandum opinion held that the government was foreclosed from alleging that the transfer of property from Sequoia to the Crisps was a fraudulent conveyance under California state law. The Court concluded that State framers of the California Uniform Fraudulent Transfer Act were specific in providing for a literal extinguishment of the cause of action upon expiration of the prescribed time period. No overriding national concern was suggested to prevent states from passing fraudulent conveyance laws which have extinguishment provisions as part of the state statutory scheme. Section 3439.09 of the California Uniform Fraudulent Transfer Act extinguishes the government's right to maintain a cause of action for fraudulent conveyance under California state law. The Court held that the government's right to sue under California law was extinguished after the passage of four years. The government's right to maintain the action under state law was not vested, and in fact was extinguished before it sued. On this basis plaintiff's motion for summary judgment on the government's claim to set aside an alleged fraudulent conveyance under state law was granted.

With respect to the alter ego and nominee theories state law governs the determination of whether there exists a nominee or alter ego from whom the government may satisfy the obligation of a taxpayer. See Towe Antique Ford Foundation v. I.R.S. [92-1 USTC ¶50,115], 791 F.Supp. 1450, 1453-1454 (D. Montana 1992). In the state of California fraud is not required in order to invoke the alter ego theory. See United States Fire Insurance Co. v. National Union Fire Insurance Company of Pittsburgh, 165 Cal.Rptr. 726, 735, 107 Cal.App.3d 456, 470 (1980). The general purpose of the alter ego theory is to look through the fiction of the corporation and to hold the individuals doing business in the name of the corporation liable for its debts in those cases where it should be so held in order to avoid fraud or injustice. D. N. & E. Walter & Co. v. Zuckerman, 214 Cal. 418 (6 P.2d 251, 79 A.L.R. 329). "It is not necessary that the plaintiff prove actual fraud. It is enough if the recognition of the two entities as separate would result in an injustice." United States v. Healthwin-Midtown Convalescent Hospital and Rehabilitation Center, Inc., 511 F.Supp. 416, 420 (C.D.Cal. 1981) (quoting Gordon v. Aztec Brewing Co., 33 Cal.2d 514, 203 P.2d 522 (1949)). The burden is on the moving party to also show actual intent by a preponderance of the evidence. Liodas v. Sahadi, 19 Cal. 3d 278, 286(1977).

The parties dispute whether fraud is a component of the claim. Plaintiff alleges that the Court's ruling in favor of plaintiff on the issue of fraudulent conveyance forecloses the government from bringing a motion for summary judgment based on the alter ego and nominee theories. Plaintiff contends that the broad language of the Uniform Fraudulent Transfer Act encompasses all direct and indirect transfers of property, which would include alter ego and nominee claims. Thus, defendant's alter ego and nominee theories were extinguished when the Court granted plaintiff's motion for summary judgment. Plaintiff further alleges that fraud is a required element to establish an alter ego or nominee theory. Plaintiff contends that because the fraudulent transfer claim has been extinguished, defendant can never prove the transfer was "fraudulent", which is an essential element of its alter ego or nominee theory. Therefore, summary judgment as to the entire case is warranted.

The government counters that when a taxpayer seeks to avoid tax collection by clouding the title to his property, there are generally three discrete remedies that will undo the transaction. First, the transferee can be deemed a nominee. Second, the transferee can be deemed the alter ego of the taxpayer. Third, a fraudulent transfer may be set aside by the Court. Thus, the government asserts that because the Court's summary judgement ruling was limited to the issue of fraudulent conveyance the theories of whether a transferee is a nominee or alter ego are not foreclosed.

Under California state law the alter ego and nominee theories may be established without a showing of fraud. Even if fraud is an element, the fact that the fraudulent conveyance theory is extinguished is neither res judicata or collateral estoppel on the issue of fraud, which has not been determined on the merits for other theories of recovery. The fraudulent conveyance, alter ego and nominee theories are discrete, despite the similar factual basis necessary to establish each theory. See Towe Antique Ford Foundation v. I.R.S. [93-2 USTC ¶50,430], 999 F.2d 1387, 1390 (9th. Cir. 1993). A triable issue of fact exists as to whether plaintiff is the nominee or alter ego of the Crisps. Plaintiff's motion for clarification is GRANTED. The fraudulent conveyance, nominee and alter ego theories are discrete. The government is not precluded from asserting the alter ego or nominee theories.

B. GOVERNMENT'S MOTION FOR SUMMARY JUDGMENT BASED ON THE ALTER EGO AND NOMINEE THEORIES

1. Alter Ego Theory

It must also be determined whether the government is entitled to summary judgment based on the theory that Sequoia is the alter ego (also called "piercing the corporate veil" and "disregarding the corporate entity") of the Crisps. "State 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). Therefore, the substantive law of California controls the determination of whether Sequoia is the alter ego of the Crisps. While the alter ego doctrine is usually applied to show that an individual is liable for the actions of a corporation, the reverse is also permissible. See Taylor v. Newton, 117 Cal.App.2d 752, 758-60 (1953) (corporation found to be alter ego of defendant debtor who transferred property to corporation to avoid execution). The government may "reverse pierce" the corporate veil to impose the tax liabilities of an individual on the individual's alter ego corporation. Towe Antique Ford Foundation v. IRS [93-2 USTC ¶50,430], 999 F.2d 1387, 1390 (9th Cir. 1993) (Alarcon, J.).

Under California law, a company is the alter ego of an individual where:

(1) such a unity of interest and ownership exists that the personalities of the corporation and the individual are no longer separate, and

(2) an inequitable result will follow if the acts giving rise to liability are treated as those of the individual alone.

Orloff v. Allman, 819 F.2d 904, 908-909 (9th Cir. 1987) (abrogated on other basis in an our en banc decision in Hollinger v. Titan Corp., 914 F.2d 1564 (9th Cir.1990)); RRX Indus., Inc. v. Lab-Con, Inc., 772 F.2d 543, 545 (9th Cir.1985) (citing Automotriz Del Golfo de California S.A. De C.V v. Resnick, 47 Cal.2d 792, 796 (1957) and United States Fire Ins. Co. v. National Union Fire Ins., 107 Cal.App.3d 456, 470 (1980)); see also Firstmark Capital Corp. v. Hempel Fin. Corp., 859 F.2d 92, 94 (9th Cir.1988).

The government relies on the alter ego theory and asserts it is applicable. Plaintiff counters that a fraudulent transfer is nothing more than a "transfer" made for the alter ego purpose. Thus, plaintiff's alter ego theory is extinguished under the extinguishment provision of the California Fraudulent Transfer Act. Plaintiff's contention is answered by the cases that hold alter ego and nominee theories distinguishable and separate causes of action.

Here, the facts presented are insufficient to support the government's motion for summary judgment. The government's motion is based primarily on the unanswered Requests for Admissions, which were deemed admitted, however, the Court later relieved plaintiff from said admissions. The remaining evidence to support the motion for summary judgment, includes: (1) the Certificates of Assessment and Payments from 1988 and 1989, which indicate an assessment occurred in 1995; (2) Certificate of Limited Partnership which indicates the Crisps are the sole general partners of the plaintiff Sequoia; (3) a grant deed which records the transfer of the property from the Crisps to the plaintiff in 1992; (4) a Refusal to Accept Form Letter 2050 for Cause without Dishonor; and (5) a gas bill for the subject property in the name of Gilbert Mark Crisp as of November 11, 1996.

Plaintiff provides the declaration of Gilbert Mark Crisp in opposition. Mr. Crisp declares: (1) Sequoia is not the alter ego of Gilbert or Rhonda Crisp; (2) all general and limited partners of the partnership reside at the residence; (3) Limited partners in Sequoia help pay the rent; and (4) the partnership was created and sanctioned by the state of California and is in good standing. On these remaining facts the government proffers genuine issues of material fact exist and summary judgment is inappropriate. The government is entitled to have responses to its discovery to resolve the alter ego issue. Defendant's motion for summary judgment based on the alter ego theory is DENIED.

2. Nominee theory

In addition to asserting that Sequoia is the alter ego of the Crisps, the government asserts that Sequoia is also the nominee of the Crisps. The nominee theory focuses on the relationship between the taxpayer and the property. With respect to the nominee theory, state law governs the determination of whether there exists a nominee from whom the government may satisfy the obligation of a taxpayer. See Towe Antique Ford Foundation [93-2 USTC ¶50,430], 791 F.Supp. at 1454. There are no California decisions which directly address the issue of which factors are relevant in determining whether a business entity is the nominee of an individual. However, other Courts have considered the following factors to be relevant in determining whether a business entity is the nominee of an individual:

(a) No consideration or inadequate consideration paid by the nominee;

(b) Property 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) Close relationship between transferor and the nominee;

(d) Failure to record conveyance;

(e) Retention of possession by the transferor; and

(f) Continued enjoyment by the transferor of benefits of the transferred property.

See Towe Antique Ford Foundation [93-2 USTC ¶50,430], 791 F.Supp. at 1454; United States v. Miller Bros. Constr. Co., 505 F.2d 1031 (10th Cir. 1974) (legal title holder was merely the nominee of the taxpayer); United States v. Code Prod. Corp. [63-1 USTC ¶9367], 216 F.Supp. 281 (E.D. Pa. 1963) (title holder was nominee of corporate taxpayer); Tato Int'l Corp. v. United States [89-2 USTC ¶9485], 64 A.F.T.R.2d (P-H) para. 89-5124 (S.D. Fla. 1989) (United States' levy against assets of corporation was proper since corporation was taxpayer's nominee).

The government alleges the nominee theory is applicable and is discrete from the issue of fraudulent conveyance. Plaintiff counters that a fraudulent transfer is nothing more than a "transfer" made for the nominee purpose and the government's alter ego theory is extinguished under the extinguishment provision of the California Fraudulent Transfer Act.

Here, for the same reasons stated above the facts presented are insufficient to support the government's motion for summary judgment. The government's motion is based primarily on the absence of responses to Requests for Admissions, which were deemed admitted, however, the Court later relieved plaintiff from said admissions, upon the condition that plaintiff complete responses to such discovery. The remaining evidence to support the motion for summary judgment, includes: (1) the Certificates of Assessment and Payments from 1988 and 1989, which indicate an assessment occurred in 1995; (2) Certificate of Limited Partnership which indicates the Crisps are the sole general partners of the plaintiff Sequoia; (3) a grant deed which records the transfer of the property from the Crisps to the plaintiff in 1992; (4) a Refusal to Accept Form Letter 2050 for Cause without Dishonor; and (5) a gas bill for the subject property was in the name of Gilbert Mark Crisp as of November 11, 1996.

Plaintiff provides the declaration of Gilbert Mark Crisp in opposition. Mr. Crisp declares: (1) Sequoia is not the nominee of Gilbert or Rhonda Crisp; (2) all general and limited partners of the partnership reside at the residence; (3) limited partners in Sequoia help pay the rent; (4) the partnership was created and sanctioned by the state of California and is in good standing; (5) the property was transferred to the partnership in 1992 for the purpose of estate planning; (6) Sequoia was created by the law firm of Chuck Tanko & Associates for the purpose of estate planning; and (7) no audit occurred on Mark or Rhonda Crisp personally, (Crisp Construction Company was audited)

The facts before the Court are insufficient to determine whether genuine issues of material fact exist and summary judgment is inappropriate. The government is entitled to have responses to its discovery. Defendant's motion for summary judgment based on the nominee theory is DENIED.

C. GOVERNMENT REQUEST FOR RULE 56(f) RELIEF

The issue before the Court is whether the government is entitled to relief under Rule 56(f). Fed. R. Civ. P. 56(f) ⁴ permits the court to grant a continuance to allow further discovery or to deny summary judgment if it appears from the affidavits of the party opposing the motion for summary judgment that the party cannot present by affidavit facts essential to justify the party's opposition. Where a party believes that additional discovery is required to oppose a motion for summary judgment, that party must submit an affidavit pursuant to Rule 56(f) stating what information will be obtained and how that information will preclude summary judgment. Barona Group of the Capitan Grande Band of Mission Indians v. American Mgmt & Amusemet, Inc., 840 F.2d 1394, 1400 (9th Cir. 1987).

Rule 56(f) permits a court, in the interests of justice, to deny or continue a summary judgment motion when additional discovery is needed to counter the motion. District courts have much discretion when applying Rule 56(f). Volk v. D.A. Davidson & Co., 816 F.2d 1406, 1416-17 (9th Cir. 1987). To gain a continuance, the party opposing the motion must show the evidence allegedly to be uncovered through further discovery is reasonably likely to exist and show adequate cause for not conducting discovery earlier. Volk, 816 F.2d at 1416. A district court does not abuse its discretion by denying a party's motion to reopen discovery where the party has failed to comply with the requirements of Rule 56(f). See Ahston-Tate Corp. v. Ross, 916 F.2d 516, 619 (9th Cir. 1990).

Here, the summary judgment motion before the Court was filed by the government. As the moving party it is precluded from bringing a motion for relief under Rule 56(f). Rule 56(f) relief is limited to the party opposing the motion for summary judgment. See Adickes v. Kress, 398 U.S. 144, 161, 90 S.Ct. 1598, 1610 (1970). The government as the moving party is not entitled to relief under Rule 56(f) of the Federal Rules of Civil Procedure. The government's motion for Rule 56(f) relief is DENIED. To the extent the government is a responding party to the Crisps' motion for summary judgment, it is entitled to have the Crisps' discovery responses.

C. THE GOVERNMENT'S REQUEST TO RE-OPEN DISCOVERY

The government requests re-opening of discovery. The issue is whether there is any basis to re-open discovery. Pursuant to Rule 16(b), the government may file a motion with the Court for modification of the joint scheduling order. Modification of the joint scheduling order will be granted by leave of the district court upon a showing of good cause. Fed.R.Civ.P. 16(b); Johnson Mammoth Recreations, Inc., 975 F.2d 604, (9th Cir. 1992). Rule 16(b)'s "good cause" standard primarily considers the diligency of the party seeking the amendment. The district court may modify the pretrial schedule "if it cannot reasonably be met despite the diligence of the party seeking the extension." Moreover, carelessness is not compatible with a finding of diligence and offers no reason for a grant of relief. Although the existence or degree of prejudice to the party opposing the modification might supply additional reasons to deny a motion, the focus of the inquiry is upon the moving party's reasons for seeking modification. If that party was not diligent, the inquiry should end. Johnson, 975 F.2d at 609 (citations omitted) (quoting Fed.R.Civ.P. 16 advisory committee's notes (1983 amendment)).

Here, the record supports a re-opening of discovery. The government contends that it was unfairly burdened when the Court relieved plaintiff from the deemed admissions without ordering the plaintiff to respond to the governments request for admissions. Plaintiff counters that the government disregarded the Court's order to file discovery motions on or before February 15, 1998, and have any such motions heard on March 23, 1998. Further, plaintiff alleges the governments failure to comply with Local Rule 37-251(d) and make a good faith effort to confer and resolve the discovery dispute before filing the instant motion to amend the scheduling order to reopen discovery is an independent basis to deny the governments motion to reopen discovery. Plaintiff further alleges the government violated Local Rule 37-251(d) by failing to make any attempt to prepare and present a "Joint Stipulation re Discovery Dispute" and on this independent basis the governments motion to reopen discovery should be denied.

Here, the Court's inquiry focuses on whether the government was diligent. These factors warrant a modification of the joint scheduling conference. The government proffered good cause to modify the joint scheduling order. First, the plaintiff refused to comply with discovery. Second, the government diligently attempted to seek compliance with the discovery requests from plaintiff. Lastly, the Court apparently relieved plaintiff from admissions without compelling completion of discovery, although the Court intended to require plaintiff to comply with the government's discovery requests. The government acted diligently and is entitled to relief under Rule 16(b). Defendant's request to reopen discovery is GRANTED.

VI. CONCLUSION

For the foregoing reasons,

1. Plaintiff's motion for clarification of the order granting summary judgment is GRANTED. Pursuant to clarification Defendant is not foreclosed from bringing alter ego or nominee theories.

2. Defendant's motion for Rule 56(f) relief is DENIED, except as to completion of pending discovery to Plaintiff, as to Plaintiff's motion for summary judgment.

3. Defendant's motion to amend scheduling order to reopen discovery is GRANTED. The pending discovery is to be completed within 15 (fifteen) days, on or before May 28, 1998. All Discovery is to be completed in 45 (forty-five) days, on or before June 9, 1998.

4. Defendant's motion for summary judgment under the alter ego and nominee theories is DENIED.

5. Counsel for plaintiff Sequoia Properties shall prepare an order in conformity with the memorandum opinion and lodge it with the Court within five (5) days following date of service of this opinion.

SO ORDERED.

¹ The fraudulent conveyance theory is moot as it was decided in favor of the plaintiff in a memorandum opinion dated March 27, 1998. The opinion was issued prior to the governments filing of their motion for summary judgment. Thus, the theory of fraudulent conveyance, nominee and alter ego are intertwined in the governments motion for summary judgment.

² The issue of whether Crisps are the alter ego or nominee of Sequoia Properties was not before the Court in plaintiff's motion for summary judgment.

³ During oral argument Mr. Jennings, plaintiff for the government conceded that the government's motion for summary judgment should have been filed as a cross motion for summary judgment.

⁴ Rule 56(f) of the Federal Rules of Civil Procedure provides in pertinent part:

When Affidavits Are Unavailable. Should it appear from the affidavits of a party opposing the motion that he cannot for reasons stated present by affidavit facts essential to justify his opposition, the court may refuse the application for judgment or may order a continuance to permit affidavits to be obtained or depositions to be taken or discovery to be had or may make such other order as is just.

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

 

 

Daniel L. Jessen, by his Court-Appointed Conservator, Janice Tusinger, Plaintiff v. United States of America, Internal Revenue Service, Defendant United States of America, Counterclaim Plaintiff v. Daniel L. Jessen, by his Court-Appointed Conservator, Janice Tusinger, Counterclaim Defendant United States of America, Crossclaim Plaintiff v. Allen L. Jessen, Loren L. Jessen, Anita L. Jessen, and Banc One Corporation, Crossclaim Defendants

U.S. District Court, Dist. Wyo., 95-CV-109-B, 7/29/96

[Code Sec. 6321 ]

Tax liens: Transfer of property interest to child: Fraudulent conveyance: Nominee.--The IRS properly filed notices of federal tax liens on a farm that was owned by an individual who was assessed with deficiencies, penalties and interest even though he transferred his interest in the farm to his son. Under the Uniform Fraudulent Conveyance Act, which was adopted by the state (Wyoming) where the property is located, the transfer was set aside as fraudulent. The taxpayer received no consideration for the transfer, and he continued to live on and farm the property after the transfer. His son had no input or control over the farm's operations. Since the transferee was the taxpayer's son, the taxpayer had a close relationship with him. The taxpayer admitted that he transferred the property to his son after he learned that a creditor planned to sue him. Moreover, the transfer rendered him insolvent. The taxpayer's son was also his nominee.

Alexander K. Davison, Patton & Davison, 1920 Thomes Ave., Cheyenne, Wyo. 82003-0945, for plaintiff. Donald R. Wrobetz, Assistant United States Attorney, Cheyenne, Wyo. 82003-0668, Susan L. Berson, Department of Justice, Washington, D.C. 20530, for defendant. Donald R. Wrobetz, Assistant United States Attorney, Cheyenne, Wyo. 82003-0668, Susan L. Berson, Department of Justice, Washington, D.C. 20530, for cross-claimant. Stephanie R. Bryant, Dennis K. Ridley & Assocs., 300 E. 18th St., Cheyenne, Wyo. 82001, for cross-defendant (Jessen, D.). Bruce N. Willoughby, Brown, Drew, Massey & Sullivan, 123 W. 1st St., Casper, Wyo. 82601, for cross-defendant (Bk. One Corp.). Donald R. Wrobetz, Assistant United States Attorney, Cheyenne, Wyo. 82003-0668, Susan L. Berson, Department of Justice, Washington, D.C. 20530, for cross-claimant. Stephanie R. Bryant, Dennis K. Ridley & Assocs., 300 E. 18th St., Cheyenne, Wyo. 82001, for cross-defendant (Jessen, D.). Bruce N. Willoughby, Brown, Drew, Massey & Sullivan, 123 W. 1st St., Casper, Wyo. 82601, for cross-defendant (Bk. One Corp.). Donald R. Wrobetz, Assistant United States Attorney, Cheyenne, Wyo. 82003-0668, Susan L. Berson, Department of Justice, Washington, D.C. 20530, for counter-claimant. Alexander K. Davidson, Patton & Davison, 1920 Thomes Ave., Cheyenne, Wyo. 82003-0945, for counter-defendant (Tusinger, J.). James T. Dinneen, Lathrop & Rutledge, P.O. Box 4068, Cheyenne, Wyo. 82003-4068, for counter-defendant (Jessen, A.L.). Bruce N. Willoughby, Brown, Drew, Massey & Sullivan, 123 W. 1st St., Casper, Wyo. 82601, for counter-defendant (Bk. One Corp.). Stephanie R. Bryant, Dennis K. Ridley & Assocs. 300 E. 18th St., Cheyenne, Wyo. 82001, for counter-defendant, (Jessen, D.).

ORDER AND JUDGMENT

BRIMMER, District Judge:

Plaintiff Janice Tusinger claims that the IRS wrongfully levied on property owned by Daniel Jessen. The government claims that Dennis Jessen transferred the property to his son Daniel and that Daniel is Dennis Jessen's nominee. The government asserts that it properly placed a lien on the property to recover unpaid income taxes. The Court makes the following findings of fact and conclusions of law:

Findings of Fact

1. Dennis Jessen and his three siblings, Allen Jessen, Loren Jessen, and Anita Jessen, each owned an undivided 1/4 interest in family property located in Laramie County, Wyoming.

2. The legal description of the real property at issue is:

All that portion of the S1 /2SE1/4 of Section 19, T16 N. R60W of the 6th P.M., Laramie County, Wyoming, being described as follows:

Beginning at a point on the South boundary of said Section 19, from which the Southeast Corner thereof bears easterly a distance of 1241.7 feet; thence northerly perpendicular to the South boundary of said Section 19, a distance of 323.6 feet; thence westerly, parallel to the South boundary of said Section 19, a distance of 244.2 feet; thence southerly, perpendicular to the South boundary of said Section 19, a distance of 123.6 feet; thence westerly, parallel to the South boundary of said Section 19, a distance of 200.0 feet to a point on the South boundary of said Section 19, a distance of 938.2 feet to the point of beginning. Said portion of land containing 5.00 acres.

(1) West Half of Section 11 , Township 15 North, Range 60 West of the 6th P.M.

(2) West Half of Section 14, Township 15 North, Range 60 West of the 6th P.M.

(3) Northeast Quarter of Section 11 , Township 16 North, Range 61 West of the 6th P.M.

(4) East Half of Section 24 , Township 16 North, Range 61 West of the 6th P.M.

(5) Northwest Quarter of Section 19, Township 16 North, Range 60 West of the 6th P.M.

3. Dennis Jessen transferred his share of the property to his son Daniel in 1984, when Daniel was three years old. Dennis did not receive any money or assets with a total value greater than $10.00 in exchange for this conveyance to his son.

4. Dennis Jessen made this transfer after he discovered that a creditor planned to sue him. After the conveyance, Dennis Jessen had no assets in his name except for personal belongings.

5. Dennis Jessen has farmed and managed the property since the transfer. He has never made a rental payment to Daniel Jessen for use of the land.

6. Dennis Jessen has lived on the property rent-free since the transfer.

7. Dennis Jessen used farm proceeds to pay personal expenses, including groceries, credit card bills, and "miscellaneous items."

8. Dennis Jessen used farm proceeds to purchase a pick up truck and other farm equipment.

9. Dennis Jessen characterizes this equipment as "Daniel's," but Daniel Jessen has never held title to this equipment. Dennis Jessen was the only person to operate this equipment. Dennis Jessen sold some of this equipment and used the proceeds to pay a portion of his settlement with Chromalloy.

10. Dennis Jessen also has operated an equipment leasing company on the property.

11. Daniel Jessen is now fifteen years old.

12. Janice Tusinger was appointed as conservator of Daniel Jessen's estate by the Jasper County, Missouri, Probate Court on September 24, 1992.

13. Dennis Jessen paid property taxes on Daniel Jessen's property until Tusinger's appointment. Tusinger has paid the property taxes since that time.

14. Dennis Jessen failed to file income tax returns for the tax years 1984, 1986, 1988, and 1990.

15. The Internal Revenue Service (IRS) assessed tax deficiencies, penalties, and interest against Dennis Jessen as a result of his failure to file income tax returns.

16. Dennis Jessen reached a settlement with the IRS, and the Tax Court approved this settlement on May 4, 1995. As of May 11, 1995, Dennis Jessen's outstanding tax liability was $139,248.31.

17. On May 10, 1995, the IRS issued a Notice of Levy and Notice of Seizure on the property Dennis transferred to Daniel in 1984.

18. On May 24, 1995, Tusinger (acting on Daniel's behalf) filed a complaint and request for a temporary restraining order and asked the Court to declare that the liens and levies were wrongful.

19. The IRS counterclaimed and alleged that Dennis Jessen fraudulently transferred the property to Daniel. The IRS also asserted Daniel was Dennis Jessen's alter ego or nominee. The IRS also filed third-party claims against BancOne, Allen Jessen, Loren Jessen, and Anita Jessen.

20. On November 20, 1995, Judge Johnson approved a stipulation between the IRS and BancOne providing that BancOne's mortgage lien had priority over the federal tax liens.

21. On January 19, 1996, the IRS and Dennis Jessen's siblings (Allen, Loren, and Anita) signed a stipulation outlining the siblings' respective interests and specifying that the federal tax lien does not attach to their proportional interests in the property. Thus, the federal tax liens do not have priority over the siblings' interest in the parcel jointly owned by Daniel Jessen and the siblings.

Conclusions of Law

1. The Court has subject matter jurisdiction under 28 U.S.C. §1346(e) and 26 U.S.C. §7426(a) .

2. The Court has jurisdiction over the parties and over the property at issue. Venue is proper in this Court.

3. When the IRS levies on property, any person, other than the taxpayer, has standing to bring an action to have the levy set aside if: (1) the person has an interest in, or a lien on, the property; and (2) the person claims that the levy was wrongful. 26 U.S.C. §7426(a)(1) . Tusinger, acting on behalf of Daniel Jessen, meets these requirements.

4. A plaintiff seeking to set aside a levy bears the initial burden of proving that he has an interest in the property. The burden then shifts to the IRS to establish a nexus between the taxpayer and the property. If the IRS meets its burden, the burden shifts back to the plaintiff to prove that the levy is wrongful. Morris v. United States [87-1 USTC ¶9241 ], 813 F.2d 343, 345 (11th Cir. 1987).

5. A levy is wrongful if "[t]he levy is on property in which the taxpayer has no interest at the time the lien arose." Treasury Regulations, §301.7426(a)(1) .

Fraudulent Transfer

6. "When a taxpayer disposes of his property prior to the time a federal tax lien arises, the United States may sue to have the conveyance set aside as fraudulent under the laws of the state where the property is located." United States v. Morgan [83-2 USTC ¶9535 ], 554 F. Supp. 582, 585 (D. Colo. 1982).

7. Wyoming has adopted the Uniform Fraudulent Conveyance Act (UFCA). Wyo. Stat. §§34 -14-101 to 113.

8. A creditor "is a person having any claim, whether matured or unmatured, liquidated or unliquidated, absolute, fixed, or contingent." Wyo. Stat. §34 -14-102(ii). The United States qualifies as a creditor in this case and has standing to challenge Dennis Jessen's conveyance to his son Daniel.

9. "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 and future creditors." Wyo. Stat. §34 -14-108.

10. "Every conveyance made ... by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made ... without fair consideration." Wyo. Stat. §34 -14-105(2). The UFCA does not distinguish between present and future creditors; a conveyance designed to hinder, delay, or defraud either present or future creditors is void. Morgan [83-2 USTC ¶9535 ], 554 F. Supp. at 585.

11. Fair consideration is a good faith transfer of property or satisfaction of an antecedent debt that is "not disproportionately small as compared with the value of the property." Wyo. Stat. §37-14-104.

12. Dennis Jessen did not receive any money or assets with a total value greater than $10.00 when he transferred the property to Daniel. See Finding of Fact No. 3. Therefore, Dennis Jessen did not receive fair consideration for the property.

13. "A person is insolvent when the present fair salable value of his assets is less than the amount that will be required to pay his probable liability on his existing debts as they became absolute and matured." Wyo. Stat. §34 -14-103(a).

14. Dennis Jessen owned nothing except personal belongings after he transferred the property to Daniel. His assets were not sufficient to pay his probable liabilities--the tax debt and his debt to Chromalloy. Thus, this transfer rendered Dennis Jessen insolvent.

15. Intent to defraud may be inferred from circumstantial evidence of the "badges of fraud." These "badges" are: (1) Inadequate consideration; (2) Retention of possession by transferor after transfer; (3) Close relationship between transferor and transferee; (4) Transfer made in anticipation of lawsuit or liability; and (5) Insolvency of the transferor. Fish v. East, 114 F.2d 177, 183 (10th Cir. 1940); Dahnken, Inc. of Salt Lake City v. Wilmarth, 726 P.2d 420, 423 (Utah 1986).

16. All of these factors are present here. Dennis Jessen received no consideration for the transfer to his son. He continued to live on and run the farm after the transfer. Daniel had no input or control over the farm's operations. Dennis is Daniel's father, and thus has a close relationship with him. Dennis Jessen admitted that he transferred the property to Daniel after he learned that another creditor planned to sue him. Finally, the transfer rendered Dennis Jessen insolvent as that term is defined in Wyo. Stat. §34 -14-103(a). Therefore, the Court holds that the transfer was fraudulent and should be set aside.

Nominee Theory

17. The IRS also argues that Daniel Jessen is the nominee of Dennis Jessen.

18. The government may seize and sell property held by a taxpayer's nominee to collect the taxpayer's liability. G.M. Leasing Corp. v. United States [77-1 USTC ¶9140 ], 429 U.S. 338, 350-51 (1977); Shades Ridge Holding Co., Inc. v. United States, 888 F.2d 725, 728 (11th Cir. 1989).

19. A court can consider a number of factors when determining whether an individual holds property as the taxpayer's nominee. These factors include:

(1) Whether the individual paid little or no consideration;

(2) Whether the taxpayer placed the property in the individual's name in anticipation of a lawsuit or liability;

(3) Whether there is a close relationship between taxpayer and the individual;

(4) Whether the taxpayer exercises dominion and control over the property;

(5) Whether the taxpayer continued to enjoy the benefits of the property; and

(6) Whether the record owner (nominee) fails to interfere with the taxpayer's use of the property.

Shades Ridge Holding Co., 888 F.2d at 729; Loving Saviour Church v. United States [84-1 USTC ¶9261 ], 728 F.2d 1085, 1086 (8th Cir. 1984).

20. These factors are very similar to the "badges of fraud," and all of them are present in this case. See Conclusion of Law No. 16. The Court therefore holds that Daniel Jessen is Dennis Jessen's nominee.

21. Because Daniel Jessen is merely the nominee of Dennis Jessen and Dennis Jessen's transfer of the property to Daniel was fraudulent, the Court holds that Dennis Jessen has an interest in the property and the IRS properly filed notices of federal tax liens on the property. Thus, the IRS may levy on the property to collect on Dennis Jessen's tax liability.

22. The liens continue in effect until the liability is satisfied. 26 U.S.C. §6322 ; United States v. Cache Valley Bank [89-1 USTC ¶9157 ], 866 F.2d 1242, 1244 (10th Cir. 1989).

Judgment

For these reasons, the Court ORDERS and ADJUDGES that Dennis Jessen's conveyance of the property to Daniel Jessen was fraudulent and that Daniel Jessen is the nominee of Dennis Jessen. The IRS liens therefore are lawful. Finally, Daniel Jessen's request for relief is DENIED and his complaint is DISMISSED WITH PREJUDICE.

 

 

 

United States of America v. Harry C. Jones, Janet E. Jones, Atco Savings & Loan Association, The Financial Source, Inc. of New Jersey, Harry C. Jones, Sr., Appellant

(CA-3), U.S. Court of Appeals, 3rd Circuit, 95-5370, 12/5/95, Affirming a District Court decision, 95-1 USTC ¶50,190 , 877 FSupp 907

[Code Sec. 6203 ]

Method assessment: Evidence: Tax protestors: Individuals subject to tax.--The government properly assessed taxes owed by a pipe fitter who claimed to be exempt from federal income tax and who presented only tax protestor arguments. He argued that, since he was not an employee of the federal government or a resident of the District of Columbia, he was not subject to federal income tax. In addition, the government's assessments were correctly made prior to the expiration of the statute of limitations.

[Code Sec. 6321 ]

Lien for taxes: Fraudulent conveyances: Real property.--A husband's fraudulent conveyance to his wife of a principal residence held with his wife as tenants by the entirety was set aside. However, the IRS could not force a sale of the property. Instead, the wife was required to make monthly payments in satisfaction of her husband's outstanding tax liability. Each payment was equal to one-half of the monthly rental value of the property.

[Code Sec. 7403 ]

Enforcement of lien: Foreclosure.--The government could not force a sale of a married couple's home in order to satisfy its valid tax lien against the husband's property interest. Since the wife's interest was held as a tenant by the entirety, she had sufficient legal basis to expect that the property would not be disturbed by her husband's creditors. Also, half of the property's market value would not fully compensate the wife because she could become the sole owner by right of survivorship. Therefore, the government and the wife became tenants in common, the wife was ordered to pay the government half of the property's rental value, and the rental payments were credited against the unpaid amount of the judgment against the husband.

Harry C. Jones, Sr., 165 Sherman Ave., Atco, N.J. 08004, for appellant. Gary R. Allen, Roger E. Cole, Bruce R. Ellisen, Department of Justice, Washington, D.C. 20530, for appellee.

Before: BECKER, MCKEE and SEITZ, Circuit Judges.

JUDGMENT ORDER

BECKER, Circuit Judge:

After consideration of all contentions raised by appellant, it is

ADJUDGED AND ORDERED that the orders of the district court of September 27, 1993, January 13, 1994, February 7, 1995, February 17, 1995, March 30, 1995 and May 16, 1995 be and are hereby AFFIRMED.

 

 

 

United States of America, Plaintiff v. Harry C. Jones, Janet E. Jones, and Atco Savings & Loan Assn., Defendants

U.S. District Court, Dist. N.J., Civ. 92-1563 (SSB), 2/15/95, 877 FSupp 907, 877 FSupp 907

[Code Sec. 6203 ]

Method assessment: Evidence: Tax protestors: Individuals subject to tax.--The government properly assessed taxes owed by a pipe fitter who claimed to be exempt from federal income tax and who presented only tax protest arguments. He argued that since he was not an employee of the federal government or a resident of the District of Columbia, he was not subject to federal income tax. The government's assessments were correctly made prior to the expiration of the statute of limitations.

[Code Secs. 6321 and 7403 ]

Lien for taxes: Fraudulent conveyances: Real property: Enforcement of lien: Foreclosure.--A transfer of real property by a pipe fitter to his wife was set aside as a fraudulent conveyance, but the government was unable to force a sale of the entire property to satisfy a tax lien. The transfer was fraudulent under prior state (New Jersey) law. The government was a creditor of the pipe fitter at the time of the transfer, and he was insolvent when he transferred the property. In addition, the transfer was not supported by fair consideration. The pipe fitter transferred the property for nominal consideration and was left with no assets and considerable debt. Further, he continued to live on the property following the transfer. After the transfer was set aside, the government was not able to sell the entire property to satisfy the tax lien. Since the government's recovery was limited due to the need to compensate the wife for her interest in the property, the prejudice to the government by the disallowance of the sale of the entire property was diminished. The wife, as a tenant by the entirety, had a sufficient legal basis to expect that the property would not be disturbed by her husband's creditors. The amount totaling half the market value of the property was not sufficient to compensate the wife because she could ultimately become the sole owner of the property given her right of survivorship. In addition, the wife had no job, no source of income, and had a minor child residing on the property. However, the government and the wife became tenants in common. Therefore, since the government was not able to occupy the property, the wife, as cotenant in possession, was required to pay the government one-half the imputed rental value of the property, minus appropriate costs and expenses. These payments were credited against the unpaid amount of the judgment against her husband.

Louis J. Bizzarri, Assistant United States Attorney, Camden. N.J. 08101, Charles M. Flesch, Richard Gilman, Department of Justice, Washington, D.C. 20530, for plaintiff. Harry C. Jones, Sr., Janet E. Jones, 165 Sherman Ave., Atco, N.J. 08004, pro se.

OPINION

BROTMAN, District Judge:

Presently before the court is the motion of plaintiff, United States government, for summary judgment. For the reasons set forth below, the government's motion is granted in part and denied in part.

I. Factual and Procedural Background

The facts in the present matter are uncontested as they have been stipulated to by all parties. The uncontested facts are reproduced below in the same format that they appear in the Joint Final Pretrial Order entered in this matter on September 2, 1994.

1. Defendant Harry Jones and Janet Jones are married and reside at the Sherman Avenue property. They have lived at that residence since September 1977 (Harry Jones ("HJ") Dep. Tr. at 13-16; Janet Jones ("JJ") Dep. Tr. at 10-11). ¹

2. The defendants purchased the Sherman Avenue property on or about September 15, 1997, for the sum of $36,500.00 (a true and correct copy of the deed transferring ownership of said parcel of real property of the defendants Harry C. Jones and Janet E. Jones, is attached to the amended complaint as Exhibit A; see also HJ Dep. Tr. at 19 and Exhibit ("Exh.") 6 annexed thereto).

3. On September 17, 1977, defendants Harry Jones and Janet E. Jones granted a mortgage to Atco Savings and Loan Association on the Sherman Avenue property (a true and correct copy of said mortgage instrument is attached as Exh. B to the amended complaint; see also HJ Dep. Tr. at 18-19 and Exh. 5 annexed thereto; JJ Dep. Tr. at 19-21, and Exh. 3 annexed thereto).

4. Harry Jones and Janet Jones signed a promissory note to repay the loan made by Atco Savings and Loan which helped finance their purchase of the Sherman Avenue property. The mortgage was security against the property for the promissory note. (JJ Dep. Tr. at 22-23 and Exh. 4 (Promissory Note) annexed thereto; HJ Dep. Tr. at 17 and Exh. 4 annexed thereto).

5. During 1980 or 1981, Harry Jones joined the South Jersey Patriots, and organization or association which he described as "constitutional study group." That association was a tax protestor group. Harry Jones and president of the South Jersey Patriots, and attended weekly meetings. Janet Jones also attended meetings of the South Jersey Patriots. (See JJ Dep. Tr. at 61, 62-63; see also HJ Dep. Tr. at 37-40).

6. Harry Jones maintains that between 1981 and 1984, he believed that his wages were exempt from taxation (see HJ Dep. Tr. at 36). Indeed, Harry Jones contended, and still contends, that only federal employees and citizens of the District of Columbia are subject to federal income tax (id. at 39-41).

7. In 1982, Harry Jones worked in the construction industry as a pipe fitter (id. at 8-9). In 1982, Harry Jones worked for Bechtle Power Corp. and received wages from thatcompany (id. at 43 and Exh. 10 (Employee's Statement annexed thereto and signed by Harry Jones).

8. In 1982, Harry Jones received a total salary of $67,396.55 from Bechtle Power Corp. for his work as a pipe fitter (see HJ Dep. Tr. at 52-53 and Exh. 15A annexed thereto (1982 Federal Form 1040 income tax return for Harry Jones, and specifically the W-2 Form attached thereto)).

9. In or about 1982, Harry Jones and Janet Jones filed amended Federal Form 1040 income tax returns seeking refunds of taxes paid for tax years 1979 through 1981. The purported basis for the refund claims was that Harry Jones' labor was allegedly tax exempt. The amended refunds for these years triggered audits by the Internal Revenue Service ("IRS") (HJ Dep. Tr. at 46-47).

10. On or about February 8, 1983, Harry Jones submitted a Federal Form W-4 claiming that he was exempt from taxation (id. at 33-34 and Exh. 9 annexed thereto).

11. By letter dated March 11, 1983, the IRS notified Harry Jones and Janet Jones that their amended income tax return for 1981 was under audit, and the IRS requested them to appear for an examination (HJ Dep. Tr. at 44-46; Exh. 11 annexed thereto).

12. By letter dated March 23, 1983, the IRS notified Harry Jones and Janet Jones that their amended tax return which claimed a refund for tax year 1982 was disallowed in full. The IRS advised Mr. and Mrs. Jones that, pursuant to 26 U.S.C. §61 , his income was taxable. (See HJ Dep. Tr. at 46-47, 49 and Exh. 13 annexed thereto).

13. During February or March 1983, Harry Jones filed a Federal Form 1040 income tax return for tax year 1982. He filed that return under the status of "married filing separate return." On the 1982 income tax return, Harry Jones claimed that his wages were deductible or tax exempt, and reported that he owed no income tax for 1982 (HJ Dep. Tr. at 39-41, 52-54; see Exh. 15A, 1982 Form 1040 income tax return; see also Exh. 10, Jones' Employee Statement). Indeed, Mr. Jones sought a refund of the taxes that had been withheld by his employer for 1982.

14. On April 12, 1983, a delegate of the Secretary of the Treasury made a penalty assessment, in the amount of $500.00 against Harry Jones (see Declaration of Russell Mattaboni at ¶4; certified Form 4340, Certificate of Assessments and Payments regarding Harry Jones (annexed as Exh. C to Flesch Declaration)). Notice of the $500.00 penalty assessment and a demand for payment was duly sent to Harry Jones (see id.)

15. By letter dated June 9, 1983, the IRS sent Mr.Jones a final demand notice seeking payment of the $500.00 penalty assessment. By letter dated June 18, 1983, Mr. Jones responded by stating that he did not owe the tax and that he challenged the right of the IRS to charge him with "a fine for [filing] a frivolous return." (See IRS letter dated June 9, 1983 and Mr. Jones' response thereto, collectively annexed as Exh. D to the declaration of Charles Flesch.)

16. On June 9, 1983, for consideration of $10.00 and "love and affection," defendant Harry Jones conveyed his interest in the Sherman Avenue property to his wife Janet Jones (a true and correct copy of the deed of conveyance between defendants Harry C. Jones and Janet E. Jones is annexed as Exh. C to the amended complaint; see also HJ Dep. Tr. at 54-56 and Exh. 16 annexed thereto; JJ Dep. Tr. at 57-59 and Exh. 13 annexed thereto). After the conveyance of the Sherman Avenue property, Harry Jones continued to reside at the premises (see JJ. Dep. Tr. at 60). The June 9, 1983 deed was recorded on July 11, 1983 (see Exh. 16, page 4 to HJ. Dep. Tr.).

17. Neither Harry Jones nor Janet Jones notified Atco Savings and Loan Association of the transfer to Janet Jones. Harry Jones, however, remained indebted to Atco Saving and Loan Association for the mortgage payments by virtue of the promissory note he had signed (JJ Dep. Tr. at 67-68, 70; HJ Dep. Tr. at 56).

18. After the conveyance of the Sherman Avenue property to Janet Jones, Mr. Jones continued to make payments to Atco Savings & Loan Association on the mortgage until about 1983. Thereafter, Mr. Jones' mother made payments on the mortgage on his behalf (see HJ Dep. Tr. at 25-28).

19. After the conveyance of the Sherman Avenue property to Janet Jones, Mr. Jones owned no property (see JJ Dep. Tr. at 68-70).

20. In response to what he termed as a proposed IRS notice of deficiency for tax year 1982, on March 12, 1984, Harry Jones wrote the IRS advising that his wages were not income and not taxable (HJ Dep. Tr. at 64, Exh. 23 annexed thereto).

21. On June 14, 1984, the IRS wrote Harry Jones providing him with its examination report regarding an income tax deficiency for tax year 1982 and proposing an assessment of various penalties (HJ Dep. Tr. at 65-66 and Ex. 24 annexed thereto). In response, Harry Jones denied the audit findings (HJ Dep. Tr. at 66-67 and Exh. 25 annexed thereto).

22. By letter dated April 5, 1985, the IRS sent Harry Jones a notice of deficiency for tax year 1982. In that notice (which incorporated the aforesaid examination report in part), the IRS asserted that Harry Jones was liable for an income tax deficiency, in the amount of $26,975.28, and was also liable for various penalties as set forth therein (HJ Dep. Tr. at 69, Exh. 25 (IRS Notice of Deficiency) annexed thereto).

23. By letter dated April 15, 1985, Harry Jones wrote the IRS admitting that he received the Notice of Deficiency. In his April 15 letter, Jones set forth various tax protestor statements, including asserting that the IRS had no authority to issue him the Notice of Deficiency (see HJ Dep. Tr. at 69, 71-72, and Exh. 27 annexed thereto).

24. Harry Jones did not petition the U.S. Tax Court to contest the IRS' April 5, 1985 Notice of Deficiency (HJ Dep. Tr. at 71).

25. A delegate of the Secretary of the Treasury made assessments against defendant Harry C. Jones for additional tax and penalties for the tax year ending December 31, 1982, on the dates and in the amounts set forth below:

                                                         Internal Revenue

Type of Assessment       Assessment Date Amount Assessed   Code Section

Miscellaneous

Penalty ................     4/12/83       $    500.00

Income Tax .............    10/21/85       $ 26,975.28

Negligence Penalty .....    10/21/85       $  6,055.66   6653(a)(1) & (2)

Estimated Tax Penalty ..    10/21/85       $  2,143.80   6654

Substantial

  Understatement of

  Income Tax Penalty ...    10/21/85       $  2,697.53   6651.

(See Amended Complaint; Declaration of Indebtedness by Russell Mattaboni, dated May 13, 1994, at ¶4, submitted in support of U.S. Motion For Summary Judgment; see also certified Form 4340, Certificate of Assessments and Payments, annexed as Exh. C to Flesch declaration).

26. Notice of the assessments, referred to in paragraph 25, above, and demands for payment were duly sent to Harry C. Jones (Declaration of Russell Mattaboni at ¶5; see also certified Form 4340, Certificate of Assessments and Payments).

27. Statutory interest, penalties and costs also have accrued and continue to accrue on the unpaid balance of the assessments made against defendant Harry C. Jones (Declaration of Russell Mattaboni at ¶¶6, 7).

28. Since the date of the October 21, 1985 assessments, payments in the amount of $4,199.20 have been credited to the amounts assessed against defendant Harry C. Jones (id. at ¶8).

29. As of May 31, 1994, $66,644.32 in interest had accrued on the unpaid tax liabilities (id. at ¶9).

30. As of May 31, 1994, there was due and owing to the United States from Harry C. Jones the total amount of $107,049.99. That amount is calculated as follows: assessed tax ($26,975.28), plus assessed penalties ($11,396.99), less the credits for payments ($4,199.20), plus failure to pay tax penalty ($6,196.90) accrued on the unpaid tax, plus interest ($66,644.32), plus ($36.00) lien filing fees (id. at ¶10).

31. On March 11, 1994, the mortgage of Atco Savings & Loan Association on the subject real property was satisfied (see copy of letter dated May 11, 1994, from counsel for the bank, with satisfaction attached thereto, annexed as Exh. E to the declaration of Charles M. Flesch).

32. On April 25, 1994, William J. Kennedy, a real estate appraiser, inspected the Sherman Avenue property. He recently issued an appraisal report of the property which estimated the fair market value of the Sherman Avenue property to be $108,000, and its rental value to be $750.00 per month (see Uniform Residential Appraisal Report annexed as Exh. F to the declaration of Charles M. Flesch).

33. Defendants Harry and Janet Jones are the same age.

34. The value of Harry Jones' life estate and survivorship interest in the subject real property is equivalent to 1/2 of the fair market value of the property.

35. For all her married life, Janet Jones has been a housewife with no separate income (JJ Dep. Tr. at 8-9, HJ Dep. Tr. at 24-25).

II. Discussion

As there appear to be few, if any, issues of material fact, the only questions remaining in this summary judgment motion are legal ones for the court to decide. The court will address the legal questions presented and resolve the present case on this motion for summary judgment.

A. Count I--Judgment on Assessed Taxes

The government seeks summary judgment on Count I of its Amended Complaint to recover on various tax assessments made against defendant Harry C. Jones ("defendant") based on income taxes that the defendant failed to pay for the tax year ending December 31, 1982. In his Opposition to Summary Judgment, defendant Jones argues that the court does not have subject matter jurisdiction over the government's claim. Defendant makes references to various affidavits he has filed with the court as grounds for his argument. Upon review of such affidavits and other papers filed by the defendant, the court is unable to find any viable basis for challenging this court's jurisdiction.

Defendant's papers state numerous incoherent arguments which the court is unable to decipher. The arguments that the court is able to identify are similar to those raised in defendant's Motion to Dismiss for Failure to State a Cause of Action and defendant's Motion to Dismiss for Lack of Venue and Jurisdiction and Unlawful Standing to Prosecute. Basically, defendant alleges that the government's failure to notify him under which law and regulations he is being sued and the government's failure to identify the type of tax being assessed against his amount to a violation of Due Process and strip this court of subject matter jurisdiction. Defendant further argues that, in bringing its suit, the government failed to follow the necessary procedures mandated by the Constitution, statute and regulations. Additionally, defendant alleges that because he is neither an employee of the federal government nor a resident of the District of Columbia, his income is not subject to federal taxation.

All of the defendant's arguments have been previously addressed and rejected by the court. See court's Order dated Sept. 27, 1993 denying defendant's motion to dismiss for lack of venue and jurisdiction and unlawful standing; court's Order dated Jan. 13, 1994 denying defendant's motion for reconsideration of the court's Sept. 27, 1993 order; court's opinion dated Feb. 6, 1995 addressing defendant's three motions to dismiss as beyond the statute of limitations and for failure to state a claim for which relief can be granted. This court has jurisdiction over the present action pursuant to 28 U.S.C. §§1340 and 1345, in conjunction with 26 U.S.C.§§7402(a) and 7403. ² Furthermore, courts have routinely rejected arguments such as those made by defendant Jones with regard to being exempt from federal taxation, and held that the federal government has the power to tax the income of all United States citizens. United States v. Connor [90-1 USTC ¶50,166 ], 898 F.2d 942, 943-44 (3d Cir.) (Congress properly exercised its power to tax income, wages are income within the meaning of the Sixteenth Amendment, and arguments that wages are not taxable income have been unequivocally rejected), cert. denied, 497 U.S. 1029 (1990); United States v. Freeman [93-1 USTC ¶50,296 ], 71 A.F.T.R.2d 93-1272, 1275 (D.M.J.) (federal courts routinely reject tax protester arguments; the government has power to tax the income of all its citizens) (citing Brushaber v. Union Pac. R.R. [1 USTC ¶4 ], 240 U.S. 1, 12-19 [3 A.F.T.R. 2926] (1916) (federal income tax imposed on citizens throughout nation) and United States v. Sloan [91-2 USTC ¶50,388 ], 939 F.2d 499, 501 [68 A.F.T.R.2d 91-5351] (7th Cir. 1991) (all individuals, freeborn and nonfreeborn, natural and unnatural alike, must pay federal income tax on their wages, regardless of whether they have requested, obtained or exercised any privilege from federal government), cert. denied, 112 S.Ct. 940 (1992)), aff'd, 16 F.3d 406 (3d Cir. 1993), cert. denied, 114 S.Ct. 2150 (1994). See also Wilcox v. Commissioner [88-1 USTC ¶9387 ], 848 F.2d 1007, 1008 (9th Cir. 1988) (rejecting claims that wages are not income and that paying taxes is voluntary); Coleman v. Commissioner [86-1 USTC ¶9401 ], 791 F.2d 68, 70 (7th Cir. 1986) (rejecting arguments that wages are not taxable, that wages may not be taxed pursuant to the Sixteenth Amendment, and that the income tax is a "taking" in violation of the Fifth Amendment); Capps v. Eggers [86-1 USTC ¶9246 ], 782 F.2d 1341 (5th Cir. 1986) (rejecting claim that wages are not taxable as income) (citations omitted); Connor v. Commissioner [85-2 USTC ¶9598 ], 770 F.2d 17, 20 (2d Cir. 1985) (argument that wages are not taxable income is so frivolous that it is sanctionable).

The present action to reduce to judgment federal tax assessments made by the government involves defendant's income tax liability for the tax year of 1982. In paragraph 10 of the Amended Complaint, the government lists the dates on which the alleged assessments were made and the unpaid balances due on those dates. In support of its motion for summary judgment, the government has submitted a certified Form 4340, Certificate of Assessments and Payments. See Brief in Support of United States' Motion for Summary Judgment, Exhibit C to the Declaration of Charles M. Flesch. This Form identifies all relevant assessments made by the Internal Revenue Service against the defendant and any credits made to such assessments.

A Certificate of Assessments and Payments is entitled to a presumption of correctness. Freck v. Internal Revenue Service [94-2 USTC ¶50,518 ], 37 F.3d 986, 991-92 n.8 (3d Cir. 1994) ("Assessments are generally presumed valid and establish a prima facie case of liability against a taxpayer") (citations omitted); United States v. Mazzara [82-2 USTC ¶9423 ], 530 F. Supp. 1380, 1382 (D.N.J. 1982) (affidavit by I.R.S. officer detailing defendant's tax liability is entitled to a presumption of correctness) (citing Psaty v. United States [71-1 USTC ¶9346 ], 442 F.2d 1154, 1159 (3d Cir. 1971)), aff'd, 722 F.2d 733, 736 (3d Cir. 1983); Long v. United States [92-2 USTC ¶50,431 ], 972 F.2d 1174, 1181 (10th Cir. 1992) ("For purposes of granting summary judgment, a Certificate of Assessments and Payments is sufficient evidence that an assessment was made in the manner prescribed by §6203 and Treas. Reg. 301.6203-1 "); Geiselman v. United States [92-1 USTC ¶50,200 ], 961 F.2d 1, 6 (1st Cir.) (Certificate of Assessments and Payments is presumptive proof of a valid assessment and is frequently used to prove that an assessment has been made), cert. denied, 113 S. Ct. 261 (1992); Hughes v. United States [92-1 USTC ¶50,086 ], 953 F.2d 531, 535 (9th Cir. 1992) (Certificate of Assessments and Payments can serve as proof that assessments were actually made); McCarty v. United States [92-1 USTC ¶50,222 ], 929 F.2d 1085, 1089 (5th Cir. 1991) (Certificate of Assessments and Payments is admissible evidence for purposes of summary judgment); United States v. Chila [89-1 USTC ¶9299 ], 871 F.2d 1015, 1018 (11th Cir.) (Certificate of Assessments and Payments submitted by the government is accepted as presumptive proof of a valid assessment), cert. denied, 493 U.S. 975 (1989); United States v. Nuttall [89-2 USTC ¶9460 ], 713 F. Supp. 132, 135 (D. Del.) (assessments listed in Form 4340 are given presumptive effect), aff'd, 893 F.2d 1332 (3d Cir. 1989). Consequently, the government has established a prima facie case by providing the court with this Certificate. Psaty v. United States [71-1 USTC ¶9346 ], 442 F.2d 1154, 1159-60 (3d Cir. 1971); Nuttall [89-2 USTC ¶9460 ], 713 F. Supp. at 135. At trial, the burden of production and persuasion, at this point, would shift to the defendant. Psaty [71-1 USTC ¶9346 ], 442 F.2d at 1160. However, because the case is presently before the court on a summary judgment motion, the defendant needs only to establish the existence of a genuine issue of material fact with regard to the validity or correctness of the assessments. Long [92-2 USTC ¶50,431 ], 972 F.2d at 1181 n.9 ("taxpayer has the burden of going forward with evidence and the burden of persuasion to overcome the presumption attaching to the Forms 4340") (citing Psaty v. United States [71-1 USTC ¶9346 ], 442 F.2d 1154, 1160 (3d Cir. 1971)); United States v. Carson, 741 F. Supp. 92, 94 (E.D. Pa. 1990) (once presumption of correctness of assessments is established by Certificate of Assessments and Payments, burden of production and persuasion shifts to defendant taxpayer to show any errors) (citing Psaty [71-1 USTC ¶9346 ], 442 F.2d at 1158-60); Nuttall [89-2 USTC ¶9460 ], 713 F. Supp. at 135.

In his opposition papers, the defendant does not question either the correctness or the validity of the assessments. The defendant merely makes references to the statute of limitations argument raised in his Motion to Dismiss Count I as Beyond the Statute of Limitations. Defendant argues that the present collection action was brought after the statute of limitations had expired. Mr. Jones claims that letters sent to him by the government on June 9, 1983 and June 14, 1984 constitute the actual assessments from which the statute of limitations for any collection action should begin to toll. See Exhibits A and B to Defendant's Motion to Dismiss Count I Beyond Statute of Limitations. However, the June 9, 1983 letter is relevant only to a $500 penalty assessment, the government's claim to which has been dismissed. The June 14, 1984 letter cannot be construed as an assessment by the government. This letter neither assesses a deficiency against the defendant, nor does it demand that the defendant make payment in a specified amount to the I.R.S. The letter merely explains that the I.R.S. believes that an adjustment of Mr. Jones' tax liability is necessary, and details the procedures Mr. Jones should follow if he disagrees with the findings of the I.R.S. Additionally, the letter explains that the defendant's case will only be processed on the basis of this proposed adjustment if the I.R.S. does not hear from the defendant in 30 days. By no means can this letter be adjudged as an assessment against the defendant.

The above constitutes the only challenge made by defendant to the government's Certificate of Assessments and Payments. Because this challenge bears no merit and because defendant Jones has offered no evidence contesting the validity or correctness of the government's Certificate, there exists no issue of material fact preventing entry of judgment in favor of the government. Consequently, the court will enter judgment against defendant Jones on Count I of the government's Amended Complaint in the amount of $107,049.99, plus interest that has accrued and will accrue thereon from May 31, 1994, until this judgment is fully paid. ³

B. Count II--Fraudulent Conveyance

In Count II, the government seeks to set aside as a fraudulent conveyance a June 9, 1983 transfer of property by Mr.Jones to his wife, Janet Jones. Prior to the transfer, Mr. and Mrs. Jones owned the property located at 165 Sherman Avenue, Atco, New Jersey as tenants by the entirety. On June 9, 1983, Mr. Jones transferred his interest in the property to his wife for $10.00 and "love and affection." The government asserts that because this transfer was not supported by fair consideration, was intended to defraud creditors, and was made at a time when defendant Jones was insolvent, the transfer should be set aside under the New Jersey Fraudulent Conveyance Act. Defendant Jones opposes the government's motion for summary judgment and argues the following: (1) the government's claim is beyond the statute of limitations and thus fails to state a claim for relief ⁴; (2) the government's claim is vague and thus fails to state a claim for relief; ⁵ (3) the transfer was not intended to defraud any creditors; and (4) the defendant was insolvent prior to the transfer in question. Defendant Janet Jones opposes the government's motion on the following grounds: (1) the transfer was made without any intent to defraud, hinder, delay or evade creditors; (2) the transfer was made as part of a marriage reconciliation in order to provide security to Mrs. Jones and ensure that she would not be left without a place of live; and (3) the government's claim is beyond the statute of limitations.

Because the allegedly fraudulent conveyance took place in 1983, the court must analyze the government's claim under the New Jersey Fraudulent Conveyance Act (currently repealed), and not under the more recently enacted Uniform Fraudulent Transfer Act which because prospectively effective as of January 1, 1989. Official Unsecured Creditors' Committee v. Rachles (In re S. Rachles, Inc.), 131 B.R. 782, 787-89 (Bankr. D.N.J. 1991); Fleet v. Rhode (In re Fleet), 122 B.R. 910, 915-16 (Bankr. E.D. Pa. 1990). Section 25 :2-10 of the New Jersey Fraudulent Conveyance Act provides:

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

N.J. STAT. ANN. §25 :2-10 (West 1940). A "creditor" is defined broadly as "a person having any claim, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent." N.J. STAT. ANN. §25 :2-7.

The issue before the court is whether the United States was a creditor of defendant Jones at the time of the property transfer. The United States is deemed a creditor of a taxpayer as of the date that the obligation to pay income taxes accrues. United States v. Bushlow [93-2 USTC ¶50,556 ], 832 F.Supp. 574, 581 (E.D. N.Y. 1993); United States v. Mantarro [94-1 USTC ¶50,229 ], 72 A.F.T.R.2d 93-6428 (N.D. Ohio 1992); United States v. Klayman, 736 F.Supp. 647, 649 (E.D. Pa. 1990); United States v. St. Mary [72-1 USTC ¶9319 ], 334 F.Supp. 799, 803 (E.D. Pa. 1971). Some courts have said that tax liabilities, even if unassessed, are deemed due and owing at the close of the taxable year. Edelson v. Commissioner [87-2 USTC ¶9547 ], 829 F.2d 828, 833-34 (9th Cir. 1987) (citing In re Ad-Yu Elec., Inc., 71-1 USTC (CCH) ¶9132 (1968)). Other courts has stated that taxes accrue on the date the tax returns are due to be filed. Mantarro [94-1 USTC ¶50,229 ], 72 A.F.T.R.2D 93-6428; St. Mary [72-1 USTC ¶9319 ], 334 F.Supp. at 803. Thus, the government became Mr. Jones' creditor either at the end of 1982, or on April 15, 1983, the deadline for Mr. Jones to file his tax return. Regardless of which view is adopted, defendant Jones' taxes were obligations due and owing by June 9, 1983, the date of the transfer. Because the fraudulent conveyance statute defines "creditors" broadly to include persons holding contingent and unmatured claims and because the government is deemed a creditor when the obligation to pay taxes accrues, the government, in the instant matter, was a creditor of defendant Jones at the time of the transfer.

Section 25 :2-10 of the New Jersey Fraudulent Conveyance Act also requires the debtor to either be insolvent at the time of the transfer or to be rendered insolvent as a result of the transfer. Section 25 :2-8 provides that "[a] person is insolvent when the present fair saleable 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." This definition of insolvency "can be met merely by showing that, at the crucial date of transfer, the debtor's liabilities exceeded the debtor's assets." In re Fleet, 89 B.R. at 424; Zucker v. Silverstein, 134 N.J. Super. 39, 53, 338 A.2d 211 (App. Div. 1975) (a person is insolvent "when he cannot pay his debts as they become due from the present fair saleable value of his assets"); Johnson v. Lentini, 66 N.J. Super. 398, 404, 169 A.2d 208 (Ch. Div. 1961) (finding debtors insolvent when the value of their assets is significantly less than the total debt owed). With full understanding of the definition of insolvency, defendant Jones, in his brief, admitted that he was insolvent prior to the date of transfer to his wife. Defendant's Opposition to Summary Judgment, at 4. ⁶ Furthermore, according to the deposition of Janet Jones, defendant Jones owned no assets after the June 9, 1983 transfer of the subject property to Janet Jones. JJ Dep. Tr. at 68. At this same time, however, defendant Jones was indebted to the government for the income taxes he failed to pay on his earnings in 1982, estimated at approximately $27,000. See Letter from I.R.S. to Harry Jones dated June 14, 1984, attached as Exh. 24 to the Deposition of Harry Jones. Because neither Mr. Jones nor Mrs. Jones dispute Harry Jones' insolvency, the court concludes that defendant Jones was insolvent on June 9, 1983 when he transferred his only asset to his wife.

In order to find that Mr. Jones' transfer was a fraudulent conveyance, the government must also show that the transfer was not supported by fair consideration. Section 25 :2-9 of the Fraudulent Conveyance Act defines "fair consideration" as follows:

Fair consideration is given for property or obligation:

a. When in exchange for such property or obligation, as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied; or

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

In the present case, Mr. Jones transferred property to his wife for $10 and "love and affection." Such transfers between family members are scrutinized closely and with suspicion. ESB, Inc. v. Fischer, 185 N.J. Super. 373, 376, 448 A.2d 1030 (Ch. Div. 1982) (citing Coles v. Osback, 22 N.J. Super. 358, 364, 92 A.2d 35 (App. Div. 1952); Haberstroh v. DeMarco, 2 N.J. Super. 429, 432, 64 A.2d 380 (Ch. Div. 1949)). The transfer at issue was between family members, for nominal consideration and left Mr. Jones with no assets and significant debt. Furthermore, Mr. Jones continued to reside on this property following the transfer. The court must keep in mind that "the purpose of the fraudulent conveyance statute is to prevent insolvent debtors from placing their property beyond the reach of their creditors while at the same time enjoying the benefits thereof." Mazzara, 530 F. Supp. at 1383 (citing Townsend v. McGrain, 43 N.J. Super. 438, 441, 128 A.2d 875 (Ch. Div. 1957)). The only stated reasonfor the transfer was to provide security to Mrs. Jones ensuring that she always has a place to live. While this may be a legitimate motive for the transfer, such rationale does not constitute "fair consideration" within the purview of the fraudulent conveyance statute. ESB, Inc., 185 N.J. Super. at 378. Additionally, proof of actual intent to defraud is not required under N.J. STAT. ANN. §25 :2-10. The court is left with no choice but to conclude that the transfer from Mr. Jones to Mrs. Jones, unsupported by fair consideration and made at a time when Mr. Jones was insolvent, is a fraudulent conveyance which must be set aside under §25 :2-10 of the New Jersey Fraudulent Conveyance Act with regard to the plaintiff creditor. ⁷

C. Count III--Foreclosure Sale as a Remedy

In Count III, the government seeks a foreclosure sale of the Jones' home to satisfy the tax liens placed against Mr. Jones' interest in the property. Pursuant to §6321 of the Internal Revenue Code, the government of the United States obtains a lien against "all property and rights to property, whether real or personal" of any person who neglects or refuses to pay their taxes. 26 U.S.C. §6321 . Section 6322 provides that such lien arises automatically on the date of the assessment and continues until the tax liability is satisfied or the statute of limitations bars enforcement of the lien. 26 U.S.C. §6322 ; United States v. National Bank of Commerce [85-2 USTC ¶9486 ], 472 U.S. 713, 719 (1985); United States v. McDermott [93-1 USTC ¶50,164 ], -- U.S. --, 113 S. Ct. 1526, 1527 (1993). The broad character of the language "all property and rights to property" appearing in §6321 evidences Congress' intent that any and all of a taxpayer's interests in property be reachable. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 719-20.

To determine the nature of the legal interest the taxpayer has in the subject property, the court must apply state law. Id. at 722; Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513 (1960) (quoting Morgan v. Commissioner [40-1 USTC ¶9210 ], 309 U.S. 78, 82 (1940). "This follows from the fact that the federal statute 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law.' " National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 722 (quoting United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55 (1958)). The consequences that attach to the interests are "a matter left to federal law." United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 683 (1983); accord National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 722.

Because the transfer from Mr. Jones to Mrs. Jones has been set aside as a fraudulent conveyance with regard to the government, Mr. and Mrs. Jones are returned to their status as tenants by the entirety. ESB, Inc., 185 N.J. Super. at 379. A tenancy by the entirety vests each spouse with an undivided one-half interest in the home and a right of survivorship. Id. The spouses hold the property as tenants in common during their joint lives, and own a right of survivorship entitling each to become the sole owner of the property upon the death of the other spouse. Newman v. Chase, 70 N.J. 254, 259, 359 A.2d 474 (1976). "[A]lthough the interests of husband and wife [are] 'essentially' those of tenants in common, nevertheless during coverture each [is] seized of the indivisible whole of the property" therefore permitting no partition of the spouse's interests. Newman, 70 N.J. at 262 (citations omitted). "While the rights of each spouse are alienable, the right of ownership is 'indestructible by unilateral action.' " United States v. Diemer [94-2 USTC ¶50,420 ], 859 F. Supp. 126, 131 (D.N.J. 1994) (citing State v. U.S. Currency, 239 N.J. Super. 241, 246, 570 A.2d 1304 (Sup. Ct. 1990). "[A]lthough a debtor's interest in property held as a tenant by the entirety may be reached by his or her creditors, the remedy of partition is not automatically available to a purchaser at execution sale." Newman, 70 N.J. at 262; see Freda v. Commercial Trust Co., 118 N.J. 36, 45, 570 A.2d 409 (1990). Because tenancies by the entirety operate to protect marital assets during coverture and as security for a spouse upon the death of the other, New Jersey courts are reticent to permit any interference by creditors with property owned as a tenancy by the entirety, especially where this entails dispossessing a family of its home. Freda, 118 N.J. at 46; Newman, 70 N.J. at 265-66. "Because a tax lien extends only so far as the taxpayer's interest in the property to which it attaches, U.S. v. Durham Lumber Co. [60-2 USTC ¶9539 ], 363 U.S. 522, 526, 80 S.Ct. 1282, 1284, 4 L.Ed.2d 1371 (1960), the [government's] lien attached to an undivided one-half interest" held by Mr. Jones in the Jones' home, subject to Mrs. Jones' right of survivorship. Diemer [94-2 USTC ¶50,420 ], 859 F. Supp. at 131.

The government takes the position that federal law controls the consequences that attach to Mr. Jones' interests and that 26 U.S.C. §7403 permits the government not only to foreclose on Mr. Jones' interests in the property, but to sell the entire property to satisfy its tax lien. Brief in Support of United States' Motion for Summary Judgment, at 27. Section 7403(a) provides that, in the event a taxpayer is delinquent, the government can enforce its lien and subject "any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability." 26 U.S.C. §7403(a) . Furthermore, §7403(c) provides that the court "shall . . . determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property . . . and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the United States." 26 U.S.C. §7403(c) (emphasis added).

Although the Supreme Court in United States v. Rodgers interpreted §7403 broadly to encompass the sale of the entire property in certain circumstances as long as other interest holders in the property are adequately compensated, the Supreme Court expressly recognized that district courts have a degree of discretion in determining whether or not the government should be entitled to sell the entire property. Rodgers [83-1 USTC ¶9374 ], 461 U.S. at 693-94, 706. The Rodgers Court mentioned a number of factors which, among others, courts may consider in making the determination as to whether or not to order the sale of the entire property when the debtor only holds a partial interest in that property.

The first factor mentioned by the Supreme Court was a consideration of the extent to which the government would be financially prejudiced if it was limited only to the sale of the partial interest rather than the entire property. Id. at 710. In the present matter, the sale of solely Mr. Jones' interest in the subject property would yield little, if any, value. The sale of the entire home would attract a larger group of purchasers and likely bring in a much higher price. However, the financial prejudice to the government in the instant case must be considered in conjunction with the amount of profits that the government would have available for satisfaction of its tax lien. The Rodgers Court made clear that the non-debtors' interests in the property must be properly compensated. Id. at 699 (the government should not receive from the sale proceeds any more than what they are entitled to). Mrs. Jones' interest in the property is that of a tenant in common with a right of survivorship. At the very least, this would entitle her to 50% of the fair market value of the home. ⁸ As a result, the government's recovery would be limited to an amount equal to the sale price of the property less $54,000 (half the estimated fair market value of the home). Because the government's ultimate recovery from the sale would be greatly diminished due to the need to compensate Mrs. Jones for her interest in the home, the degree to which the government is prejudiced by a disallowance of the sale of the entire property is accordingly diminished.

The second factor discussed by the Rodgers Court is "whether the third party with a nonliable separate interest in the property would, in the normal course of events . . . have a legally recognized expectation that that separate property would not be subject to forced sale by the delinquent taxpayer or his or her creditors." Id. at 710-11. Mrs. Jones had every right to expect that her home would not be disturbed by any of her husband's creditors. If the conveyance of June 9, 1983 was not set aside, Mrs. Jones, as a sole owner of the property, would have a legally legitimate expectation that no other person or entity could disturb her ownership of the property. Additionally, as owner of property as a tenant by the entirety, Mrs. Jones could legitimately believe that the family home would be protected against her husband's creditors by virtue of New Jersey's special treatment of this type of property ownership. Because the purposes behind a tenancy by the entirety are to protect marital assets during coverture and provide security for a spouse upon the death of the other, Mrs. Jones had sufficient legal basis to believe that her home would not be susceptible to a forced sale. See Freda, 118 N.J. at 46; Newman, 70 N.J. at 265-66.

The third and fourth factors set out by the Supreme Court in Rodgers are the prejudice to the nonliable interest holder in terms of personal dislocation costs and undercompensation of interest, and the relative character and value of all the interests held in the property. Rodgers [83-1 USTC ¶9374 ], 461 U.S. at 711. Mrs. Jones has resided at the property in question for more than 17 years. Mrs. Jones has always been a housewife, and thus, has not worked outside the home since her marriage in 1969. To dispossess an unemployed individual who has no source of income and who still has a minor son residing with her at her home in order to satisfy a debt owed solely by her husband presents a grossly unfair solution and one that violates New Jersey's policy of protecting the marital home. Furthermore, as discussed previously, because Mrs. Jones has a right of survivorship with regard to the subject property, she could ultimately become the sole owner of her home. Based on life expectancy tables, Mrs. Jones is likely to outlive her husband and thus obtain a fee interest in the home. Faced with this possibility, the court believes that an amount totalling half the fair market value of the home is not sufficient to compensate Mrs. Jones' interests in the property. ⁹

An analysis of these factors leads the court to conclude that a sale of the entire property should not be allowed in the present case. The court acknowledges that government's strong interest in the efficient collection of delinquent taxes. However, the taxes at issue here are owed solely by Mr. Jones while property the government requests to sell is owned by Mr. and Mrs. Jones as tenants by the entirety. Because allowance of the requested sale will violate Mrs. Jones' legally recognized expectations, result in the dislocation of an unemployed mother and her minor son, and severely offend New Jersey's interest in protecting the marital home, the court believes that the equities of the present case strongly dictate against the sale of the Jones' home. See Diemer [94-2 USTC ¶50,420 ], 859 F.Supp. at 132 (where non-debtor spouse remains in possession of property and still has her right of survivorship, the IRS lien against the debtor spouse's interest in the property remains subject to the non-debtor spouse's right of survivorship).

Further supporting the court's decision is the fact that the Rodgers case is factually distinguishable from the present matter. In Rodgers, the Supreme Court held that the government may sell the nondelinquent spouse's homestead estate ¹⁰ to satisfy the tax debt of the delinquent spouse as long as the interests of the nondelinquent spouse are fully compensated. Rodgers [83-1 USTC ¶9374 ], 461 U.S. at 680. A tenancy by the entirety is an interest quite distinct from the homestead right created by the Texas Constitution. First of all, a homestead right does not represent an ownership interest in property, but is more like a personal right or privilege belonging to a spouse. Hunter v. Clark, 687 S.W.2d 811, 815 (Tex. Ct. App. 1985); Western Fire Ins. Co. v. Sanchez, 671 S.W.2d 666, 669 (Tex. Ct. App. 1984); Williamson v. Kelley, 444 S.W.2d 311, 314 (Tex. Civ. App. 1969). That is, a homestead right vests in a spouse whether or not that spouse has any ownership interest in the property at all. Western Fire Ins., 671 S.W.2d at 668 (whether actual property is owned by the wife only, by the husband only, or represents their community property, each spouse can have a homestead right in the property). Second, a spouse who predeceases the other spouse can still divest his ownership rights in the property or let them pass by interstate succession, subject to the surviving spouse's homestead right. Hunter, 687 S.W.2d at 814. Additionally, the surviving spouse does not receive anything akin to a right of survivorship, but instead receives "a personal privilege with the attributes and incidents of a life estate." Id. at 815; Western Fire Ins., 671 S.W.2d at 668; Fiew v. Qualtrough, 624 S.W.2d 335, 337 (Tex. Ct. App. 1981); Williamson, 444 S.W.2d at 314.

The attributes of a homestead right created by the Texas Constitution and recounted above do not in any way resemble the characteristics of a tenancy by the entirety. The only common thread between the tenancy by the entirety and the homestead right is their common purpose of protecting the family home. In contrast to the homestead right, a tenancy by the entirety is: (1) a form of ownership in property; (2) does not arise unless both spouses are owners of the property; (3) is accompanied by a right of survivorship which grants the surviving spouse a fee interest in the entire property (not a personal privilege akin to a life estate); and (4) is a right which cannot pass by interstate succession or will of the predeceased spouse. Given the great disparity between the tenancy by the entirety and the homestead estate, the Rodgers holding cannot be controlling on the present facts. ¹¹

Based on the analysis set forth above, the court holds that while the tenancy by the entirety or Mrs. Jones' right of survivorship remains in tact, the government cannot satisfy its tax lien against Mr. Jones' property interests by forcing a foreclosure sale of the entire Jones property. ¹² However, "a federal tax lien . . . is not self-executing." National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 720. A lien foreclosure suit is certainly one method of affirmatively enforcing collection of unpaid taxes. Id. Although a foreclosure of the entire property is disallowed, the government seeks alternative remedies in their Amended Complaint and requests a writ of execution and levy by U.S. Marshall against Harry Jones' interest in the property, and that Janet Jones be required to pay to the government one-half of the imputed rental value of the property which will be credited against Mr. Jones' liability.

The court sees no reason why the plaintiff creditor should receive treatment different from that accorded a purchaser at a judgment sale. ESB, Inc., 185 N.J. Super. at 380. Because Mrs. Jones continues to maintain a right of survivorship in the property, an actual foreclosure sale of the government's lien against Mr. Jones' interest in the property would likely yield little monetary return and subject any currently owned and after-acquired property of Mr. Jones to liens by the government. Applying its equitable powers, the court holds that the formality of a foreclosure sale is not necessary under the present circumstances and that the government should be entitled to the same remedies as a purchaser at a judgment sale. See id. Accordingly, a writ of execution shall be issued in favor of the government and against Mr. Jones' interest in the property. See id. This writ of execution shall be the basis for an immediate levy by the U.S. Marshall upon Mr. Jones' tenancy by the entirety. However, no immediate sale is to be held. "The levy shall be deemed continuously effective without the requirement of a sale of the property, thus according plaintiff an on-going priorityposition "until such time as the judgment entered by this court is satisfied or until the death of Mr. Jones. ¹³ Id. at 380-81.

Furthermore, by virtue of the writ of execution and the subsequent levy, the government and Mrs. Jones will become tenants in common in the property for the joint lives of Mr. and Mrs. Jones. Newman, 70 N.J. at 261. Since the government will not be able to jointly occupy the Jones' home with Mrs. Jones, equity requires that the cotenant make appropriate payments to the cotenant out of possession. Id. at 267-68; ESB, Inc., 185 N.J. Super. at 381. As a result, Mrs. Jones will have to commence paying to the government one-half the imputed rental value of the property, which payments are to be credited against unpaid amounts of the government's judgment. Newman, 70 N.J. at 267-68; ESB, Inc., 185 N.J. Super. at 381. The current rental value of the property is estimated at $750 per month. See Appraisal Report attached as Exh. F to Declaration of Charles M. Flesch. Thus, Mrs. Jones will be responsible for making monthly payments to the government in the amount of $350, to be reduced by appropriate maintenance costs and expenses. ¹⁴ See Newman, 70 N.J. at 267-68; ESB, Inc., 185 N.J. Super. at 381.

The net effect of the remedy structured above is to allow Mr. Jones' family to remain in possession of the family home, and to provide some return to the government on its lien against Mr. Jones' interest. If Mr. Jones is able to satisfy the government's lien at any time prior to his own death or the death of Mrs. Jones, the judgment shall be satisfied and Mr. Jones' right of survivorship will revert back to him. See ESB, Inc., 185 N.J. Super. at 382.

III. Conclusion

For the reasons set forth above, the motion of the United States government for summary judgment is granted in part and denied in part as follows:

(1) A judgment shall be entered on Count I of the Amended Complaint in favor of the United States government and against defendant Harry C. Jones in the amount of $107,049.99, plus interest that has accrued and will accrue thereon from May 31, 1994 until this judgment is fully paid;

(2) The June 9, 1983 conveyance of the real property located at 165 Sherman Avenue, Atco, New Jersey by defendant Harry C. Jones to defendant Janet E. Jones for $10.00 and "love and affection" was and is fraudulent as to the United States government, and is set aside as null and void;

(3) The United States government is adjudged to have valid and subsisting federal tax liens by virtue of the federal tax and penalty assessments made against Harry C. Jones on all property rights of defendant Harry C. Jones, specifically including Harry C. Jones' ownership interest in the real property located at 165 Sherman Avenue, Atco, New Jersey;

(4) The United States government is prohibited from forcing the sale of the entire real property located at 165 Sherman Avenue, Atco, New Jersey until such time as Janet E. Jones' survivorship interest in the property is extinguished;

(5) A writ of execution shall be issued in favor of the United States government and against defendant Harry C. Jones' interest in the real property located at 165 Sherman Avenue, Atco, New Jersey;

(6) Upon entry of the writ of execution, the United States Marshall shall be directed to immediately levy upon defendant Harry C. Jones' interest in the real property located at 165 Sherman Avenue, Atco, New Jersey, but no sale of the subject property is to take place;

(7) The levy by the United States Marshall shall be deemed continuously effective without the requirement of a sale of the real property until such time as the judgment entered under Count I of the Amended Complaint is satisfied or until the death of Harry C. Jones;

(8) Defendant Janet E. Jones shall make payments to the United States government in the amount of one-half the imputed rental value of the real property (currently $325 per month); minus appropriate costs, to be credited against the unpaid amount of the judgment to be entered in favor of the United States government and against the defendant Harry C. Jones.

An appropriate order will be entered.

¹ Copies of the deposition transcript pages and deposition exhibits referenced herein are annexed to the declaration of Charles M. Flesch submitted in support of the United States' motion for summary judgment.

The relevant portions of the deposition transcript of Harry Jones, with the Exhibits annexed thereto, are collectively annexed to Mr. Flesch's declaration as Exhibit A. Similarly, the relevant portions of the deposition transcript of Janet Jones, with the Exhibits annexed thereto, are collectively annexed to Mr. Flesch's declaration as Exhibit B.

² The government is authorized to file this action against defendant pursuant to 26 U.S.C. §§7401 and 7403(a) . Proof of such authorization has previously been produced to the court.

³ This judgment does not contain any amounts attributable to the $500 penalty assessment made on April 12, 1983 by the I.R.S. against Mr. Jones.

⁴ This argument was addressed and rejected by the court's opinion dated February 6, 1995 dealing with defendant's motions to dismiss.

⁵ This argument was likewise addressed and rejected by the court's February 6, 1995 opinion.

⁶ Specifically, defendant states the following:

Defendants understanding of "insolvent" means that you owe more than you are worth. Defendant was in that position before said transfer, so Defendant was insolvent even before said transfer.

Defendant's Opposition to Summary Judgment, at 4.

⁷ The court is not required to decide whether defendant Jones possessed actual intent to hinder, delay or defraud any creditors in order to set aside the fraudulent conveyance under N.J. STAT. ANN. §25 :2-13. Although such a specific finding is not required, the court notes that the present facts, specifically absence of fair consideration, conveyance to a family member, defendant Jones' continued use and enjoyment of the transferred property, and his inability to pay the plaintiff creditor, are sufficient to infer an actual intent to defraud creditors. Edelson [87-2 USTC ¶9547 ], 829 F.2d at 833 (applying New Jersey law).

⁸ The court believes that the valuation of an interest such as a right to survivorship presents a difficult problem because such a right can leave a spouse either with absolutely nothing or a fee interest in the entire property, depending on which spouse predeceases the other. Thus, unlike a life estate, the value of which can be predicted with the use of life expectancy tables, the imprecise nature of an interest such as a right of survivorship makes it less susceptible of valuation. Although the court notes the existence of such a problem, it need not deal with it in the present matter because the parties have stipulated that each spouse's interest is equal to half of the fair market value of their home. See ¶34 of the Joint Final Pretrial Order dated Sept. 2, 1994, at 11.

⁹ The weight the court is able to attribute to the issue of Mrs. Jones' undercompensation is diminished in view of the fact that the Jones' stipulated that each of their interests is worth half the fair market value of the home.

¹⁰ The Supreme Court was addressing a homestead interest created by the Texas Constitution.

¹¹ The Rodgers Court, in footnote 31, distinguished tenancies by the entirety because in some states, a lien cannot attach to property held as a tenancy by the entirety. Rodgers [83-1 USTC ¶9374 ], 461 U.S. at 702-03 n.31. The Supreme Court did not address the type of tenancy by the entirety adopted by New Jersey law. Furthermore, it must be pointed out that the decision in Rodgers was a plurality decision in which the dissent presented a very strong view holding that 26 U.S.C. §7403 does not give the government "the power to sell jointly owned property if an unindebted co-owner enjoys an indestructible right to bar a sale and to continue in possession." Rodgers [83-1 USTC ¶9374 ], 461 U.S. at 713 (emphasis in original)). Because the composition of the Supreme Court has greatly altered since the Rodgers opinion, the only remaining members being those who comprised the dissent, it is not clear whether the Supreme Court would adopt a similar disposition on the issues if faced with the same questions today.

¹² The government cites United States v. Mazzara [82-2 USTC ¶9423 ], 530 F.Supp. 1380 (D.N.J. 1982) in support of its contention that a sale of the entire Jones property should be permitted. However, because Mazzara did not involve property held as a tenancy by the entirety, this court does not find the case prescriptive with regard to the present facts.

¹³ If Mrs. Jones survives her husband, she will obtain full title to the property via her right of survivorship, and the writ of execution will be discharged because Mrs. Jones would take the property free of the government's interest. ESB, Inc., 185 N.J. Super. at 381. However, if Mr. Jones outlives Mrs. Jones, he will become the sole owner of the property and the government will be able to force the sale of the property and satisfy the balance of Mr. Jones' liability out of the proceeds collected from the sale. Id. Additionally, if for any reason Mrs. Jones' right of survivorship should become extinguished, e.g. upon her sale of the property to another, the government will also be entitled to recover upon its judgment. See id.

¹⁴ Examples of appropriate expenses are property taxes and insurance costs. Such expenses are to be shared by the co-tenants.

 

 

 

Mardy David Ross, individually and as Trustee for Ross Family Trust I, and Lisa Ross Allen, Plaintiffs v. United States of America, Defendant

U.S. District Court, East. Dist. N.C., Raleigh Div., 93-701-CIV-5-H, 3/25/94, 861 FSupp 406

[Code Secs. 6321 , 6322 and 7421 ]

Lien for taxes: Anti-Injunction Act: Real property: Fraudulent conveyances: Statute of limitations.--Individuals who received real property by deed of gift from their tax-delinquent parents were denied injunctive relief against the IRS, which maintained a lien on the property; the Anti-Injunction Act barred any action seeking to restrain the IRS from collecting the parents' taxes by proceeding against the property, and no exception to the Act applied. The individuals failed to show that the IRS could not establish its claim that a lien could attach to the property because the parents had fraudulently conveyed it under state (North Carolina) law to the individuals or that the lien attached prior to the transfer. Additionally, because a tax lien attaches upon assessment and continues until the tax liability is discharged, the lien was not barred by the statute of limitations.

Herman Wolff, Jr., 801 Oberlin Rd., Raleigh, N.C. 27605, for plaintiff. William K. Rounsborg, Department of Justice, Washington, D.C. 20530, for defendant. William K. Rounsborg, Department of Justice, Washington, D.C. 20530, for counter-claimant. Herman Wolff, Jr., 801 Oberlin Rd., Raleigh, N.C. 27605, for counter-defendant. William K. Rounsborg, Department of Justice, Washington, D.C. 20530, for third-party plaintiff. Herman Wolff, Jr., 801 Oberlin Rd., Raleigh, N.C. 27605, for third-party defendant.

ORDER

HOWARD, District Judge:

This matter is before the court on plaintiffs' motion for a temporary restraining order and defendant's motion to dismiss. Plaintiffs allege that the United States, through the Internal Revenue Service ("IRS"), now maintains a tax lien against certain real property owned by the plaintiffs. Plaintiffs seek an order restraining the United States from proceeding against their property. The United States filed a motion to dismiss on the grounds that plaintiff's claims for injunctive relief are barred by the Anti-Injunction Act, 26 U.S.C. §7421(a) . The time in which to respond to the motions has elapsed, and this matter is now ripe.

Plaintiffs' complaint alleges that the Internal Revenue Service has filed an illegal notice of lien on six parcels of real property conveyed to them by their parents. Plaintiffs received the properties in question by deed of gift in 1983. In 1990, the IRS determined that the plaintiffs' parents owed substantial taxes from the years 1979 through 1982. According to the plaintiffs, the IRS claims that the liens on plaintiffs' property arise out of plaintiffs' status as nominees, agents or transferees of the parents. Plaintiffs further allege that the statute of limitations bars any action by the United States. Plaintiffs seek an order both temporarily and permanently restraining defendant from proceeding against the property in question; a determination that the lien is invalid; and an order removing the cloud from plaintiffs' titles.

The Anti-Injunction Act is in the nature of a jurisdictional bar. See Enochs v. Williams Packing & Navigation Co. [62-2 USTC ¶9495], 370 U.S. 1 (1962); Bennett v. United States Director of Internal Revenue, 468 F.2d 584 (4th Cir. 1972); Johnson v. Wall, 329 F.2d 149 (4th Cir. 1964). The Act provides that suit to restrain the collection of a tax shall not be maintained by any person. 26 U.S.C. §7421(a) . Plaintiffs seek to restrain the United States from collecting taxes. Their restraining order claims are explicitly barred by the statute. Because the Anti-Injunction Act divests this court of jurisdiction to hear those claims, the court must first address the Government's contention that plaintiffs' claims for a restraining order are barred by the Anti-Injunction Act.

In Enochs the Supreme Court discussed a judicial exception to the Anti-Injunction Act which permits a taxpayer to restrain the assessment or collection of a tax if he can show that "under the most liberal view of the law and the facts, the United States cannot establish its claim." Enochs [62-2 USTC ¶9495], 370 U.S. at 7. Plaintiffs filed no response to the defendant's motion to dismiss and make no argument that their case falls within the exception. Nonetheless, in the interests of fairness, the court will determine whether the exception applies to this matter.

A tax lien attaches upon assessment and continues until the tax liability is discharged. 26 U.S.C. §§6321 , 6322 . Therefore plaintiffs' contention that the statute of limitations bars the Government's lien must fail. The court notes that any challenges to the validity of the tax itself have already been decided by the Tax Court in the Government's favor in 1990. The question before this court is whether plaintiffs' land is subject to a lien arising from the tax liability of their predecessors in title.

The Government charges that the parents of plaintiffs fraudulently conveyed the land to plaintiffs, and that the transfers may be set aside. Whether a taxpayer has an interest in property to which a lien can attach is a matter of state law. See Aquilino v. United States [60-2 USTC ¶9358], 363 U.S. 509 (1960); Wilkinson v. United States, 741 F.Supp. 577 (W.D.N.C. 1990). The North Carolina statute governing fraudulent transfers, N.C. Gen. Stat. §39 -15, provides in part that a conveyance may be set aside when the transferror is insolvent and receives insufficient consideration. Edwards v. Northwestern Bank, 39 N.C. App. 261, 250 S.E.2d 651 (1979).

Plaintiffs received their property by deed of gift, and so the transfer was for insufficient consideration. The Government need only show that the taxpayers were insolvent in order to void the conveyance, and thereby maintain a lien upon plaintiffs' property. In the alternative, of course, the Government may also demonstrate that the lien attached prior to the transfer.

Plaintiffs have wholly failed to meet their burden to show that the Government cannot establish its claim. The exception to the Anti-Injunction Act does not apply to this matter, and this court lacks jurisdiction to hear plaintiffs' motion for a temporary restraining order or plaintiffs' claims for restraining orders. Therefore the Government's motion to dismiss must be granted and plaintiffs' claims for restraining orders be dismissed.

In conclusion, the Government's motion to dismiss plaintiffs' motion and claims for a restraining order is GRANTED. Plaintiffs' motion for a temporary restraining order is DENIED. Plaintiffs claims to quiet title and to remove the clouds from plaintiff's title to the six parcels of land remain before the court.